For purposes of this discussion, "MetLife," the "Company," "we," "our" and "us"
refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its
subsidiaries and affiliates. Following this summary is a discussion addressing
the consolidated results of operations and financial condition of the Company
for the periods indicated. This discussion should be read in conjunction with
MetLife, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011,
as revised by MetLife, Inc.'s Current Report on Form 8-K filed with the U.S.
Securities and Exchange Commission on May 23, 2012 (as revised, the "2011 Annual
Report"), the forward-looking statement information included below, the "Risk
Factors" set forth in Part II, Item 1A, and the additional risk factors referred
to therein, and the Company's interim condensed consolidated financial
statements included elsewhere herein.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain or incorporate by reference information that includes or
is based upon forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements give
expectations or forecasts of future events. These statements can be identified
by the fact that they do not relate strictly to historical or current facts.
They use words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with a discussion of future operating or financial performance. In particular,
these include statements relating to future actions, prospective services or
products, future performance or results of current and anticipated services or
products, sales efforts, expenses, the outcome of contingencies such as legal
proceedings, trends in operations and financial results. Any or all
forward-looking statements may turn out to be wrong. Actual results could differ
materially from those expressed or implied in the forward-looking statements.
See "Note Regarding Forward-Looking Statements."
The following discussion includes references to our performance measures,
operating earnings and operating earnings available to common shareholders, that
are not based on accounting principles generally accepted in the United States
of America ("GAAP"). Operating earnings is the measure of segment profit or loss
we use to evaluate segment performance and allocate resources. Consistent with
GAAP accounting guidance for segment reporting, operating earnings is our
measure of segment performance. Operating earnings is also a measure by which
senior management's and many other employees' performance is evaluated for the
purposes of determining their compensation under applicable compensation plans.
Operating earnings is defined as operating revenues less operating expenses,
both net of income tax. Operating earnings available to common shareholders is
defined as operating earnings less preferred stock dividends.
Operating revenues and operating expenses exclude results of discontinued
operations and other businesses that have been or will be sold or exited by
MetLife, Inc. ("Divested Businesses"). Operating revenues also excludes net
investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to GAAP revenues, in the line
items indicated, in calculating operating revenues:
• Universal life and investment-type product policy fees excludes the
amortization of unearned revenue related to net investment gains (losses) and
net derivative gains (losses) and certain variable annuity guaranteed minimum
income benefits ("GMIB") fees ("GMIB Fees");
• Net investment income: (i) includes amounts for scheduled periodic settlement
payments and amortization of premium on derivatives that are hedges of
investments but do not qualify for hedge accounting treatment, (ii) includes
income from discontinued real estate operations, (iii) excludes post-tax
operating earnings adjustments relating to insurance joint ventures accounted
for under the equity method, (iv) excludes certain amounts related to
contractholder-directed unit-linked investments, and (v) excludes certain
amounts related to securitization entities that are variable interest
entities ("VIEs") consolidated under GAAP; and
• Other revenues are adjusted for settlements of foreign currency earnings
hedges.
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The following additional adjustments are made to GAAP expenses, in the line
items indicated, in calculating operating expenses:
• Policyholder benefits and claims and policyholder dividends excludes:
(i) changes in the policyholder dividend obligation related to net investment
gains (losses) and net derivative gains (losses), (ii) inflation-indexed
benefit adjustments associated with contracts backed by inflation-indexed
investments and amounts associated with periodic crediting rate adjustments
based on the total return of a contractually referenced pool of assets,
(iii) benefits and hedging costs related to GMIBs ("GMIB Costs"), and
(iv) market value adjustments associated with surrenders or terminations of
contracts ("Market Value Adjustments");
• Interest credited to policyholder account balances includes adjustments for
scheduled periodic settlement payments and amortization of premium on
derivatives that are hedges of policyholder account balances ("PABs") but do
not qualify for hedge accounting treatment and excludes amounts related to
net investment income earned on contractholder-directed unit-linked
investments;
• Amortization of deferred policy acquisition costs ("DAC") and value of
business acquired ("VOBA") excludes amounts related to: (i) net investment
gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB
Costs, and (iii) Market Value Adjustments;
• Amortization of negative VOBA excludes amounts related to Market Value Adjustments;
• Interest expense on debt excludes certain amounts related to securitization
entities that are VIEs consolidated under GAAP; and
• Other expenses excludes costs related to: (i) noncontrolling interests,
(ii) implementation of new insurance regulatory requirements, and
(iii) acquisition and integration costs.
We believe the presentation of operating earnings and operating earnings
available to common shareholders as we measure it for management purposes
enhances the understanding of our performance by highlighting the results of
operations and the underlying profitability drivers of our business. Operating
revenues, operating expenses, operating earnings, and operating earnings
available to common shareholders, should not be viewed as substitutes for the
following financial measures calculated in accordance with GAAP: GAAP revenues,
GAAP expenses, GAAP income (loss) from continuing operations, net of income tax,
and GAAP net income (loss) available to MetLife, Inc.'s common shareholders,
respectively. Reconciliations of these measures to the most directly comparable
GAAP measures are included in "- Results of Operations."
In 2011, management modified its definition of operating earnings to exclude the
impacts of the Divested Businesses, which includes certain operations of MetLife
Bank, National Association ("MetLife Bank") and our insurance operations in the
Caribbean region, Panama and Costa Rica (the "Caribbean Business"), as these
results are not relevant to understanding the Company's ongoing operating
results. Consequently, prior period results for Corporate & Other have been
increased by $27 million, net of $15 million of income tax, and $54 million, net
of $31 million of income tax, for the three months and six months ended June 30,
2011, respectively. Also, prior period results for Latin America have been
decreased by $3 million, net of $1 million of income tax, and $7 million, net of
$3 million of income tax, for the three months and six months ended June 30,
2011, respectively. As a result of the modified definition, prior period
consolidated operating earnings increased by $24 million, net of $14 million of
income tax, and $47 million, net of $28 million of income tax, for the three
months and six months ended June 30, 2011, respectively.
In this discussion, we sometimes refer to sales activity for various products.
These sales statistics do not correspond to revenues under GAAP, but are used as
relevant measures of business activity. Additionally, the impact of changes in
our foreign currency exchange rates is calculated using the average foreign
currency exchange rates for the current period and is applied to the prior
period. Also, operating return on common equity is defined as operating earnings
available to common shareholders divided by average GAAP common equity.
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Executive Summary
MetLife is a leading global provider of insurance, annuities and employee
benefit programs throughout the United States, Japan, Latin America, Asia,
Europe and the Middle East. Through its subsidiaries and affiliates, MetLife
offers life insurance, annuities, property & casualty insurance, and other
financial services to individuals, as well as group insurance and retirement &
savings products and services to corporations and other institutions.
Our well-recognized brand, leading market positions, competitive and innovative
product offerings and financial strength and expertise should help drive future
growth and enhance shareholder value, building on a long history of fairness,
honesty and integrity. Over the course of the next several years, we will pursue
the following objectives to position the Company for continued growth and
achieve our vision of being recognized as the leading global life insurance and
employee benefits provider:
• Refocus our U.S. businesses
- Manage mature markets for cash flow
- Shift product mix away from capital intensive products
- Invest in growth initiatives for the voluntary/worksite and direct channels
- Drive margin improvement
• Build the Global Employee Benefits business
- Accelerate our local employee benefits businesses outside the United States
- Grow our global benefits businesses through multinational and expatriate
solutions
• Grow emerging markets presence
- Seek opportunistic mergers and acquisitions opportunities to complement
our organic growth
- Accelerate our base of earnings in emerging markets in which we already
have a strong presence
• Drive toward customer centricity and a global brand
- Develop a deep understanding of our customers' needs and expectations
- Capture unique market and industry consumer insights
- Build a global brand with a singular global brand promise
As announced in November 2011, the Company reorganized its business from its
former U.S. Business and International structure into three broad geographic
regions to better reflect its global reach. As a result, in the first quarter of
2012, the Company reorganized into six segments, reflecting these broad
geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate
Benefit Funding; and Latin America (collectively, "The Americas"); Asia; and
Europe, the Middle East and Africa ("EMEA"). In addition, the Company reports
certain of its results of operations in Corporate & Other, which includes
MetLife Bank and other business activities. Management continues to evaluate the
Company's segment performance and allocated resources and may adjust such
measurements in the future to better reflect segment profitability.
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The Americas. The Americas consists of the following segments:
• Retail. Our Retail segment offers a broad range of protection products and
services and a variety of annuities to individuals and employees of
corporations and other institutions, and is organized into two businesses:
Life and Annuities. Our Life insurance products and services include variable
life, universal life, term life and whole life products. Annuities include a
variety of variable and fixed annuities which provide for both asset
accumulation and asset distribution needs. Additionally, through our
broker-dealer affiliates, we offer a full range of mutual funds and other
securities products.
• Group, Voluntary & Worksite Benefits. Our Group, Voluntary & Worksite
Benefits segment offers a broad range of protection products and services to
individuals and corporations, as well as other institutions and their
respective employees, and is organized into three businesses: Group Life,
Non-Medical Health and Property & Casualty. Group Life insurance products and
services include variable life, universal life and term life products. Our
Non-Medical Health products and services include dental insurance, group
short- and long-term disability, individual disability income, long-term
care, critical illness and accidental death & dismemberment coverages.
Property & Casualty provides personal lines property and casualty insurance,
including private passenger automobile, homeowners and personal excess
liability insurance.
• Corporate Benefit Funding. Our Corporate Benefit Funding segment includes an
array of annuity and investment products, including guaranteed interest
products and other stable value products, income annuities, and separate
account contracts for the investment management of defined benefit and
defined contribution plan assets. This segment also includes certain products
to fund postretirement benefits and company-, bank- or trust-owned life
insurance used to finance non-qualified benefit programs for executives.
• Latin America. Our Latin America segment offers a broad range of products to
both individuals and corporations, as well as other institutions and their
respective employees, which include life insurance, accident and health
insurance, group medical, dental, credit life insurance, annuities, endowment
and retirement & savings products.
Asia. Our Asia segment offers a broad range of products to both individuals and
corporations, as well as other institutions and their respective employees,
which include whole life, term life, variable life, universal life, accident and
health insurance, fixed and variable annuities and endowment products.
EMEA. Our EMEA segment offers a broad range of products to both individuals and
corporations, as well as other institutions and their respective employees,
which include life insurance, accident and health insurance, credit life
insurance, annuities, endowment and retirement & savings products.
Corporate & Other contains the excess capital not allocated to the segments,
external integration costs, internal resource costs for associates committed to
acquisitions and various start-up and certain run-off entities. Corporate &
Other also includes assumed reinsurance of certain variable annuity products
from our former operating joint venture in Japan. This in-force reinsurance
agreement reinsures living and death benefit guarantees issued in connection
with variable annuity products. Additionally, Corporate & Other includes
interest expense related to the majority of the Company's outstanding debt,
expenses associated with certain legal proceedings, the financial results of
MetLife Bank (see "Industry Trends - Regulatory Developments" and Note 2 of the
Notes to the Interim Condensed Consolidated Financial Statements for information
regarding MetLife Bank's exit from certain of its businesses (the "MetLife Bank
Events")) and income tax audit issues. Corporate & Other also includes the
elimination of intersegment amounts, which generally relate to intersegment
loans, which bear interest rates commensurate with related borrowings.
Also in the first quarter of 2012, the Company adopted new guidance regarding
accounting for DAC. See Note 1 of the Notes to the Interim Condensed Financial
Statements for further information. As a result, prior period results have been
revised in connection with the Company's reorganization and the retrospective
application of the first quarter 2012 adoption of new guidance regarding
accounting for DAC.
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We continue to experience an increase in market share and sales in several of
our businesses; however, global economic conditions continue to negatively
impact the demand for some of our products. Portfolio growth resulting from
strong sales from the majority of our businesses drove positive investment
results and higher asset-based fee revenue. In addition, declining interest
rates resulted in significant derivative gains.
Three Months Six Months
Ended Ended
June 30, June 30,
2012 2011 2012 2011
(In millions)
Income (loss) from continuing operations,
net of income tax $ 2,300 $ 1,062 $ 2,166 $ 1,986
Less: Net investment gains (losses) (64 ) (155 ) (174 ) (254 )
Less: Net derivative gains (losses) 2,092 352 114 37
Less: Other adjustments to continuing
operations (1) (725 ) (446 ) (1,135 ) (660 )
Less: Provision for income tax (expense)
benefit (460 ) 73 411 277
Operating earnings 1,457 1,238 2,950 2,586
Less: Preferred stock dividends 31 31 61 61
Operating earnings available to common
shareholders $ 1,426 $ 1,207 $ 2,889 $ 2,525
(1) See definitions of operating revenues and operating expenses for the
components of such adjustments
Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30,
2011
During the three months ended June 30, 2012, income (loss) from continuing
operations, net of income tax, increased $1.2 billion over the prior period. The
change was predominantly due to a $1.7 billion ($1.1 billion, net of income tax)
favorable change in net derivative gains (losses) primarily driven by declining
interest rates and the impact of nonperformance risk, and by a $219 million, net
of income tax, favorable change in operating earnings available to common
shareholders. Also included in income (loss) from continuing operations, net of
income tax, were the unfavorable results of the Divested Businesses which
decreased $186 million ($123 million, net of income tax) over the prior period.
The increase in operating earnings available to common shareholders was
primarily driven by improved investment results and higher asset-based fee
revenue as strong sales levels drove portfolio growth. In addition, market
factors contributed to lower average crediting rates. Catastrophe losses were
lower in the current period as compared to the significant weather-related
claims in the prior period.
Six Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011
During the six months ended June 30, 2012, income (loss) from continuing
operations, net of income tax, increased $180 million over the prior period. The
change was predominantly due to a $364 million, net of income tax, favorable
change in operating earnings available to common shareholders. Also included in
income (loss) from continuing operations, net of income tax, were the
unfavorable results of the Divested Businesses which decreased $309 million
($202 million, net of income tax) over the prior period.
The favorable change in operating earnings available to common shareholders was
primarily driven by improved investment results and higher asset-based fee
revenue as strong sales levels drove portfolio growth. In addition, market
factors contributed to lower average crediting rates and higher investment
yields. Net cash flows from operations and reinvestment proceeds have been
invested in longer duration and higher yielding assets, including
privately-placed investments, which also improved yields. Favorable claims
experience resulted from lower catastrophe losses in the current period as
compared to the significant weather-related claims in the prior period.
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Consolidated Company Outlook
In 2012, we expect a solid improvement in the operating earnings of the Company
over 2011, driven primarily by the following:
• Growth in premiums, fees and other revenues driven by:
- Rational pricing strategy in the group insurance marketplace;
- Higher fees earned on separate accounts primarily due to favorable net
flows of variable annuities, which are expected to remain strong in 2012,
thereby increasing the value of those separate accounts; and
- Increases in our businesses outside of the U.S., notably accident and health, from continuing organic growth throughout our various geographic
regions and leveraging of our multichannel distribution network.
• Expanding our presence in emerging markets.
• Focus on disciplined underwriting. We see no significant changes to the
underlying trends that drive underwriting results and continue to anticipate
solid results in 2012; however, unanticipated catastrophes, similar to those
that occurred during 2011, could result in a high volume of claims.
• Focus on expense management. We continue to focus on expense control
throughout the Company, and managing the costs associated with the
integration of American Life Insurance Company and Delaware American Life
Insurance Company (collectively, "ALICO").
• Continued disciplined approach to investing and asset/liability management
("ALM"), including significant hedging to protect against low interest rates.
As a result of new financial accounting guidance for DAC which we adopted in the
first quarter of 2012, we estimate that there will be a negative impact on our
2012 operating earnings primarily in the Asia segment, with no impact on our
future cash flows. See Note 1 of the Notes to the Interim Condensed Consolidated
Financial Statements.
We expect only modest investment losses in 2012, but more difficult to predict
is the impact of potential changes in fair value of freestanding and embedded
derivatives as even relatively small movements in market variables, including
interest rates, equity levels and volatility, can have a large impact on the
fair value of derivatives and net derivative gains (losses). Additionally,
changes in fair value of embedded derivatives within certain insurance
liabilities may have a material impact on net derivative gains (losses) related
to the inclusion of an adjustment for nonperformance risk.
As part of an enterprise-wide strategic initiative, by 2016, the Company expects
to increase its operating return on common equity to between 12% and 14%, up
from 10.3% at December 31, 2011, driven by higher operating earnings. The
Company will leverage its scale to improve the value it provides to customers
and shareholders in order to achieve $1 billion in efficiencies, $600 million of
which is related to net pre-tax expense savings, and $400 million of which will
be reinvested in our technology, platforms and functionality to improve our
current operations and develop new capabilities. Additionally, the Company will
shift its product mix toward protection products and away from more
capital-intensive products, in order to generate more predictable operating
earnings and cash flows, and improve its risk profile and free cash flow. The
Company expects that by 2016, more than 20% of its operating earnings will come
from emerging markets.
Industry Trends
We continue to be impacted by the unstable global financial and economic
environment that has been affecting the industry.
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Financial and Economic Environment
Our business and results of operations are materially affected by conditions in
the global capital markets and the economy generally. Stressed conditions,
volatility and disruptions in global capital markets, particular markets, or
financial asset classes can have an adverse effect on us, in part because we
have a large investment portfolio and our insurance liabilities are sensitive to
changing market factors. Global market factors, including interest rates, credit
spreads, equity prices, real estate markets, foreign currency exchange rates,
consumer spending, business investment, government spending, the volatility and
strength of the capital markets, deflation and inflation, all affect the
business and economic environment and, ultimately, the amount and profitability
of our business. Disruptions in one market or asset class can also spread to
other markets or asset classes. Upheavals in the financial markets can also
affect our business through their effects on general levels of economic
activity, employment and customer behavior. While our diversified business mix
and geographically diverse business operations partially mitigate these risks,
correlation across regions, countries and global market factors may reduce the
benefits of diversification.
For the last several quarters, concerns about capital markets and the solvency
of certain European Union member states, including Portugal, Ireland, Italy,
Greece and Spain ("Europe's perimeter region"), and of financial institutions
that have significant direct or indirect exposure to debt issued by these
countries, have been a cause of elevated levels of market volatility. See "-
Investments - Current Environment" for information regarding credit ratings
downgrades, support programs for Europe's perimeter region and our exposure to
obligations of European governments and private obligors. The financial markets
have also been affected by concerns that other European Union member states
could experience similar financial troubles, that some countries could default
on their obligations, have to restructure their outstanding debt, or be unable
or unwilling to comply with the terms of any aid provided to them, that
financial institutions with significant holdings of sovereign or private debt
issued by borrowers in Europe's perimeter region could experience financial
stress, or that one or more countries may exit the Euro zone, any of which could
have significant adverse effects on the European and global economies and on
financial markets, generally. See "Risk Factors - We Are Exposed to Significant
Financial and Capital Markets Risk Which May Adversely Affect Our Results of
Operations, Financial Condition and Liquidity, and May Cause Our Net Investment
Income to Vary from Period to Period" included in the 2011 Annual Report.
Financial markets have also been affected by concerns over U.S. fiscal policy,
including the uncertainty regarding the "fiscal cliff" composed of tax increases
and automatic government spending cuts that will become effective at the end of
2012 unless steps are taken to delay or offset them, as well as the need to
again raise the U.S. federal government's debt ceiling by the end of 2012 and
reduce the federal deficit. These issues could, on their own, or combined with
the slowing of the global economy generally, have severe repercussions to the
U.S. and global credit and financial markets, further exacerbate concerns over
sovereign debt of other countries and disrupt economic activity in the U.S. and
elsewhere. See "Risk Factors - Concerns Over U.S. Fiscal Policy and the "Fiscal
Cliff" in the U.S., as well as Rating Agency Downgrades of U.S. Treasury
Securities, Could Have an Adverse Effect on Our Business, Financial Condition
and Results of Operations."
In June 2012, Moody's Investors Service ("Moody's") announced that it downgraded
the long-term ratings and standalone credit for a number of banks and securities
firms with global capital markets operations. Through our ongoing credit
evaluation process, we have been closely monitoring our financial institution
investment holdings, including the impact of the Moody's downgrades to these
institutions, and do not expect these downgrades to have a material adverse
effect on our business, results of operations and financial condition.
Impact of a Sustained Low Interest Rate Environment. As a financial holding
company with significant operations in the U.S., we are affected by the monetary
policy of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Federal Reserve Bank of New York (the "FRB of NY" and,
collectively with the Federal Reserve Board, the "Federal Reserve"). The Federal
Reserve Board has taken a number of actions in recent years to spur economic
activity by keeping interest rates low and may take further actions to influence
interest rates in the future, which may have an impact on the pricing levels of
risk-bearing investments, and may adversely impact the level of product sales.
On June 20, 2012, the Federal Reserve Board
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reiterated its plans to keep interest rates low until at least through late
2014, in order to revive the slow recovery from stressed economic conditions. It
also extended to the end of 2012 "Operation Twist," a program announced in
September 2011 by the Federal Open Market Committee to purchase U.S. Treasury
securities with remaining maturities of six to 30 years and to sell, over the
same period, an equal par value of U.S. Treasury securities with remaining
maturities of approximately three years or less. By reducing the supply of
longer-term securities in the market, Operation Twist is intended to put
downward pressure on longer-term interest rates relative to levels that would
otherwise prevail. The reduction in longer-term interest rates, in turn, is
intended to contribute to a broad easing of financial market conditions that
could provide additional stimulus to support the economic recovery. As a global
insurance company, we are also affected by the monetary policy of central banks
around the world. Central banks around the world, including the European Central
Bank, the Bank of England, the Bank of Japan, the Bank of Australia, the Central
Bank of Brazil and the Central Bank of China, followed the recent actions of the
Federal Reserve Board to lower interest rates. The collective effort globally to
lower interest rates was in response to concerns about Europe's sovereign debt
crisis and slowing global economic growth. See "Risk Factors - Governmental and
Regulatory Actions for the Purpose of Stabilizing and Revitalizing the Financial
Markets and Protecting Investors and Consumers May Not Achieve the Intended
Effect or Could Adversely Affect Our Competitive Position" included in the 2011
Annual Report and "- Investments - Current Environment."
Some of our products expose us to the risk that changes in interest rates will
reduce our investment margin or "spread," or the difference between the amounts
that we are required to fund under contracts in our general account liabilities
and the rate of return we are able to earn on general account investments
intended to support obligations under the contracts. Our spread is a key
component of our net income.
In periods of declining interest rates, we may have to invest insurance cash
flows and to reinvest the cash flows we received as interest or return of
principal on our investments in lower yielding instruments. Moreover, borrowers
may prepay or redeem the fixed income securities, commercial or agricultural
mortgage loans and mortgage-backed securities in our investment portfolio with
greater frequency in order to borrow at lower market rates. In periods of
changing interest rates, net derivative gains (losses) will also be impacted,
particularly when changes in interest rates are highly volatile. Our expectation
for future spreads is an important component in the amortization of DAC and
VOBA, and significantly lower spreads may cause us to accelerate amortization,
thereby reducing net income in the affected reporting period. Lower net income
and operating earnings may also impact the carrying value of certain assets such
as goodwill or potentially result in loss recognition on certain policy
liabilities.
Mitigating Actions. The Company has been and continues to be proactive in its
investment strategies, product designs, and crediting rate strategies to
mitigate the risk of unfavorable consequences in this type of environment.
Lowering interest crediting rates can help offset decreases in investment
margins on some products. Our ability to lower interest crediting rates could be
limited by competition, regulatory approval, or contractual guarantees of
minimum rates and may not match the timing or magnitude of changes in asset
yields. As a result, our spread could decrease or potentially become negative.
The Company applies disciplined asset-liability management strategies, including
the use of derivatives, to protect spreads on products subject to these risks as
part of its investment strategy in mitigating the risk of sustained low interest
rates in the U.S. In addition, business actions, such as shifting the sales
focus to less interest rate sensitive products, can also mitigate this risk. As
a result of these actions, the Company expects to be able to substantially
mitigate the negative impact of a sustained low interest rate environment in the
U.S. on the Company's profitability. Based on a near to intermediate term
analysis of sustained lower interest rate environment in the U.S., the Company
anticipates operating earnings will continue to increase, although at a slower
growth rate.
In addition, the Company is well diversified across product, distribution, and
geography. Our non-U.S. businesses, reported within our Latin America, Asia and
EMEA segments, which account for approximately 35% of our operating earnings,
are not significantly interest rate or market sensitive. The Company's primary
exposure within these segments is insurance risk. We expect our non-U.S.
businesses to grow faster than our U.S. businesses and, over time, to become a
larger percentage of our total business.
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The products that have significant sensitivity to U.S. interest rates are
concentrated in the Company's Retail and Group, Voluntary & Worksite Benefits
segments.
Competitive Pressures
The life insurance industry remains highly competitive. The product development
and product life-cycles have shortened in many product segments, leading to more
intense competition with respect to product features. Larger companies have the
ability to invest in brand equity, product development, technology and risk
management, which are among the fundamentals for sustained profitable growth in
the life insurance industry. In addition, several of the industry's products can
be quite homogeneous and subject to intense price competition. Sufficient scale,
financial strength and financial flexibility are becoming prerequisites for
sustainable growth in the life insurance industry. Larger market participants
tend to have the capacity to invest in additional distribution capability and
the information technology needed to offer the superior customer service
demanded by an increasingly sophisticated industry client base. We believe that
the turbulence in financial markets that began in the second half of 2007, its
impact on the capital position of many competitors, and subsequent actions by
regulators and rating agencies have highlighted financial strength as a
significant differentiator from the perspective of customers and certain
distributors. In addition, the financial market turbulence and the economic
recession have led many companies in our industry to re-examine the pricing and
features of the products they offer and may lead to consolidation in the life
insurance industry.
Regulatory Developments
The U.S. life insurance industry is regulated primarily at the state level, with
some products and services also subject to Federal regulation. As life insurers
introduce new and often more complex products, regulators refine capital
requirements and introduce new reserving standards for the life insurance
industry. Regulations recently adopted or currently under review can potentially
impact the statutory reserve and capital requirements of the industry. In
addition, regulators have undertaken market and sales practices reviews of
several markets or products, including equity-indexed annuities, variable
annuities and group products, as well as reviews of the utilization of
affiliated captives or off-shore entities to reinsure insurance risks. The
regulation of the financial services industry in the U.S. and internationally
has received renewed scrutiny as a result of the disruptions in the financial
markets. Significant regulatory reforms have been recently adopted and
additional reforms proposed, and these or other reforms could be implemented.
See "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly
Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies
May Reduce Our Profitability and Limit Our Growth," as well as "Risk Factors -
Changes in U.S. Federal and State Securities Laws and Regulations, and State
Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect
Our Operations and Our Profitability" included in the 2011 Annual Report.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"),
which was signed by President Obama in July 2010, effected the most far-reaching
overhaul of financial regulation in the U.S. in decades. The full impact of
Dodd-Frank on us will depend on the numerous rulemaking initiatives required or
permitted by Dodd-Frank which have begun to be implemented, but which are not
scheduled to be completed for several years. See "Risk Factors - Various Aspects
of Dodd-Frank Could Impact Our Business Operations, Capital Requirements and
Profitability and Limit Our Growth" included in the 2011 Annual Report.
As a federally chartered national banking association, MetLife Bank is subject
to a wide variety of banking laws, regulations and guidelines, as is MetLife,
Inc., as a bank holding company. Numerous other proposed or recently adopted
enhanced regulatory requirements will apply to MetLife, Inc. if it remains a
bank holding company, as discussed below. If MetLife is able to deregister as a
bank holding company, it may be subject to some of the same or other enhanced
regulatory requirements if, in the future, it is designated as a non-bank
systemically important financial institution subject to enhanced supervision by
the Federal Reserve (a "non-bank systemically important financial institution"
or "non-bank SIFI") or as a global systemically important insurer ("G-SII"), as
described below.
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In December 2011, MetLife Bank and MetLife, Inc. entered into a definitive
agreement to sell most of the depository business of MetLife Bank to GE Capital
Financial Inc. ("GE Capital Bank"). The transaction is subject to the receipt of
regulatory approvals from the Federal Deposit Insurance Corporation ("FDIC") and
to the satisfaction of other customary closing conditions. The Utah Department
of Financial Institutions has approved the transaction and the Office of the
Comptroller of the Currency (the "OCC") has granted approval of a change in the
composition of all or substantially all of MetLife Bank's assets in connection
with the transaction. GE Capital Bank has filed an application with the FDIC
seeking approval of the assumption of the deposits to be transferred to it, and
MetLife Bank has filed an application with the FDIC to terminate MetLife Bank'sFDIC deposit insurance contingent upon certification that MetLife Bank has no
remaining deposits (which is dependent on the assumption by GE Capital Bank of
the deposits to be transferred to it). The parties have each responded to
questions on their applications from the staff of the FDIC, and GE Capital Bank
is in the process of responding to recent additional requests from the FDIC. The
parties are awaiting action by the FDIC on their applications. Additionally, in
January 2012, MetLife, Inc. announced it was exiting the business of originating
forward residential mortgages and, in April 2012, announced it was exiting the
businesses of originating and servicing reverse residential mortgages and that
it and MetLife Bank entered into a definitive agreement to sell MetLife Bank's
reverse mortgage servicing portfolio. On June 29, 2012, the Company sold the
majority of MetLife Bank's reverse mortgage servicing rights and related assets
and liabilities. See Note 2 of the Notes to the Interim Condensed Consolidated
Financial Statements. Once MetLife Bank has completely exited its depository
business, MetLife, Inc. plans to terminate MetLife Bank'sFDIC insurance,
putting MetLife, Inc. in a position to be able to deregister as a bank holding
company. Upon completion of the foregoing, MetLife, Inc. will no longer be
regulated as a bank holding company or subject to enhanced supervision and
prudential standards as a bank holding company with assets of $50 billion or
more. However, if, in the future, the Financial Stability Oversight Council
("FSOC") designates MetLife, Inc. as a non-bank SIFI, we would once again be
subject to regulation by the Federal Reserve and enhanced supervision and
prudential standards, such as Regulation YY. See "- Industry Trends - Regulatory
Developments - Regulatory Developments Relating to Non-Bank SIFIs and G-SIIs."
Regulatory Developments Applicable to Bank Holding Companies. The Federal
Reserve's capital plans rule requires all bank holding companies with assets of
more than $50 billion, including MetLife, Inc., to submit annual capital plans
which include projections of the company's capital levels under baseline and
stress scenarios over a nine-quarter period. The Federal Reserve will approve or
object to a company's proposed capital actions, such as dividends and stock
repurchases, based on the results of those capital plans and the Federal
Reserve's assessment of the robustness of the company's capital planning
processes. In addition, in recent years, the Federal Reserve has conducted the
Comprehensive Capital Analysis and Review ("CCAR"), an assessment of the
internal capital planning processes, capital adequacy and proposed capital
distributions of large holding companies, including MetLife, Inc.See "Risk
Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated,
and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce
Our Profitability and Limit Our Growth." In January 2012, MetLife submitted to
the Federal Reserve a comprehensive capital plan, as mandated by the capital
plans rule, and additional information required by the 2012 CCAR. The capital
plan projected MetLife's capital levels to the end of 2013 under baseline and
stress scenarios, including a stress scenario developed and provided by the
Federal Reserve as part of the 2012 CCAR. In March 2012, the Federal Reserve,
based on its assessment, objected to the incremental capital actions described
in MetLife's capital distribution plan, which included a proposed stock
repurchase and dividend increase. In June 2012, the Federal Reserve Board
granted MetLife, Inc. an extension of time until September 30, 2012 to resubmit
its capital plan under the capital plans rule.
In June 2012, the OCC, Federal Reserve Board and the FDIC published three
notices of proposed rulemaking (the "Bank Capital NPRs") that would revise and
replace the agencies' current capital rules with rules consistent with (i) the
final rules for increased capital and liquidity requirements for bank holding
companies, such as MetLife, Inc., published by the Basel Committee on Banking
Supervision (the "Basel Committee") in December 2010 ("Basel III"), as well as
the applicable sections of Dodd-Frank, (ii) a series of revisions adopted by the
Basel Committee to the market risk capital requirements for exposures in a
banking organization's trading book in 2005, 2009 and 2010 (collectively, "Basel
II.5"), and (iii) the market risk capital requirements as initially
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published by the Basel Committee in June 2004 ("Basel II"). The first Bank
Capital NPR, to be phased in from 2013 through 2019, focuses on establishing new
risk-based and leverage capital ratios, and would revise rules on what
constitutes "capital" in accordance with Basel III. The second Bank Capital NPR,
to be effective on January 1, 2015, focuses primarily on the risk-weighting of
assets and activities of banking organizations in accordance with Basel II. The
third Bank Capital NPR includes revisions to the advanced approaches risk-based
capital rules of Basel II, applicable to the largest banking organizations, to
make them consistent with Basel III and Dodd-Frank. Finally, the agencies
finalized the market risk capital rule, implementing Basel II.5. These capital
requirements would not apply to MetLife, Inc. if it succeeds in de-registering
as a bank holding company before the rules become effective.
The Basel Committee has also published rules requiring a capital surcharge for
globally systemically important banks. The Bank Capital NPRs did not implement
this capital surcharge. Rules implementing the capital surcharge are expected to
be finalized by 2014, with a phase-in from 2016 to 2019. As currently proposed,
this surcharge would not apply to global non-bank SIFIs. However, international
regulatory bodies are currently engaged in evaluating standards to identify such
companies and to develop a regulatory regime that would apply to them, which may
include enhanced capital requirements or other measures, as discussed below.
In December 2011, the Federal Reserve Board issued a notice of proposed
rulemaking relating to enhanced prudential standards required by Dodd-Frank for
bank holding companies with assets of $50 billion or more and non-bank SIFIs,
known as Regulation YY. Regulation YY would impose (i) enhanced risk-based
capital requirements, (ii) leverage limits, (iii) liquidity requirements,
(iv) single counterparty exposure limits, (v) governance requirements for risk
management, (vi) stress test requirements, and (vii) special debt-to-equity
limits for certain companies, and would establish a procedure for early
remediation based on the failure to comply with these requirements.
The ability of MetLife Bank and MetLife, Inc., as a bank holding company, to pay
dividends, repurchase common stock or other securities or engage in other
transactions that could affect its capital or need for capital could be reduced
by any additional capital requirements that might be imposed as a result of the
enactment of Dodd-Frank, Regulation YY and/or the adoption of the Bank Capital
NPRs and other regulatory initiatives, if MetLife Inc. is unable to de-register
as a bank holding company before the requirements become effective. See "Risk
Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated,
and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce
Our Profitability and Limit Our Growth."
In April 2011, the Federal Reserve Board and the FDIC proposed a rule regarding
the implementation of the Dodd-Frank requirement that (i) each non-bank SIFI and
each bank holding company with assets of $50 billion or more report periodically
to the Federal Reserve Board, the FDIC and the FSOC the plan of such company for
rapid and orderly resolution in the event of material financial distress or
failure (sometimes referred to as a "living will"), and (ii) that each such
company report on the nature and extent of credit exposures of such company to
significant bank holding companies and significant non-bank financial companies
and the nature and extent of credit exposures of significant bank holding
companies and significant non-bank financial companies to such covered company.
In November 2011, the Federal Reserve Board and the FDIC adopted a final rule
implementing the resolution plan requirement, effective November 30, 2011, but
deferred finalizing the credit exposure reporting requirement until a later
date. MetLife, Inc. was not among the institutions that were required to submit
a resolution plan on July 2, 2012, but the requirement may apply to MetLife,
Inc. if it remains a bank holding company, or if, in the future, the FSOC
designates MetLife, Inc. as a non-bank SIFI. See "Risk Factors - Dodd-Frank
Provides for the Resolution or Liquidation of Certain Types of Financial
Institutions, Including Bank Holding Companies Like MetLife, Inc."
Regulatory Developments Relating to Non-Bank SIFIs and G-SIIs. If MetLife, Inc.
is able to deregister as a bank holding company, many of the foregoing
requirements will not apply to it. However, if, in the future, the FSOC
designates MetLife, Inc. as a non-bank SIFI, it could once again be subject to
regulation by the Federal Reserve and enhanced supervision and prudential
standards, such as enhanced prudential standards pursuant to Regulation YY and
the requirements relating to resolution planning and (when adopted) credit
exposure reporting. Although non-bank SIFIs are not subject to the capital plans
rule, they would be subject to the stress
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testing requirements in proposed Regulation YY. As proposed, Regulation YY would
apply the same enhanced regulatory standards to non-bank SIFIs as would apply to
systemically important banks; the Federal Reserve Board has solicited and is
considering comments on the appropriateness of this treatment. For further
information regarding enhanced prudential standards and Regulation YY, see
"Business - U.S. Regulation - Dodd Frank and Other Legislative and Regulatory
Developments - Enhanced Prudential Standards" included in the 2011 Annual
Report.
In April 2012, the FSOC adopted final rules setting forth the process it will
follow and the criteria it will use to assess whether a non-bank financial
company should be subject to enhanced supervision by the Federal Reserve as a
non-bank SIFI. The FSOC will follow a three-stage process. In Stage 1, a set of
uniform quantitative metrics will be applied to a broad group of non-bank
financial companies in order to identify non-bank financial companies for
further evaluation. If MetLife, Inc. meets the total consolidated assets
threshold and at least one of the other five quantitative thresholds used in the
first stage, the FSOC will continue with two stages of further analysis using
additional sources of data and qualitative and quantitative factors. MetLife,
Inc. is currently a bank holding company and, as a result, it is not subject to
designation as a non-bank SIFI. However, if MetLife, Inc. succeeds in
deregistering as a bank holding company, it could be considered for designation
as a non-bank SIFI. As of June 30, 2012, MetLife, Inc. met the total
consolidated assets threshold and at least one of the other Stage 1 quantitative
thresholds.
As part of the global initiative to identify global systemically important
financial institutions ("G-SIFIs"), in May 2012, the International Association
of Insurance Supervisors ("IAIS") published a proposed assessment methodology
for designating G-SIIs. The proposed methodology is intended to identify those
insurers whose distress or disorderly failure, because of their size, complexity
and interconnectedness, would cause significant disruption to the global
financial system and economic activity. The proposed methodology has three
steps: (i) data collection; (ii) indicator-based assessment addressing five
categories: size, extent of global activity, degree of interconnectedness within
the financial system, amount of non-traditional and non-insurance activities and
substitutability; and (iii) supervisory judgment and validation process,
including quantitative and qualitative assessments. Any insurers identified by
the IAIS as G-SIIs would be subject to additional policy measures. These policy
measures will be the subject to a subsequent IAIS consultation paper to be
released later in 2012, but the IAIS has indicated that they could include
higher capital requirements, enhanced supervision (including more detailed and
frequent reporting and removal of barriers to orderly resolution of the G-SII),
as well as additional measures to improve the degree of self-sufficiency of a
G-SII's different business segments (including separate legal structures for
traditional insurance and non-traditional or non-insurance activities, and
restrictions on intercompany subsidies). Comments on the proposal were due by
July 31, 2012. The IAIS expects to publish the first list of G-SIIs in November
2013, with annual updates thereafter, enabling insurers to move on and off the
list, in order to incentivize insurers to reduce their systemic importance. If
MetLife, Inc. were identified as a G-SII, its competitive position relative to
other life insurers that were not so designated could be adversely affected. See
"Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly
Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies
May Reduce Our Profitability and Limit Our Growth."
If and when MetLife Bank'sFDIC insurance is terminated, MetLife, Inc. and its
affiliates will not be subject to the bans on proprietary trading and fund
activities under the Volcker Rule (as discussed more fully below under "-
Regulatory Developments Affecting Investment Activities and Derivatives,
including the Volcker Rule." However, because the Volcker Rule nevertheless
imposes additional capital requirements and quantitative limits on such trading
and activities by a non-bank SIFI, MetLife, Inc. and its affiliates could be
subject to such requirements and limits were they to be designated non-bank
SIFIs, Regulations defining and governing such requirements and limits on
non-bank SIFIs have not been proposed. Commencing from the date of designation,
a non-bank SIFI will have a two-year period, subject to further extension by the
Federal Reserve, to conform with any such requirements and limits. Subject to
safety and soundness determinations as part of rulemaking that could require
additional capital requirements and quantitative limits, Dodd-Frank provides
that the exemptions under the Volcker Rule also are available to exempt any
additional capital requirements and quantitative limits on non-bank SIFIs.
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Regulatory Developments Affecting Investment Activities and Derivatives,
including the Volcker Rule. Dodd-Frank also includes provisions that may impact
the investments and investment activities of MetLife, Inc. and its subsidiaries,
including the federal regulation of such activities. Such provisions include the
regulation of the over-the-counter ("OTC") derivatives markets and the
prohibitions on FDIC-insured depository institutions and their affiliates
engaging in proprietary trading or sponsoring or investing in hedge funds or
private equity funds (commonly known as the Volcker Rule). Dodd-Frank provides
an exemption to the Volcker Rule for investment activity by a regulated
insurance company or its affiliate solely for the general account of such
insurance company if such activity is in compliance with the insurance company
investment laws of the state or jurisdiction in which such company is domiciled
and the appropriate Federal regulators after consultation with relevant
insurance commissioners have not jointly determined such laws to be insufficient
to protect the safety and soundness of the institution or the financial
stability of the U.S. Other exemptions to the Volcker Rule, including, but not
limited to, activities for risk-mitigating hedging and activities on behalf of
customers, may be available for the general account or separate account
activities of insurance companies. Notwithstanding the foregoing, the
appropriate Federal regulatory authorities are permitted under Dodd-Frank to
impose, as part of rulemaking, additional capital requirements and other
restrictions on any exempted activity to protect the safety and soundness of an
entity engaged in such activity. Dodd-Frank provides for a period of rulemaking
during which the effects of the statutory language may be clarified. Among other
things, one task of the rulemaking is to appropriately accommodate the business
of insurance within an insurance company subject to regulation in accordance
with relevant insurance company investments laws. Pursuant to Dodd-Frank, the
Volcker Rule has become effective on July 21, 2012, notwithstanding the fact
that final regulations on the Volcker Rule were not implemented by such date. On
April 19, 2012, the Federal Reserve Board adopted a statement clarifying that a
covered banking entity has the full two-year period provided by Dodd-Frank
(i.e., until July 21, 2014) to fully conform its activities and investments to
the Volcker Rule, subject to further extensions (up to three one-year
extensions) by the Board in accordance with the statute. According to the
statement, during the conformance period, every covered banking entity is
expected to engage in good-faith efforts, appropriate for its activities and
investments, that will result in the conformance of all its activities and
investments to such restrictions by no later than the end of the conformance
period. Although MetLife believes that the statutory exemptions apply to the
activities and investments of its insurance companies and other applicable
affiliates, while it remains subject to the Volcker Rule and, until the
rulemaking is complete, including the scope of the statutory exemptions to be
applied to insurance companies for each of the prohibitions on proprietary
trading and fund sponsoring or investing, it is unclear whether MetLife, Inc.
may have to alter any of its future activities to comply, including continuing
to invest in private investment funds for its general accounts or to issue
certain insurance products backed by its separate accounts. See "Risk Factors -
Various Aspects of Dodd-Frank Could Impact Our Business Operations, Capital
Requirements and Profitability and Limit Our Growth" included in the 2011 Annual
Report.
Mortgage and Foreclosure-Related Exposures
Since 2008, MetLife Bank has been engaged in the forward and reverse residential
mortgage origination and servicing business. In January 2012, MetLife, Inc.
announced that it was exiting the business of originating forward residential
mortgages and, in April 2012, announced it was exiting the businesses of
originating and servicing reverse residential mortgages and that it and MetLife
Bank entered into a definitive agreement to sell MetLife Bank's reverse mortgage
servicing portfolio. On June 29, 2012, the Company sold the majority of MetLife
Bank's reverse mortgage servicing rights and related assets and liabilities. See
Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements.
Notwithstanding the foregoing, MetLife Bank continues to have obligations to
repurchase loans or compensate for losses upon demand by investors due to claims
alleging defects in servicing of the loans or that material representations made
in connection with the sale of the loans (relating, for example, to the
underwriting and origination of the loans) are incorrect. MetLife Bank is
indemnified by the sellers of the acquired assets, for various periods depending
on the transaction and the nature of the claim, for origination and servicing
deficiencies that occurred prior to MetLife Bank's acquisition, including
indemnification for any repurchase claims made from investors who purchased
mortgage loans from the sellers. Substantially all mortgage servicing rights
("MSRs") that were acquired by MetLife Bank relate to loans sold to Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
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("FHLMC"). MetLife Bank has originated and sold conventional residential
mortgage loans primarily to FNMA and FHLMC and government residential mortgage
loans (insured by the Federal Housing Administration or guaranteed by the United
States Department of Veterans Affairs) into mortgage-backed securities
guaranteed by Government National Mortgage Association ("GNMA") (collectively,
the "Agency Investors") and, to a limited extent, a small number of private
investors. Substantially all of MetLife Bank's$76.0 billion servicing portfolio
consists of Agency Investors' product. Other than repurchase obligations,
MetLife Bank's exposure to repurchase obligations and losses related to
origination deficiencies is limited to the approximately $68.2 billion of loans
originated by MetLife Bank (all of which have been originated since August
2008). Reserves for representation and warranty repurchases and indemnifications
were $80 million and $69 million at June 30, 2012 and December 31, 2011,
respectively. MetLife Bank is exposed to losses due to claims alleging servicing
deficiencies on loans originated and sold, as well as servicing acquired, to the
extent such servicing deficiencies occurred while MetLife Bank was the servicer
of record. Management is satisfied that adequate provision has been made in the
Company's consolidated financial statements for all probable and reasonably
estimable repurchase obligations and losses.
Currently, MetLife Bank services approximately 1% of the aggregate principal
amount of the mortgage loans serviced in the U.S. State and federal regulatory
and law enforcement authorities have initiated various inquiries, investigations
or examinations of alleged irregularities in the foreclosure practices of the
residential mortgage servicing industry. Mortgage servicing practices have also
been the subject of Congressional attention. Authorities have publicly stated
that the scope of the investigations extends beyond foreclosure documentation
practices to include mortgage loan modification and loss mitigation practices.
On April 13, 2011, the OCC entered into consent decrees with several banks,
including MetLife Bank. The consent decrees require an independent review of
foreclosure practices and set forth new residential mortgage servicing
standards, including a requirement for a designated point of contact for a
borrower during the loss mitigation process. In addition, the Federal Reserve
Board entered into consent decrees with the affiliated bank holding companies of
these banks, including MetLife, Inc., to enhance the supervision of the mortgage
servicing activities of their banking subsidiaries. On August 6, 2012, the
Federal Reserve Board issued an Order of Assessment of a Civil Monetary Penalty
Issued Upon Consent against MetLife, Inc. that will impose a penalty of up to
$3,200,000 for the deficiencies in servicing of residential mortgage loans and
processing foreclosures at MetLife Bank that were the subject of the 2011
consent decree.
MetLife Bank also had a meeting with the Department of Justice regarding
mortgage servicing and foreclosure practices. It is possible that various state
or federal regulatory and law enforcement authorities may seek monetary
penalties from MetLife Bank relating to foreclosure practices.
MetLife Bank has also responded to a subpoena issued by the New York State
Department of Financial Services ("Department of Financial Services") regarding
hazard insurance and flood insurance that MetLife Bank obtains to protect the
lienholder's interest when the borrower's insurance has lapsed. In April and May
2012, MetLife Bank received two subpoenas issued by the Office of Inspector
General for the U.S. Department of Housing and Urban Development regarding
Federal Housing Administration ("FHA") insured loans. In June 2012, MetLife Bank
received a Civil Investigative Demand that the U.S. Department of Justice issued
as part of a False Claims Act investigation of allegations that MetLife Bank had
improperly originated and/or underwritten loans insured by the FHA.
The consent decrees, as well as the inquiries or investigations referred to
above, could adversely affect MetLife's reputation or result in material fines,
penalties, equitable remedies or other enforcement actions, and result in
significant legal costs in responding to governmental investigations or other
litigation. In addition, the changes to the mortgage servicing business required
by the consent decrees and the resolution of any other inquiries or
investigations may affect the profitability of such business.
The MetLife Bank Events may not relieve MetLife from complying with the consent
decrees, or protect it from the inquiries and investigations relating to
residential mortgage servicing and foreclosure activities, or any
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fines, penalties, equitable remedies or enforcement actions that may result, the
costs of responding to any such governmental investigations, or other
litigation.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the Interim Condensed Consolidated Financial
Statements. The most critical estimates include those used in determining:
(i) estimated fair values of investments in the absence of quoted market
values;
(ii) investment impairments;
(iii) estimated fair values of freestanding derivatives and the recognition and
estimated fair value of embedded derivatives requiring bifurcation;
(iv) capitalization and amortization of DAC and the establishment and
amortization of VOBA;
(v) measurement of goodwill and related impairment, if any;
(vi) liabilities for future policyholder benefits and the accounting for
reinsurance;
(vii) measurement of income taxes and the valuation of deferred tax assets;
(viii) measurement of employee benefit plan liabilities; and
(ix) liabilities for litigation and regulatory matters.
In addition, the application of acquisition accounting requires the use of
estimation techniques in determining the estimated fair values of assets
acquired and liabilities assumed - the most significant of which relate to
aforementioned critical accounting estimates. In applying the Company's
accounting policies, we make subjective and complex judgments that frequently
require estimates about matters that are inherently uncertain. Many of these
policies, estimates and related judgments are common in the insurance and
financial services industries; others are specific to the Company's business and
operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Summary of Critical Accounting Estimates" and Note 1 of the Notes to the
Consolidated Financial Statements included in the 2011 Annual Report.
Also, for a discussion of the new accounting guidance on DAC, see Note 1 of the
Notes to the Interim Condensed Consolidated Financial Statements.
Economic Capital
Economic capital is an internally developed risk capital model, the purpose of
which is to measure the risk in the business and to provide a basis upon which
capital is deployed. The economic capital model accounts for the unique and
specific nature of the risks inherent in the Company's business.
The Company's economic capital model aligns segment allocated equity with
emerging standards and consistent risk principles. Segment net investment income
is credited or charged based on the level of allocated equity; however, changes
in allocated equity do not impact the Company's consolidated net investment
income, operating earnings or income (loss) from continuing operations, net of
income tax.
Acquisitions and Dispositions
See Notes 2 and 18 of the Notes to the Interim Condensed Consolidated Financial
Statements.
On July 31, 2012, the previously announced acquisition to acquire, from members
of the Aviva Plc group ("Aviva"), Aviva's life insurance business in the Czech
Republic, Hungary and Romania closed. The acquisition of Aviva's Romanian
pension business is expected to close in the next six months, subject to
regulatory approvals.
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Results of Operations
Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30,
2011
Consolidated Results
We have experienced growth and an increase in market share in several of our
businesses. In the U.S., the economy has shown some signs of improvement and, as
a result, our group term life and disability businesses exhibited growth from
new sales, and our dental business continued to benefit from strong enrollments
and renewals along with a large new customer. Sales of annuities declined in
response to actions taken to manage sales volume in order to strike the right
balance among growth, profitability and risk. While we continue to experience
strong sales in our pension closeout business in the U.K, weak equity market
returns and lower interest rates adversely impacted sales of our pension
closeouts in the U.S. Policy sales of our property and casualty products
decreased as the housing and automobile markets remained sluggish; however,
average premiums for new policies increased. We also experienced steady growth
and improvement in sales of the majority of our products abroad.
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
Revenues
Premiums $ 9,161 $ 9,294 $ (133 ) (1.4 )%
Universal life and investment-type product
policy fees 2,097 1,969 128 6.5 %
Net investment income 4,719 5,094 (375 ) (7.4 )%
Other revenues 393 592 (199 ) (33.6 )%
Net investment gains (losses) (64 ) (155 ) 91 58.7 %
Net derivative gains (losses) 2,092 352 1,740
Total revenues 18,398 17,146 1,252 7.3 %
Expenses
Policyholder benefits and claims and
policyholder dividends 9,263 9,495 (232 ) (2.4 )%
Interest credited to policyholder account
balances 1,022 1,442 (420 ) (29.1 )%
Capitalization of DAC (1,315 ) (1,367 ) 52 3.8 %
Amortization of DAC and VOBA 1,479 1,254 225 17.9 %
Amortization of negative VOBA (181 ) (183 ) 2 1.1 %
Interest expense on debt 342 420 (78 ) (18.6 )%
Other expenses 4,450 4,575 (125 ) (2.7 )%
Total expenses 15,060 15,636 (576 ) (3.7 )%
Income (loss) from continuing operations
before provision for income tax 3,338 1,510
1,828
Provision for income tax expense (benefit) 1,038 448
590
Income (loss) from continuing operations,
net of income tax 2,300 1,062
1,238
Income (loss) from discontinued
operations, net of income tax 3 31
(28 ) (90.3 )%
Net income (loss) 2,303 1,093
1,210
Less: Net income (loss) attributable to
noncontrolling interests 8 (7
) 15
Net income (loss) attributable to MetLife,
Inc. 2,295 1,100
1,195
Less: Preferred stock dividends 31 31 - - %
Preferred stock redemption premium - - -
Net income (loss) available to MetLife,
Inc.'s common shareholders $ 2,264 $ 1,069 $ 1,195
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During the three months ended June 30, 2012, income (loss) from continuing
operations, before provision for income tax, increased $1.8 billion ($1.2
billion, net of income tax) over the prior period primarily driven by a
favorable change in net derivative gains (losses). This was partially offset by
an unfavorable change in the results of the Divested Businesses over the prior
period.
We manage our investment portfolio using disciplined ALM principles, focusing on
cash flow and duration to support our current and future liabilities. Our intent
is to match the timing and amount of liability cash outflows with invested
assets that have cash inflows of comparable timing and amount, while optimizing
risk-adjusted net investment income and risk-adjusted total return. Our
investment portfolio is heavily weighted toward fixed income investments, with
over 80% of our portfolio invested in fixed maturity securities and mortgage
loans. These securities and loans have varying maturities and other
characteristics which cause them to be generally well suited for matching the
cash flow and duration of insurance liabilities. Other invested asset classes
including, but not limited to, equity securities, other limited partnership
interests and real estate and real estate joint ventures, provide additional
diversification and opportunity for long-term yield enhancement in addition to
supporting the cash flow and duration objectives of our investment portfolio. We
also use derivatives as an integral part of our management of the investment
portfolio to hedge certain risks, including changes in interest rates, foreign
currencies, credit spreads and equity market levels. Additional considerations
for our investment portfolio include current and expected market conditions and
expectations for changes within our specific mix of products and business
segments. In addition, the general account investment portfolio includes, within
trading and other securities, contractholder-directed investments supporting
unit-linked variable annuity type liabilities, which do not qualify as separate
account assets. The returns on these contractholder-directed investments, which
can vary significantly period to period, include changes in estimated fair value
subsequent to purchase, inure to contractholders and are offset in earnings by a
corresponding change in PABs through interest credited to policyholder account
balances.
The composition of the investment portfolio of each business segment is tailored
to the specific characteristics of its insurance liabilities, causing certain
portfolios to be shorter in duration and others to be longer in duration.
Accordingly, certain portfolios are more heavily weighted in longer duration,
higher yielding fixed maturity securities, or certain sub-sectors of fixed
maturity securities, than other portfolios.
Investments are purchased to support our insurance liabilities and not to
generate net investment gains and losses. However, net investment gains and
losses are incurred and can change significantly from period to period due to
changes in external influences, including changes in market factors such as
interest rates, foreign currencies, credit spreads and equity markets;
counterparty specific factors such as financial performance, credit rating and
collateral valuation; and internal factors such as portfolio rebalancing.
Changes in these factors from period to period can significantly impact the
levels of both impairments and realized gains and losses on investments sold.
We use freestanding interest rate, equity, credit and currency derivatives to
hedge certain invested assets and insurance liabilities. Certain of these hedges
are designated and qualify as accounting hedges, which reduce volatility in
earnings. For those hedges not designated as accounting hedges, changes in
market factors lead to the recognition of fair value changes in net derivative
gains (losses) generally without an offsetting gain or loss recognized in
earnings for the item being hedged.
Certain variable annuity products with minimum benefit guarantees contain
embedded derivatives that are measured at estimated fair value separately from
the host variable annuity contract, with changes in estimated fair value
recorded in net derivative gains (losses). The Company uses freestanding
derivatives to hedge the market risks inherent in these variable annuity
guarantees. The valuation of these embedded derivatives includes a
nonperformance risk adjustment, which is unhedged and can be a significant
driver of net derivative gains (losses) but does not have an economic impact on
the Company.
The variable annuity embedded derivatives and associated freestanding derivative
hedges are collectively referred to as "VA program derivatives" in the following
table. All other derivatives that are economic hedges of
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certain invested assets and insurance liabilities are referred to as "non-VA
program derivatives" in the following table. The table below presents the impact
on net derivative gains (losses) from non-VA program derivatives and VA program
derivatives:
Three Months
Ended
June 30,
2012 2011 Change
(In millions)
Non-VA program derivatives
Interest rate $ 1,355 $ 404 $ 951
Foreign currency 164 (76 ) 240
Credit (25 ) 29 (54 )
Equity (4 ) (11 ) 7
Total non-VA program derivatives 1,490 346 1,144
VA program derivatives
Market and other risks in embedded derivatives (1,962 ) (499 ) (1,463 )
Nonperformance risk on embedded derivatives 608 108 500
Total embedded derivatives (1,354 ) (391 ) (963 )
Freestanding derivatives hedging embedded derivatives 1,956 397 1,559
Total VA program derivatives 602 6 596
Net derivative gains (losses) $ 2,092 $ 352 $ 1,740
The favorable change in net derivative gains (losses) on non-VA program
derivatives was $1.1 billion ($744 million, net of income tax). This reflects
long-term interest rates decreasing more in the current period than in the prior
period, which primarily impacted receive-fixed interest rate swaps, long
interest rate futures, long interest rate floors and receiver swaptions. These
freestanding derivatives are primarily hedging long duration liability
portfolios. In addition, a strengthening of the U.S. dollar and Japanese yen
relative to other key currencies favorably impacted foreign currency swaps and
forwards, which primarily hedge certain foreign denominated bonds. Because
certain of these hedging strategies are not designated or do not qualify as
accounting hedges, the changes in the estimated fair value of these freestanding
derivatives are recognized in net derivative gains (losses) without an
offsetting gain or loss recognized in earnings for the item being hedged.
The favorable change in net derivative gains (losses) on VA program derivatives
was $596 million ($387 million, net of income tax). This was due to a favorable
change of $500 million ($325 million, net of income tax) related to the change
in the nonperformance risk adjustment on embedded derivatives, and a favorable
change of $96 million ($62 million, net of income tax) in freestanding
derivatives that hedge market risks in embedded derivatives, net of market and
other risks in our embedded derivatives.
The additional favorable change of $96 million is comprised of a $1.6 billion
($1.0 billion, net of income tax) favorable change in freestanding derivatives
that hedge market risks in embedded derivatives and a $1.5 billion ($951
million, net of income tax) unfavorable change in market and other risks in our
embedded derivatives which were driven by changes in market factors. The primary
changes in market factors are summarized as follows:
• Equity index levels decreased more in the current period than in the prior
period and equity volatility increased more in the current period than in the
prior period. These changes contributed to a favorable change in our
freestanding derivatives and unfavorable changes in our embedded derivatives.
• Long-term interest rates decreased more in the current period than in the
prior period and contributed to a favorable change in our freestanding
derivatives and unfavorable changes in our embedded derivatives.
• Changes in foreign currency exchange rates contributed to a favorable change
in our freestanding derivatives and unfavorable changes in our embedded
derivatives.
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The decrease in net investment losses primarily reflects a decrease in losses on
sales of fixed maturity and equity securities combined with decreases in
impairments in fixed maturity and equity securities, primarily in the financial
services and consumer industries.
Income (loss) from continuing operations, before provision for income tax,
related to the Divested Businesses, excluding net investment gains (losses) and
net derivative gains (losses), decreased $186 million to a loss of $224 million
in the second quarter of 2012 compared to a loss of $38 million in the prior
period. Included in this loss was a decrease in total revenues of $165 million
and an increase in total expenses of $21 million. As previously mentioned, the
Divested Businesses include certain operations of MetLife Bank and the Caribbean
Business.
Income tax expense for the three months ended June 30, 2012 was $1.0 billion, or
31% of income (loss) from continuing operations before provision for income tax,
compared with income tax expense of $448 million, or 30% of income (loss) from
continuing operations before provision for income tax, for the prior period. The
Company's second quarter 2012 and 2011 effective tax rates differ from the U.S.
statutory rate of 35% primarily due to the impact of certain permanent tax
differences, including non-taxable investment income and tax credits for
investments in low income housing, in relation to income (loss) from continuing
operations before provision for income tax, as well as certain foreign permanent
tax differences.
As more fully described in the discussion of performance measures above, we use
operating earnings, which does not equate to income (loss) from continuing
operations, net of income tax, as determined in accordance with GAAP, to analyze
our performance, evaluate segment performance, and allocate resources. We
believe that the presentation of operating earnings and operating earnings
available to common shareholders, as we measure it for management purposes,
enhances the understanding of our performance by highlighting the results of
operations and the underlying profitability drivers of the business. Operating
earnings and operating earnings available to common shareholders should not be
viewed as substitutes for GAAP income (loss) from continuing operations, net of
income tax, and GAAP net income (loss) available to MetLife, Inc.'s common
shareholders, respectively. Operating earnings available to common shareholders
increased $219 million, net of income tax, to $1.4 billion, net of income tax,
for the second quarter of 2012 from $1.2 billion, net of income tax, in the
prior period.
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Reconciliation of income (loss) from continuing operations, net of income tax,
to operating earnings available to common shareholders
Three Months Ended June 30, 2012
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Income (loss) from continuing
operations, net of income tax $ 869 $ 649 $ 595 $ 18 $ 270$ 87 $ (188 ) $ 2,300
Less: Net investment gains (losses) 52
19 144 (13 ) (36 ) (25 ) (205 ) (64 )
Less: Net derivative gains (losses) 960 567 288 (14 ) 50 14 227 2,092
Less: Other adjustments to continuing
operations (1) (260 ) (40 ) (7 ) (128 ) 5 (23 ) (272 ) (725 )
Less: Provision for income tax
(expense) benefit (263 ) (192 ) (148 ) 38 (24 ) 39 90 (460 )
Operating earnings $ 380 $ 295 $ 318 $ 135 $ 275 $ 82 (28 ) 1,457
Less: Preferred stock dividends 31 31
Operating earnings available to
common shareholders $ (59 ) $ 1,426
Three Months Ended June 30, 2011
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Income (loss) from continuing
operations, net of income tax $ 504 $ 313 $ 303 $ 5 $ 197 $ (10 ) $ (250 ) $ 1,062
Less: Net investment gains (losses) 47
(8 ) (10 ) (13 ) (32 ) (34 ) (105 ) (155 )
Less: Net derivative gains (losses) 336 177 (37 ) 8 5 (12 ) (125 ) 352
Less: Other adjustments to continuing
operations (1) (121 ) (37 ) 15 (175 ) 43 (34 ) (137 ) (446 )
Less: Provision for income tax
(expense) benefit (91 ) (47 ) 10 56 10 6 129 73
Operating earnings $ 333 $ 228 $ 325 $ 129 $ 171 $ 64 (12 ) 1,238
Less: Preferred stock dividends 31 31
Operating earnings available to
common shareholders $ (43 ) $ 1,207
(1) See definitions of operating revenues and operating expenses for the
components of such adjustments.
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Reconciliation of GAAP revenues to operating revenues and GAAP expenses to
operating expenses
Three Months Ended June 30, 2012
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Total revenues $ 5,254 $ 5,499 $ 2,518 $ 1,160$ 2,714$ 797 $ 456 $ 18,398
Less: Net investment gains (losses) 52
19 144 (13 ) (36 ) (25 ) (205 ) (64 )
Less: Net derivative gains (losses) 960 567 288 (14 ) 50 14 227 2,092
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 8 - - - (1 ) 13 - 20
Less: Other adjustments to revenues
(1) (18 ) (40 ) 10 53 (352 ) (177 ) 85 (439 )
Total operating revenues $ 4,252 $ 4,953 $
2,076 $ 1,134$ 3,053$ 972 $ 349 $ 16,789
Total expenses $ 3,918 $ 4,519 $ 1,604 $ 1,144 $ 2,282 $ 710 $ 883 $ 15,060
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 242 - - - (1 ) 16 - 257
Less: Other adjustments to expenses
(1) 8 - 17 181 (357 ) (157 ) 357 49
Total operating expenses $ 3,668 $ 4,519 $
1,587 $ 963$ 2,640$ 851 $ 526 $ 14,754
Three Months Ended June 30, 2011
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Total revenues $ 4,572 $ 4,919 $ 2,388 $ 1,159$ 2,584$ 1,106 $ 418 $ 17,146
Less: Net investment gains (losses) 47
(8 ) (10 ) (13 ) (32 ) (34 ) (105 ) (155 )
Less: Net derivative gains (losses) 336 177 (37 ) 8 5 (12 ) (125 ) 352
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 1 - - - - - - 1
Less: Other adjustments to revenues
(1) 7 (37 ) 34 49 (173 ) 121 300 301
Total operating revenues $ 4,181 $ 4,787 $ 2,401 $ 1,115 $ 2,784 $ 1,031 $ 348 $ 16,647
Total expenses $ 3,793 $ 4,458 $ 1,921 $ 1,174 $ 2,309 $ 1,077 $ 904 $ 15,636
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 112 - - - - - - 112
Less: Other adjustments to
expenses (1) 17 - 19 224 (216 ) 155 437 636
Total operating expenses $ 3,664 $ 4,458 $ 1,902 $ 950 $ 2,525 $ 922 $ 467 $ 14,888
(1) See definitions of operating revenues and operating expenses for the
components of such adjustments.
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Consolidated Results-Operating
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 9,139 $ 9,270 $ (131 ) (1.4 )%
Universal life and investment-type
product policy fees 1,999 1,908 91 4.8 %
Net investment income 5,187 5,011 176 3.5 %
Other revenues 464 458 6 1.3 %
Total operating revenues 16,789 16,647 142 0.9 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 9,132 9,272 (140 ) (1.5 )%
Interest credited to policyholder
account balances 1,525 1,508 17 1.1 %
Capitalization of DAC (1,313 ) (1,365 ) 52 3.8 %
Amortization of DAC and VOBA 1,162 1,136 26 2.3 %
Amortization of negative VOBA (164 ) (163 ) (1 ) (0.6 )%
Interest expense on debt 299 328 (29 ) (8.8 )%
Other expenses 4,113 4,172 (59 ) (1.4 )%
Total operating expenses 14,754 14,888 (134 ) (0.9 )%
Provision for income tax expense
(benefit) 578 521 57 10.9 %
Operating earnings 1,457 1,238 219 17.7 %
Less: Preferred stock dividends 31 31 - - %
Operating earnings available to common
shareholders $ 1,426 $ 1,207 $ 219 18.1 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Stronger investment results and higher policy fee income were the primary
drivers of the increase in operating earnings. In addition, the prior period
included $44 million of insurance claims and operating expenses related to the
March 2011 earthquake and tsunami in Japan. Changes in foreign currency exchange
rates had a negative impact on results compared to the prior period.
Positive net flows from strong sales led to growth in our investment portfolio
which generated higher net investment income of $118 million. Since many of our
products are interest spread-based, the growth in our individual life and
structured settlement businesses also resulted in a $70 million increase to
interest credited expenses. In addition, strong variable annuity sales,
primarily in 2011, increased our average separate account assets which resulted
in higher policy fee income of $104 million. Commission expenses decreased $45
million as lower annuity sales in the U.S. in the current period were partially
offset by increased sales in the international businesses. This was slightly
offset by related DAC capitalization. In addition, DAC amortization was up $45
million due to growth in our existing businesses.
The low interest rate environment continued to impact interest credited to
certain insurance liabilities which are tied to market indices. As a result of
the low interest rate environment, we set lower interest credited rates on new
business and on existing business with terms that can fluctuate. The positive
impact of lower interest credited rates was partially offset by an increase in
interest credited expense resulting from the impact of derivatives that are used
to hedge certain liabilities. Market factors and portfolio management actions
mitigated the low interest rate environment driving higher yields on the
investment portfolio, excluding the Divested Businesses. Market factors that
contributed to increased yields included higher returns in the private equity
and real estate markets on our equity method private equity and real estate
joint venture investments. The combined impact of lower interest credited
expense and higher investment returns resulted in a $28 million increase in
operating earnings.
Although still high in the current period, severity of property & casualty
catastrophe claims decreased $79 million mainly as a result of severe storm
activity in the second quarter of 2011. However, this was largely offset
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by unfavorable claims experience, primarily in our Asia and Group, Voluntary &
Worksite Benefits segments, which reduced operating earnings by $58 million.
Results from our mortgage loan servicing business were down $27 million as a
result of an increase in expenses, higher run-off in a lower interest rate
environment and a decrease in service fees. Operating earnings associated with
the assumed reinsurance of certain variable annuity products from our former
operating joint venture in Japan decreased $18 million. This was primarily due
to an increase in benefit liabilities resulting from lower returns in the
underlying funds. In addition, the current period benefited $19 million from
favorable liability refinements, partially offset by an unfavorable DAC
capitalization adjustment. The second quarter of 2012 also included $13 million
of employee-related costs associated with the Company's enterprise-wide
strategic initiative.
The Company benefited from a $39 million higher tax benefit in the second
quarter of 2012 over the prior period as a result of higher utilization of tax
preferenced investments, which provide tax credits and deductions.
Retail
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 1,081 $ 1,135 $ (54 ) (4.8 )%
Universal life and investment-type
product policy fees 1,119 1,032 87 8.4 %
Net investment income 1,839 1,827 12 0.7 %
Other revenues 213 187 26 13.9 %
Total operating revenues 4,252 4,181 71 1.7 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 1,837 1,876 (39 ) (2.1 )%
Interest credited to policyholder account
balances 590 595 (5 ) (0.8 )%
Capitalization of DAC (367 ) (499 ) 132 26.5 %
Amortization of DAC and VOBA 407 368 39 10.6 %
Other expenses 1,201 1,324 (123 ) (9.3 )%
Total operating expenses 3,668 3,664 4 0.1 %
Provision for income tax expense
(benefit) 204 184 20 10.9 %
Operating earnings $ 380 $ 333 $ 47 14.1 %
Unless otherwise stated, all amounts discussed below are net of income tax.
The Company implemented several changes to product pricing and variable annuity
riders as we continued to manage sales volume in order to strike the right
balance among growth, profitability and risk. These actions resulted in a net
decrease in the overall segment sales in the current period, most notably a $2.4
billion, before income tax, or 33%, decrease in annuity sales. Consistent with
the decrease in sales, total retail net flows were down $2.4 billion, before
income tax, compared to the prior period. The negative impact of the sales
decline was mitigated by strong sales in 2011 as asset-based fee revenues are
based on average assets.
Stronger sales of variable annuities in the prior period increased our average
separate account assets and, as a result, generated higher asset-based fee
revenue. This, coupled with positive net flows from the life products, as well
as the impact of an increase in allocated equity for the annuity business,
bolstered invested assets, increasing net investment income. The reduction of
sales levels from the prior period resulted in lower deferrable expenses, which
were directly offset by lower DAC capitalization; however, stronger annuity
sales in the prior period significantly increased our in-force business
contributing to an increase in non-deferrable expenses. In addition, our
business growth generated increased DAC amortization, and higher interest
credited on certain insurance liabilities. The net impact of these items
resulted in a $52 million increase in operating earnings.
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Interest rates continued to remain low while equity markets showed some
improvement from the prior period. The low interest rate environment resulted in
a net $16 million unfavorable impact on our operating earnings. This was driven
by lower net investment income due to lower yields, partially offset by a
decrease in DAC amortization, coupled with lower interest credited on certain
insurance liabilities.
Slightly less favorable mortality in our life businesses, coupled with
unfavorable mortality in our income annuities business, resulted in a $7 million
decrease to operating earnings.
The impact of the reduction in our closed block dividend scale, which was
announced in the fourth quarter of 2011, increased operating earnings by $6
million, net of DAC amortization. In addition, certain insurance-related
liabilities and DAC refinements in both the current and prior periods resulted
in a $9 million increase to operating earnings.
Group, Voluntary & Worksite Benefits
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 4,178 $ 4,028 $ 150 3.7 %
Universal life and investment-type
product policy fees 165 155 10 6.5 %
Net investment income 494 505 (11 ) (2.2 )%
Other revenues 116 99 17 17.2 %
Total operating revenues 4,953 4,787 166 3.5 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 3,766 3,725 41 1.1 %
Interest credited to policyholder
account balances 43 45 (2 ) (4.4 )%
Capitalization of DAC (112 ) (123 ) 11 8.9 %
Amortization of DAC and VOBA 98 119 (21 ) (17.6 )%
Other expenses 724 692 32 4.6 %
Total operating expenses 4,519 4,458 61 1.4 %
Provision for income tax expense
(benefit) 139 101 38 37.6 %
Operating earnings $ 295 $ 228 $ 67 29.4 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Each of our businesses experienced growth in the second quarter of 2012, as the
economy has continued to show some signs of improvement. Our group term life and
disability businesses grew as a result of new sales, and our dental business
continued to benefit from strong enrollments and renewals, as well as revenues
associated with the implementation of a new dental contract from a large
customer in the current period. Although we have discontinued selling our
long-term care ("LTC") product, we continue to collect premiums and administer
the existing block of business, contributing to asset growth in the segment. As
housing and automobile markets remained sluggish, property & casualty policy
sales decreased in the second quarter of 2012 compared to the prior period;
however, the impact of an increase in the average premium for new policies sold
more than offset the decline in policy sales.
The increase in average premium per policy in both our homeowners and auto
businesses improved operating earnings by $24 million and a decrease in
exposures resulted in a $7 million decrease in operating earnings. Exposures are
generally defined as each covered automobile, for the auto line of business, and
each covered residence, for the homeowners line of business.
Current period premiums and deposits, together with growth in the securities
lending program, partially offset by a reduction in allocated equity, have
resulted in an increase in our average invested assets, contributing
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$12 million to operating earnings. Consistent with the growth in average
invested assets, primarily in our LTC business, interest credited on
long-duration contracts increased by $6 million. Increased expenses associated
with the implementation of the new dental contract in the current period, along
with growth across our businesses, reduced operating earnings by $4 million.
Although still high in the current period, severity of property & casualty
catastrophe claims decreased mainly as a result of severe storm activity in the
second quarter of 2011, which improved operating earnings by $79 million. Also
contributing to the increase in operating earnings was additional favorable
development of prior year losses of $7 million. Favorable morbidity experience
from across our non-medical health businesses contributed $30 million to
operating earnings. This favorable result stems primarily from a decrease in
claims in our dental, disability and accidental death and dismemberment
businesses and an increase in claims closed in our individual disability
insurance business. Less favorable claims experience in our group life business
resulted in a decrease in operating earnings of $49 million. The group life
mortality ratio has returned to a more historically representative level of
87.3% in the second quarter of 2012, from a record low of 82.1% in the prior
period. The impact of the items discussed above related to the property &
casualty business, can be seen in the favorable change in the combined ratio,
excluding catastrophes, to 83.4% in the second quarter of 2012 from 85.9% in the
prior period, as well as the favorable change in the combined ratio, including
catastrophes, to 102.3% in the second quarter of 2012 from 121.7% in the prior
period.
The low interest rate environment and lower prepayment fees resulted in a
decline in investment yields, primarily in our fixed maturity securities and
mortgage loan portfolios. Unlike in the Retail and Corporate Benefit Funding
segments, a reduction in investment yield does not necessarily drive a
corresponding change in the rates credited on certain insurance liabilities. The
reduction in investment yield, partially offset by marginally lower crediting
rates in the current period, resulted in an $18 million decrease in operating
earnings.
Corporate Benefit Funding
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 523 $ 874 $ (351 ) (40.2 )%
Universal life and investment-type
product policy fees 57 58 (1 ) (1.7 )%
Net investment income 1,431 1,408 23 1.6 %
Other revenues 65 61 4 6.6 %
Total operating revenues 2,076 2,401 (325 ) (13.5 )%
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 1,131 1,446 (315 ) (21.8 )%
Interest credited to policyholder account
balances 338 331 7 2.1 %
Capitalization of DAC (8 ) (5 ) (3 ) (60.0 )%
Amortization of DAC and VOBA 4 5 (1 ) (20.0 )%
Interest expense on debt 2 3 (1 ) (33.3 )%
Other expenses 120 122 (2 ) (1.6 )%
Total operating expenses 1,587 1,902 (315 ) (16.6 )%
Provision for income tax expense
(benefit) 171 174 (3 ) (1.7 )%
Operating earnings $ 318 $ 325 $ (7 ) (2.2 )%
Unless otherwise stated, all amounts discussed below are net of income tax.
A combination of weak equity market returns and the low interest rate
environment has resulted in underfunded pension plans, which reduces our
customers' flexibility to engage in transactions such as pension closeouts.
While this is predominantly impacting sales in the U.S., sales in the U.K.
remain strong. However, our
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U.K. sales decreased $235 million, before income tax, as a result of the impact
of a significant sale in the prior period. Structured settlement sales have
decreased $137 million, before income tax, reflecting a more competitive market
and a decrease in demand due to the low interest rate environment. Changes in
premiums for these businesses were almost entirely offset by the related change
in policyholder benefits. The impact of current period premiums, deposits, and
funding agreement issuances contributed to an increase in invested assets,
partially offset by a decrease in allocated equity, resulting in an increase of
$31 million to operating earnings. The growth in premiums, deposits and funding
agreement issuances resulted in a corresponding increase in interest credited on
certain insurance liabilities, which decreased operating earnings by $39
million.
The low interest rate environment continued to have an impact on our investment
returns, as well as our interest credited on certain insurance liabilities.
Lower investment returns on fixed maturities, mortgage loans, and our securities
lending program were partially offset by higher returns in the equity markets on
our private equity investments. Many of our funding agreement and guaranteed
interest contract liabilities are tied to market indices and, as a result,
interest credited rates on new business were set lower, as were the rates on
existing business with terms that can fluctuate. The positive impact of lower
interest credited rates was partially offset by an increase in interest credited
expense resulting from the impact of derivatives that are used to hedge certain
liabilities. The net impact of lower interest credited expense and lower
investment returns resulted in an increase in operating earnings of $5 million.
Mortality results across various products and the net impact of insurance
liability refinements in both periods had an $11 million unfavorable impact on
operating earnings.
Latin America
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 652 $ 647 $ 5 0.8 %
Universal life and investment-type
product policy fees 196 194 2 1.0 %
Net investment income 283 272 11 4.0 %
Other revenues 3 2 1 50.0 %
Total operating revenues 1,134 1,115 19 1.7 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 568 534 34 6.4 %
Interest credited to policyholder account
balances 90 94 (4 ) (4.3 )%
Capitalization of DAC (71 ) (78 ) 7 9.0 %
Amortization of DAC and VOBA 54 62 (8 ) (12.9 )%
Amortization of negative VOBA (1 ) (2 ) 1 50.0 %
Interest expense on debt - 1 (1 ) (100.0 )%
Other expenses 323 339 (16 ) (4.7 )%
Total operating expenses 963 950 13 1.4 %
Provision for income tax expense
(benefit) 36 36 - - %
Operating earnings $ 135 $ 129 $ 6 4.7 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $6 million over the prior period. The impact of
changes in foreign currency exchange rates reduced operating earnings by $16
million for the second quarter of 2012 compared to the prior period.
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Latin America experienced sales growth driven primarily by retirement products
in Chile and Mexico and by accident and health products in Argentina and Chile.
The resulting growth in premiums was offset by a corresponding increase in
policyholder benefits. The growth in our businesses drove an increase in average
invested assets, which generated higher net investment income and higher policy
fee income. The increase in sales also generated higher commission expense,
which was partially offset by related DAC capitalization. The combined impact of
the items discussed above were the primary drivers of the $12 million
improvement in operating earnings.
Market factors favorably impacted operating earnings by $12 million. The
increase in yields reflects improved fixed maturity securities returns related
to a repositioning to higher yielding investments and improved returns on
variable rate investments, primarily in Brazil. The resulting increase in net
investment income was partially offset by a corresponding increase in
policyholder benefits, and higher interest credited expense.
The current period results include an unfavorable DAC capitalization adjustment
of $8 million, partially offset by a favorable liability refinement of $4
million.
Asia
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 2,011 $ 1,884 $ 127 6.7 %
Universal life and investment-type
product policy fees 315 296 19 6.4 %
Net investment income 730 596 134 22.5 %
Other revenues (3 ) 8 (11 )
Total operating revenues 3,053 2,784 269 9.7 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 1,374 1,272 102 8.0 %
Interest credited to policyholder
account balances 426 398 28 7.0 %
Capitalization of DAC (538 ) (467 ) (71 ) (15.2 )%
Amortization of DAC and VOBA 404 401 3 0.7 %
Amortization of negative VOBA (127 ) (141 ) 14 9.9 %
Interest expense on debt 4 (1 ) 5
Other expenses 1,097 1,063 34 3.2 %
Total operating expenses 2,640 2,525 115 4.6 %
Provision for income tax expense
(benefit) 138 88 50 56.8 %
Operating earnings $ 275 $ 171 $ 104 60.8 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $104 million over the prior period. The impact
of changes in foreign currency exchange rates improved operating earnings by $6
million for the second quarter of 2012 compared to the prior period.
Asia experienced sales growth in ordinary and universal life products in Japan
which drove higher premiums and universal life fees over the prior period. This
was partially offset by a decline in life product sales and persistency in Hong
Kong, which drove lower premiums. The changes in premiums were offset by
corresponding changes in policyholder benefits. In addition, average invested
assets increased over the prior period, reflecting positive cash flows from
continued strong annuity sales in Japan generating increases in both net
investment income and policy fee income. The increase in sales also generated
higher commission expense, which was largely offset by an increase in related
DAC capitalization. The combined impact of the items discussed above improved
operating earnings by $60 million.
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The repositioning of the Japan portfolio to longer duration and higher yielding
investments contributed to an increase in investment yields. In addition, yields
improved as a result of growth in the Australian dollar annuity business with
the funds invested in higher yielding Australian dollar investments, as well as
higher returns on our alternative investments. However, these increases in
yields were partially offset by higher interest credited expense and lower joint
venture income from China resulting in a net increase to operating earnings of
$24 million.
Unfavorable claims experience decreased operating earnings by $29 million. Prior
period results in Japan included $44 million of insurance claims and operating
expenses related to the March 2011 earthquake and tsunami. The unfavorable
impact of changes in actuarial assumptions was almost entirely offset by the
positive impact of favorable liability refinements.
EMEA
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 680 $ 689 $ (9 ) (1.3 )%
Universal life and investment-type product
policy fees 108 135 (27 ) (20.0 )%
Net investment income 157 178 (21 ) (11.8 )%
Other revenues 27 29 (2 ) (6.9 )%
Total operating revenues 972 1,031 (59 ) (5.7 )%
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 404 395 9 2.3 %
Interest credited to policyholder account
balances 26 45 (19 ) (42.2 )%
Capitalization of DAC (217 ) (193 ) (24 ) (12.4 )%
Amortization of DAC and VOBA 195 181 14 7.7 %
Amortization of negative VOBA (36 ) (20 ) (16 ) (80.0 )%
Interest expense on debt 1 - 1
Other expenses 478 514 (36 ) (7.0 )%
Total operating expenses 851 922 (71 ) (7.7 )%
Provision for income tax expense (benefit) 39 45 (6 ) (13.3 )%
Operating earnings $ 82 $ 64 $ 18 28.1 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $18 million over the prior period. The impact of
changes in foreign currency exchange rates reduced operating earnings by $8
million for the second quarter of 2012 compared to the prior period. The fourth
quarter 2011 purchase of a Turkish life insurance and pension company increased
operating earnings by $3 million.
The segment experienced overall business growth; however, certain European
countries in the region continued to be challenged by the prevailing economic
environment. Retirement sales in western Europe increased due to strong sales of
fixed and variable annuity products and credit life sales in Russia increased
due to a modest recovery in credit markets, both of which resulted in higher
premiums and policyholder benefits. Despite dividends paid to MetLife, Inc. at
the end of 2011, the growth in our businesses drove an increase in average
invested assets, which generated higher net investment income. These increases
were largely offset by a decrease in policy fee income in western Europe. The
items discussed above, on a combined basis, did not have a significant impact on
operating earnings.
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Operating earnings decreased $5 million reflecting lower yields. The decrease in
yields reflects lower returns on our alternative investments driven by declining
equity markets.
Current period results benefited by $16 million primarily due to a release of
negative VOBA associated with the conversion of certain policies. In addition,
certain tax items in both periods improved results by $13 million.
Corporate & Other
Three Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 14 $ 13 $ 1 7.7 %
Universal life and investment-type product
policy fees 39 38 1 2.6 %
Net investment income 253 225 28 12.4 %
Other revenues 43 72 (29 ) (40.3 )%
Total operating revenues 349 348 1 0.3 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 52 24
28
Interest credited to policyholder account
balances 12 - 12
Interest expense on debt 292 325 (33 ) (10.2 )%
Other expenses 170 118 52 44.1 %
Total operating expenses 526 467 59 12.6 %
Provision for income tax expense (benefit) (149 ) (107 )
(42 ) (39.3 )%
Operating earnings (28 ) (12 ) (16 )
Less: Preferred stock dividends 31 31 - - %
Operating earnings available to common
shareholders $ (59 ) $ (43 ) $ (16 ) (37.2 )%
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings available to common shareholders and operating earnings each
decreased $16 million, primarily due to lower earnings from our mortgage loan
servicing business and the assumed reinsurance of a variable annuity business.
These decreases were partially offset by higher net investment income and a
higher tax benefit in the second quarter of 2012.
Results from our mortgage loan servicing business were lower, driven by an
increase in expenses of $19 million due to higher regulatory oversight and
expenses related to the processing of foreclosed loans. In addition, revenues
decreased by $8 million due to higher run-off in a lower interest rate
environment and a decrease in service fees due to the termination of
sub-servicing contracts.
Operating earnings associated with the assumed reinsurance of certain variable
annuity products from our former operating joint venture in Japan decreased $18
million. This was primarily due to an increase in benefit liabilities resulting
from lower returns in the underlying funds.
Net investment income increased $18 million driven by improving real estate
markets on our real estate joint venture investments and higher private equity
returns, partially offset by the impact of lower interest rates on fixed
maturity securities and an increase in the amount credited to the segments due
to growth in the economic capital managed by Corporate & Other on their behalf.
In the second quarter of 2012, the Company incurred $13 million of
employee-related costs associated with the Company's enterprise-wide strategic
initiative.
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Corporate & Other benefited in the second quarter of 2012 from a higher tax
benefit of $22 million over the prior period primarily due to higher utilization
of tax preferenced investments, which provide tax credits and deductions.
Six Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011
Consolidated Results
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
Revenues
Premiums $ 18,290 $ 17,848 $ 442 2.5 %
Universal life and investment-type product
policy fees 4,175 3,858 317 8.2 %
Net investment income 10,919 10,406 513 4.9 %
Other revenues 990 1,158 (168 ) (14.5 )%
Net investment gains (losses) (174 ) (254 ) 80 31.5 %
Net derivative gains (losses) 114 37 77
Total revenues 34,314 33,053 1,261 3.8 %
Expenses
Policyholder benefits and claims and
policyholder dividends 18,710 18,104 606 3.3 %
Interest credited to policyholder account
balances 3,579 3,366 213 6.3 %
Capitalization of DAC (2,679 ) (2,631 ) (48 ) (1.8 )%
Amortization of DAC and VOBA 2,193 2,193 - - %
Amortization of negative VOBA (336 ) (366 ) 30 8.2 %
Interest expense on debt 700 835 (135 ) (16.2 )%
Other expenses 9,218 8,758 460 5.3 %
Total expenses 31,385 30,259 1,126 3.7 %
Income (loss) from continuing operations
before provision for income tax 2,929 2,794 135 4.8 %
Provision for income tax expense (benefit) 763 808
(45 ) (5.6 )%
Income (loss) from continuing operations, net
of income tax 2,166 1,986 180 9.1 %
Income (loss) from discontinued operations,
net of income tax 17 (9 ) 26
Net income (loss) 2,183 1,977 206 10.4 %
Less: Net income (loss) attributable to
noncontrolling interests 32 - 32 - %
Net income (loss) attributable to MetLife,
Inc. 2,151 1,977 174 8.8 %
Less: Preferred stock dividends 61 61 - - %
Preferred stock redemption premium - 146
(146 ) (100.0 )%
Net income (loss) available to MetLife,
Inc.'s common shareholders $ 2,090 $ 1,770 $ 320 18.1 %
During the six months ended June 30, 2012, income (loss) from continuing
operations, before provision for income tax, increased $135 million ($180
million, net of income tax) over the prior period primarily driven by favorable
operating results, and favorable changes in net investment gains (losses) and
net derivative gains (losses). These favorable changes were partially offset by
an unfavorable change in the results of the Divested Businesses over the prior
period.
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The variable annuity embedded derivatives and associated freestanding derivative
hedges are collectively referred to as "VA program derivatives" in the following
table. All other derivatives that are economic hedges of certain invested assets
and insurance liabilities are referred to as "non-VA program derivatives" in the
following table. The table below presents the impact on net derivative gains
(losses) from non-VA program derivatives and VA program derivatives:
Six Months
Ended
June 30,
2012 2011 Change
(In millions)
Non-VA program derivatives
Interest rate $ 544 $ 273 $ 271
Foreign currency 13 (259 ) 272
Credit (107 ) (20 ) (87 )
Equity (3 ) 4 (7 )
Total non-VA program derivatives 447 (2 ) 449
VA program derivatives
Market and other risks in embedded derivatives 1,129 494
635
Nonperformance risk on embedded derivatives (636 ) 34
(670 )
Total embedded derivatives 493 528 (35 )
Freestanding derivatives hedging embedded derivatives (826 ) (489 ) (337 )
Total VA program derivatives (333 ) 39 (372 )
Net derivative gains (losses) $ 114 $ 37 $ 77
The favorable change in net derivative gains (losses) on non-VA program
derivatives was $449 million ($292 million, net of income tax). This was
primarily due to a strengthening of the U.S. dollar relative to other key
currencies, favorably impacting foreign currency swaps and forwards, which
primarily hedge certain foreign denominated bonds. In addition, long-term
interest rates decreasing more in the current period than in the prior period
favorably impacted receive-fixed interest rate swaps, long interest rate floors
and receiver swaptions. These freestanding derivatives are primarily hedging
long duration liability portfolios. Because certain of these hedging strategies
are not designated or do not qualify as accounting hedges, the changes in the
estimated fair value of these freestanding derivatives are recognized in net
derivative gains (losses) without an offsetting gain or loss recognized in
earnings for the item being hedged.
The unfavorable change in net derivative gains (losses) on VA program
derivatives was $372 million ($242 million, net of income tax). This was due to
an unfavorable change of $670 million ($436 million, net of income tax) related
to the change in the nonperformance risk adjustment on embedded derivatives,
partially offset by a favorable change of $298 million ($194 million, net of
income tax) on market and other risks in embedded derivatives, net of the impact
of freestanding derivatives hedging those risks.
The favorable change of $298 million is comprised of a $337 million ($219
million, net of income tax) unfavorable change in freestanding derivatives that
hedge market risks in embedded derivatives which was more than offset by a $635
million ($413 million, net of income tax) favorable change in market and other
risks in our embedded derivatives, driven by changes in market factors. The
primary changes in market factors are summarized as follows:
• Equity index levels improved more in the current period than in the prior
period and equity volatility decreased more in the current period than in the
prior period. These changes contributed to an unfavorable change in our
freestanding derivatives and favorable changes in our embedded derivatives.
• Long-term interest rates decreased more in the current period than in the
prior period and contributed to a favorable change in our freestanding
derivatives and unfavorable changes in our embedded derivatives.
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The decrease in net investment losses primarily reflects a decrease in losses on
sales of equity securities, a decrease in intent-to-sell impairments on fixed
maturity and equity securities, primarily in foreign government and financial
services industry, combined with an increase in gains on fixed maturity
securities sold in connection with the planned disposition of MetLife Bank.
These were partially offset by a decrease in gains on mortgage loan sales.
Income (loss) from continuing operations, before provision for income tax,
related to the Divested Businesses, excluding net investment gains (losses) and
net derivative gains (losses), decreased $309 million to a loss of $384 million
during the six months ended June 30, 2012 compared to a loss of $75 million in
the prior period. Included in this loss was an increase in total expenses of
$211 million and a decrease in total revenues of $98 million. As previously
mentioned, the Divested Businesses include certain operations of MetLife Bank
and the Caribbean Business.
Income tax expense for the six months ended June 30, 2012 was $763 million, or
26% of income (loss) from continuing operations before provision for income tax,
compared with income tax expense of $808 million, or 29% of income (loss) from
continuing operations before provision for income tax, for the prior period. The
Company's 2012 and 2011 effective tax rates differ from the U.S. statutory rate
of 35% primarily due to the impact of certain permanent tax differences,
including non-taxable investment income and tax credits for investments in low
income housing, in relation to income (loss) from continuing operations before
provision for income tax, as well as certain foreign permanent tax differences.
As more fully described in the discussion of performance measures above, we use
operating earnings, which does not equate to income (loss) from continuing
operations, net of income tax, as determined in accordance with GAAP, to analyze
our performance, evaluate segment performance, and allocate resources. We
believe that the presentation of operating earnings and operating earnings
available to common shareholders, as we measure it for management purposes,
enhances the understanding of our performance by highlighting the results of
operations and the underlying profitability drivers of the business. Operating
earnings and operating earnings available to common shareholders should not be
viewed as substitutes for GAAP income (loss) from continuing operations, net of
income tax, and GAAP net income (loss) available to MetLife, Inc.'s common
shareholders, respectively. Operating earnings available to common shareholders
increased $364 million, net of income tax, to $2.9 billion, net of income tax,
for the six months ended June 30, 2012 from $2.5 billion, net of income tax, in
the prior period.
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Reconciliation of income (loss) from continuing operations, net of income tax,
to operating earnings available to common shareholders
Six Months Ended June 30, 2012
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)Income (loss) from continuing operations, net of income tax $ 913
$ 679 $ 684 $ 147$ 485$ 191
$ (933 ) $ 2,166
Less: Net investment gains (losses) 118 13 46 (10 ) (139 ) (18 ) (184 ) (174 )
Less: Net derivative gains (losses) 438 188 45 23 20 43 (643 ) 114
Less: Other adjustments to continuing operations (1) (364 ) (78 ) 14 (197 ) (1 ) (5 ) (504 ) (1,135 )
Less: Provision for income tax (expense) benefit (67 ) (43 ) (37 ) 48 33 13 464 411
Operating earnings $ 788 $ 599 $ 616 $ 283 $ 572 $ 158 (66 ) 2,950
Less: Preferred stock dividends 61 61
Operating earnings available to common shareholders $ (127 ) $ 2,889
Six Months Ended June 30, 2011
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)Income (loss) from continuing operations, net of income tax $ 763
$ 508 $ 542 $ 115$ 365$ 41
$ (348 ) $ 1,986
Less: Net investment gains (losses) 82 3 2 7 (158 ) (88 ) (102 ) (254 )
Less: Net derivative gains (losses) 262 78 (167 ) 3 61 7 (207 ) 37
Less: Other adjustments to continuing operations (1) (207 ) (69 ) 55 (184 ) 29 (47 ) (237 ) (660 )
Less: Provision for income tax (expense) benefit (48 ) (5 ) 38 39 38 26 189 277
Operating earnings $ 674 $ 501 $ 614 $ 250 $ 395 $ 143 9 2,586
Less: Preferred stock dividends 61 61
Operating earnings available to common shareholders $ (52 ) $ 2,525
(1) See definitions of operating revenues and operating expenses for the
components of such adjustments.
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Reconciliation of GAAP revenues to operating revenues and GAAP expenses to
operating expenses
Six Months Ended June 30, 2012
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Total revenues $ 9,094 $ 9,918 $ 4,229 $ 2,462$ 6,031$ 2,376 $ 204 $ 34,314
Less: Net investment gains (losses) 118
13 46 (10 ) (139 ) (18 ) (184 ) (174 )
Less: Net derivative gains (losses) 438 188 45 23 20 43 (643 ) 114
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 3 - - - (2 ) 13 - 14
Less: Other adjustments to
revenues (1) (28 ) (78 ) 39 129 160 282 377 881
Total operating revenues $ 8,563 $ 9,795 $
4,099 $ 2,320$ 5,992$ 2,056 $ 654 $ 33,479
Total expenses $ 7,689 $ 8,915 $ 3,176 $ 2,277 $ 5,282 $ 2,116 $ 1,930 $ 31,385
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 51 - - - (2 ) 16 - 65
Less: Other adjustments to
expenses (1) 288 - 25 326 161 284 881 1,965
Total operating expenses $ 7,350 $ 8,915 $
3,151 $ 1,951$ 5,123$ 1,816$ 1,049$ 29,355
Six Months Ended June 30, 2011
Group,
Voluntary Corporate
& Worksite Benefit Latin Corporate
Retail Benefits Funding America Asia EMEA & Other Total
(In millions)
Total revenues $ 8,541 $ 9,520 $ 4,233 $ 2,165$ 5,383$ 2,211$ 1,000$ 33,053
Less: Net investment gains (losses) 82
3 2 7 (158 ) (88 ) (102 ) (254 )
Less: Net derivative gains (losses) 262 78 (167 ) 3 61 7 (207 ) 37
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) (2 ) - - - - - - (2 )
Less: Other adjustments to
revenues (1) 12 (69 ) 74 87 71 261 574 1,010
Total operating revenues $ 8,187 $ 9,508 $
4,324 $ 2,068$ 5,409$ 2,031 $ 735 $ 32,262
Total expenses $ 7,365 $ 8,779 $ 3,397 $ 2,015 $ 4,868 $ 2,104 $ 1,731 $ 30,259
Less: Adjustments related to net
investment gains (losses) and net
derivative gains (losses) 84 - - - - - - 84
Less: Other adjustments to
expenses (1) 133 - 19 271 42 308 811 1,584
Total operating expenses $ 7,148 $ 8,779 $
3,378 $ 1,744 $ 4,826 $ 1,796 $ 920 $ 28,591
(1) See definitions of operating revenues and operating expenses for the
components of such adjustments.
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Consolidated Results - Operating
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 18,246 $ 17,802 $ 444 2.5 %
Universal life and investment-type
product policy fees 4,008 3,740 268 7.2 %
Net investment income 10,272 9,794 478 4.9 %
Other revenues 953 926 27 2.9 %
Total operating revenues 33,479 32,262 1,217 3.8 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 18,071 17,711 360 2.0 %
Interest credited to policyholder
account balances 3,064 2,987 77 2.6 %
Capitalization of DAC (2,675 ) (2,627 ) (48 ) (1.8 )%
Amortization of DAC and VOBA 2,180 2,133 47 2.2 %
Amortization of negative VOBA (301 ) (326 ) 25 7.7 %
Interest expense on debt 612 651 (39 ) (6.0 )%
Other expenses 8,404 8,062 342 4.2 %
Total operating expenses 29,355 28,591 764 2.7 %
Provision for income tax expense
(benefit) 1,174 1,085 89 8.2 %
Operating earnings 2,950 2,586 364 14.1 %
Less: Preferred stock dividends 61 61 - - %
Operating earnings available to common
shareholders $ 2,889 $ 2,525 $ 364 14.4 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Higher policy fee income, stronger investment results and favorable claims
experience were the primary drivers of the increase in operating earnings. These
positive impacts on operating earnings were partially offset by a $52 million
charge taken in the first quarter of 2012 representing a multi-state examination
payment related to unclaimed property and MetLife's use of the U.S. Social
Security Administration's Death Master File to identify potential life insurance
claims, as well as the expected acceleration of benefit payments to
policyholders under the settlements. In addition, the prior period included $44
million of insurance claims and operating expenses related to the March 2011
earthquake and tsunami in Japan. Changes in foreign currency exchange rates had
a negative impact on results compared to the prior period.
We benefited from strong sales, as well as growth and higher persistency in our
business across many of our products. In addition, as a result of stronger sales
of variable annuities in 2011, we experienced growth in both our average
separate account assets and our investment portfolio. The growth in the average
separate account assets generated higher policy fee income of $217 million. The
growth in our investment portfolio generated higher net investment income of
$208 million. Since many of our products are interest spread-based, the growth
in our individual life and structured settlement businesses also resulted in a
$118 million increase to interest credited expenses. These increased sales also
generated an increase in commissions which was offset by an increase in related
DAC capitalization. In addition, other non-variable expenses increased $84
million and DAC amortization was up $83 million due to growth in our existing
businesses. Higher premiums, partially offset by higher policyholder benefits in
our international businesses improved operating earnings by $40 million.
Operating earnings from our property & casualty business improved $48 million
from an increase in average premium per policy; however, this was partially
offset by a decrease in exposures which reduced operating earnings by $11
million.
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The low interest rate environment continued to impact interest credited to
certain insurance liabilities which are tied to market indices. As a result of
the low interest rate environment, we set lower interest credited rates on new
business and on existing business with terms that can fluctuate. The positive
impact of lower interest credited rates was partially offset by an increase in
interest credited expense resulting from the impact of derivatives that are used
to hedge certain liabilities. Market factors and portfolio management actions
mitigated the low interest rate environment driving higher yields on the
investment portfolio, excluding the Divested Businesses. Market factors that
contributed to increased yields included higher returns in the real estate and
private equity markets on our equity method real estate joint venture and
private equity investments. The combined impact of lower interest credited
expense and higher investment returns resulted in a $68 million increase in
operating earnings.
Lower severity of property & casualty catastrophe claims in the current period
increased operating earnings by $92 million as a result of severe storm activity
in the second quarter of 2011. Favorable morbidity experience from our
non-medical health business and favorable mortality results in our Retail
segment were more than offset by less favorable claims experience in our group
life business and our Asia segment, reducing operating earnings by $30 million.
Results from our mortgage loan servicing business were down $55 million as a
result of an increase in expenses, higher run-off in a lower interest rate
environment and a decrease in service fees. In addition, the current period
benefited $50 million from favorable liability refinements, partially offset by
an unfavorable DAC capitalization adjustment. The first half of 2012 also
included $31 million of employee-related costs associated with the Company's
enterprise-wide strategic initiative. Operating earnings associated with the
assumed reinsurance of certain variable annuity products from our former
operating joint venture in Japan decreased $13 million. This was primarily due
to an increase in benefit liabilities resulting from lower returns in the
underlying funds.
The Company also benefited from a $69 million higher tax benefit in the first
half of 2012 over the prior period as a result of higher utilization of tax
preferenced investments, which provide tax credits and deductions.
Retail
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 2,217 $ 2,160 $ 57 2.6 %
Universal life and investment-type
product policy fees 2,233 2,023 210 10.4 %
Net investment income 3,695 3,635 60 1.7 %
Other revenues 418 369 49 13.3 %
Total operating revenues 8,563 8,187 376 4.6 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 3,739 3,655 84 2.3 %
Interest credited to policyholder account
balances 1,186 1,186 - - %
Capitalization of DAC (772 ) (920 ) 148 16.1 %
Amortization of DAC and VOBA 740 706 34 4.8 %
Other expenses 2,457 2,521 (64 ) (2.5 )%
Total operating expenses 7,350 7,148 202 2.8 %
Provision for income tax expense
(benefit) 425 365 60 16.4 %
Operating earnings $ 788 $ 674 $ 114 16.9 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Stronger sales of variable annuities in the prior period increased our average
separate account assets and, as a result, generated higher asset-based fee
revenue. This, coupled with positive net flows from the life products as
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well as the impact of an increase in allocated equity for annuities, led to
growth in the investment portfolio, increasing net investment income. The
reduction of sales levels from the prior period resulted in lower deferrable
expenses, which were directly offset by lower DAC capitalization; however,
stronger annuity sales in the prior period significantly increased our in-force
business contributing to an increase in non-deferrable expenses. Our 2011
business growth also generated higher DAC amortization and interest credited on
certain insurance liabilities. The net impact of these items resulted in a
$99 million increase in operating earnings.
Interest rates continued to remain low while equity markets showed some
improvement from the prior period. The low interest rate environment resulted in
a net $3 million unfavorable impact on operating earnings. This was driven by
lower net investment income due to lower yields, partially offset by a decrease
in DAC amortization, coupled with lower interest credited on certain insurance
liabilities.
Favorable mortality experience in the traditional life and variable and
universal life businesses was more than offset by a $26 million charge for the
expected acceleration of benefit payments to policyholders under a multi-state
examination related to unclaimed property and MetLife's use of the U.S. Social
Security Administration's Death Master File. Also offsetting the favorable
mortality in the traditional life and variable and universal life businesses was
unfavorable mortality in income annuities. The net impact of these items
resulted in a $10 million decrease in operating earnings.
The impact of the reduction in our closed block dividend scale, which was
announced in the fourth quarter of 2011, increased operating earnings by $14
million, net of DAC amortization. In addition, certain insurance-related
liabilities and DAC refinements in both the current and prior periods resulted
in a $13 million increase to operating earnings.
Group, Voluntary & Worksite Benefits
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 8,251 $ 8,004 $ 247 3.1 %
Universal life and investment-type
product policy fees 331 314 17 5.4 %
Net investment income 985 990 (5 ) (0.5 )%
Other revenues 228 200 28 14.0 %
Total operating revenues 9,795 9,508 287 3.0 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 7,405 7,319 86 1.2 %
Interest credited to policyholder
account balances 85 88 (3 ) (3.4 )%
Capitalization of DAC (214 ) (245 ) 31 12.7 %
Amortization of DAC and VOBA 199 233 (34 ) (14.6 )%
Other expenses 1,440 1,384 56 4.0 %
Total operating expenses 8,915 8,779 136 1.5 %
Provision for income tax expense
(benefit) 281 228 53 23.2 %
Operating earnings $ 599 $ 501 $ 98 19.6 %
Unless otherwise stated, all amounts discussed below are net of income tax.
The increase in average premium per policy in both our auto and homeowners
businesses improved operating earnings by $48 million and a decrease in
exposures reduced operating earnings by $11 million.
Current period premiums and deposits, together with growth in the securities
lending program, partially offset by a reduction in allocated equity, have
resulted in an increase in our average invested assets, contributing $18 million
to operating earnings. Consistent with the growth in average invested assets,
primarily in our LTC
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business, interest credited on long-duration contracts increased by $11 million.
Increased expenses associated with the implementation of the new dental contract
in the current period, along with growth across our businesses, reduced
operating earnings by $18 million.
Lower severity of property & casualty catastrophe claims in the current period
increased operating earnings by $92 million, mainly as a result of severe storm
activity in the second quarter of 2011. While property & casualty
non-catastrophe claims experience was relatively flat period over period, lower
claims frequency in both our auto and homeowners businesses of $26 million was
mostly offset by an increase in severity in the auto business of $23 million.
Favorable morbidity experience from across our non-medical health businesses
contributed $45 million to operating earnings. This favorable result stems
primarily from a decrease in claims in our disability, accidental death and
dismemberment and dental businesses. Less favorable claims experience in our
group life business resulted in a decrease in operating earnings of $55 million.
The group life mortality ratio has returned to a more historically
representative level of 88.2% in 2012, from a record low of 85.2% in the prior
period. The impact of the items discussed above related to the property &
casualty business, can be seen in the favorable change in the combined ratio,
excluding catastrophes, to 85.8% in 2012 from 89.2% in the prior period, as well
as the favorable change in the combined ratio, including catastrophes, to 97.0%
in 2012 from 110.2% in the prior period.
The low interest rate environment and lower prepayment fees resulted in a
decline in investment yields, primarily in our fixed maturity securities and
mortgage loan portfolios. Unlike in the Retail and Corporate Benefit Funding
segments, a reduction in investment yield does not necessarily drive a
corresponding change in the rates credited on certain insurance liabilities. The
reduction in investment yield, partially offset by marginally lower crediting
rates in the current period, resulted in a $19 million decrease in operating
earnings.
Corporate Benefit Funding
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 1,030 $ 1,297 $ (267 ) (20.6 )%
Universal life and investment-type product
policy fees 108 112 (4 ) (3.6 )%
Net investment income 2,832 2,794 38 1.4 %
Other revenues 129 121 8 6.6 %
Total operating revenues 4,099 4,324 (225 ) (5.2 )%
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 2,223 2,466 (243 ) (9.9 )%
Interest credited to policyholder account
balances 677 666 11 1.7 %
Capitalization of DAC (15 ) (17 ) 2 11.8 %
Amortization of DAC and VOBA 14 10 4 40.0 %
Interest expense on debt 4 5 (1 ) (20.0 )%
Other expenses 248 248 - - %
Total operating expenses 3,151 3,378 (227 ) (6.7 )%
Provision for income tax expense (benefit) 332 332 - - %
Operating earnings $ 616 $ 614 $ 2 0.3 %
Unless otherwise stated, all amounts discussed below are net of income tax.
The impact of current year premiums, deposits, and funding agreement issuances
contributed to an increase in invested assets, partially offset by a decrease in
allocated equity, resulting in an increase of $30 million to
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operating earnings. The growth in premiums, deposits and funding agreement
issuances resulted in a corresponding increase in interest credited on certain
insurance liabilities, which decreased operating earnings by $60 million.
The low interest rate environment continued to have an impact on our investment
returns, as well as our interest credited on certain insurance liabilities.
Lower investment returns on fixed maturity securities and our securities lending
program were partially offset by higher returns in the equity markets on our
private equity and real estate investments. Many of our funding agreement and
guaranteed interest contract liabilities are tied to market indices and, as a
result, interest credited rates on new business were set lower, as were the
rates on existing business with terms that can fluctuate. The positive impact of
lower interest credited rates was partially offset by an increase in interest
credited expense resulting from the impact of derivatives that are used to hedge
certain liabilities. The net impact of lower interest credited expense and lower
investment returns resulted in an increase in operating earnings of $25 million.
Mortality results across various products and the net impact of insurance
liability refinements in both periods had a $4 million favorable impact on
operating earnings.
Latin America
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 1,338 $ 1,241 $ 97 7.8 %
Universal life and investment-type
product policy fees 392 383 9 2.3 %
Net investment income 582 438 144 32.9 %
Other revenues 8 6 2 33.3 %
Total operating revenues 2,320 2,068 252 12.2 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 1,160 958 202 21.1 %
Interest credited to policyholder account
balances 190 185 5 2.7 %
Capitalization of DAC (155 ) (153 ) (2 ) (1.3 )%
Amortization of DAC and VOBA 109 109 - - %
Amortization of negative VOBA (3 ) (4 ) 1 25.0 %
Interest expense on debt 1 1 - - %
Other expenses 649 648 1 0.2 %
Total operating expenses 1,951 1,744 207 11.9 %
Provision for income tax expense
(benefit) 86 74 12 16.2 %
Operating earnings $ 283 $ 250 $ 33 13.2 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $33 million over the prior period. The impact of
changes in foreign currency exchange rates reduced operating earnings by $23
million for the first half of 2012 compared to the prior period.
Latin America experienced strong sales growth driven primarily by retirement
products in Chile and Mexico and by accident and health products in Argentina
and Chile. The resulting growth in premiums was partially offset by a
corresponding increase in policyholder benefits. The growth in our businesses
drove an increase in average invested assets, which generated higher net
investment income and higher policy fee income. The increase in sales also
generated higher commission expense, which was partially offset by related DAC
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capitalization. The combined impact of the items discussed above were the
primary drivers of the $47 million improvement in operating earnings.
Market factors favorably impacted operating earnings by $12 million. An increase
in yields reflects the period over period change from lower yields in the prior
period due to the impact of changes in assumptions for measuring the effects of
inflation on certain inflation-indexed investments, primarily in Chile, offset
by lower inflation on inflation-linked investments, mainly in Chile and Brazil.
The decrease in net investment income from lower inflation was substantially
offset by a corresponding decrease in policyholder benefits and lower interest
credited expense.
Current period results include an unfavorable DAC capitalization adjustment of
$8 million, which was partially offset by a favorable liability refinement of $4
million.
Asia
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 3,958 $ 3,687 $ 271 7.4 %
Universal life and investment-type
product policy fees 638 593 45 7.6 %
Net investment income 1,383 1,109 274 24.7 %
Other revenues 13 20 (7 ) (35.0 )%
Total operating revenues 5,992 5,409 583 10.8 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 2,643 2,470 173 7.0 %
Interest credited to policyholder
account balances 853 778 75 9.6 %
Capitalization of DAC (1,099 ) (918 ) (181 ) (19.7 )%
Amortization of DAC and VOBA 759 730 29 4.0 %
Amortization of negative VOBA (257 ) (287 ) 30 10.5 %
Interest expense on debt 5 - 5
Other expenses 2,219 2,053 166 8.1 %
Total operating expenses 5,123 4,826 297 6.2 %
Provision for income tax expense
(benefit) 297 188 109 58.0 %
Operating earnings $ 572 $ 395 $ 177 44.8 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $177 million over the prior period. The impact
of changes in foreign currency exchange rates improved operating earnings by $12
million for the first half of 2012 compared to the prior period.
Asia experienced sales growth in ordinary and universal life products in Japan,
which drove higher premiums and universal life fees over the prior period. This
was partially offset by a decline in life product sales and persistency in Hong
Kong, which drove lower premiums. The changes in premiums were offset by
corresponding changes in policyholder benefits. In addition, average invested
assets increased over the prior period, reflecting positive cash flows from
continued strong annuity sales in Japan generating increases in both net
investment income and policy fee income. The increase in sales also generated
higher commission expense, which was largely offset by an increase in related
DAC capitalization. The combined impact of the items discussed above were the
primary drivers of the $103 million improvement in operating earnings.
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The repositioning of the Japan portfolio to longer duration and higher yielding
investments contributed to an increase in investment yields. In addition, yields
improved as a result of growth in the Australian dollar annuity business with
the funds invested in higher yielding Australian dollar investments, as well as
higher returns on our alternative investments. These increases in yields
improved net investment income and were partially offset by higher interest
credited expense resulting in a net increase to operating earnings of $51
million.
The positive impact of liability refinements in both the current and prior
periods was partially offset by unfavorable changes in actuarial assumptions in
the current period which, combined, resulted in a $19 million increase to
operating earnings.
Unfavorable claims experience in the current period decreased operating earnings
by $39 million. Prior period results included $44 million of insurance claims
and operating expenses related to the March 2011 earthquake and tsunami and a
tax benefit of $13 million.
EMEA
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 1,424 $ 1,386 $ 38 2.7 %
Universal life and investment-type
product policy fees 227 239 (12 ) (5.0 )%
Net investment income 342 351 (9 ) (2.6 )%
Other revenues 63 55 8 14.5 %
Total operating revenues 2,056 2,031 25 1.2 %
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 838 803 35 4.4 %
Interest credited to policyholder
account balances 61 84 (23 ) (27.4 )%
Capitalization of DAC (420 ) (374 ) (46 ) (12.3 )%
Amortization of DAC and VOBA 359 345 14 4.1 %
Amortization of negative VOBA (41 ) (35 ) (6 ) (17.1 )%
Interest expense on debt 1 1 - - %
Other expenses 1,018 972 46 4.7 %
Total operating expenses 1,816 1,796 20 1.1 %
Provision for income tax expense
(benefit) 82 92 (10 ) (10.9 )%
Operating earnings $ 158 $ 143 $ 15 10.5 %
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $15 million over the prior period. The impact of
changes in foreign currency exchange rates reduced operating earnings by $12
million for the first half of 2012 compared to the prior period. The fourth
quarter 2011 purchase of a Turkish life insurance and pension company increased
operating earnings by $7 million.
The segment experienced overall business growth; however, certain European
countries in the region continued to be challenged by the prevailing economic
environment. Retirement sales in western Europe increased due to strong sales of
fixed and variable annuity products and credit life sales in Russia increased
due to a modest recovery in credit markets both of which resulted in higher
premiums and policyholder benefits. Consistent with the business growth,
operating expenses increased, most notably through higher compensation and
administrative costs. The increased sales generated an increase in commissions,
which was largely offset by
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related DAC capitalization. DAC amortization also increased. Fee income
increased largely due to growth in India and the Middle East. Despite dividends
paid to MetLife, Inc. at the end of 2011, the growth in our business drove an
increase in average invested assets, which generated higher net investment
income. The combined impact of the items discussed above reduced earnings by $18
million over the prior period.
Operating earnings increased $5 million reflecting higher positive mark to
market on certain of our alternative investments, partially offset by decreased
yields driven by declining equity markets.
Current period results benefited by $16 million primarily due to a release of
negative VOBA associated with the conversion of certain policies. In addition,
certain tax items in both periods improved results by $17 million.
Corporate & Other
Six Months
Ended
June 30,
2012 2011 Change % Change
(In millions)
OPERATING REVENUES
Premiums $ 28 $ 27 $ 1 3.7 %
Universal life and investment-type product
policy fees 79 76 3 3.9 %
Net investment income 453 477 (24 ) (5.0 )%
Other revenues 94 155 (61 ) (39.4 )%
Total operating revenues 654 735 (81 ) (11.0 )%
OPERATING EXPENSES
Policyholder benefits and claims and
policyholder dividends 63 40 23 57.5 %
Interest credited to policyholder account
balances 12 - 12
Interest expense on debt 601 644 (43 ) (6.7 )%
Other expenses 373 236 137 58.1 %
Total operating expenses 1,049 920 129 14.0 %
Provision for income tax expense (benefit) (329 ) (194 )
(135 ) (69.6 )%
Operating earnings (66 ) 9 (75 )
Less: Preferred stock dividends 61 61 - - %
Operating earnings available to common
shareholders $ (127 ) $ (52 ) $ (75 )
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings available to common shareholders and operating earnings each
decreased $75 million, primarily due to lower earnings from our mortgage loan
servicing business and the assumed reinsurance of a variable annuity business,
lower net investment income, and higher corporate expenses. These increases were
partially offset by a higher tax benefit and lower interest expense on debt.
Results from our mortgage loan servicing business were lower, driven by an
increase in expenses of $35 million due to higher regulatory oversight and
expenses related to the processing of foreclosed loans. In addition, revenues
decreased by $20 million due to higher run-off in a lower interest rate
environment and a decrease in service fees due to the termination of
sub-servicing contracts.
Operating earnings associated with the assumed reinsurance of certain variable
annuity products from our former operating joint venture in Japan decreased $13
million. This was primarily due to an increase in benefit liabilities resulting
from lower returns in the underlying funds.
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Net investment income decreased $16 million driven by an increase in the amount
credited to the segments due to growth in the economic capital managed by
Corporate & Other on their behalf, lower private equity returns and lower
investment returns realized from the impact of lower interest rates on our fixed
maturity securities. These decreases were partially offset by a higher return on
real estate joint venture investments due to improving real estate markets.
In the first quarter of 2012, the Company incurred a $26 million charge
representing a multi-state examination payment related to unclaimed property and
MetLife's use of the U.S. Social Security Administration's Death Master File.
The Company also incurred $31 million of employee-related costs associated with
the Company's enterprise-wide strategic initiative. In addition, advertising
costs were $7 million higher compared to the prior period, partially offset by a
$13 million decline in interest expense on debt.
Corporate & Other benefited in the first half of 2012 from a higher tax benefit
of $62 million over the prior period primarily due to higher utilization of tax
preferenced investments, which provide tax credits and deductions.
Investments
Investment Risks
The Company's primary investment objective is to optimize, net of income tax,
risk-adjusted investment income and risk-adjusted total return while ensuring
that assets and liabilities are managed on a cash flow and duration basis. The
Company is exposed to five primary sources of investment risk:
• credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and interest;
• interest rate risk, relating to the market price and cash flow variability
associated with changes in market interest rates;
• liquidity risk, relating to the diminished ability to sell certain
investments in times of strained market conditions;
• market valuation risk, relating to the variability in the estimated fair
value of investments associated with changes in market factors such as credit
spreads; and
• currency risk, relating to the variability in currency exchange rates for
foreign denominated investments.
The Company manages risk through in-house fundamental analysis of the underlying
obligors, issuers, transaction structures and real estate properties. The
Company also manages credit risk, market valuation risk and liquidity risk
through industry and issuer diversification and asset allocation. For real
estate and agricultural assets, the Company manages credit risk and market
valuation risk through geographic, property type and product type
diversification and asset allocation. The Company manages interest rate risk as
part of its asset and liability management strategies; through product design,
such as the use of market value adjustment features and surrender charges; and
through proactive monitoring and management of certain non-guaranteed elements
of its products, such as the resetting of credited interest and dividend rates
for policies that permit such adjustments. The Company also uses certain
derivative instruments in the management of credit, interest rate, currency and
equity market risks.
The Company generally enters into market standard purchased credit default swap
contracts to mitigate the credit risk of its investment portfolio. Payout under
such contracts is generally triggered by certain credit events experienced by
the referenced entities. For credit default swaps covering North American
corporate issuers, credit events typically include bankruptcy and failure to pay
on borrowed money. For European corporate issuers, credit events typically also
include involuntary restructuring. With respect to credit default contracts on
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western European sovereign debt, credit events typically include failure to pay
debt obligations, repudiation, moratorium, or involuntary restructuring. In each
case, payout on a credit default swap is triggered only after the relevant
Credit Derivatives Determinations Committee of the International Swaps and
Derivatives Association deems that a credit event has occurred.
Current Environment
The global economy and markets are still affected by a period of significant
stress that began in the second half of 2007. This disruption adversely affected
the financial services sector in particular and global capital markets. As a
financial holding company with significant operations in the U.S., we are
affected by the monetary policy of the Federal Reserve. The Federal Reserve
Board has taken a number of actions in recent years to spur economic activity by
keeping interest rates low and, on June 20, 2012, reiterated its plans to keep
interest rates low until at least through late 2014. The Federal Reserve may
take further actions to influence interest rates in the future, which may have
an impact on the pricing levels of risk-bearing investments. It extended to the
end of 2012 "Operation Twist," a program announced in September 2011 by the
Federal Open Market Committee to purchase U.S. Treasury securities with
remaining maturities of six to 30 years and to sell, over the same period, an
equal par value of U.S. Treasury securities with remaining maturities of
approximately three years or less. By reducing the supply of longer-term
securities in the market, Operation Twist is intended to put downward pressure
on longer-term interest rates relative to levels that would otherwise prevail.
The reduction in longer-term interest rates, in turn, is intended to contribute
to a broad easing of financial market conditions that could provide additional
stimulus to support the economic recovery.
As a global insurance company, we are also affected by the monetary policy of
central banks around the world. Central banks around the world, including the
European Central Bank, the Bank of England, the Bank of Japan, the Bank of
Australia, the Central Bank of Brazil and the Central Bank of China, followed
the recent actions of the Federal Reserve Board to lower interest rates. The
collective effort globally to lower interest rates was in response to concerns
about Europe's sovereign debt crisis and slowing global economic growth. See
"Risk Factors - Governmental and Regulatory Actions for the Purpose of
Stabilizing and Revitalizing the Financial Markets and Protecting Investors and
Consumers May Not Achieve the Intended Effect or Could Adversely Affect Our
Competitive Position" included in the 2011 Annual Report.
During the second quarter of 2012, concerns about the economic conditions, the
capital markets and the solvency of certain European Union member states,
including Europe's perimeter region, and of financial institutions that have
significant direct or indirect exposure to their sovereign debt, continued to
create market volatility. This market volatility will likely continue to affect
the performance of various asset classes in 2012, and perhaps longer, until
there is an ultimate resolution of these European Union sovereign debt-related
concerns.
As a result of concerns about the ability of Europe's perimeter region to
service its sovereign debt, certain countries have experienced credit ratings
downgrades. Despite official financial support programs for the most stressed
governments in Europe's perimeter region, concerns about sovereign debt
sustainability subsequently expanded to other European Union member states. As a
result, in late 2011 and during 2012, several other European Union member states
experienced sovereign credit ratings downgrades or had their credit ratings
outlook revised to negative. As summarized below, at June 30, 2012, the Company
did not have significant exposure to the sovereign debt of Europe's perimeter
region. Accordingly, we do not expect such investments to have a material
adverse effect on our results of operations or financial condition. Outside of
Europe's perimeter region, the Company's holdings of sovereign debt, corporate
debt and perpetual hybrid securities in certain European Union member states and
other countries in the region that are not members of the European Union
(collectively, the "European Region") were concentrated in the United Kingdom,
Germany, France, the Netherlands, Poland, Switzerland and Norway, the sovereign
debt of which continues to maintain the highest credit ratings from all major
rating agencies.
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Greece Support Program. In March 2012, the leaders of the European Union member
states nations approved Greece's second support program. In connection with this
€130 billion support program, Greece exchanged €177 billion of its domestic law
sovereign debt with private sector holders in exchange for a package of four new
securities issued by Greece and the public sector supported European Financial
Stability Facility ("EFSF"). The debt exchange resulted in a loss to private
sector holders of approximately 70% on a net present value basis. In the
exchange, private sector holders received new Greece longer-dated sovereign debt
maturing in 11 to 30 years with a face amount of 31.5% of the former debt;
detachable Gross Domestic Product ("GDP")-linked Greece warrants; short-dated
EFSF bonds maturing in two years or less with a face amount of 15% of the former
debt; and six-month EFSF notes in payment of accrued interest. Greece's newly
issued sovereign debt is rated C by Moody's, CCC by Standard & Poor's Rating
Services ("S&P") and CCC by Fitch Ratings ("Fitch").
Europe'sPerimeter Region Sovereign Debt Securities. Our holdings of Greece
sovereign debt were acquired in the acquisition of ALICO and our amortized cost
basis reflects recording such securities at estimated fair value on November 1,
2010, which was substantially below par, partially mitigating our exposure.
During the year ended December 31, 2011, we sold a significant portion of our
Europe's perimeter region sovereign debt, thereby substantially reducing our
exposure. During 2011, we recorded non-cash impairment charges of $405 million
on our holdings of Greece sovereign debt. In 2012, we recorded an insignificant
gain on the exchange of our holdings of Greece sovereign debt. As described
above, in the exchange we received both EFSF debt and Greece sovereign debt,
which reduced our exposure to Greece sovereign debt from $158 million to $57
million on the date of the exchange, while the short-dated EFSF debt, which was
rated Aaa by Moody's and Fitch and AA+ by S&P was valued at $115 million on the
date of exchange. The par value (excluding the notional amount of the detachable
GDP-linked Greece warrants), amortized cost and estimated fair value of holdings
in sovereign debt of Europe's perimeter region were $257 million, $88 million
and $55 million at June 30, 2012, respectively, and $874 million, $254 million
and $264 million at December 31, 2011, respectively.
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Select European Countries - Investment Exposures. Due to the current level of
economic, fiscal and political strain in Europe's perimeter region and Cyprus,
the Company continually monitors and adjusts its level of investment exposure in
these countries. We manage direct and indirect investment exposure in these
countries through fundamental credit analysis. The following table presents a
summary of investments by invested asset class and related purchased credit
default protection across Europe's perimeter region, by country, and Cyprus.
Summary of Select European Country Investment Exposure at June 30, 2012 (1) (2)
Fixed maturity securities (3)
All Other Purchased
Non- General Account Credit
Financial Financial Investment Total Default Net
Sovereign Services Services Total Exposure (4) (5) Exposure % Protection (5) Exposure %
(In millions)
Europe's perimeter region:
Portugal $ 3 $ - $ 55 $ 58 $ 6 $ 64 2 % $ (12 ) $ 52 1 %
Italy 23 188 738 949 106 1,055 30 (9 ) 1,046 30
Ireland - 23 199 222 1,176 1,398 39 - 1,398 40
Greece 27 - - 27 160 187 5 - 187 5
Spain 2 103 591 696 46 742 21 - 742 21
Total Europe's perimeter region 55 314 1,583 1,952 1,494 3,446 97 (21 ) 3,425 97
Cyprus 60 - - 60 30 90 3 - 90 3
Total $ 115 $ 314 $ 1,583$ 2,012 $ 1,524 $ 3,536 100 % $ (21 ) $ 3,515 100 %
As percent of total cash and
invested assets 0.0 % 0.1 % 0.3 % 0.4 %
Investment grade percent 38 % 94 % 92 %
Non investment grade percent 62 % 6 % 8 %
(1) Information is presented on a country of risk basis (e.g. the country where
the issuer primarily conducts business).
(2) The Company has not written any credit default swaps with an underlying risk
related to any of these six countries. For Greece, the Company has $2 million
of commitments to fund partnership investments at June 30, 2012.
(3) Presented at estimated fair value. The par value and amortized cost of the
fixed maturity securities were $2.2 billion and $2.2 billion, respectively,
at June 30, 2012.
(4) Comprised of equity securities, fair value option ("FVO") general account
securities, real estate and real estate joint ventures, other limited
partnership interests, cash, cash equivalents and short-term investments, and
other invested assets at carrying value. See Note 1 of the Notes to the
Consolidated Financial Statements included in the 2011 Annual Report for an
explanation of the carrying value for these invested asset classes. Excludes
FVO contractholder-directed unit-linked investments of $522 million, which
support unit-linked variable annuity type liabilities and do not qualify for
separate account summary total assets and liabilities. The contractholder,
and not the Company, directs the investment of these funds. The related
variable annuity type liability is satisfied from the contractholder's
account balance and not from the general account investments of the Company.
(5) Purchased credit default protection is stated at the estimated fair value of
the swap. For Portugal, the purchased credit default protection relates to
sovereign securities and this swap had a notional amount of $60 million and
an estimated fair value of $12 million as of June 30, 2012. For Italy, the
purchased credit default protection relates to financial services corporate
securities and these swaps had a notional amount of $80 million and an
estimated fair value of $9 million at June 30, 2012. The counterparties to
these swaps are financial institutions with S&P credit ratings ranging from
A+ to A- as of June 30, 2012.
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European Region Investments. The Company has investments across the European
Region. We have proactively mitigated risk in both direct and indirect exposures
in the European Region by investing in a diversified portfolio of high quality
investments with a focus on the higher-rated countries, reducing our holdings
through sales of financial services securities during 2010, 2011 and 2012 and
sales of Europe's perimeter region sovereign debt in 2011 and 2012, and by
purchasing certain single name credit default protection in 2010 and 2011. Our
sales of financial services securities were focused on institutions with
exposure to Europe's perimeter region, lower preference capital structure
instruments and larger positions. Investments in sovereign debt and corporate
securities (fixed maturity and perpetual hybrid securities) were $39.8 billion
at June 30, 2012. Sovereign debt issued by countries outside of Europe's
perimeter region comprised $8.7 billion, or 99% of European Region sovereign
fixed maturity securities, at estimated fair value, at June 30, 2012. The
European Region corporate securities are invested in a diversified portfolio of
primarily non-financial services securities, which comprised $23.5 billion, or
76% of European Region total corporate securities, at estimated fair value, at
June 30, 2012. Of these European Region sovereign fixed maturity and corporate
securities, 91% were investment grade and, for the 9% that were below investment
grade, the majority were non-financial services corporate securities, at
June 30, 2012. European Region financial services corporate securities, at
estimated fair value, were $7.6 billion, including $5.8 billion within the
banking sector, with 92% invested in investment grade rated corporate
securities, at June 30, 2012.
Japan Investments. The Japanese economy, to which we face substantial exposure
given our operations there, continues to be weak. Disruptions to the Japanese
economy are possible and may have negative impacts on the overall global
economy, not all of which can be foreseen. The Company's investment in fixed
maturity and equity securities in Japan were $29.3 billion, of which $21.7
billion, or 74%, were Japan government and agency fixed maturity securities, at
estimated fair value, at June 30, 2012.
Rating Actions - U.S. Treasury Securities. As a result of a special
Congressional committee failing to agree on certain deficit-reduction measures,
in August 2011, U.S. Treasury securities were downgraded to AA+ by S&P with
negative outlook. Financial markets continue to be affected by concerns over
U.S. fiscal policy, including the uncertainty regarding the "fiscal cliff"
composed of tax increases and automatic government spending cuts that will
become effective at the end of 2012 unless steps are taken to delay or offset
them, as well as the need to again raise the U.S. federal government's debt
ceiling by the end of 2012 and reduce the federal deficit. These issues could
result in the future downgrade of U.S. credit ratings. We continue to closely
evaluate the implications on our investment portfolio of further rating agency
downgrades of U.S. Treasury securities and believe our investment portfolio is
well positioned. See "Risk Factors - Concerns Over U.S. Fiscal Policy and the
"Fiscal Cliff" in the U.S., as well as Rating Agency Downgrades of U.S. Treasury
Securities, Could Have an Adverse Effect on Our Business, Financial Condition
and Results of Operations."
Summary. All of these factors have had and could continue to have an adverse
effect on the financial results of companies in the financial services industry,
including MetLife. Such global economic conditions, as well as the global
financial markets, continue to impact our net investment income, our net
investment gains (losses) and net derivative gains (losses), level of unrealized
gains and (losses) within the various asset classes within our investment
portfolio and our allocation to lower yielding cash equivalents and short-term
investments. See "- Industry Trends" and "Risk Factors - Difficult Conditions in
the Global Capital Markets and the Economy Generally May Materially Adversely
Affect Our Business and Results of Operations and These Conditions May Not
Improve in the Near Future" included in the 2011 Annual Report.
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Composition of Investment Portfolio and Investment Portfolio Results
The composition of the investment portfolio, the related investment portfolio
results and gains (losses) on derivative instruments which are used to manage
risk for certain invested assets and certain insurance liabilities is presented
in the yield table below:
At or For the At or For the
Three Months Six Months
Ended Ended
June 30, June 30,
2012 2011 2012 2011
(In millions)
Fixed Maturity Securities:
Yield (1) 4.76 % 4.94 % 4.86 % 4.93 %
Investment income (2),(3),(4) $ 3,720 $ 3,794 $ 7,560 $ 7,487
Investment gains (losses) (3) (19 ) (105 ) (155 ) (268 )
Ending carrying value (2),(3) 367,138 342,607 367,138 342,607
Mortgage Loans:
Yield (1) 5.44 % 5.50 % 5.53 % 5.52 %
Investment income (3),(4) 764 765 1,594 1,524
Investment gains (losses) (3) 13 68 49 115
Ending carrying value (3) 55,750 56,927 55,750 56,927
Real Estate and Real Estate Joint Ventures:
Yield (1) 8.75 % 4.85 % 6.25 % 3.85 %
Investment income (3) 185 99 265 156
Investment gains (losses) (3) (12 ) 47 5 76
Ending carrying value 8,477 8,234 8,477 8,234
Policy Loans:
Yield (1) 5.27 % 5.41 % 5.28 % 5.41 %
Investment income 156 160 314 320
Ending carrying value 11,912 11,858 11,912 11,858
Equity Securities:
Yield (1) 5.24 % 6.04 % 4.69 % 4.70 %
Investment income 38 48 70 78
Investment gains (losses) 19 (70 ) 10 (34 )
Ending carrying value 2,882 3,238 2,882 3,238
Other Limited Partnership Interests:
Yield (1) 16.07 % 9.90 % 13.74 % 12.52 %
Investment income 266 159 448 402
Investment gains (losses) (9 ) 5 (11 ) 8
Ending carrying value 6,726 6,453 6,726 6,453
Cash and Short-Term Investments:
Yield (1),(7) 0.65 % 1.09 % 0.67 % 1.09 %
Investment income 34 41 66 84
Investment gains (losses) - 1 - 1
Ending carrying value (3) 34,540 22,026 34,540 22,026
Other Invested Assets: (1)
Investment income (7) 197 163 329 173
Investment gains (losses) (3) (10 ) (7 ) (35 ) (3 )
Ending carrying value (7) 24,288 14,866 24,288 14,866
Total Investments:
Investment income yield (1),(3),(5),(7) 5.05 % 5.08 % 5.03 % 5.00 %
Investment fees and expenses yield (0.13 ) (0.13
) (0.13 ) (0.13 )
Net Investment Income Yield (1),(3),(5),(7) 4.92 % 4.95
% 4.90 % 4.87 %
Investment income (5),(7) $ 5,360 $ 5,229 $ 10,646 $ 10,224
Investment fees and expenses (139 ) (138
) (279 ) (266 )
Net investment income including certain
Divested Businesses (5),(7) 5,221 5,091 10,367 9,958
Less: net investment income from certain
Divested Businesses (5) 34 80 95 164
Net Investment Income (3),(6),(7) $ 5,187 $ 5,011
$ 10,272$ 9,794
Ending Carrying Value (3),(5),(7) $ 511,713 $ 466,209
$ 511,713$ 466,209
Investment portfolio gains (losses) including
Divested Businesses $ (18 ) $ (61 ) $ (137 ) $ (105 )
Less: investment portfolio gains (losses) from
Divested Businesses (5) (35 ) (6 ) 61 (9 )
Investment portfolio gains (losses) (3),(5),(6) $ 17 $ (55 ) $ (198 ) $ (96 )
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At or For the At or For the
Three Months Six Months
Ended Ended
June 30, June 30,
2012 2011 2012 2011
(In millions)
Gross investment gains $ 255 $ 348 $ 533 $ 633
Gross investment losses (182 ) (288 ) (517 ) (531 )
Writedowns (56 ) (115 ) (214 ) (198 )
Investment Portfolio Gains (Losses) (3),(5),(6) 17 (55 ) (198 ) (96 )
Investment portfolio gains (losses) income tax
(expense) benefit (13 )
21 57 35
Investment Portfolio Gains (Losses), Net of Income Tax $ 4 $ (34 ) $ (141 ) $ (61 )
Derivative gains (losses) including Divested Businesses $ 1,984 $ 293 $ (80 ) $ (93 )
Less: derivative gains (losses) from Divested
Businesses (5) (2 )
(9 ) (7 ) (11 )
Derivative gains (losses) (3),(5),(6) 1,986
302 (73 ) (82 )
Derivative gains (losses) income tax (expense) benefit (699 ) (107 ) 28 24
Derivative Gains (Losses), Net of Income Tax $ 1,287 $ 195 $ (45 ) $ (58 )
As described in the footnotes below, the yield table reflects certain
differences from the GAAP presentation of invested assets, net investment
income, net investment gains (losses) and net derivative gains (losses) as
presented in the consolidated balance sheets and consolidated statements of
operations and comprehensive income. This yield table presentation is consistent
with how we measure our investment performance for management purposes, and we
believe it enhances understanding of our investment portfolio results.
(1) Yields are calculated as investment income as a percent of average quarterly
asset carrying values. Investment income excludes recognized gains and losses
and reflects GAAP adjustments related to net investment income. Asset
carrying values exclude unrealized gains (losses), collateral received in
connection with our securities lending program, freestanding derivative
assets, collateral received from derivative counterparties, the effects of
consolidating under GAAP certain VIEs that are treated as consolidated
securitization entities ("CSEs"), contractholder-directed unit-linked
investments and securitized reverse residential mortgage loans. A yield is not presented for other invested assets, as it is not considered a meaningful
measure of performance for this asset class.
(2) Fixed maturity securities include $799 million and $863 million at estimated
fair value of trading and other securities at June 30, 2012 and 2011,
respectively. Fixed maturity securities include ($1) million and $44 million
of investment income (loss) related to trading and other securities for the
three months and six months ended June 30, 2012, respectively, and
$16 million and $44 million of investment income related to trading and other
securities for the three months and six months ended June 30, 2011,
respectively.
(3) As described in footnote (1) above, ending carrying values exclude
contractholder-directed unit-linked investments - reported within trading and
other securities, securities held by CSEs - reported within trading and other
securities, and securitized reverse residential mortgage loans- reported
within mortgage loans. The related adjustments to ending carrying value,
investment income and investment gains (losses) by invested asset class are
presented below. The adjustments to investment income, net investment income
and investment gains (losses) in the aggregate are as shown in footnote
(6) to this yield table. The adjustment to investment gains (losses)
presented below and in footnote (6) to this yield table includes the effects
of remeasuring both the invested assets and long-term debt in accordance with
the FVO.
At or For the Three Months Ended June 30, 2012 At or For the Six Months Ended June 30, 2012
As Reported in the Excluded As Reported in the Excluded
Yield Table Amounts Total Yield Table Amounts Total
(In millions) (In millions)
Trading and Other Securities:
(included within Fixed
Maturity Securities):
Ending carrying value $ 799 $ 17,529 $ 18,328 $ 799 $ 17,529 $ 18,328
Investment income $ (1 ) $ (516 ) $ (517 ) $ 44 $ 501 $ 545
Investment gains (losses) $ (1 ) $ 1 $ - $ 3 $ (10 ) $ (7 )
Mortgage Loans:
Ending carrying value $ 55,750 $ 3,191 $ 58,941 $ 55,750 $ 3,191 $ 58,941
Investment income $ 764 $ 44 $ 808 $ 1,594 $ 89 $ 1,683
Investment gains (losses) $ 13 $ 3 $ 16 $ 49 $ 9 $ 58
Cash and Short-Term
Investments:
Ending carrying value $ 34,540 $ 21 $ 34,561 $ 34,540 $ 21 $ 34,561
Total Investments:
Ending carrying value $ 511,713 $ 20,741 $ 532,454 $ 511,713 $ 20,741 $ 532,454
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At or For the Three Months Ended June 30, 2011 At or For the Six Months Ended June 30, 2011
As Reported in the Excluded As Reported in the Excluded
Yield Table Amounts Total Yield Table Amounts Total
(In millions) (In millions)
Trading and Other Securities:
(included within Fixed
Maturity Securities):
Ending carrying value $ 863 $ 18,837 $ 19,700 $ 863 $ 18,837 $ 19,700
Investment income $ 16 $ (32 ) $ (16 ) $ 44 $ 388 $ 432
Investment gains (losses) $ - $ (15 ) $ (15 ) $ - $ (8 ) $ (8 )
Mortgage Loans:
Ending carrying value $ 56,927 $ 6,697 $ 63,624 $ 56,927 $
6,697 $ 63,624
Investment income $ 765 $ 96 $ 861 $ 1,524 $ 191 $ 1,715
Investment gains (losses) $ 68 $ (1 ) $ 67 $ 115 $ 17 $ 132
Cash and Short-Term
Investments:
Ending carrying value $ 22,026 $ 21 $ 22,047 $ 22,026 $ 21 $ 22,047
Total Investments:
Ending carrying value $ 466,209 $
25,555 $ 491,764 $ 466,209 $ 25,555 $ 491,764
(4) Investment income from fixed maturity securities and mortgage loans includes
prepayment fees.
(5) Yields are calculated including net investment income of certain of the
Divested Businesses and related ending carrying values. The net investment
income adjustment in footnote (6) to this yield table for the Divested
Businesses for the three months and six months ended June 30, 2012 includes
$88 million and $173 million, respectively, for securitized reverse
residential mortgage loans that was excluded from the Mortgage Loans and
total yield sections presented above. For further information on the Divested
Businesses, see Note 2 of the Notes to the Interim Condensed Consolidated
Financial Statements.
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(6) Net investment income, investment portfolio gains (losses) and derivative
gains (losses) presented in this yield table vary from the most directly
comparable measures presented in the GAAP consolidated statements of
operations and comprehensive income due to certain reclassifications
affecting net investment income, net investment gains (losses), net
derivative gains (losses), interest credited to policyholder account balances, and other revenues, and excludes the effects of consolidating under
GAAP certain VIEs that are treated as CSEs. Such reclassifications are
presented in the tables below.
Three Months Six Months
Ended Ended
June 30, June 30,
2012 2011 2012 2011
(Inmillions)
Net investment income - in above yield table $ 5,187$ 5,011
$ 10,272 $ 9,794
Real estate discontinued operations - deduct
from net investment income (2 ) (2 ) (2 ) (6 )
Scheduled periodic settlement payments on
derivatives not qualifying for hedge
accounting -deduct from net investment income,
add to net derivative gains (losses) (113 ) (55 ) (202 ) (94 )
Equity method operating joint ventures- add to
net investment income, deduct from net
derivative gains (losses) - - - (23 )
Net investment income on
contractholder-directed unit-linked
investments - reported within trading and
other securities - add to net investment
income (517 ) (32 ) 498 387
Divested Businesses - add to net investment
income 122 80 268 164
Incremental net investment income from CSEs -
add to net investment income 42 92 85 184
Net investment income - GAAP consolidated
statements of operations and comprehensive
income $ 4,719 $ 5,094
$ 10,919$ 10,406
Investment portfolio gains (losses) including
Divested Businesses - in above yield table $ (18 ) $ (61 ) $ (137 ) $ (105 )
Real estate discontinued operations - deduct
from net investment gains (losses) (4 ) (43 ) (25 ) (71 )
Investment gains (losses) related to CSEs -
add to net investment gains (losses) 4 (16 ) (1 ) 9
Other gains (losses) - add to net investment
gains (losses) (46 ) (35 )
(11 ) (87 )
Net investment gains (losses) - GAAP
consolidated statements of operations and
comprehensive income $ (64 ) $ (155 )
$ (174 ) $ (254 )
Derivative gains (losses) including Divested
Businesses - in above yield table $ 1,984 $ 293 $ (80 ) $ (93 )
Scheduled periodic settlement payments on
derivatives not qualifying for hedge
accounting -add to net derivative gains
(losses), deduct from net investment income 113 55 202 94
Scheduled periodic settlement payments on
derivatives not qualifying for hedge
accounting - add to net derivative gains
(losses), deduct from interest credited to
policyholder account balances 1 8 3 16
Settlement of foreign currency earnings - add
to net derivative gains (losses), deduct from
other revenues (6 ) (4 ) (11 ) (3 )
Equity method operating joint ventures- add to
net investment income, deduct from net
derivative gains (losses) - - - 23
Net derivative gains (losses) - GAAP
consolidated statements of operations and
comprehensive income $ 2,092 $ 352 $ 114 $ 37
(7) Certain amounts in the prior periods have been revised in connection with the
retrospective application of the first quarter 2012 adoption of the new
guidance regarding accounting for DAC. Prior period yields have been recast
to conform to the current presentation to exclude from asset carrying values
freestanding derivatives and collateral received from derivative
counterparties.
See "- Results of Operations - Three Months Ended June 30, 2012 Compared with
the Three Months Ended June 30, 2011 - Consolidated Results" and "- Results of
Operations - Six Months Ended June 30, 2012 Compared with the Six Months Ended
June 30, 2011 - Consolidated Results" for analyses of the period over period
changes in net investment income, net investment gains (losses) and net
derivative gains (losses).
Fixed Maturity and Equity Securities Available-for-Sale
Fixed maturity securities, which consisted principally of publicly-traded and
privately placed fixed maturity securities, were $366.3 billion and
$350.3 billion, at estimated fair value, at June 30, 2012 and December 31, 2011,
respectively, or 69% and 67% of total cash and invested assets at June 30, 2012
and December 31, 2011, respectively. Publicly-traded fixed maturity securities
represented $318.8 billion and $303.6 billion, at estimated fair value, at
June 30, 2012 and December 31, 2011, respectively, or 87% of total fixed
maturity securities, at both June 30, 2012 and December 31, 2011. Privately
placed fixed maturity securities represented $47.5 billion and $46.7 billion, at
estimated fair value, at June 30, 2012 and December 31, 2011, respectively, or
13% of total fixed maturity securities, at estimated fair value, at both
June 30, 2012 and December 31, 2011.
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Equity securities, which consisted principally of publicly-traded and
privately-held common and preferred stocks, including certain perpetual hybrid
securities and mutual fund interests, were $2.9 billion and $3.0 billion, at
estimated fair value, or 0.5% and 0.6%, of total cash and invested assets, at
June 30, 2012 and December 31, 2011, respectively. Publicly-traded equity
securities represented $1.6 billion and $1.7 billion, at estimated fair value,
or 55% and 57% of total equity securities, at June 30, 2012 and December 31,
2011, respectively. Privately-held equity securities represented $1.3 billion,
at estimated fair value, at both June 30, 2012 and December 31, 2011, or 45% and
43%, of total equity securities, at June 30, 2012 and December 31, 2011,
respectively.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Investments - Fixed Maturity and Equity Securities
Available-for-Sale - Valuation of Securities" included in the 2011 Annual Report
for a discussion of the processes we use to value securities and the related
controls.
Fair Value Hierarchy and Level 3 Rollforward - Fixed Maturity and Equity
Securities. Fixed maturity securities and equity securities available-for-sale
measured at estimated fair value on a recurring basis and their corresponding
fair value pricing sources and fair value hierarchy are as follows:
June 30, 2012
Fixed
Maturity % of Equity % of
Pricing Source: Securities Total Securities Total
(In millions) (In millions)
Level 1:
Quoted prices in active markets for
identical assets $ 24,916 6.8 % $ 820 28.4 %
Level 2:
Independent pricing source 283,161 77.3 456 15.8
Internal matrix pricing or discounted
cash flow techniques 37,438 10.2 892 31.0
Significant other observable inputs 320,599 87.5 1,348 46.8
Level 3:
Independent pricing source 8,978 2.5 487 16.9
Internal matrix pricing or discounted
cash flow techniques 10,765 2.9 218 7.6
Independent broker quotations 1,081 0.3 9 0.3
Significant unobservable inputs 20,824 5.7 714 24.8
Total estimated fair value $ 366,339 100.0 % $ 2,882 100.0 %
June 30, 2012
Fair Value Measurements Using
Quoted Prices Significant
in Active Other Significant Total
Markets for Observable Unobservable Estimated
Identical Assets Inputs Inputs Fair
Fair Value Hierarchy: (Level 1) (Level 2) (Level 3) Value
(In millions)
Fixed Maturity Securities:
U.S. corporate securities $ - $ 102,979 $ 7,394 $ 110,373
Foreign corporate securities - 58,532 4,813 63,345
Foreign government securities - 53,807 2,386 56,193
U.S. Treasury and agency
securities 24,916 22,851 74 47,841
Residential mortgage-backed
securities ("RMBS") - 38,701 2,363 41,064
Commercial mortgage-backed
securities ("CMBS") - 17,979 1,038 19,017
State and political subdivision
securities - 14,538 76 14,614
Asset-backed securities ("ABS") - 11,212 2,680 13,892
Total fixed maturity securities $ 24,916 $ 320,599 $ 20,824 $ 366,339
Equity Securities:
Common stock $ 820 $ 992 $ 282 $ 2,094
Non-redeemable preferred stock - 356 432 788
Total equity securities $ 820 $ 1,348 $ 714 $ 2,882
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The composition of fair value pricing sources for and significant changes in
Level 3 securities at June 30, 2012 are as follows:
• The majority of the Level 3 fixed maturity and equity securities (91%, as
presented above) were concentrated in five sectors: U.S. and foreign
corporate securities, ABS, foreign government securities and RMBS.
• Level 3 fixed maturity securities are priced principally through market
standard valuation methodologies, independent pricing services and, to a much
lesser extent, independent non-binding broker quotations using inputs that
are not market observable or cannot be derived principally from or
corroborated by observable market data. Level 3 fixed maturity securities
consist of less liquid securities with very limited trading activity or where
less price transparency exists around the inputs to the valuation
methodologies including alternative residential mortgage loan ("Alt-A") and
sub-prime RMBS, certain below investment grade private securities and less
liquid investment grade corporate securities (included in U.S. and foreign
corporate securities), less liquid ABS and foreign government securities.
• During the three months ended June 30, 2012, Level 3 fixed maturity
securities increased by $1.3 billion, or 7%. The increase was driven by net
purchases in excess of sales, partially offset by net transfers out of Level
3.
• During the six months ended June 30, 2012, Level 3 fixed maturity securities
increased by $3.1 billion, or 17%. The increase was driven by net purchases
in excess of sales.
An analysis of transfers into and/or out of Level 3, purchases and sales on a
sector basis as well as additional information about the valuation techniques
and inputs by level by major classes of invested assets that affect the amounts
reported above, is presented within Note 5 of the Notes to the Interim Condensed
Consolidated Financial Statements.
A rollforward of the fair value measurements for fixed maturity securities and
equity securities available-for-sale measured at estimated fair value on a
recurring basis using significant unobservable (Level 3) inputs is as follows:
Three Months Six Months
Ended Ended
June 30, 2012 June 30, 2012
Fixed Fixed
Maturity Equity Maturity Equity
Securities Securities Securities Securities
(Inmillions)
Balance, beginning of period $ 19,476 $ 714 $ 17,765 $ 719
Total realized/unrealized gains
(losses) included in:
Earnings (1) (16 ) 1 (45 ) (9 )
Other comprehensive income (loss) 35 (11 ) 112 27
Purchases 3,219 41 5,338 57
Sales (1,316 ) (34 ) (1,871 ) (72 )
Transfers into Level 3 317 3 442 5
Transfers out of Level 3 (891 ) - (917 ) (13 )
Balance, end of period $ 20,824 $ 714 $ 20,824 $ 714
(1) Total gains and losses in earnings and other comprehensive income (loss) are
calculated assuming transfers into or out of Level 3 occurred at the
beginning of the period. Items transferred into and out during the same
period are excluded from the rollforward. Total gains (losses) for fixed
maturity securities included in other comprehensive income (loss) of
$1 million and $(4) million, were incurred on these securities subsequent to
their transfer into Level 3, for the three months and six months ended
June 30, 2012, respectively. No gains (losses) were included in earnings.
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See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Summary of Critical Accounting Estimates - Estimated Fair Value of
Investments" included in the 2011 Annual Report for further information on the
estimates and assumptions that affect the amounts reported above.
Fixed Maturity Securities. See Note 3 of the Notes to the Interim Condensed
Consolidated Financial Statements for information about:
• Fixed maturity and equity securities on a sector basis;
• Government and agency securities holdings in excess of 10% of the Company's
equity; and
• Maturities of fixed maturity securities.
Fixed Maturity Securities Credit Quality - Ratings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Fixed Maturity
Securities Credit Quality - Ratings" included in the 2011 Annual Report for a
discussion of the ratings methodologies used by rating agencies and the
Securities Valuation Office of the National Association of Insurance
Commissioners ("NAIC") for fixed maturity securities.
The following table presents total fixed maturity securities by Nationally
Recognized Statistical Rating Organizations ("NRSRO") designation and the
equivalent designations of the NAIC, except for certain structured securities,
which utilize NAIC rating methodologies, as well as the percentage, based on
estimated fair value that each designation is comprised of at:
June 30, 2012 December 31, 2011
Estimated
Estimated Fair
NAIC Amortized Fair % of Amortized % of
Rating Rating Agency Designation Cost Value Total Cost Value Total
(In millions) (In millions)
1 Aaa/Aa/A $ 236,547 $ 258,302 70.5 % $ 230,195 $ 246,786 70.5 %
2 Baa 77,127 83,515 22.8 73,352 78,531 22.4
3 Ba 14,841 14,848 4.1 14,604 14,375 4.1
4 B 8,762 8,503 2.3 9,437 8,849 2.5
5 Caa and lower 1,544 1,121 0.3 2,142 1,668 0.5
6 In or near default 50 50 - 81 62 -
Total fixed maturity securities $ 338,871 $ 366,339 100.0 % $ 329,811 $ 350,271 100.0 %
The following tables present total fixed maturity securities, based on estimated
fair value, by sector classification and by NRSRO designation and the equivalent
designations of the NAIC, except for certain structured securities, which are
presented as described above, that each designation is comprised of at:
Fixed Maturity
Securities - by Sector & Credit Quality Rating at June 30, 2012
NAIC Rating: 1 2 3 4 5 6 Total
Caa and In or Near Estimated
Rating Agency Designation: Aaa/Aa/A Baa Ba B Lower Default Fair Value
(In millions)
U.S. corporate securities $ 52,132 $ 45,036 $ 8,569 $ 4,347 $ 269 $ 20 $ 110,373
Foreign corporate securities 31,699 27,119 3,263 1,207 53 4 63,345
Foreign government securities 45,117 8,476 1,305 1,259 36 - 56,193
U.S. Treasury and agency
securities 47,841 - - - - - 47,841
RMBS (1) 35,720 1,469 1,562 1,607 684 22 41,064
CMBS (1) 18,612 207 111 30 57 - 19,017
State and political
subdivision securities 13,753 834 18 9 - - 14,614
ABS (1) 13,428 374 20 44 22 4 13,892
Total fixed maturity
securities $ 258,302 $ 83,515 $ 14,848 $ 8,503 $ 1,121 $ 50 $ 366,339
Percentage of total 70.5 % 22.8 % 4.1 % 2.3 % 0.3 % - % 100.0 %
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Fixed Maturity Securities - by Sector & Credit Quality Rating at December 31, 2011
NAIC Rating: 1 2 3 4 5 6 Total
Caa and In or Near Estimated
Rating Agency Designation: Aaa/Aa/A Baa Ba B Lower Default Fair Value
(In millions)
U.S. corporate securities $ 51,045 $ 41,533 $ 8,677 $ 4,257 $ 271 $ 2 $ 105,785
Foreign corporate securities 33,403 26,383 2,915 1,173 140 4 64,018
Foreign government securities 42,360 7,553 1,146 1,281 196 - 52,536
U.S. Treasury and agency
securities 40,012 - - - - - 40,012
RMBS (1) 36,699 1,477 1,450 2,026 933 52 42,637
CMBS (1) 18,403 388 125 57 96 - 19,069
State and political
subdivision securities 12,357 842 23 5 8 - 13,235
ABS (1) 12,507 355 39 50 24 4 12,979
Total fixed maturity
securities $ 246,786 $ 78,531 $ 14,375 $ 8,849 $ 1,668 $ 62 $ 350,271
Percentage of total 70.5 % 22.4 % 4.1 % 2.5 % 0.5 % - % 100.0 %
(1) Presented using the revised NAIC rating methodologies described above.
The Company held below investment grade fixed maturity securities with an
estimated fair value of $24.5 billion and $25.0 billion, at June 30, 2012 and
December 31, 2011, respectively, with unrealized gains (losses) of ($675)
million and ($1.3) billion at June 30, 2012 and December 31, 2011, respectively.
U.S. and Foreign Corporate Fixed Maturity Securities. The Company maintains a
diversified portfolio of corporate fixed maturity securities across many
industries and issuers. This portfolio does not have an exposure to any single
issuer in excess of 1% of total investments. The tables below present
information about U.S. and foreign corporate securities at:
June 30, 2012 December 31, 2011
Estimated Estimated
Fair % of Fair % of
Value Total Value Total
(In millions) (In millions)
Corporate fixed maturity securities - by
sector:
Foreign corporate fixed maturity
securities (1) $ 63,345 36.5 % $ 64,018 37.7 %
U.S. corporate fixed maturity
securities - by industry:
Industrial 28,980 16.7 26,962 15.9
Consumer 28,526 16.4 26,739 15.7
Finance 21,180 12.2 20,854 12.3
Utility 19,820 11.4 19,508 11.5
Communications 8,348 4.8 8,178 4.8
Other 3,519 2.0 3,544 2.1
Total $ 173,718 100.0 % $ 169,803 100.0 %
(1) Includes U.S. dollar and foreign denominated fixed maturity securities of
foreign obligors.
June 30, 2012 December 31, 2011
Estimated Estimated
Fair % of Total Fair % of Total
Value Investments Value Investments
(In millions) (In millions)
Concentrations within
corporate fixed maturity
securities:
Largest exposure to a single
issuer $ 1,557 0.3 % $ 1,642 0.3 %
Holdings in ten issuers with
the largest exposures $ 10,461 2.0 % $ 10,716 2.1 %
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Structured Securities. The following table presents information about structured
securities at:
June 30, 2012 December 31, 2011
Estimated Estimated
Fair % of Fair % of
Value Total Value Total
(In millions) (In millions)
RMBS $ 41,064 55.5 % $ 42,637 57.1 %
CMBS 19,017 25.7 19,069 25.5
ABS 13,892 18.8 12,979 17.4
Total structured securities $ 73,973 100.0 % $ 74,685 100.0 %
Ratings profile:
RMBS rated Aaa $ 30,300 73.8 % $ 31,690 74.3 %
RMBS rated NAIC 1 $ 35,720 87.0 % $ 36,699 86.1 %
CMBS rated Aaa $ 15,677 82.4 % $ 15,785 82.8 %
CMBS rated NAIC 1 $ 18,612 97.9 % $ 18,403 96.5 %
ABS rated Aaa $ 8,612 62.0 % $ 8,223 63.4 %
ABS rated NAIC 1 $ 13,428 96.7 % $ 12,507 96.4 %
RMBS. The table below presents information about RMBS at:
June 30, 2012 December 31, 2011
Estimated Estimated
Fair % of Fair % of
Value Total Value Total
(In millions) (In millions)
By security type:
Collateralized mortgage obligations $ 21,851 53.2 % $ 23,392 54.9 %
Pass-through securities 19,213 46.8 19,245 45.1
Total RMBS $ 41,064 100.0 % $ 42,637 100.0 %
By risk profile:
Agency $ 28,945 70.5 % $ 31,055 72.8 %
Prime 5,805 14.1 5,959 14.0
Alt-A 4,818 11.7 4,648 10.9
Sub-prime 1,496 3.7 975 2.3
Total RMBS $ 41,064 100.0 % $ 42,637 100.0 %
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Investments - Fixed Maturity and Equity Securities
Available-for-Sale - Structured Securities" for further information about
collateralized mortgage obligations and pass-through mortgage-backed securities;
and agency, prime, Alt-A and sub-prime RMBS.
At June 30, 2012 and December 31, 2011, the Company's Alt-A RMBS portfolio has
no exposure to option adjustable rate mortgages ("ARMs") and a minimal exposure
to hybrid ARMs. The Company's Alt-A RMBS portfolio is comprised primarily of
fixed rate mortgages (94% and 93% at June 30, 2012 and December 31, 2011,
respectively) which have performed better than both option ARMs and hybrid ARMs
in the Alt-A market. The Company's Alt-A RMBS holdings had unrealized losses of
$664 million and $871 million at June 30, 2012 and December 31, 2011,
respectively.
The Company's sub-prime RMBS holdings are comprised primarily of vintage year
2005 and prior holdings (56% and 79% at June 30, 2012 and December 31, 2011,
respectively). These older vintages from 2005 and prior benefit from better
underwriting, improved credit enhancement levels and higher residential property
price appreciation. The Company's sub-prime RMBS holdings had unrealized losses
of $313 million and $347 million at June 30, 2012 and December 31, 2011,
respectively.
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CMBS. The following tables present our CMBS by rating agency designation and by
vintage year at:
June 30, 2012
Below
Investment
Aaa Aa A Baa Grade Total
Estimated Estimated Estimated Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
(In millions)
2004 & Prior $ 8,088$ 8,318 $ 527 $ 542 $ 197 $ 193 $ 90 $ 86 $ 46 $ 42 $ 8,948$ 9,181
2005 3,139 3,414 396 419 294 296 109 101 20 18 3,958 4,248
2006 2,056 2,219 226 236 62 59 54 53 35 28 2,433 2,595
2007 908 943 218 213 204 213 84 71 36 32 1,450 1,472
2008 - - - - - - - - 26 23 26 23
2009 - - - - - - - - - - - -
2010 3 3 - - - - 59 64 - - 62 67
2011 577 605 1 1 92 96 - - 8 7 678 709
2012 175 175 302 306 199 199 - - 39 42 715 722
Total $ 14,946$ 15,677$ 1,670$ 1,717$ 1,048$ 1,056 $ 396 $ 375 $ 210 $ 192 $ 18,270$ 19,017
Ratings Distribution 82.4 % 9.0 % 5.6 % 2.0 % 1.0 % 100.0 %
December 31, 2011
Below
Investment
Aaa Aa A Baa Grade Total
Estimated Estimated Estimated Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
(In millions)
2004 & Prior $ 9,160$ 9,407 $ 606 $ 616 $ 226 $ 217 $ 137 $ 132 $ 61 $ 52 $ 10,190$ 10,424
2005 3,081 3,318 427 432 277 269 184 175 31 28 4,000 4,222
2006 1,712 1,835 245 237 89 83 118 110 123 106 2,287 2,371
2007 643 665 395 332 163 138 67 71 94 88 1,362 1,294
2008 - - - - - - - - 25 27 25 27
2009 - - - - - - - - - - - -
2010 3 3 - - - - 60 66 - - 63 69
2011 536 557 1 1 92 96 - - 9 8 638 662
Total $ 15,135$ 15,785$ 1,674$ 1,618 $ 847 $ 803 $ 566 $ 554 $ 343 $ 309 $ 18,565$ 19,069
Ratings Distribution 82.8 % 8.5 % 4.2 % 2.9 % 1.6 % 100.0 %
The above tables reflect rating agency designations assigned by nationally
recognized rating agencies including Moody's, S&P, Fitch and Realpoint, LLC.
ABS. The Company's ABS are diversified both by collateral type and by issuer.
The following table presents information about ABS held at:
June 30, 2012 December 31, 2011
Estimated Estimated
Fair % of Fair % of
Value Total Value Total
(In millions) (In millions)
By collateral type:
Credit card loans $ 2,856 20.6 % $ 4,038 31.1 %
Foreign residential loans 2,558 18.4 1,771 13.7
Collateralized debt obligations 2,404 17.3 2,575 19.8
Automobile loans 2,156 15.5 977 7.5
Student loans 2,066 14.9 2,434 18.8
Other loans 1,852 13.3 1,184 9.1
Total $ 13,892 100.0 % $ 12,979 100.0 %
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Evaluation of Fixed Maturity Securities and Equity Securities Available-for-Sale
for Other-Than-Temporary Impairment
See the following sections within Note 3 of the Notes to the Interim Condensed
Consolidated Financial Statements for information about the evaluation of fixed
maturity securities and equity securities available-for-sale for
other-than-temporary impairments ("OTTI"):
• Evaluating available-for-sale securities for other-than-temporary impairment;
• Net unrealized investment gains (losses);
• Continuous gross unrealized losses and OTTI losses for fixed maturity and
equity securities available-for-sale by sector;
• Aging of gross unrealized losses and OTTI losses for fixed maturity and equity securities available-for-sale;
• Concentration of gross unrealized losses and OTTI losses for fixed maturity
and equity securities available-for-sale; and
• Evaluating temporarily impaired available-for-sale securities.
Trading and Other Securities
The Company has a trading securities portfolio, principally invested in fixed
maturity securities, to support investment strategies that involve the active
and frequent purchase and sale of securities ("Actively Traded Securities") and
the execution of short sale agreements. Trading and other securities also
include securities for which the FVO has been elected ("FVO Securities"). See
also "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Investments - Trading and Other Securities" included in the 2011
Annual Report for further information about composition of Actively Traded
Securities and FVO Securities. Trading and other securities were $18.3 billion,
at estimated fair value, at both June 30, 2012 and December 31, 2011, or 3.4%
and 3.5% of total cash and invested assets, at June 30, 2012 and December 31,
2011, respectively. See Note 3 of the Notes to the Interim Condensed
Consolidated Financial Statements for information about the Actively Traded
Securities and FVO Securities, related short sale agreement liabilities and
investments pledged to secure short sale agreement liabilities:
Trading and other securities and trading (short sale agreement) liabilities,
measured at estimated fair value on a recurring basis and their corresponding
fair value hierarchy, are presented as follows:
June 30, 2012
Trading and Other % of Trading % of
Securities Total Liabilities Total
(In millions) (In millions)
Quoted prices in active markets for
identical assets and liabilities
(Level 1) $ 8,372 46 % $ 140 100 %
Significant other observable inputs
(Level 2) 8,821 48 - -
Significant unobservable inputs
(Level 3) 1,135 6 - -
Total estimated fair value $ 18,328 100 % $ 140 100 %
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A rollforward of the fair value measurements for trading and other securities
measured at estimated fair value on a recurring basis using significant
unobservable (Level 3) inputs for the three months and six months ended June 30,
2012, is as follows:
Three Months Six Months
Ended Ended
June 30, 2012 June 30, 2012
(In millions)
Balance, beginning of period $ 1,280 $ 1,409
Total realized/unrealized gains (losses)
included in earnings (50 ) (28 )
Purchases 846 857
Sales (910 ) (1,070 )
Transfers into Level 3 5 5
Transfers out of Level 3 (36 ) (38 )
Balance, end of period $ 1,135 $ 1,135
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Summary of Critical Accounting Estimates" included in the 2011
Annual Report for further information on the estimates and assumptions that
affect the amounts reported above.
See Note 5 of the Notes to the Interim Condensed Consolidated Financial
Statements for further information about the valuation techniques and inputs by
level of major classes of invested assets that affect the amounts reported
above.
Net Investment Gains (Losses) Including OTTI Losses Recognized in Earnings
See Note 3 of the Notes to the Interim Condensed Consolidated Financial
Statements for tables that present:
• The components of net investment gains (losses);
• Proceeds from sales or disposals of fixed maturity and equity securities and
the components of fixed maturity and equity securities net investment gains
(losses);
• Fixed maturity security OTTI losses recognized in earnings by sector and
industry within the U.S. and foreign corporate securities sector; and
• Equity security OTTI losses recognized in earnings by sector and industry.
Overview of Fixed Maturity and Equity Security OTTI Losses Recognized in
Earnings. Impairments of fixed maturity and equity securities were $93 million
and $241 million for the three months and six months ended June 30, 2012,
respectively, and $170 million and $299 million for the three months and six
months ended June 30, 2011, respectively. Impairments of fixed maturity
securities were $91 million and $224 million for the three months and six months
ended June 30, 2012, respectively, and $123 million and $246 million for the
three months and six months ended June 30, 2011, respectively. Impairments of
equity securities were $2 million and $17 million for the three months and six
months ended June 30, 2012, respectively, and $47 million and $53 million for
the three months and six months ended June 30, 2011, respectively.
The Company's credit-related impairments of fixed maturity securities were
$68 million and $141 million for the three months and six months ended June 30,
2012, respectively, and $70 million and $113 million for the three months and
six months ended June 30, 2011, respectively.
The Company's three largest impairments totaled $35 million and $73 million for
the three months and six months ended June 30, 2012, respectively, and
$56 million and $92 million for the three months and six months ended June 30,
2011, respectively.
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The Company sold or disposed of fixed maturity and equity securities at a loss
that had an estimated fair value of $5.4 billion and $14.0 billion for the three
months and six months ended June 30, 2012, respectively, and $8.0 billion and
$18.4 billion for the three months and six months ended June 30, 2011,
respectively. Gross losses excluding impairments for fixed maturity and equity
securities were $154 million and $490 million for the three months and six
months ended June 30, 2012, respectively, and $266 million and $505 million for
the three months and six months ended June 30, 2011, respectively.
Explanations of period over period changes in fixed maturity and equity
securities impairments are as follows:
Three months ended June 30, 2012 compared to the three months ended June 30,
2011 - Overall OTTI losses recognized in earnings on fixed maturity and equity
securities were $93 million for the three months ended June 30, 2012 as compared
to $170 million in the prior period. The decrease in OTTI losses in the current
period, as compared to the prior period, primarily reflects intent-to-sell
impairments of $91 million in the prior period from the continuing
diversification of the portfolio. The most significant decreases were in the
financial services and consumer industries within U.S. and foreign corporate
fixed maturity securities and the financial services industry within equity
securities, which comprised $9 million in fixed maturity and equity impairments
in the three months ended June 30, 2012, as compared to $105 million for the
three months ended June 30, 2011.
Six months ended June 30, 2012 compared to the six months ended June 30, 2011 -
Overall OTTI losses recognized in earnings on fixed maturity and equity
securities were $241 million for the six months ended June 30, 2012 as compared
to $299 million in the prior period. The most significant decrease in the
current period, as compared to the prior period, was in foreign government
securities primarily attributable to prior period intent-to-sell impairments of
$89 million, while utility industry impairments within U.S. and foreign
corporate securities increased $50 million in the current period.
Future Impairments. Future OTTIs will depend primarily on economic fundamentals,
issuer performance (including changes in the present value of future cash flows
expected to be collected), changes in credit ratings, changes in collateral
valuation, changes in interest rates and changes in credit spreads. If economic
fundamentals or any of the above factors deteriorate, additional OTTIs may be
incurred in upcoming quarters.
Credit Loss Rollforward
See Note 3 of the Notes to the Interim Condensed Consolidated Financial
Statements for the credit loss rollforward.
Securities Lending
The Company participates in a securities lending program whereby blocks of
securities, which are included in fixed maturity securities, short-term
investments, equity securities and cash and cash equivalents, are loaned to
third parties, primarily brokerage firms and commercial banks. See Note 3 of the
Notes to the Interim Condensed Consolidated Financial Statements for certain
information regarding the Company's securities lending program.
Invested Assets on Deposit, Held in Trust and Pledged as Collateral
See Note 3 of the Notes to the Interim Condensed Consolidated Financial
Statements for a table of the invested assets on deposit, held in trust and
pledged as collateral.
Mortgage Loans
The Company's mortgage loans are principally collateralized by commercial real
estate, agricultural real estate and residential properties. The carrying value
of mortgage loans was $58.9 billion and $72.1 billion, or 11.1% and 13.8% of
total cash and invested assets, at June 30, 2012 and December 31, 2011,
respectively. The decrease of $13.2 billion since December 31, 2011 is primarily
due to the Company's exit from the businesses of originating forward and reverse
residential mortgage loans and the de-recognition of the majority of the
securitized reverse residential mortgage loans in connection with the sale of
the majority of MetLife Bank's reverse mortgage servicing rights. See Note 3 of
the Notes to the Interim Condensed Consolidated Financial
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Statements for a table that presents the Company's mortgage loans
held-for-investment of $57.2 billion and $56.9 billion by portfolio segment at
June 30, 2012 and December 31, 2011, respectively, as well as the components of
the mortgage loans held-for-sale of $1.7 billion and $15.2 billion at June 30,
2012 and December 31, 2011, respectively. The information presented below
excludes the effects of consolidating certain VIEs that are treated as CSEs and
securitized reverse residential mortgage loans. Such amounts are presented in
the aforementioned table.
The Company diversifies its mortgage loan portfolio by both geographic region
and property type to reduce the risk of concentration. Of the Company's
commercial and agricultural mortgage loans, 90% are collateralized by properties
located in the U.S., with the remaining 10% collateralized by properties located
outside the U.S., calculated as a percent of the total mortgage loans
held-for-investment (excluding commercial mortgage loans held by CSEs) at
June 30, 2012. The three locations with the most commercial and agricultural
mortgage loans were California, New York and Texas at 18%, 10% and 7%,
respectively, of total mortgage loans held for investment (excluding commercial
mortgage loans held by CSEs) at June 30, 2012. Additionally, the Company manages
risk when originating commercial and agricultural mortgage loans by generally
lending only up to 75% of the estimated fair value of the underlying real estate
collateral.
Commercial Mortgage Loans by Geographic Region and Property Type. Commercial
mortgage loans are the largest component of the mortgage loan invested asset
class as it represents over 75% of total mortgage loans held-for-investment
(excluding the effects of consolidating certain VIEs that are treated as CSEs)
at both June 30, 2012 and December 31, 2011. The tables below present the
diversification across geographic regions and property types of commercial
mortgage loans held-for-investment at:
June 30, 2012 December 31, 2011
% of % of
Amount Total Amount Total
(In millions) (In millions)
Region:
South Atlantic $ 8,966 21.9 % $ 9,022 22.3 %
Pacific 7,973 19.4 8,209 20.3
Middle Atlantic 6,412 15.6 6,370 15.8
International 4,955 12.1 4,713 11.7
West South Central 3,492 8.5 3,220 8.0
East North Central 3,110 7.6 2,984 7.3
New England 1,553 3.8 1,563 3.9
Mountain 992 2.4 746 1.8
East South Central 460 1.1 487 1.2
West North Central 338 0.8 365 0.9
Multi-Region and Other 2,784 6.8 2,761 6.8
Total recorded investment 41,035 100.0 % 40,440 100.0 %
Less: valuation allowances 300 398
Carrying value, net of valuation allowances $ 40,735 $ 40,042
Property Type:
Office $ 18,502 45.1 % $ 18,582 45.9 %
Retail 9,669 23.6 9,524 23.6
Apartments 4,303 10.5 4,011 9.9
Industrial 3,224 7.9 3,102 7.7
Hotel 3,181 7.7 3,114 7.7
Other 2,156 5.2 2,107 5.2
Total recorded investment 41,035 100.0 % 40,440 100.0 %
Less: valuation allowances 300 398
Carrying value, net of valuation allowances $ 40,735 $ 40,042
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Mortgage Loan Credit Quality - Restructured, Potentially Delinquent, Delinquent
or Under Foreclosure. The Company monitors its mortgage loan investments on an
ongoing basis, including reviewing loans that are restructured, potentially
delinquent, and delinquent or under foreclosure. These loan classifications are
consistent with those used in the insurance industry.
We define restructured mortgage loans as loans in which we, for economic or
legal reasons related to the debtor's financial difficulties, grants a
concession to the debtor that it would not otherwise consider. We define
potentially delinquent loans as loans that, in management's opinion, have a high
probability of becoming delinquent in the near term. We define delinquent
mortgage loans consistent with industry practice, when interest and principal
payments are past due as follows: commercial and residential mortgage loans - 60
days or more and agricultural mortgage loans - 90 days or more. We define
mortgage loans under foreclosure as loans in which foreclosure proceedings have
formally commenced.
The following table presents the recorded investment and valuation allowance for
all mortgage loans held-for-investment distributed by the above stated loan
classifications at:
June 30, 2012 December 31, 2011
% of % of
Recorded % of Valuation Recorded Recorded % of Valuation Recorded
Investment Total Allowance Investment Investment Total Allowance Investment
(In millions) (In millions)
Commercial:
Performing $ 40,800 99.4 % $ 256 0.6 % $ 40,106 99.1 % $ 339 0.8 %
Restructured (1) 175 0.4 44 25.1 % 248 0.6 44 17.7 %
Potentially delinquent 60 0.2 - - % 23 0.1 15 65.2 %
Delinquent or under
foreclosure - - - - % 63 0.2 - - %
Total $ 41,035 100.0 % $ 300 0.7 % $ 40,440 100.0 % $ 398 1.0 %
Agricultural (2):
Performing $ 12,655 98.4 % $ 34 0.3 % $ 12,899 98.3 % $ 41 0.3 %
Restructured (3) 47 0.4 7 14.9 % 58 0.4 7 12.1 %
Potentially delinquent 7 0.1 - - % 25 0.2 4 16.0 %
Delinquent or under
foreclosure (3) 139 1.1 18 12.9 % 147 1.1 29 19.7 %
Total $ 12,848 100.0 % $ 59 0.5 % $ 13,129 100.0 % $ 81 0.6 %
Residential (4):
Performing $ 724 96.9 % $ 1 0.1 % $ 664 96.4 % $ 1 0.2 %
Restructured - - - - % - - - - %
Potentially delinquent - - - - % - - - - %
Delinquent or under
foreclosure 23 3.1 1 4.3 % 25 3.6 1 4.0 %
Total $ 747 100.0 % $ 2 0.3 % $ 689 100.0 % $ 2 0.3 %
(1) As of June 30, 2012 and December 31, 2011, restructured commercial mortgage
loans were comprised of eight and 10 restructured loans, respectively, all of
which were performing.
(2) Of the $12.8 billion of agricultural mortgage loans outstanding at June 30,
2012, 49% were subject to rate resets prior to maturity. A substantial
portion of these mortgage loans have been successfully reset, refinanced or
extended at market terms.
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(3) As of June 30, 2012 and December 31, 2011, restructured agricultural mortgage
loans were comprised of 12 and 11 restructured loans, respectively, all of
which were performing. Additionally, as of June 30, 2012 and December 31,
2011, delinquent or under foreclosure agricultural mortgage loans included
one and four restructured loans with a recorded investment of $23 million and
$13 million, respectively, which were not performing.
(4) Residential mortgage loans held-for-investment consist primarily of first
lien residential mortgage loans.
See Notes 3 and 5 of the Notes to the Interim Condensed Consolidated Financial
Statements for tables that present, by portfolio segment, mortgage loans by
credit quality indicator, impaired mortgage loans, past due and nonaccrual
mortgage loans, loans modified through troubled debt restructurings, the
activity in the Company's valuation allowances, the Company's valuation
allowances by type of credit loss and information on impairments of mortgage
loans and the related carrying value after impairments.
Mortgage Loan Credit Quality - Monitoring Process - Commercial and Agricultural
Mortgage Loans. The Company reviews all commercial mortgage loans on an ongoing
basis. These reviews may include an analysis of the property financial
statements and rent roll, lease rollover analysis, property inspections, market
analysis, estimated valuations of the underlying collateral, loan-to-value
ratios, debt service coverage ratios, and tenant creditworthiness. The
monitoring process focuses on higher risk loans, which include those that are
classified as restructured, potentially delinquent, delinquent or in
foreclosure, as well as loans with higher loan-to-value ratios and lower debt
service coverage ratios. The monitoring process for agricultural mortgage loans
is generally similar, with a focus on higher risk loans, such as loans with
higher loan-to-value ratios, including reviews on a geographic and property type
basis.
Loan-to-value ratios and debt service coverage ratios are common measures in the
assessment of the quality of commercial mortgage loans. Loan-to-value ratios are
a common measure in the assessment of the quality of agricultural mortgage
loans. Loan-to-value ratios compare the amount of the loan to the estimated fair
value of the underlying collateral. A loan-to-value ratio greater than 100%
indicates that the loan amount is greater than the collateral value. A
loan-to-value ratio of less than 100% indicates an excess of collateral value
over the loan amount. The debt service coverage ratio compares a property's net
operating income to amounts needed to service the principal and interest due
under the loan. For commercial mortgage loans, the average loan-to-value ratio
was 59% and 61% at June 30, 2012 and December 31, 2011, respectively, and the
average debt service coverage ratio was 2.1x at both June 30, 2012 and
December 31, 2011. The commercial mortgage loan debt service coverage ratio and
loan-to-value ratio, as well as the values utilized in calculating these ratios,
are updated annually, on a rolling basis, with a portion of the commercial
mortgage loan portfolio updated each quarter. For agricultural mortgage loans,
the average loan-to-value ratio was 46% and 48% at June 30, 2012 and
December 31, 2011, respectively. The values utilized in calculating the
agricultural mortgage loan loan-to-value ratio are developed in connection with
the ongoing review of the agricultural loan portfolio and are routinely updated.
Mortgage Loan Credit Quality - Monitoring Process - Residential Mortgage
Loans. The Company has a conservative residential mortgage loan portfolio and
does not hold any option ARMs, sub-prime or low teaser rate loans. Higher risk
loans include those that are classified as restructured, potentially delinquent,
delinquent or in foreclosure, as well as loans with higher loan-to-value ratios
and interest-only loans. The Company's investment in residential junior lien
loans and residential mortgage loans with a loan-to-value ratio of 80% or more
was $34 million and $74 million at June 30, 2012 and December 31, 2011,
respectively, and certain of the higher loan-to-value residential mortgage loans
have mortgage insurance coverage which reduces the loan-to-value ratio to less
than 80%.
Mortgage Loan Valuation Allowances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Investments - Mortgage Loans -
Mortgage Loan Valuation Allowance" included in the 2011 Annual Report for
further information on our mortgage valuation allowance policy.
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Real Estate and Real Estate Joint Ventures
Real estate holdings by type consisted of the following:
June 30, 2012 December 31, 2011
Carrying % of Carrying % of
Value Total Value Total
(In millions) (In millions)
Traditional $ 7,071 83.4 % $ 5,836 68.2 %
Real estate joint ventures and funds 1,109 13.1 2,340 27.3
Real estate and real estate joint
ventures 8,180 96.5 8,176 95.5
Foreclosed (commercial, agricultural
and residential) 285 3.4 264 3.1
Real estate held-for-investment 8,465 99.9 8,440 98.6
Real estate held-for-sale 12 0.1 123 1.4
Total real estate and real estate joint
ventures $ 8,477 100.0 % $ 8,563 100.0 %
See also Note 3 of the Notes to the Consolidated Financial Statements included
in the 2011 Annual Report for a discussion of the types of investments reported
within traditional real estate and real estate joint ventures and funds. The
estimated fair value of the traditional real estate investment portfolio was
$9.0 billion and $7.6 billion at June 30, 2012 and December 31, 2011,
respectively.
The Company diversifies its real estate investments by both geographic region
and property type to reduce risk of concentration. Of the Company's real estate
investments, 83% are located in the United States, with the remaining 17%
located outside the United States, at June 30, 2012. The three locations with
the largest real estate investments were California, Japan and Florida at 20%,
15%, and 12%, respectively, at June 30, 2012.
Impairments recognized on real estate held-for-investment were $3 million for
both the three months and six months ended June 30, 2012. There were no
impairments recognized on real estate held-for-investment for the three months
and six months ended June 30, 2011. There were no impairments recognized on real
estate held-for-sale for the three months ended June 30, 2012 and $4 million for
the six months ended June 30, 2012. Impairments recognized on real estate
held-for-sale were $1 million for both three months and six months ended
June 30, 2011. See Note 5 of the Notes to the Interim Condensed Consolidated
Financial Statements for information about impairments on real estate joint
ventures and the related carrying value after impairment.
Other Limited Partnership Interests
The carrying value of other limited partnership interests (which primarily
represent ownership interests in pooled investment funds that principally make
private equity investments in companies in the United States and overseas) was
$6.7 billion and $6.4 billion at June 30, 2012 and December 31, 2011,
respectively, which included $1.2 billion and $1.1 billion of hedge funds, at
June 30, 2012 and December 31, 2011, respectively. See Note 5 of the Notes to
the Interim Condensed Consolidated Financial Statements for information about
impairments on other limited partnerships and the related carrying value after
impairment.
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Other Invested Assets
The following table that presents the Company's other invested assets by type
at:
June 30, 2012 December 31, 2011
Carrying % of Carrying % of
Value Total Value Total
(In millions) (In millions)
Freestanding derivatives with positive
estimated fair values $ 16,602 68.4 % $ 16,200 68.7 %
Leveraged leases, net of non-recourse
debt 2,209 9.1 2,248 9.5
Tax credit partnerships 1,821 7.5 1,531 6.5
Funds withheld 620 2.6 608 2.6
MSRs 564 2.3 666 2.8
Joint venture investments 213 0.9 171 0.7
Other 2,259 9.2 2,157 9.2
Total $ 24,288 100.0 % $ 23,581 100.0 %
Short-term Investments and Cash Equivalents
The carrying value of short-term investments, which includes securities and
other investments with remaining maturities of one year or less, but greater
than three months, at the time of purchase was $18.5 billion and $17.3 billion,
or 3.5% and 3.3% of total cash and invested assets, at June 30, 2012 and
December 31, 2011, respectively. The carrying value of cash equivalents, which
includes securities and other investments with an original or remaining maturity
of three months or less at the time of purchase, was $5.3 billion and $5.0
billion, or 1.0% of total cash and invested assets, at both June 30, 2012 and
December 31, 2011.
Derivative Financial Instruments
Derivatives. The Company is exposed to various risks relating to its ongoing
business operations, including interest rate risk, foreign currency risk, credit
risk and equity market risk. The Company uses a variety of strategies to manage
these risks, including the use of derivative instruments. See Note 4 of the
Notes to the Interim Condensed Consolidated Financial Statements for:
• A comprehensive description of the nature of the Company's derivative
instruments, including the strategies for which derivatives are used in
managing various risks.
• Information about the notional amount, estimated fair value, and primary
underlying risk exposure of the Company's derivative financial instruments,
excluding embedded derivatives held at June 30, 2012 and December 31, 2011.
Hedging. See Note 4 of the Notes to the Interim Condensed Consolidated Financial
Statements for information about:
• The notional amount and estimated fair value of derivatives and
non-derivative instruments designated as hedging instruments by type of hedge
designation at June 30, 2012 and December 31, 2011.
• The notional amount and estimated fair value of derivatives that were not
designated or do not qualify as hedging instruments by derivative type at
June 30, 2012 and December 31, 2011.
• The statement of operations effects of derivatives in cash flow, fair value,
or non-qualifying hedge relationships for the three months and six months
ended June 30, 2012 and 2011.
See "Quantitative and Qualitative Disclosures About Market Risk - Management of
Market Risk Exposures - Hedging Activities" for more information about the
Company's use of derivatives by major hedge program.
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Fair Value Hierarchy. Derivatives measured at estimated fair value on a
recurring basis and their corresponding fair value hierarchy, are presented as
follows:
June 30, 2012
Derivative % of Derivative % of
Assets Total Liabilities Total
(In millions) (In millions)
Quoted prices in active markets for
identical assets and liabilities
(Level 1) $ 19 - % $ 289 6 %
Significant other observable inputs
(Level 2) 15,515 94 3,863 89
Significant unobservable inputs
(Level 3) 1,068 6 201 5
Total estimated fair value $ 16,602 100 % $ 4,353 100 %
The valuation of Level 3 derivatives involves the use of significant
unobservable inputs and generally requires a higher degree of management
judgment or estimation than the valuations of Level 1 and Level 2 derivatives.
Although Level 3 inputs are unobservable, management believes they are
consistent with what other market participants would use when pricing such
instruments and are considered appropriate given the circumstances. The use of
different inputs or methodologies could have a material effect on the estimated
fair value of Level 3 derivatives and could materially affect net income.
Derivatives categorized as Level 3 at June 30, 2012 include: interest rate swaps
and interest rate forwards with maturities which extend beyond the observable
portion of the yield curve; foreign currency swaps which are cancelable and
priced through independent broker quotations; foreign currency swaps and
forwards with certain unobservable inputs, including unobservable portion of the
yield curve; credit default swaps priced using unobservable credit spreads, or
that are priced through independent broker quotations; equity variance swaps
with unobservable volatility inputs; and equity contracts that are priced
through independent broker quotations. At both June 30, 2012 and December 31,
2011, 5% of the net derivative estimated fair value was priced through
independent broker quotations.
A rollforward of the fair value measurements for derivatives measured at
estimated fair value on a recurring basis using significant unobservable
(Level 3) inputs for the three months and six months ended June 30, 2012 is as
follows:
Three Months Six Months
Ended Ended
June 30, 2012 June 30, 2012
(In millions)
Balance, beginning of period $ 627 $ 1,234
Total realized/unrealized gains (losses)
included in:
Earnings 215 (280 )
Other comprehensive income (loss) 99 9
Purchases, sales, issuances and settlements (74 ) (96 )
Transfer into and/or out of Level 3 - -
Balance, end of period $ 867 $ 867
The $215 million and ($280) million gain (loss) for the three months and six
months ended June 30, 2012 in the table above primarily relates to certain
purchased equity options that are valued using models dependent on an
unobservable market correlation input and equity variance swaps that are valued
using observable equity volatility data plus an unobservable equity variance
spread. The unobservable equity variance spread is calculated from a comparison
between broker offered variance swap volatility levels and observable plain
vanilla equity option volatility. Other significant inputs, which are
observable, include equity index levels, equity volatility and the swap yield
curve. The Company validates the reasonableness of these inputs by valuing the
positions using internal models and comparing the results to broker quotations.
The primary drivers of the gain
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during the three months ended June 30, 2012 were increases in equity volatility,
both historical and implied, and decreases in equity index levels, which in
total accounted for approximately 104% of the gain. Changes in the unobservable
inputs accounted for an offsetting decline in the gain of approximately (4)%.
The primary drivers of the loss during the six months ended June 30, 2012 were
decreases in equity volatility, both historical and implied, and increases in
equity index levels, which in total accounted for approximately 92% of the loss.
Changes in the unobservable inputs accounted for approximately 8% of the loss.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Summary of Critical Accounting Estimates - Derivative Financial
Instruments" included in the 2011 Annual Report for further information on the
estimates and assumptions that affect the amounts reported above.
Credit Risk. See Note 4 of the Notes to the Interim Condensed Consolidated
Financial Statements for information about how the Company manages credit risk
related to its freestanding derivatives, including the use of master netting
agreements and collateral arrangements.
The Company's policy is not to offset the fair value amounts recognized for
derivatives executed with the same counterparty under the same master netting
agreement. This policy applies to the recognition of derivatives in the
consolidated balance sheets, and does not affect the Company's legal right of
offset. The estimated fair value of the Company's net derivative assets and net
derivative liabilities after the application of master netting agreements and
collateral were as follows at June 30, 2012:
June 30, 2012
Net Derivative Net Derivative
Assets Liabilities
(In millions)
Estimated Fair Value of OTC Derivatives After
Application of Master Netting Agreements (1) $ 13,310 $ 624
Cash collateral on OTC Derivatives (10,817 ) (4 )
Estimated Fair Value of OTC Derivatives After
Application of Master Netting Agreements and
Cash Collateral (1) 2,493 620
Securities Collateral on OTC Derivatives (2) (2,959 ) (396 )
Estimated Fair Value of OTC Derivatives After
Application of Master Netting Agreements and
Cash and Securities Collateral (1) (466 ) 224
Estimated Fair Value of Exchange-Traded
Derivatives 19 288
Total Estimated Fair Value of Derivatives After
Application of Master Netting Agreements and
Cash and Securities Collateral (1),(3) $ (447 ) $ 512
(1) Includes income accruals on derivatives.
(2) The collateral is held in separate custodial accounts and is not recorded on
the Company's consolidated balance sheets.
(3) The negative asset value is due to the customary delay in the timing of
collateral movements.
Credit Derivatives. See Note 4 of the Notes to the Interim Condensed
Consolidated Financial Statements for information about the estimated fair value
and maximum amount at risk related to the Company's written credit default
swaps.
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Embedded Derivatives. The embedded derivatives measured at estimated fair value
on a recurring basis and their corresponding fair value hierarchy, are presented
as follows:
June 30, 2012
Net Embedded Derivatives Within
Liability
Asset Host % of Host % of
Contracts Total Contracts Total
(In millions) (In millions)
Quoted prices in active markets for
identical assets and liabilities
(Level 1) $ - - % $ - - %
Significant other observable inputs
(Level 2) 1 - 19 -
Significant unobservable inputs (Level 3) 411 100 4,372 100
Total estimated fair value $ 412 100 % $ 4,391 100 %
A rollforward of the fair value measurements for net embedded derivatives
measured at estimated fair value on a recurring basis using significant
unobservable (Level 3) inputs is as follows:
Three Months Six Months
Ended Ended
June 30, 2012 June 30, 2012
(In millions)
Balance, beginning of period $ (2,413 ) $ (4,203 )
Total realized/unrealized gains (losses) included in:
Earnings
(1,320 ) 506
Other comprehensive income (loss) (64 ) 39
Purchases, sales, issuances and settlements (164 ) (303 )
Transfer into and/or out of Level 3 - -
Balance, end of period $ (3,961 ) $ (3,961 )
The valuation of guaranteed minimum benefits includes an adjustment for
nonperformance risk. The amounts included in net derivative gains (losses), in
connection with this adjustment, were $608 million and ($636) million for the
three months and six months ended June 30, 2012, respectively, and $108 million
and $34 million for the three months and six months ended June 30, 2011,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Summary of Critical Accounting Estimates" included
in the 2011 Annual Report.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Summary of Critical Accounting Estimates - Derivative
Financial Instruments" included in the 2011 Annual Report for further
information on the estimates and assumptions that affect the amounts reported
above.
Off-Balance Sheet Arrangements
Credit and Committed Facilities
The Company maintains unsecured credit facilities and committed facilities with
various financial institutions. See "- Liquidity and Capital Resources - The
Company - Liquidity and Capital Sources - Credit and Committed Facilities" for
further descriptions of such arrangements.
Collateral for Securities Lending and Derivative Financial Instruments
The Company participates in a securities lending program in the normal course of
business for the purpose of enhancing the Company's total return on its
investment portfolio. The Company has non-cash collateral for securities lending
from counterparties on deposit from customers, which cannot be sold or
repledged, and which has not been recorded on its consolidated balance sheets.
The amount of this collateral was $165 million and $371 million at estimated
fair value at June 30, 2012 and December 31, 2011, respectively.
See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations - Investments -
Securities Lending" and "Securities Lending" in Note 1 of the Notes to the
Consolidated Financial Statements included in the 2011 Annual Report for further
information on discussion of the Company's securities lending program and the
classification of revenues and expenses and the nature of the secured financing
arrangement and associated liability.
The Company enters into derivative financial instruments to manage various risks
relating to its ongoing business operations. The Company has non-cash collateral
from counterparties for derivative financial instruments, which can be sold or
repledged subject to certain constraints, and has not been recorded on its
consolidated balance sheets. The amount of this collateral was $3.0 billion and
$2.5 billion at June 30, 2012 and December 31, 2011, respectively, which were
held in separate custodial accounts and not recorded on the Company's
consolidated balance sheets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
-The Company - Liquidity and Capital Sources - Collateral Financing
Arrangements" included in the 2011 Annual Report and "Derivatives" in Note 4 of
the Notes to the Interim Condensed Consolidated Financial Statements for
information on the earned income on and the gross notional amount, estimated
fair value of assets and liabilities and primary underlying risk exposure of the
Company's derivative financial instruments.
Guarantees
See "Guarantees" in Note 11 of the Notes to the Interim Condensed Consolidated
Financial Statements.
Other
Additionally, the Company has the following commitments in the normal course of
business for the purpose of enhancing the Company's total return on its
investment portfolio:
• Commitments to Fund Partnership Investments;
• Mortgage Loan Commitments; and
• Commitments to Fund Bank Credit Facilities, Bridge Loans and Private
Corporate Bond Investments.
See "Net Investment Income" and "Net Investment Gains (Losses)" in Note 3 of the
Notes to the Interim Condensed Consolidated Financial Statements for information
on the investment income, investment expense, gains and losses from such
investments. See also "Fixed Maturity and Equity Securities Available-for-Sale,"
and "Mortgage Loans" in Note 3 of the Notes to the Interim Condensed
Consolidated Financial Statements and " - Investments - Real Estate and Real
Estate Joint Ventures and Other Limited Partnerships" for information on our
investments in fixed maturity securities, mortgage loans and partnership
investments.
Other than the commitments disclosed in Note 11 of the Notes to the Interim
Condensed Consolidated Financial Statements, there are no other material
obligations or liabilities arising from the commitments to fund partnership
investments, mortgage loans, bank credit facilities, bridge loans, and private
corporate bond investments.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - The Company -
Liquidity and Capital Uses - Contractual Obligations" included in the 2011
Annual Report for further information on commitments to fund partnership
investments, mortgage loans, bank credit facilities, bridge loans and private
corporate bond investments. In addition, see "Primary Risks Managed by
Derivative Financial Instruments and Non-Derivative Financial Instruments" in
Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements
for further information on interest rate lock commitments.
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Policyholder Liabilities
Policyholder Account Balances
PABs are generally equal to the account value, which includes accrued interest
credited, but exclude the impact of any applicable surrender charge that may be
incurred upon surrender. See Note 1 of the Notes to the Consolidated Financial
Statements included in the 2011 Annual Report and Note 8 of the Notes to the
Interim Condensed Consolidated Financial Statements for additional information.
Retail. The Life PABs are held for death benefit disbursement retained asset
accounts, universal life policies, the fixed account of variable life insurance
policies and general account universal life policies. PABs are credited interest
at a rate set by the Company, which are influenced by current market rates. The
majority of the PABs have a guaranteed minimum credited rates between 4.0% and
6.0%. A sustained low interest rate environment could negatively impact earnings
as a result of the minimum credited rate guarantees. The Company has various
derivative positions, primarily interest rate floors, to partially mitigate the
risks associated with such a scenario. For Annuities, PABs are held for fixed
deferred annuities and the fixed account portion of variable annuities, for
certain income annuities, and for certain portions of guaranteed benefits. PABs
are credited interest at a rate set by the Company. Credited rates for deferred
annuities are influenced by current market rates, and most of these contracts
have a minimum guaranteed rate between 1.0% and 4.0%. See "- Variable Annuity
Guarantees."
The table below presents the breakdown of account value subject to minimum
guaranteed credited rates for Retail:
June 30, 2012
Account
Account Value at
Guaranteed Minimum Credited Rate Value Guarantee
(In millions)
Life:
Greater than 0% but less than 2% $ 53 $ 53
Equal to 2% but less than 4% $ 10,284 $ 4,068
Equal to or greater than 4% $ 10,974 $ 5,707
Annuities:
Greater than 0% but less than 2% $ 3,663 $ 1,780
Equal to 2% but less than 4% $ 34,476 $ 26,801
Equal to or greater than 4% $ 3,047 $ 2,930
As a result of acquisitions, the Company establishes additional liabilities
known as excess interest reserves for policies with credited rates in excess of
market rates as of the acquisition date. At June 30, 2012, excess interest
reserves were $152 million and $398 million for Life and Annuities,
respectively.
Group, Voluntary & Worksite Benefits. PABs are held for death benefit
disbursement retained asset accounts, universal life policies, the fixed account
of variable life insurance policies, specialized life insurance products for
benefit programs and general account universal life policies. PABs are credited
interest at a rate set by the Company, which are influenced by current market
rates. The majority of the PABs have a guaranteed minimum credited rates between
0.5% and 6.0%. A sustained low interest rate environment could negatively impact
earnings as a result of the minimum credited rate guarantees. The Company has
various derivative positions, primarily interest rate floors, to partially
mitigate the risks associated with such a scenario.
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The table below presents the breakdown of account value subject to minimum
guaranteed credited rates for Group, Voluntary & Worksite Benefits:
June 30, 2012
Account
Account Value at
Guaranteed Minimum Credited Rate Value Guarantee
(In millions)
Greater than 0% but less than 2% $ 5,511 $ 5,511
Equal to 2% but less than 4% $ 2,446 $ 2,435
Equal to or greater than 4% $ 585 $ 559
Corporate Benefit Funding. PABs are comprised of funding agreements. Interest
crediting rates vary by type of contract, and can be fixed or variable. Variable
interest crediting rates are generally tied to an external index, most commonly
(1-month or 3-month) London Inter-Bank Offer Rate ("LIBOR"). MetLife is exposed
to interest rate risks, as well as foreign exchange risk when guaranteeing
payment of interest and return of principal at the contractual maturity date.
The Company may invest in floating rate assets or enter into floating rate
swaps, also tied to external indices, as well as caps, to mitigate the impact of
changes in market interest rates. The Company also mitigates its risks by
implementing an asset/liability matching policy and seeks to hedge all foreign
currency exchange rate risk through the use of foreign currency hedges,
including cross currency swaps.
Latin America. PABs are held largely for deferred annuities mainly in Mexico and
Brazil, and for universal life products mainly in Mexico. Some of the deferred
annuities in Brazil are unit-linked-type funds that do not meet the GAAP
definition of separate accounts. The rest of the deferred annuities have minimum
credited rate guarantees, and these liabilities and the universal life
liabilities are generally impacted by sustained periods of low interest rates.
Liabilities for unit-linked-type funds are impacted by changes in the fair value
of the associated underlying investments, as the return on assets is generally
passed directly to the policyholder.
Asia. PABs are held largely for fixed income retirement and savings plans and,
to a lesser degree, amounts for unit-linked-type funds in certain countries that
do not meet the GAAP definition of separate accounts. Also included are certain
liabilities for retirement and savings products sold in certain countries in
Asia that generally are sold with minimum credited rate guarantees. Liabilities
for guarantees on certain variable annuities in Asia are established in
accordance with derivatives and hedging guidance and are also included within
PABs. These liabilities are generally impacted by sustained periods of low
interest rates, where there are interest rate guarantees. The Company mitigates
its risks by implementing an asset/liability matching policy and by hedging its
variable annuity guarantees and with reinsurance. Liabilities for
unit-linked-type funds are impacted by changes in the fair value of the
associated underlying investments, as the return on assets is generally passed
directly to the policyholder. See "- Variable Annuity Guarantees."
EMEA. PABs are held mostly for universal life, deferred annuity, pension
products, and unit-linked-type funds that do not meet the GAAP definition of
separate accounts. They are also held for endowment products without significant
mortality risk. Where there are interest rate guarantees, these liabilities are
generally impacted by sustained periods of low interest rates. The Company
mitigates its risks by implementing an asset/liability matching policy.
Liabilities for unit-linked-type funds are impacted by changes in the fair value
of the associated underlying investments, as the return on assets is generally
passed directly to the policyholder.
Corporate & Other. Variable annuity guaranteed minimum accumulation benefits and
guaranteed minimum withdrawal benefits were assumed from a former operating
joint venture in Japan. Liabilities for these guarantees are recorded at
estimated fair value and included in PABs. The Company mitigates its risks by
hedging its variable annuity guarantees. Liabilities are impacted by changes in
the fair value of the associated underlying investments of variable annuity
funds, lapse experience and capital market volatility. See "- Variable Annuity
Guarantees."
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Variable Annuity Guarantees
The Company issues, directly and through assumed reinsurance, certain variable
annuity products with guaranteed minimum benefits that provide the policyholder
a minimum return based on their initial deposit (i.e., the benefit base) less
withdrawals. See Note 1 of the Notes to the Consolidated Financial Statements
included in the 2011 Annual Report and Note 8 of the Notes to the Interim
Condensed Consolidated Financial Statements for additional information.
Guarantees, including portions thereof, accounted for as embedded derivatives,
are recorded at estimated fair value and included in PABs. Guarantees accounted
for as embedded derivatives include guaranteed minimum accumulation benefits,
the non-life-contingent portion of guaranteed minimum withdrawal benefits
("GMWB") and the portion of certain GMIB that do not require annuitization.
The estimated fair values of guarantees accounted for as embedded derivatives
are determined based on the present value of projected future benefits minus the
present value of projected future fees. The projections of future benefits and
future fees require capital market and actuarial assumptions including
expectations concerning policyholder behavior. A risk neutral valuation
methodology is used to project the cash flows from the guarantees under multiple
capital market scenarios to determine an economic liability. The reported
estimated fair value is then determined by taking the present value of these
risk-free generated cash flows using a discount rate that incorporates a spread
over the risk free rate to reflect the Company's nonperformance risk and adding
a risk margin. For more information on the determination of estimated fair
value, see Note 5 of the Notes to the Interim Condensed Consolidated Financial
Statements.
The table below contains the carrying value for guarantees included in PABs at:
June 30, 2012 December 31, 2011
(In millions)
The Americas:
Guaranteed minimum accumulation benefit $ 41 $ 52
Guaranteed minimum withdrawal benefit 650 710
Guaranteed minimum income benefit 640 988
Asia:
Guaranteed minimum accumulation benefit 9 11
Guaranteed minimum withdrawal benefit 209 175
EMEA:
Guaranteed minimum accumulation benefit 138 168
Corporate & Other:
Guaranteed minimum accumulation benefit 463 515
Guaranteed minimum withdrawal benefit 2,097 1,825
Total $ 4,247 $ 4,444
The carrying amounts above include a nonperformance risk adjustment of $2.2
billion and $2.9 billion at June 30, 2012 and December 31, 2011, respectively.
The nonperformance risk adjustments represent the impact of including a credit
spread when discounting the underlying risk neutral cash flows to determine the
estimated fair values. Therefore, the amount of the nonperformance risk
adjustment is a function of both the size of the economic liability and credit
spreads. In certain periods, changes in the nonperformance risk adjustment can
be a significant driver of net derivative gains (losses). Additionally, changes
in the underlying cash flows can have a greater impact on the nonperformance
risk adjustment than changes in credit spreads. The nonperformance risk
adjustment does not have an economic impact on the Company as it cannot be
monetized given the nature of these policyholder liabilities.
The estimated fair value of guarantees accounted for as embedded derivatives can
change significantly during periods of sizable and sustained shifts in equity
market performance, equity volatility, interest rates or foreign
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currency exchange rates. The Company uses derivative instruments and reinsurance
to mitigate the risk of loss and the volatility of net income arising from these
market factors. The change in valuation arising from the nonperformance risk
adjustment is not hedged.
The table below presents the estimated fair value of the derivatives hedging
guarantees accounted for as embedded derivatives:
June 30, 2012 December 31, 2011
Primary Underlying Notional Estimated Fair Value Notional Estimated Fair Value
Risk Exposure Instrument Type Amount Assets Liabilities Amount Assets Liabilities
(In millions)
Interest rate Interest rate swaps $ 23,489 $ 2,246 $ 725 $ 22,719 $ 1,869 $ 598
Interest rate futures 10,408 12 23 11,126 17 16
Interest rate options 11,440 552 5 11,372 567 6
Foreign currency Foreign currency forwards 2,287 61 10 2,311 41 4
Foreign currency futures 281 2 1 177 - -
Equity market Equity futures 5,321 1 173 4,916 15 10
Equity options 18,306 3,261 196 16,367 3,239 177
Variance swaps 19,112 196 143 18,402 390 75
Total rate of return swaps 1,252 22 29 1,274 8 31
Total $ 91,896 $ 6,353 $ 1,305 $ 88,664 $ 6,146 $ 917
Guarantees, including portions thereof, have liabilities established that are
included in future policy benefits. Guarantees accounted for in this manner
include Guaranteed Minimum Death Benefits, the life-contingent portion of
certain GMWB, and the portion of GMIB that requires annuitization. These
liabilities are accrued over the life of the contract in proportion to actual
and future expected policy assessments based on the level of guaranteed minimum
benefits generated using multiple scenarios of separate account returns. The
scenarios use best estimate assumptions consistent with those used to amortize
deferred acquisition costs. When current estimates of future benefits exceed
those previously projected or when current estimates of future assessments are
lower than those previously projected, liabilities will increase, resulting in a
current period charge to net income. The opposite result occurs when the current
estimates of future benefits are lower than that previously projected or when
current estimates of future assessments exceed those previously projected. At
each reporting period, the Company updates the actual amount of business
remaining in-force, which impacts expected future assessments and the projection
of estimated future benefits resulting in a current period charge or increase to
earnings.
The table below contains the carrying value for guarantees included in future
policy benefits at:
June 30, 2012 December 31, 2011
(In millions)
The Americas: Guaranteed minimum death benefit $ 307 $
260
Guaranteed minimum income benefit 826
722
Asia:
Guaranteed minimum death benefit 11
12
Guaranteed minimum income benefit 139
133
EMEA:
Guaranteed minimum death benefit 4
4
Guaranteed minimum income benefit 15
17
Corporate & Other:
Guaranteed minimum death benefit 127
102
Total $ 1,429 $ 1,250
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The carrying amount of guarantees accounted for as insurance liabilities can
change significantly during periods of sizable and sustained shifts in equity
market performance, increased equity volatility, or changes in interest rates.
The Company uses reinsurance in combination with derivative instruments to
mitigate the liability exposure, risk of loss and the volatility of net income
associated with these liabilities. Derivative instruments used for risk
mitigation are primarily equity futures, equity options and variance swaps.
The net amount at risk ("NAR") for guarantees can change significantly during
periods of sizable and sustained shifts in equity market performance, increased
equity volatility, or changes in interest rates. The NAR disclosed in Note 8 of
the Notes to the Interim Condensed Consolidated Financial Statements represents
management's estimate of the current value of the benefits under these
guarantees if they were all exercised simultaneously at June 30, 2012 and
December 31, 2011. However, there are features, such as deferral periods and
benefits requiring annuitization or death, that limit the amount of benefits
that will be payable in the near future.
While the Company believes that the reinsurance and hedging strategies employed
for guarantees included in both PABs and in future policy benefits, as well as
other risk management actions, have mitigated the risks related to these
benefits, the Company remains liable for the guaranteed benefits in the event
that reinsurers or derivative counterparties are unable or unwilling to pay.
Certain of the Company's reinsurance agreements and most derivative positions
are collateralized and derivatives positions are subject to master netting
agreements, both of which significantly reduce the exposure to counterparty
risk. In addition, the Company is subject to the risk that hedging and other
risk management actions prove ineffective or that unanticipated policyholder
behavior or mortality, combined with adverse market events, produces economic
losses beyond the scope of the risk management techniques employed.
Liquidity and Capital Resources
Overview
Our business and results of operations are materially affected by conditions in
the global capital markets and the economy, generally. Stressed conditions,
volatility and disruptions in global capital markets, particular markets, or
financial asset classes can have an adverse effect on us, in part because we
have a large investment portfolio and our insurance liabilities are sensitive to
changing market factors. The global economy and global markets continue to
experience significant volatility that may affect our financing costs and market
interest for our securities.
For the last several quarters, concerns about capital markets and the solvency
of certain European Union member states and of financial institutions that have
significant direct or indirect exposure to debt issued by these countries have
been a cause of elevated levels of market volatility. The Japanese economy, to
which we face substantial exposure given our operations there, continues to be
weak. Disruptions to the Japanese economy are possible and may have negative
impacts on the overall global economy, not all of which can be foreseen.
Financial markets continue to be affected by concerns over U.S. fiscal policy,
including the uncertainty regarding the "fiscal cliff" composed of tax increases
and automatic government spending cuts that will become effective at the end of
2012 unless steps are taken to delay or offset them, as well as the need to
again raise the U.S. federal government's debt ceiling by the end of 2012 and
reduce the federal deficit. These issues could, on their own, or combined with
the slowing of the global economy generally, have severe repercussions to the
U.S. and global credit and financial markets, further exacerbate concerns over
sovereign debt of other countries and disrupt economic activity in the U.S. and
elsewhere. All of these factors could affect the Company's ability to meet
liquidity needs and obtain capital. See "- Industry Trends" and "- Investments -
Current Environment." See also "Risk Factors - Concerns Over U.S. Fiscal Policy
and the "Fiscal Cliff" in the U.S., as well as Rating Agency Downgrades of U.S.
Treasury Securities, Could Have an Adverse Effect on Our Business, Financial
Condition and Results of Operations."
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Liquidity Management
Based upon the strength of its franchise, diversification of its businesses and
strong financial fundamentals, we continue to believe the Company has ample
liquidity to meet business requirements under current market conditions and
unlikely but reasonably possible stress scenarios. The Company's short-term
liquidity position includes cash and cash equivalents and short-term
investments, excluding: (i) cash collateral received under the Company's
securities lending program that has been reinvested in cash and cash
equivalents, short-term investments and publicly-traded securities, and
(ii) cash collateral received from counterparties in connection with derivative
instruments. At June 30, 2012 and December 31, 2011, the Company's short-term
liquidity position was $20.4 billion and $16.2 billion, respectively. We
continuously monitor and adjust our liquidity and capital plans for MetLife,
Inc. and its subsidiaries in light of changing needs and opportunities. See " -
Investments - Current Environment."
Capital Management
The Company has established several senior management committees as part of its
capital management process. These committees, including the Capital Management
Committee and the Enterprise Risk Committee (comprised of members of senior
management, including MetLife, Inc.'s Chief Financial Officer, Treasurer and
Chief Risk Officer and, in the case of the Enterprise Risk Committee, MetLife,
Inc.'s Chief Investment Officer), regularly review actual and projected capital
levels (under a variety of scenarios including stress scenarios) and MetLife's
capital plan in accordance with its capital policy.
MetLife's Board and senior management are directly involved in the development
and maintenance of MetLife's capital policy. The capital policy sets forth,
among other things, minimum and target capital levels and the governance of the
capital management process. All capital actions, including proposed changes to
the capital plan, capital targets or capital policy, are reviewed by the Finance
and Risk Committee of the Board prior to obtaining full Board approval. The
Board approves the capital policy and the annual capital plan and authorizes
capital actions, as required.
MetLife's 2012 capital plan, as submitted to the Federal Reserve for approval in
January 2012 as part of the Federal Reserve Board's 2012 Comprehensive Capital
Analysis and Review, was created in accordance with MetLife's capital policy. In
June 2012, the Federal Reserve Board granted MetLife, Inc. an extension of time
until September 30, 2012 to resubmit its capital plan under the capital plans
rule. See "- Industry Trends."
The Company
Liquidity
Liquidity refers to a company's ability to generate adequate amounts of cash to
meet its needs. In the event of significant cash requirements beyond anticipated
liquidity needs, the Company has various alternatives available depending on
market conditions and the amount and timing of the liquidity need. These options
include cash flows from operations, the sale of liquid assets, global funding
sources and various credit facilities.
Capital
The Company's capital position is managed to maintain its financial strength and
credit ratings and is supported by its ability to generate strong cash flows at
the operating companies, borrow funds at competitive rates and raise additional
capital to meet its operating and growth needs.
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Summary of Primary Sources and Uses of Liquidity and Capital
The Company's primary sources and uses of liquidity and capital are summarized
as follows:
Six Months
Ended
June 30,
2012 2011
(In millions)
Sources:
Net cash provided by operating activities $ 12,102$ 6,788
Net cash provided by changes in policyholder account
balances
4,335
3,829
Net cash provided by changes in payables for collateral
under securities loaned and other transactions
6,586
2,807
Long-term debt issued -
1,221
Cash received in connection with collateral financing
arrangements
-
100
Net change in liability for securitized reverse residential
mortgage loans
1,116
-
Common stock issued, net of issuance costs -
2,950
Stock options exercised 79
73
Effect of change in foreign currency exchange rates on cash
and cash equivalents balances - 146
Total sources 24,218 17,914
Uses:
Net cash used in investing activities 12,777
16,893
Net cash used for changes in bank deposits 3,717
341
Net cash used for short-term debt repayments 585
204
Long-term debt repaid 1,022
715
Collateral financing arrangements repaid 349
-
Cash paid in connection with collateral financing
arrangements 44
-
Debt issuance costs -
1
Redemption of convertible preferred stock -
2,805
Preferred stock redemption premium - 146
Dividends on preferred stock 61 61
Net cash used in other, net 47 121
Effect of change in foreign currency exchange rates on cash
and cash equivalents balances 42 -
Total uses 18,644 21,287
Net increase (decrease) in cash and cash equivalents $ 5,574 $ (3,373 )
Liquidity and Capital Sources
Cash Flows from Operations. The Company's principal cash inflows from its
insurance activities come from insurance premiums, annuity considerations and
deposit funds. A primary liquidity concern with respect to these cash inflows is
the risk of early contractholder and policyholder withdrawal.
Cash Flows from Investments. The Company's principal cash inflows from its
investment activities come from repayments of principal, proceeds from
maturities, sales of invested assets, settlements of freestanding derivatives
and net investment income. The primary liquidity concerns with respect to these
cash inflows are the risk of default by debtors and market disruption. The
Company closely monitors and manages these risks through its credit risk
management process.
Liquid Assets. An integral part of the Company's liquidity management is the
amount of liquid assets it holds. Liquid assets include cash and cash
equivalents, short-term investments and publicly-traded securities,
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excluding: (i) cash collateral received under the Company's securities lending
program that has been reinvested in cash and cash equivalents, short-term
investments and publicly-traded securities; (ii) cash collateral received from
counterparties in connection with derivative instruments; (iii) cash and cash
equivalents, short-term investments and securities on deposit with regulatory
agencies; and (iv) securities held in trust in support of collateral financing
arrangements and pledged in support of debt and funding agreements. At June 30,
2012 and December 31, 2011, the Company had $284.2 billion and $258.9 billion,
respectively, in liquid assets. For further discussion of invested assets on
deposit with regulatory agencies, held in trust in support of collateral
financing arrangements and pledged in support of debt and funding agreements,
see "- Investments - Invested Assets on Deposit, Held in Trust and Pledged as
Collateral."
Global Funding Sources. Liquidity is provided by a variety of short-term
instruments, including funding agreements, credit facilities and commercial
paper. Capital is provided by a variety of instruments, including short-term and
long-term debt, preferred securities, junior subordinated debt securities and
equity and equity-linked securities. The diversity of the Company's funding
sources enhances funding flexibility, limits dependence on any one market or
source of funds and generally lowers the cost of funds. The Company's global
funding sources include:
• MetLife, Inc. and MetLife Funding, Inc. ("MetLife Funding") each have
commercial paper programs supported by $4.0 billion in general corporate
credit facilities (see "- The Company - Liquidity and Capital Sources -
Credit and Committed Facilities"). MetLife Funding, a subsidiary of
Metropolitan Life Insurance Company ("MLIC"), serves as a centralized finance
unit for the Company. MetLife Funding raises cash from its commercial paper
program and uses the proceeds to extend loans, through MetLife Credit Corp.,
another subsidiary of MLIC, to MetLife, Inc., MLIC and other affiliates in
order to enhance the financial flexibility and liquidity of these companies.
Outstanding balances for the commercial paper program fluctuate in line with
changes to affiliates' financing arrangements. Pursuant to a support
agreement, MLIC has agreed to cause MetLife Funding to have a tangible net
worth of at least one dollar. At both June 30, 2012 and December 31, 2011,
MetLife Funding had a tangible net worth of $12 million. At both June 30,
2012 and December 31, 2011, MetLife Funding had total outstanding liabilities
for its commercial paper program, including accrued interest payable, of
$101 million. At both June 30, 2012 and December 31, 2011, MetLife, Inc. had
no outstanding liabilities for its commercial paper program.
• MetLife Bank is a depository institution that is approved to use the FRB of
NY Discount Window borrowing privileges. At both June 30, 2012 and
December 31, 2011, MetLife Bank had no liability for advances from the FRB of
NY under this facility. For further discussion of MetLife, Inc.'s status as a
bank holding company, see Note 2 of the Notes to the Interim Condensed
Consolidated Financial Statements.
• MetLife Bank has historically taken advantage of collateralized borrowing
opportunities with the Federal Home Loan Bank of New York ("FHLB of NY") to
meet variable funding requirements from residential mortgage originations, to
term fund certain assets, and as an alternate source of liquidity. In January
2012, MetLife Bank discontinued taking advances from the FHLB of NY. At
June 30, 2012 and December 31, 2011, MetLife Bank had outstanding advances
from the FHLB of NY of $0 and $4.8 billion, respectively. In April 2012,
MetLife Bank transferred cash to MLIC related to $3.8 billion of outstanding
advances, and MLIC assumed the associated obligations under terms similar to
those of the transferred advances. In connection with the MetLife Bank
Events, there will be timing differences in MetLife Bank's cash flows giving
rise to short-term liquidity needs. In order to meet these needs, MetLife,
Inc. will provide MetLife Bank with temporary liquidity support through a
combination of internally and externally sourced funds. See "- MetLife, Inc.
- Capital" and "- MetLife, Inc. - Liquidity and Capital Uses - Support
Agreements."
• The Company had obligations under advances evidenced by funding agreements
with the FHLB of NY of $13.9 billion and $11.7 billion at June 30, 2012 and
December 31, 2011, respectively, for MLIC, which are included in PABs. During
the six months ended June 30, 2012 and 2011, the Company issued $11.7 billion
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and $3.9 billion and repaid $9.5 billion and $4.4 billion, respectively, of
such funding agreements. See Note 8 of the Notes to the Consolidated
Financial Statements included in the 2011 Annual Report. In connection with
the aforementioned MetLife Bank transfer of advances agreements and
associated transfer of cash to MLIC in April 2012, MLIC issued funding
agreements to the FHLB of NY under similar terms, which are included in the
total issuances for the six months ended June 30, 2012.
• The Company had obligations under advances evidenced by funding agreements
with the Federal Home Loan Bank of Boston ("FHLB of Boston") of $450 million
at both June 30, 2012 and December 31, 2011, for MetLife Insurance Company of
Connecticut ("MICC"), which are included in PABs. During the six months ended
June 30, 2012 and 2011, the Company issued $0 and $325 million and repaid $0
and $25 million, respectively, of such funding agreements. See Note 8 of the
Notes to the Consolidated Financial Statements included in the 2011 Annual
Report.
• The Company had obligations under advances evidenced by funding agreements
with the Federal Home Loan Bank of Des Moines ("FHLB of Des Moines") of $1.5
billion and $695 million at June 30, 2012 and December 31, 2011,
respectively, for General American Life Insurance Company and MetLife
Investors Insurance Company, which are included in PABs. During the six
months ended June 30, 2012 and 2011, the Company issued $1.5 billion and
$650 million and repaid $775 million and $50 million, respectively, of such
funding agreements. See Note 8 of the Notes to the Consolidated Financial
Statements included in the 2011 Annual Report.
• The Company issues fixed and floating rate funding agreements, which are
denominated in either U.S. dollars or foreign currencies, to certain special
purpose entities ("SPEs") that have issued either debt securities or
commercial paper for which payment of interest and principal is secured by
such funding agreements. During the six months ended June 30, 2012 and 2011,
the Company issued $20.6 billion and $20.3 billion and repaid $17.3 billion
and $18.8 billion, respectively, of such funding agreements. At June 30, 2012
and December 31, 2011, funding agreements outstanding, which are included in
PABs, were $29.0 billion and $25.5 billion, respectively. See Note 8 of the
Notes to the Consolidated Financial Statements included in the 2011 Annual
Report.
• The Company issued funding agreements to the Federal Agricultural Mortgage
Corporation ("Farmer Mac") and to certain SPEs that have issued debt
securities for which payment of interest and principal is secured by such
funding agreements; such debt securities are also guaranteed as to payment of
interest and principal by Farmer Mac. The obligations under all such funding
agreements are secured by a pledge of certain eligible agricultural real
estate mortgage loans and may, under certain circumstances, be secured by
other qualified collateral. The amount of the Company's liability for funding
agreements issued was $2.8 billion at both June 30, 2012 and December 31,
2011, which is included in PABs. During the six months ended June 30, 2012
and 2011, the Company issued $0 and $500 million and repaid $0 and $500
million, respectively, of such funding agreements. See Note 8 of the Notes to
the Consolidated Financial Statements included in the 2011 Annual Report.
Outstanding Debt. The following table summarizes the outstanding debt of the
Company at:
June 30, 2012 December 31, 2011
(In millions)
Short-term debt $ 101 $ 686
Long-term debt (1) $ 16,058 $ 20,624 Collateral financing arrangements $ 4,196 $
4,647
Junior subordinated debt securities $ 3,192 $
3,192
(1) Excludes $2.8 billion and $3.1 billion at June 30, 2012 and December 31,
2011, respectively, of long-term debt relating to CSEs. See Note 3 of the
Notes to the Interim Condensed Consolidated Financial Statements.
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Debt Issuances and Other Borrowings. During the six months ended June 30, 2012
and 2011, MetLife Bank received advances related to long-term borrowings
totaling $0 and $1.2 billion, respectively, from the FHLB of NY. During the six
months ended June 30, 2012 and 2011, MetLife Bank received advances related to
short-term borrowings totaling $150 million and $5.4 billion, respectively, from
the FHLB of NY.
Collateral Financing Arrangements. See Note 10 of the Notes to the Interim
Condensed Consolidated Financial Statements.
Credit and Committed Facilities. The Company maintains unsecured credit
facilities and committed facilities, which aggregated $4.0 billion and
$12.4 billion, respectively, at June 30, 2012. When drawn upon, these facilities
bear interest at varying rates in accordance with the respective agreements. See
Note 11 of the Notes to the Consolidated Financial Statements included in the
2011 Annual Report.
The unsecured credit facilities are used for general corporate purposes, to
support the borrowers' commercial paper programs and for the issuance of letters
of credit. At June 30, 2012, the Company had outstanding $3.0 billion in letters
of credit and no drawdowns against these facilities. Remaining unused
commitments were $1.0 billion at June 30, 2012.
The committed facilities are used for collateral for certain of the Company's
affiliated reinsurance liabilities. At June 30, 2012, the Company had
outstanding $5.9 billion in letters of credit and $2.8 billion in aggregate
drawdowns against these facilities. Remaining unused commitments were
$3.7 billion at June 30, 2012.
We have no reason to believe that our lending counterparties will be unable to
fulfill their respective contractual obligations under these facilities. As
commitments associated with letters of credit and financing arrangements may
expire unused, these amounts do not necessarily reflect the Company's actual
future cash funding requirements.
Covenants. Certain of the Company's debt instruments, credit facilities and
committed facilities contain various administrative, reporting, legal and
financial covenants. The Company believes it was in compliance with all such
covenants at June 30, 2012.
Common Stock. During the six months ended June 30, 2012 and 2011, the Holding
Company issued 4,229,541 and 2,983,291 new shares of common stock for $135
million and $97 million, respectively, to satisfy various stock option exercises
and other stock-based awards.
Liquidity and Capital Uses
Debt Repayments. On June 29, 2012, MetLife, Inc. repaid its $397 million senior
note with an interest rate of three-month LIBOR + 0.32%. During the six months
ended June 30, 2012 and 2011, MetLife Bank made repayments of $374 million and
$340 million, respectively, to the FHLB of NY related to long-term borrowings.
During the six months ended June 30, 2012 and 2011, MetLife Bank made repayments
to the FHLB of NY related to short-term borrowings of $735 million and
$5.5 billion, respectively.
Debt Repurchases. We may from time to time seek to retire or purchase our
outstanding debt through cash purchases and/or exchanges for other securities,
in open market purchases, privately negotiated transactions or otherwise. Any
such repurchases or exchanges will be dependent upon several factors, including
our liquidity requirements, contractual restrictions, general market conditions,
and applicable regulatory, legal and accounting factors. Whether or not to
repurchase any debt and the size and timing of any such repurchases will be
determined in the Company's discretion.
Insurance Liabilities. The Company's principal cash outflows primarily relate to
the liabilities associated with its various life insurance, property and
casualty, annuity and group pension products, operating expenses and income tax,
as well as principal and interest on its outstanding debt obligations.
Liabilities arising from its insurance activities primarily relate to benefit
payments under the aforementioned products, as well as payments
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for policy surrenders, withdrawals and loans. For annuity or deposit type
products, surrender or lapse product behavior differs somewhat by segment. In
the Retail segment, which includes individual annuities, lapses and surrenders
tend to occur in the normal course of business. During the six months ended
June 30, 2012 and 2011, general account surrenders and withdrawals from annuity
products were $2.3 billion and $1.8 billion, respectively. In Corporate Benefit
Funding, which includes pension closeouts, bank-owned life insurance and other
fixed annuity contracts, as well as funding agreements (including funding
agreements with the FHLB of NY, the FHLB of Des Moines and the FHLB of Boston)
and other capital market products, most of the products offered have fixed
maturities or fairly predictable surrenders or withdrawals. With regard to
Corporate Benefit Funding liabilities that provide customers with limited
liquidity rights, at June 30, 2012 there were $3.2 billion of funding agreements
and other capital market products that could be put back to the Company after a
period of notice. Of these liabilities, $535 million were subject to a notice
period of 90 days. The remainder was subject to a notice period of five months
or greater. An additional $63 million of Corporate Benefit Funding liabilities
were subject to credit ratings downgrade triggers that permit early termination
subject to a notice period of 90 days.
Dividends. Common stock dividend decisions are determined by MetLife, Inc.'s
Board of Directors after taking into consideration factors such as the Company's
current earnings, expected medium-term and long-term earnings, financial
condition, regulatory capital position, and applicable governmental regulations
and policies. The payment of dividends and other distributions by MetLife, Inc.
to its security holders is subject to regulation by the Federal Reserve. See
"Business - U.S. Regulation - Financial Holding Company Regulation" and Note 18
of the Notes to the Consolidated Financial Statements included in the 2011
Annual Report.
Information on the declaration, record and payment dates, as well as per share
and aggregate dividend amounts, for Preferred Stock is as follows for the six
months ended June 30, 2012:
Dividend
Series A Per Series A Series B Series B
Declaration Date Record Date Payment Date Share Aggregate Per Share Aggregate
(In millions, except per share data)
May 15, 2012 May 31, 2012 June 15, 2012 $ 0.2555555 $ 7 $ 0.4062500 $ 24
March 5, 2012 February 29, 2012 March 15, 2012 $ 0.2527777 6 $ 0.4062500 24
$ 13 $ 48
Residential Mortgage Loans Held-for-Sale. At June 30, 2012 and December 31,
2011, the Company held $1.7 billion and $15.2 billion, respectively, in
residential mortgage loans held-for-sale. Securitized reverse residential
mortgage loans were funded through issuance of GNMA securities, for which the
corresponding liability at June 30, 2012 and December 31, 2011 of $259 million
and $7.7 billion, respectively, is included in other liabilities. See Note 2 of
the Notes to the Interim Condensed Consolidated Financial Statements.
Investment and Other. Additional cash outflows include those related to
obligations of securities lending activities, investments in real estate,
limited partnerships and joint ventures, as well as litigation-related
liabilities. Also, the Company pledges collateral to, and has collateral pledged
to it by, counterparties under the Company's current derivative transactions. At
June 30, 2012 and December 31, 2011, the Company was obligated to return cash
collateral under its control of $10.8 billion and $9.5 billion, respectively.
See "- Investments - Derivative Financial Instruments - Credit Risk." With
respect to derivative transactions with credit ratings downgrade triggers, a
two-notch downgrade would have increased the Company's derivative collateral
requirements by $100 million at June 30, 2012. In addition, the Company has
pledged collateral and has had collateral pledged to it, and may be required
from time to time to pledge additional collateral or be entitled to have
additional collateral pledged to it, in connection with collateral financing
arrangements related to the reinsurance of closed block liabilities and
universal life secondary guarantee liabilities.
Securities Lending. The Company participates in a securities lending program
whereby blocks of securities, which are included in fixed maturity securities,
short-term investments, equity securities and cash and cash equivalents, are
loaned to third parties, primarily brokerage firms and commercial banks. The
Company obtains
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collateral, usually cash, from the borrower, which must be returned to the
borrower when the loaned securities are returned to the Company. Under the
Company's securities lending program, the Company was liable for cash collateral
under its control of $29.5 billion and $24.2 billion at June 30, 2012 and
December 31, 2011, respectively. Of these amounts, $5.9 billion and $2.7 billion
at June 30, 2012 and December 31, 2011, respectively, were on open, meaning that
the related loaned security could be returned to the Company on the next
business day upon return of cash collateral. The estimated fair value of the
securities on loan related to the cash collateral on open at June 30, 2012 was
$22.4 billion, of which $13.9 billion were U.S. Treasury and agency securities
which, if put to the Company, can be immediately sold to satisfy the cash
requirements. See "- Investments - Securities Lending" for further information.
Contractual Obligations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - The
Company - Liquidity and Capital Uses - Contractual Obligations" included in the
2011 Annual Report for additional information on the Company's contractual
obligations.
Support Agreements. MetLife, Inc. and several of its subsidiaries (each, an
"Obligor") are parties to various capital support commitments, guarantees and
contingent reinsurance agreements with certain subsidiaries of MetLife, Inc.
Under these arrangements, each Obligor, with respect to the applicable entity,
has agreed to cause such entity to meet specified capital and surplus levels,
has guaranteed certain contractual obligations or has agreed to provide, upon
the occurrence of certain contingencies, reinsurance for such entity's insurance
liabilities. We anticipate that in the event that these arrangements place
demands upon the Company, there will be sufficient liquidity and capital to
enable the Company to meet anticipated demands.
In July 2012, in connection with an operating agreement with the OCC governing
MetLife Bank's operations during its wind-down process, MetLife Bank and
MetLife, Inc. entered into a capital support agreement with the OCC and MetLife,
Inc. and MetLife Bank entered into an indemnification and capital maintenance
agreement under which agreements MetLife, Inc. will provide financial and other
support to MetLife Bank to ensure that MetLife Bank can wind down its operations
in a safe and sound manner. See "- Liquidity and Capital Resources - MetLife,
Inc. - Liquidity and Capital Uses - Support Agreements."
Litigation. Putative or certified class action litigation and other litigation,
and claims and assessments against the Company, in addition to those discussed
elsewhere herein and those otherwise provided for in the Company's consolidated
financial statements, have arisen in the course of the Company's business,
including, but not limited to, in connection with its activities as an insurer,
mortgage lending bank, employer, investor, investment advisor and taxpayer.
Further, state insurance regulatory authorities and other federal and state
authorities regularly make inquiries and conduct investigations concerning the
Company's compliance with applicable insurance and other laws and regulations.
See Note 11 of the Notes to the Interim Condensed Consolidated Financial
Statements.
The Company establishes liabilities for litigation and regulatory loss
contingencies when it is probable that a loss has been incurred and the amount
of the loss can be reasonably estimated. For material matters where a loss is
believed to be reasonably possible but not probable, no accrual is made but the
Company discloses the nature of the contingency and an aggregate estimate of the
reasonably possible range of loss in excess of amounts accrued, when such an
estimate can be made. It is not possible to predict or determine the ultimate
outcome of all pending investigations and legal proceedings. In some of the
matters referred to herein, very large and/or indeterminate amounts, including
punitive and treble damages, are sought. Although in light of these
considerations, it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's financial position, based on
information currently known by the Company's management, in its opinion, the
outcome of such pending investigations and legal proceedings are not likely to
have such an effect. However, given the large and/or indeterminate amounts
sought in certain of these matters and the inherent unpredictability of
litigation, it is possible that an adverse outcome in certain matters could,
from time to time, have a material adverse effect on the Company's consolidated
net income or cash flows in particular quarterly or annual periods.
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MetLife, Inc.
Capital
Restrictions and Limitations on Bank Holding Companies and Financial Holding
Companies. MetLife, Inc. and its insured depository institution subsidiary,
MetLife Bank, are subject to risk-based and leverage capital guidelines issued
by the federal banking regulatory agencies for banks and bank and financial
holding companies. The federal banking regulatory agencies are required by law
to take specific prompt corrective actions with respect to institutions that do
not meet minimum capital standards. As of June 30, 2012, all of MetLife, Inc.'s
and MetLife Bank's risk-based and leverage capital ratios met the federal
banking regulatory agencies' "well capitalized" standards. In addition to
requirements which may be imposed in connection with the implementation of
Dodd-Frank, such as the enhanced prudential standards under proposed Regulation
YY, the adoption of the Bank Capital NPRs and other regulatory initiatives will
also lead to increased capital and liquidity requirements for bank holding
companies, such as MetLife, Inc. See "- Industry Trends - Regulatory
Developments - Regulatory Developments Applicable to Bank Holding Companies,"
"Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly
Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies
May Reduce Our Profitability and Limit Our Growth," as well as "Business - U.S.
Regulation" included in the 2011 Annual Report. See Note 2 to the Notes to the
Interim Condensed Consolidated Financial Statements for information regarding
the Company's progress toward deregistering as a bank holding company. If
MetLife is able to deregister as a bank holding company, it may be subject to
some of the same or other enhanced regulatory requirements if, in the future, it
is designated as a non-bank SIFI or as a G-SII. See "- Industry Trends -
Regulatory Developments - Regulatory Developments Relating to Non-Bank SIFIs and
G-SIIs."
Liquidity and Capital Sources
Dividends from Subsidiaries. MetLife, Inc. relies in part on dividends from its
subsidiaries to meet its cash requirements. MetLife, Inc.'s insurance
subsidiaries are subject to regulatory restrictions on the payment of dividends
imposed by the regulators of their respective domiciles. The dividend limitation
for U.S. insurance subsidiaries is generally based on the surplus to
policyholders at the end of the immediately preceding calendar year and
statutory net gain from operations for the immediately preceding calendar year.
Statutory accounting practices, as prescribed by insurance regulators of various
states in which the Company conducts business, differ in certain respects from
accounting principles used in financial statements prepared in conformity with
GAAP. The significant differences relate to the treatment of DAC, certain
deferred income tax, required investment liabilities, statutory reserve
calculation assumptions, goodwill and surplus notes.
The table below sets forth the dividends permitted to be paid by the respective
insurance subsidiary without insurance regulatory approval and the respective
dividends paid:
2012
Permitted w/o
Company Paid Approval (1)
(In millions)
Metropolitan Life Insurance Company $ - $ 1,350
American Life Insurance Company $ 1,000 (2) $
168
MetLife Insurance Company of Connecticut$ 202 (3) $
504
Metropolitan Tower Life Insurance Company $ - $
82
MetLife Investors Insurance Company $ - $
18
Delaware American Life Insurance Company $ - $
12
(1) Reflects dividend amounts that may be paid during 2012 without prior
regulatory approval. However, because dividend tests may be based on
dividends previously paid over rolling 12-month periods, if paid before a
specified date during 2012, some or all of such dividends may require
regulatory approval. No
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available amounts were paid by the above subsidiaries to MetLife, Inc. during
the six months ended June 30, 2012, except as described for American Life and
MICC.
(2) During May 2012, American Life received regulatory approval to pay an
extraordinary dividend for an amount up to the funds remitted in connection
with the Company's restructuring of American Life's business in Japan. The
dividend may be paid in installments by November 30, 2012. Subsequently, $1.5
billion was remitted to American Life. See Note 2 of the Notes to the Interim
Condensed Consolidated Financial Statements. Of this approved amount, $1.0
billion was paid to MetLife, Inc. as an extraordinary dividend, during May
2012, which included the $168 million otherwise permitted to be paid without
approval later in 2012, due to the timing of such dividend.
(3) During June 2012, MICC distributed shares of an affiliate to MetLife, Inc. as
an in-kind extraordinary dividend of $202 million as calculated on a
statutory basis. Regulatory approval for this extraordinary dividend was
obtained due to the timing of payment. Remaining dividends permitted to be
paid in 2012 without regulatory approval total $302 million.
The dividend capacity of our non-U.S. operations is subject to similar
restrictions established by the local regulators. The non-U.S. regulatory
regimes also commonly limit the dividend payments to the parent to a portion of
the prior year's statutory income, as determined by the local accounting
principles. The regulators of our non-U.S. operations, including Japan'sFinancial Services Agency, may also limit or not permit profit repatriations or
other transfers of funds to the U.S. if such transfers are deemed to be
detrimental to the solvency or financial strength of the non-U.S. operations, or
for other reasons. Most of the non-U.S. subsidiaries are second tier
subsidiaries which are owned by various non-U.S. holding companies. The capital
and rating considerations applicable to the first tier subsidiaries may also
impact the dividend flow into MetLife, Inc.
The Company's management actively manages its target and excess capital levels
and dividend flows on a proactive basis and forecasts local capital positions as
part of the financial planning cycle. The dividend capacity of certain U.S. and
non-U.S. subsidiaries is also subject to business targets in excess of the
minimum capital necessary to maintain the desired rating or level of financial
strength in the relevant market. Management of MetLife, Inc. cannot provide
assurances that MetLife, Inc.'s subsidiaries will have statutory earnings to
support payment of dividends to MetLife, Inc. in an amount sufficient to fund
its cash requirements and pay cash dividends and that the applicable regulators
will not disapprove any dividends that such subsidiaries must submit for
approval. See Note 18 of the Notes to the Consolidated Financial Statements
included in the 2011 Annual Report.
Liquid Assets. An integral part of MetLife, Inc.'s liquidity management is the
amount of liquid assets it holds. Liquid assets include cash and cash
equivalents, short-term investments and publicly-traded securities, excluding:
(i) cash collateral received under the Company's securities lending program that
has been reinvested in cash and cash equivalents, short-term investments and
publicly-traded securities; and (ii) cash collateral received from
counterparties in connection with derivative instruments. At June 30, 2012 and
December 31, 2011, MetLife, Inc. and other MetLife holding companies had
$5.3 billion and $4.6 billion, respectively, in liquid assets. In addition,
MetLife, Inc. has pledged collateral and has had collateral pledged to it, and
may be required from time to time to pledge additional collateral or be entitled
to have additional collateral pledged to it. At June 30, 2012 and December 31,
2011, MetLife, Inc. had pledged $434 million and $449 million, respectively, of
liquid assets under collateral support agreements.
Global Funding Sources. Liquidity is also provided by a variety of short-term
instruments, including commercial paper. Capital is provided by a variety of
instruments, including medium- and long-term debt, junior subordinated debt
securities, collateral financing arrangements, capital securities and
stockholders' equity. The diversity of MetLife, Inc.'s funding sources enhances
funding flexibility, limits dependence on any one source of funds and generally
lowers the cost of funds. Other sources of MetLife, Inc.'s liquidity include
programs for short-term and long-term borrowing, as needed.
We continuously monitor and adjust our liquidity and capital plans in light of
changing requirements and market conditions.
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Long-term Debt. The following table summarizes the outstanding long-term debt of
MetLife, Inc. at:
June 30, 2012 December 31, 2011
(In millions)
Long-term debt - unaffiliated $ 15,280 $
15,666
Long-term debt - affiliated $ 500 $
500
Collateral financing arrangements $ 2,797 $
2,797
Junior subordinated debt securities $ 1,748 $
1,748
Covenants. Certain of MetLife, Inc.'s debt instruments, credit facilities and
committed facilities contain various administrative, reporting, legal and
financial covenants. MetLife, Inc. believes it was in compliance with all such
covenants at June 30, 2012.
Common Stock. For information on common stock issued by MetLife, Inc., see
"- The Company - Liquidity and Capital Sources - Common Stock."
Liquidity and Capital Uses
The primary uses of liquidity of MetLife, Inc. include debt service, cash
dividends on common and preferred stock, capital contributions to subsidiaries,
payment of general operating expenses and acquisitions. Based on our analysis
and comparison of our current and future cash inflows from the dividends we
receive from subsidiaries that are permitted to be paid without prior insurance
regulatory approval, our asset portfolio and other cash flows and anticipated
access to the capital markets, we believe there will be sufficient liquidity and
capital to enable MetLife, Inc. to make payments on debt, make cash dividend
payments on its common and preferred stock, contribute capital to its
subsidiaries, pay all general operating expenses and meet its cash needs.
Affiliated Capital Transactions. During the six months ended June 30, 2012 and
2011, MetLife, Inc. invested an aggregate of $826 million and $1.1 billion,
respectively, in various subsidiaries.
MetLife, Inc. lends funds, as necessary, to its subsidiaries, some of which are
regulated, to meet their capital requirements. In March 2012, American Life
issued a note to MetLife, Inc. for $175 million which American Life repaid on
June 29, 2012. At December 31, 2011, MetLife, Inc. did not have any loans to
subsidiaries outstanding.
Debt Repayments. On June 29, 2012, MetLife, Inc. repaid a $397 million senior
note with an interest rate of three-month LIBOR + 0.32%. MetLife, Inc. intends
to repay all or refinance in whole or in part the debt that is due in 2012. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - MetLife, Inc. - Liquidity and
Capital Sources - Senior Notes" included in the 2011 Annual Report.
Support Agreements. The Holding Company is party to various capital support
commitments and guarantees with certain of its subsidiaries. Under these
arrangements, the Holding Company has agreed to cause each such entity to meet
specified capital and surplus levels or has guaranteed certain contractual
obligations.
In July 2012, in connection with an operating agreement with the OCC governing
MetLife Bank's operations during its wind-down process, MetLife Bank and
MetLife, Inc. entered into a capital support agreement with the OCC and MetLife,
Inc. and MetLife Bank entered into an indemnification and capital maintenance
agreement under which agreements MetLife, Inc. will provide financial and other
support to MetLife Bank to ensure that MetLife Bank can wind down its operations
in a safe and sound manner. Pursuant to the agreements, MetLife, Inc. is
required to ensure that MetLife Bank meets or exceeds certain minimum capital
and liquidity requirements once its FDIC insurance has been terminated and make
indemnification payments to MetLife Bank in connection with MetLife Bank's
obligation under the April 2011 consent decree between MetLife Bank and the OCC.
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Table of Contents
Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial
Statements.
Future Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial
Statements.
