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METROPOLITAN LIFE INSURANCE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Edgar Glimpses
Index to Management's Discussion and Analysis of Financial Condition and Results
of Operations Page Forward-Looking Statements and Other Financial Information 77 Business 77 Summary of Critical Accounting Estimates 79 Results of Operations 80 Adoption of New Accounting Pronouncements 87 Future Adoption of New Accounting Pronouncements 87 Non-GAAP and Other Financial Disclosures 87 76
-------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements and Other Financial Information For purposes of this discussion, "MLIC," the "Company," "we," "our" and "us" refer toMetropolitan Life Insurance Company , aNew York corporation incorporated in 1868, and its subsidiaries.Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, "MetLife"). Management's narrative analysis of the Company's results of operations is presented pursuant to General Instruction H(2)(a) of Form 10-Q. This narrative analysis should be read in conjunction withMetropolitan Life Insurance Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Annual Report"), the cautionary language regarding forward-looking statements 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 narrative analysis 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. See "Note Regarding Forward-Looking Statements" for cautionary language regarding forward-looking statements. This narrative analysis includes references to our performance measure, adjusted earnings, that is not based on accounting principles generally accepted inthe United States of America ("GAAP"). See "- Non-GAAP and Other Financial Disclosures" for definitions and a discussion of this and other financial measures, and "- Results of Operations" for reconciliations of historical non-GAAP financial measures to the most directly comparable GAAP measures. Business Overview MLIC is a provider of insurance, annuities, employee benefits and asset management. MLIC is organized into two segments:U.S. andMetLife Holdings . In addition, the Company reports certain of its results of operations in Corporate & Other. See Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on the Company's segments and Corporate & Other. COVID-19 Pandemic and Current Market Conditions We continue to closely monitor developments relating to the novel coronavirus COVID-19 pandemic (the "COVID-19 Pandemic") and assess its impact on our business. The COVID-19 Pandemic continues to impact the global economy and financial markets and has caused volatility in the global equity, credit and real estate markets. Governments and central banks around the world have responded to the COVID-19 Pandemic with unprecedented fiscal and monetary policies, which have had significant effects and may have ongoing effects on financial markets and the global economy. These policy responses include fiscal and monetary stimulus measures, including, but not limited to, financial assistance, liquidity programs, new financing facilities and reductions in the level of interest rates. The forecasts of the members of theBoard of Governors of theFederal Reserve System suggest that the policy rate is likely to remain near zero into 2022, with possible increase thereafter. We have implemented risk management and business continuity plans and taken preventive measures and other precautions, such as employee business travel restrictions and remote work arrangements which, to date, have enabled us to maintain our critical business processes, customer service levels, relationships with key vendors, financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. We continue to grant certain accommodations to our customers and borrowers, including (i) relaxing claim documentation requirements for disability claims and (ii) payment deferrals and other loan modifications on certain commercial, agricultural and residential mortgage loans. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for further information regarding COVID-19 Pandemic-related mortgage loan concessions. See also "- Results of Operations" for further information regarding the effect of the COVID-19 Pandemic on our businesses. In addition, the possibility of government shutdowns or a failure to raise theU.S. debt ceiling, due to a policy impasse or otherwise, could adversely impact our business and liquidity. 77 -------------------------------------------------------------------------------- Table of Contents Regulatory Developments The following discussion on regulatory developments should be read in conjunction with "Business - Regulation" in the 2020 Annual Report, as amended or supplemented here.National Association of Insurance Commissioners Risk-Based Capital TheNational Association of Insurance Commissioners ("NAIC") adopted revisions to certain factors used to calculateLife Risk-Based Capital ("RBC"), which is the denominator of the RBC ratios, in light of changes toU.S. tax laws in recent years. These revisions have resulted in increased RBC charges and reduced our RBC ratios. The NAIC has approved RBC revisions for corporate bonds, real estate equity and longevity risk that will take effect at year-end 2021 and are expected to have a modest net positive RBC impact on us. NYDFS Guidance on Diversity and Corporate Governance OnMarch 16, 2021 , theNew York State Department of Financial Services ("NYDFS") stated it expects the insurers it regulates to make diversity of their leadership a business priority and a key element of their corporate governance. The NYDFS collected data from insurers that met certainNew York premium thresholds, includingMetropolitan Life Insurance Company , regarding the diversity of their corporate boards and management. The NYDFS plans to publish such data on an aggregate basis to measure progress in the industry. In addition, the NYDFS will include diversity-related questions in its examination process starting in 2022. Securities, Broker-Dealer and Investment Adviser Regulation InApril 2021 , the Appellate Division of theNew York State Supreme Court overturned NYDFS Regulation 187-Suitability and Best Interests in Life Insurance and Annuity Transactions for being unconstitutionally vague. The NYDFS has appealed the decision. Environmental Laws and Regulations OnMarch 25, 2021 , the NYDFS issued for public comment proposed guidance forNew York domestic insurers, which states that insurers are expected to take a proportionate approach, based on their business, to managing their exposure to the financial risks from climate change. The NYDFS intends to formally adopt the guidance, as modified by the comment process, and it has integrated questions on this topic as part of its supervisory activities. OnJuly 14, 2021 , the NYDFS published notice of the adoption of amendments to regulations governing enterprise risk management, effectiveAugust 13, 2021 . Among other provisions, the amendments require that certain additional risks, including climate change risk, be specifically included in an insurance group's enterprise risk management function. TheU.S. Securities and Exchange Commission (the "SEC") is continuing its focus on climate, and environmental, social and governance ("ESG") risks and opportunities, and has published its rulemaking list which contains several ESG-related rulemakings that theSEC is considering. London Interbank Offered RateThe Financial Conduct Authority , theUnited Kingdom regulator ofLondon Interbank Offered Rates ("LIBOR"), previously indicated that it intends to stop persuading or compelling panel banks to submit quotes used to determine LIBOR after 2021. OnMarch 5, 2021 , theIntercontinental Exchange Benchmark Administration , the administrator of LIBOR, announced that it will cease the publication of one week and two-monthU.S. Dollar LIBOR and all non-USD (GBP, EUR, CHF and JPY) LIBOR settings at the end ofDecember 2021 , but will extend the publication of the remainingU.S. Dollar LIBOR settings (overnight and one, three, six and 12 monthU.S. Dollar LIBOR) until the end ofJune 2023 .U.S. bank regulators have advised banks to cease writing, subject to certain limited exceptions, newU.S. Dollar LIBOR contracts by the end of 2021. We use LIBOR and other interbank offered rates as interest reference rates in many of our financial instruments. Existing contract fallback provisions, and whether, how, and when we and others develop and adopt alternative reference rates, will influence the effect of any changes to or discontinuation of LIBOR on us. We actively participate in theNew York Federal Reserve Bank convened Alternative Reference Rate Committee ("ARRC") and other industry association efforts on the transition to alternative reference rates. InApril 2021 , theState of New York enacted legislation to address the transition from LIBOR for certainNew York law governed agreements, which is generally consistent with the ARRC's recommendations to facilitate the transition. We continue to assess current and alternative reference rates' merits, limitations, risks and suitability for our investment and insurance processes. 78 -------------------------------------------------------------------------------- Table of Contents 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 on the Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining: (i) liabilities for future policy benefits and the accounting for reinsurance; (ii) capitalization and amortization of deferred policy acquisition costs ("DAC") and the establishment and amortization of value of business acquired ("VOBA"); (iii) estimated fair values of investments in the absence of quoted market values; (iv) investment allowance for credit loss and impairments; (v) estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; (vi) measurement of employee benefit plan liabilities; (vii) measurement of income taxes and the valuation of deferred tax assets; and (viii) liabilities for litigation and regulatory matters. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions 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 our business and operations. Actual results could differ from these estimates. The Company's 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 2020 Annual Report. 79
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