EXHIBIT 99.1
The 2015 Annual Report is being revised to reflect the reorganization of the Company’s business as described in Item 8.01 of this Current Report on Form 8-K. The 2015 Annual Report is revised as follows:
• | the information set forth in the following sections under the heading of “Part I, Item 1. Business” in the 2015 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 in the corresponding sections under the heading of “Part I, Item 1. Business”: |
• | Overview |
• | Segments and Corporate & Other |
• | Policyholder Liabilities |
• | Underwriting and Pricing |
• | Reinsurance Activity |
• | the information set forth in the following sections under the heading of “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2015 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 in the corresponding sections under the heading of “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”: |
• | Overview |
• | Results of Operations |
• | Non-GAAP and Other Financial Disclosures |
• | the information set forth under the heading “Part II, Item 8. Financial Statements and Supplementary Data” in the 2015 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 under the heading “Part II, Item 8. Financial Statements and Supplementary Data.” |
• | the information set forth under the heading “Part IV, Item 15. Exhibits and Financial Statement Schedules” in the 2015 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 under the heading “Part IV, Item 15. Exhibits and Financial Statement Schedules.” |
Other than as set forth herein, the 2015 Annual Report remains unchanged. Those sections of the 2015 Annual Report which have not been revised as set forth herein are not materially impacted by the actions taken by Metropolitan Life Insurance Company described in this 8-K and/or have already been updated through the Quarterly Report on Form 10-Q, including Risk Factors and the Note Regarding Forward Looking Statements contained in the Quarterly Report on Form 10-Q, and are not included in this Current Report on Form 8-K. Accordingly, the revised information set forth in this Current Report on Form 8-K should be read in conjunction with the 2015 Annual Report.
Part I
Item 1. Business
Index to Business
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Overview
As used in this Form 10-K, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New 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”).
The Company is a provider of life insurance, annuities, employee benefits and asset management through both proprietary and independent retail distribution channels, as well as at the workplace.
We are also one of the largest institutional investors in the U.S. with a $277.1 billion general account portfolio invested primarily in investment grade corporate bonds, structured finance securities, mortgage loans and U.S. Treasury and agency securities, as well as real estate and corporate equity, at December 31, 2015. Over the past several years, we have further diversified and strengthened our general account portfolio.
Our well-recognized brand, leading market positions, competitive and innovative product offerings and financial strength and expertise should help drive future growth, 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 achieve our goals:
● | Refocus the U.S. businesses |
– | Shift product mix away from capital intensive products |
– | Invest in growth initiatives for the voluntary/worksite, accident & health, and direct channels |
– | Drive margin improvement |
● | Drive toward Customer Centricity and a global brand |
– | Further institutionalize customer-centric actions and culture at MetLife |
– | Grow consideration of and preference for MetLife’s brand in key markets |
In anticipation of MetLife, Inc.’s plan to separate a substantial portion of its former Retail segment, as well as certain portions of its former Corporate Benefit Funding segment and Corporate & Other (the “Separation”), in the third quarter of 2016, the Company reorganized its businesses into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Other Key Information” for further information on the Company’s segments and the Separation. See also “— Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability.
Revenues derived from an agreement with the U.S. Office of Personnel Management for the Federal Employees’ Group Life Insurance program were $2.7 billion, $2.8 billion and $2.5 billion for the years ended December 31, 2015, 2014 and 2013, respectively, which represented 10%, 11% and 10%, respectively, of consolidated premiums, universal life and investment-type product policy fees and other revenues. Revenues derived from any other customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2015, 2014 and 2013. Substantially all of the Company’s consolidated premiums, universal life and investment-type product policy fees and other revenues originated in the U.S. Financial information, including revenues, expenses, operating earnings, and total assets by segment, as well as premiums, universal life and investment-type product policy fees and other revenues by major product groups, is provided in Note 2 of the Notes to the Consolidated Financial Statements. Operating revenues and operating earnings are performance measures that are not based on accounting principles generally accepted in the United States of America (“GAAP”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP and Other Financial Disclosures” for definitions of such measures.
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Other Key Information
On February 28, 2016, MetLife, Inc. entered into a purchase agreement with Massachusetts Mutual Life Insurance Company (“MassMutual”) pursuant to which MassMutual will acquire MetLife’s U.S. Retail advisor force, the MetLife Premier Client Group, together with its affiliated broker-dealer, MetLife Securities, Inc., a wholly-owned subsidiary of MetLife, Inc., and certain related assets. As part of the transaction, MetLife, Inc. and MassMutual have also agreed to enter into a product development agreement under which MetLife’s U.S. Retail business will be the exclusive developer of certain annuity products to be issued by MassMutual. The transaction is subject to certain closing conditions, including regulatory approval.
On January 12, 2016, MetLife, Inc. announced its plan to pursue the Separation. Additionally, on July 21, 2016, MetLife, Inc. announced that, following the Separation, the separated business will be rebranded as “Brighthouse Financial.” On October 5, 2016, Brighthouse Financial, Inc., a subsidiary of MetLife, Inc. (“Brighthouse”), filed a registration statement on Form 10 (the “Form 10”) with the U.S. Securities and Exchange Commission (“SEC”). The information statement filed as an exhibit to the Form 10 disclosed that MetLife, Inc. intends to include MetLife Insurance Company USA (“MetLife USA”), New England Life Insurance Company (“NELICO”), a wholly-owned subsidiary of Metropolitan Life Insurance Company, First MetLife Investors Insurance Company, MetLife Advisers, LLC and certain captive reinsurance companies in the proposed separated business and distribute at least 80.1% of the shares of Brighthouse’s common stock on a pro rata basis to the holders of MetLife, Inc. common stock. The ultimate form and timing of the Separation will be influenced by a number of factors, including regulatory considerations and economic conditions. MetLife continues to evaluate and pursue structural alternatives for the proposed Separation. MetLife expects that the life insurance closed block and the life and annuity business sold through Metropolitan Life Insurance Company will not be a part of Brighthouse Financial. The Separation remains subject to certain conditions including, among others, obtaining final approval from the MetLife, Inc. Board of Directors, receipt of a favorable ruling from the Internal Revenue Service (“IRS”) and an opinion from MetLife’s tax advisor regarding certain U.S. federal income tax matters, and an SEC declaration of the effectiveness of the Form 10.
In December 2014, Metropolitan Life Insurance Company distributed to MetLife, Inc., as a dividend, all of the issued and outstanding shares of common stock of its wholly-owned, broker-dealer subsidiary, New England Securities Corporation (“NES”). See Note 3 of the Notes to the Consolidated Financial Statements for further information.
In November 2014, MetLife Insurance Company of Connecticut (“MICC”), a wholly-owned subsidiary of MetLife, Inc., re-domesticated from Connecticut to Delaware, changed its name to MetLife Insurance Company USA and merged with its subsidiary, MetLife Investors USA Insurance Company, and its affiliate, MetLife Investors Insurance Company, each a U.S. insurance company that issued variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. (“Exeter”), a former offshore, captive reinsurance subsidiary of MetLife, Inc. and affiliate of MICC that mainly reinsured guarantees associated with variable annuity products (the “Mergers”). The surviving entity of the Mergers was MetLife USA. Effective January 1, 2014, following receipt of New York State Department of Financial Services (the “Department of Financial Services”) approval, MICC withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MICC reinsured with Metropolitan Life Insurance Company all existing New York insurance policies and annuity contracts that include a separate account feature. Prior to the Mergers, Metropolitan Life Insurance Company also recaptured certain risks ceded to Exeter and assumed certain risks from an affiliate. The Mergers have provided increased transparency relative to our capital allocation and variable annuity risk management. See Note 6 of the Notes to the Consolidated Financial Statements for further information on the Mergers, and see “— Regulation — Insurance Regulation — Insurance Regulatory Examinations and Other Activities” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions” for information on our use of captive reinsurers.
Segments and Corporate & Other
U.S.
Product Overview
Our businesses in the U.S. segment offer a broad range of protection products and services aimed at serving the financial needs of our customers throughout their lives. These products are sold to corporations and their respective employees, other institutions and their respective members, as well as individuals. Our U.S. segment is organized into two businesses: Group Benefits and Retirement and Income Solutions.
Group Benefits
We have built a leading position in the U.S. group insurance market through long-standing relationships with many of the largest corporate employers in the U.S.
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Our Group Benefits insurance products and services include life, dental, group short- and long-term disability, individual disability, accidental death and dismemberment (“AD&D”), critical illness, vision and accident & health coverages, as well as prepaid legal plans. We also sell administrative services-only (“ASO”) arrangements to some employers. Under such ASO arrangements, the employer is at risk, as we have not issued an insurance policy. We pay claims funded by the employer and perform other administrative services on behalf of the employer.
The major products within Group Benefits are as follows:
Variable Life. Variable life products provide insurance coverage through a contract that gives the policyholder flexibility in investment choices and, depending on the product, in premium payments and coverage amounts, with certain guarantees. Most importantly, with variable life products, premiums and account balances can be directed by the policyholder into a variety of separate account investment options or directed to the Company’s general account. In the separate account investment options, the policyholder bears the entire risk of the investment results. We collect specified fees for the management of the investment options. The policyholder’s cash value reflects the investment return of the selected investment options, net of management fees and insurance-related and other charges. In some instances, third-party money management firms manage these investment options. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.
Universal Life. Universal life products provide insurance coverage on the same basis as variable life, except that premiums, and the resulting accumulated balances, are allocated only to the Company’s general account. We credit premiums to an account maintained for the policyholder. Premiums are credited net of specified expenses. Interest is credited to the policyholder’s account at interest rates we determine, subject to specified minimums. Specific charges are made against the policyholder’s account for the cost of insurance protection and for expenses. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.
Term Life. Term life products provide a guaranteed benefit upon the death of the insured for a specified time period in return for the periodic payment of premiums. Specified coverage periods range from one year to 30 years, but in no event are they longer than the period over which premiums are paid. Death benefits may be level over the period or decreasing. Premiums may be guaranteed at a level amount for the coverage period or may be non-level and non-guaranteed. Term insurance products are sometimes referred to as pure protection products, in that there are typically no savings or investment elements. Term contracts expire without value at the end of the coverage period when the insured party is still living.
Dental. Dental products provide insurance and ASO arrangements that assist employees, retirees and their families in maintaining oral health while reducing out-of-pocket expenses and providing superior customer service. Dental plans include the Preferred Dentist Program and the Dental Health Maintenance Organization.
Disability. Group and individual disability products provide a benefit in the event of the disability of the insured. In most instances, this benefit is in the form of monthly income paid until the insured reaches age 65. In addition to income replacement, the product may be used to provide for the payment of business overhead expenses for disabled business owners or mortgage payment protection.
Retirement and Income Solutions
The Retirement and Income Solutions business provides funding and financing solutions that help institutional customers mitigate and manage liabilities primarily associated with their qualified, nonqualified and welfare employee benefit programs using a spectrum of life and annuity-based insurance and investment products.
The major products within Retirement and Income Solutions are as follows:
Stable Value Products. We offer general account guaranteed interest contracts, separate account guaranteed interest contracts, and similar products used to support the stable value option of defined contribution plans. We also offer private floating rate funding agreements that are used for money market funds, securities lending cash collateral portfolios and short-term investment funds.
General account guaranteed interest contracts are designed to provide stable value investment options within tax-qualified defined contribution plans. Traditional general account guaranteed interest contracts integrate a general account fixed or determinable fixed maturity investment with a general account guarantee of liquidity at contract value for participant transactions.
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Separate account guaranteed interest contracts are available to defined contribution plan sponsors. These contracts integrate market value returns on separate account investments with a general account guarantee of liquidity at contract value to the extent the separate account assets are not sufficient. The contracts do not have a fixed maturity date and are terminable by each party on notice.
Private floating rate funding agreements are generally privately-placed, unregistered investment contracts issued as general account obligations. Interest is credited based on an external index, generally the three-month London Interbank Offered Rate (“LIBOR”). Contracts may contain put provisions (of 90 days or longer) that allow for the contractholder to receive the account balance prior to the stated maturity date.
Pension Risk Transfers. We offer general account and separate account annuity products, generally in connection with the termination of defined benefit pension plans. These risk transfer products include single premium buyouts that allow for full or partial transfers of pension liabilities.
General account annuity products include nonparticipating contracts. Under nonparticipating contracts, group annuity benefits may be purchased for retired and terminated employees or employees covered under terminating or ongoing pension plans. Both immediate and deferred annuities may be purchased by a single premium at issue. There are generally no cash surrender rights, with some exceptions including certain contracts that include liabilities for cash balance pension plans.
Separate account annuity products include both participating and non-participating contracts. Under participating contracts, group annuity benefits are purchased for retired, terminated, or active employees covered under active or terminated pension plans. Both immediate and deferred fixed annuities are purchased with a single premium. Under some contracts, additional annuities may be periodically purchased at then current purchase rates. The assets supporting the guaranteed benefits for each contract are held in a separate account. Some contracts require the contractholder to make periodic payments to cover investment and insurance expenses. The Company fully guarantees benefit payments and is ultimately responsible for all benefit payments. The non-participating contracts have economic features similar to our general account product, but offer the added protection of an insulated separate account. Under U.S. GAAP, these annuity contracts are treated as general account products.
Institutional Income Annuities. These general account contracts are available for purchasing guaranteed payout annuities for employees upon retirement or termination of employment. These annuities can be either life contingent or non-life contingent. These annuities are nonparticipating, do not provide for any loan or cash surrender value and, with few exceptions, do not permit future considerations.
Torts and Settlements. We offer innovative strategies for complex litigation settlements, primarily structured settlement annuities.
Structured settlement annuities are customized annuities designed to serve as an alternative to a lump sum payment in a lawsuit initiated because of personal injury, wrongful death, or a workers’ compensation claim or other claim for damages. Surrenders are generally not allowed, although commutations are permitted in certain circumstances. Guaranteed payments consist of life contingent annuities, term certain annuities and lump sums.
Capital Markets Investment Products. Products we offer include funding agreements, funding agreement-backed notes and funding agreement-backed commercial paper. We also issue funding agreements to receive Federal Home Loan Bank (“FHLB”) advances and through a program with the Federal Agricultural Mortgage Corporation (“Farmer Mac”).
Funding agreement-backed notes are part of a medium term note program, under which funding agreements are issued to a special-purpose trust that issues marketable notes in U.S. dollars or foreign currencies. The proceeds of the issuance of a series of notes are used by the trust to acquire a funding agreement with matching interest and maturity payment terms from Metropolitan Life Insurance Company. The notes are underwritten and marketed by major investment banks’ broker-dealer operations and are sold to institutional investors.
Funding agreement-backed commercial paper is issued by a special purpose limited liability company which deposits the proceeds under a master funding agreement issued to it by Metropolitan Life Insurance Company. The commercial paper receives the same short-term credit rating as Metropolitan Life Insurance Company and is marketed by major investment banks’ broker-dealer operations. The program allows for funding agreement-backed commercial paper to be issued in U.S. dollars or foreign currencies.
Through the Farmer Mac program, funding agreements have been issued by Metropolitan Life Insurance Company to Farmer Mac, as well as to certain special purpose entities (“SPEs”) that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by Farmer Mac.
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Other Products and Services. We offer specialized life insurance products and funding agreements designed specifically to provide solutions for funding postretirement benefits and company-, bank- or trust- owned life insurance used to finance nonqualified benefit programs for executives.
Sales Distribution
Group Benefits Distribution
Group Benefits distributes its products and services through a sales force that is segmented by the size of the target customer. Marketing representatives sell either directly to corporate and other group customers or through an intermediary, such as a broker or consultant. In addition, voluntary products are sold by specialists. Employers have been emphasizing voluntary products and, as a result, we have increased our focus on communicating and marketing to employees in order to further foster sales of those products.
We have entered into several operating joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of Group Benefits products and services. We also sell our group products and services through sponsoring organizations and affinity groups and provide life and dental coverage to certain employees of the U.S. Government.
Retirement and Income Solutions Distribution
Retirement and Income Solutions products and services are distributed through dedicated sales teams and relationship managers. Products may be sold directly to benefit plan sponsors and advisors or through brokers, consultants or other intermediaries. In addition, these sales professionals work with individual and group distribution areas to better reach and service customers, brokers, consultants and other intermediaries.
MetLife Holdings
Product Overview
Our MetLife Holdings segment consists of operations relating to products and businesses no longer actively marketed by the Company in the U.S. These products and businesses include variable life, universal life, term life, whole life, variable annuities, fixed annuities and index-linked annuities. Our MetLife Holdings segment also includes our discontinued long-term care businesses.
The major products within MetLife Holdings are as follows:
Variable Life, Universal Life and Term Life. These life products are similar to those as described in Group Benefits, except that these products were marketed to individuals through various retail distribution channels. For a description of these products, see “— U.S. — Product Overview — Group Benefits.”
Whole Life. Whole life products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the entire life of the contract period, to a specified age or period, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, increase cash values available upon surrender or reduce the premiums required to maintain the contract in-force. Because the use of dividends is specified by the policyholder, this group of products provides significant flexibility to individuals to tailor the product to suit their specific needs and circumstances, while at the same time providing guaranteed benefits.
Variable Annuities. Variable annuities provide for both asset accumulation and asset distribution needs. Variable annuities allow the contractholder to make deposits into various investment options in a separate account, as determined by the contractholder. The risks associated with such investment options are borne entirely by the contractholder, except where guaranteed minimum benefits are involved. In certain variable annuity products, contractholders may also choose to allocate all or a portion of their account to the Company’s general account and are credited with interest at rates we determine, subject to specified minimums. In addition, contractholders may also elect certain minimum death benefit and minimum living benefit guarantees for which additional fees are charged and where asset allocation restrictions may apply.
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Fixed and Indexed-Linked Annuities. Fixed annuities provide for both asset accumulation and asset distribution needs. Fixed annuities do not allow the same investment flexibility provided by variable annuities, but provide guarantees related to the preservation of principal and interest credited. Deposits made into deferred annuity contracts are allocated to the Company’s general account and are credited with interest at rates we determine, subject to specified minimums. Credited interest rates are guaranteed not to change for certain limited periods of time, ranging from one to 10 years. Fixed income annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant. Additionally, the Company has recently begun issuing indexed-linked annuities which allow the contractholder to participate in returns from equity indices.
Long-term Care. Long-term care products provide protection against the potentially high costs of long-term care services. They generally pay benefits to insureds who need assistance with activities of daily living or have a cognitive impairment. Although we discontinued the sale of these products in 2010, we continue to support our existing policyholders.
Corporate & Other
Overview
Corporate & Other contains the excess capital, as well as certain charges and activities, not allocated to the segments, including enterprise-wide strategic initiative restructuring charges and various start-up businesses (including our investment management business through which the Company offers fee-based investment management services to institutional clients, as well as the direct to consumer portion of the U.S. Direct business). Corporate & Other also includes the Company’s ancillary international operations, the businesses of the Company that MetLife, Inc. plans to separate and include in Brighthouse Financial and interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. In addition, Corporate & Other includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Our liabilities for future policy benefits and claims are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. For life insurance and annuity products, we calculate these liabilities based on assumptions and estimates, including estimated premiums to be received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the investments we make with the premiums we receive. We establish liabilities for claims and benefits based on assumptions and estimates of losses and liabilities incurred. Amounts for actuarial liabilities are computed and reported in the consolidated financial statements in conformity with GAAP. For more details on policyholder liabilities see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Liability for Future Policy Benefits.”
Pursuant to applicable insurance laws and regulations, our insurance companies, including a captive reinsurer subsidiary, establish statutory reserves, reported as liabilities, to meet their obligations on their respective policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves and actuarial liabilities for future policy benefits generally differ based on accounting guidance.
State insurance laws and regulations, including New York Insurance Law and regulations, require certain MLIC entities to submit to superintendents of insurance, including the New York Superintendent of Financial Services, with each annual report, an opinion and memorandum of a “qualified actuary” that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for their statutory liabilities with respect to these obligations. See “— Regulation — Insurance Regulation — Policy and Contract Reserve Adequacy Analysis.”
Underwriting and Pricing
MetLife’s Global Risk Management Department (“GRM”) contains a dedicated unit, the primary responsibility of which is the development of product pricing standards and independent pricing and underwriting oversight for MetLife’s insurance businesses. Further important controls around management of underwriting and pricing processes include regular experience studies to monitor assumptions against expectations, formal new product approval processes, periodic updates to product profitability studies and the use of reinsurance to manage our exposures, as appropriate. See “— Reinsurance Activity.”
Underwriting
Underwriting generally involves an evaluation of applications by a professional staff of underwriters and actuaries, who determine the type and the amount of insurance risk that we are willing to accept. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify such risks before issuing policies to qualified applicants or groups.
Insurance underwriting considers not only an applicant’s medical history, but also other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Group underwriting generally evaluates the risk characteristics of each prospective insured group, although with certain voluntary products and for certain coverages, members of a group may be underwritten on an individual basis. We generally perform our own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and a policy is not issued unless the particular risk or group has been examined and approved in accordance with our underwriting guidelines.
The underwriting conducted by our remote underwriting offices and intermediaries, as well as our corporate underwriting office, is subject to periodic quality assurance reviews to maintain high standards of underwriting and consistency. Such offices are also subject to periodic external audits by reinsurers with whom we do business.
We have established oversight of the underwriting process that facilitates quality sales and serves the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent and us.
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We continually review our underwriting guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Pricing
Product pricing reflects our pricing standards. GRM, as well as regional finance and product teams, are responsible for pricing and oversight for all of our insurance businesses. Product pricing is based on the expected payout of benefits calculated through the use of assumptions for mortality, morbidity, expenses, persistency and investment returns, as well as certain macroeconomic factors, such as inflation. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality and possible variability of results. For certain products, pricing may include prospective and retrospective experience rating features. Prospective experience rating involves the evaluation of past experience for the purpose of determining future premium rates and we bear all prior year gains and losses. Retrospective experience rating also involves the evaluation of past experience for the purpose of determining the actual cost of providing insurance for the customer; however, the contract includes certain features that allow us to recoup certain losses or distribute certain gains back to the policyholder based on actual prior years’ experience.
Rates for group insurance and voluntary & worksite products are based on anticipated earnings and expenses for the book of business being underwritten. Renewals are generally reevaluated annually or biannually and are repriced to reflect actual experience on such products. Products offered by Retirement and Income Solutions are priced on demand. Pricing reflects expected investment returns, as well as mortality, longevity and expense assumptions appropriate for each product. This business is generally nonparticipating and illiquid, as policyholders have few or no options or contractual rights to cash values.
Rates for individual life insurance products are highly regulated and generally must be approved by the regulators of the jurisdictions in which the product is sold. Generally, such products are renewed annually and may include pricing terms that are guaranteed for a certain period of time. Individual disability income products are based on anticipated results for the occupation being underwritten. Fixed and variable annuity products are also highly regulated and approved by the respective regulators. Such products generally include penalties for early withdrawals and policyholder benefit elections to tailor the form of the product’s benefits to the needs of the opting policyholder. We periodically reevaluate the costs associated with such options and will periodically adjust pricing levels on our guarantees. Further, from time to time, we may also reevaluate the type and level of guarantee features currently being offered.
We continually review our pricing guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Reinsurance Activity
We enter into reinsurance agreements primarily as a purchaser of reinsurance for our various insurance products and also as a provider of reinsurance for some insurance products issued by third parties and related parties. We participate in reinsurance activities in order to limit losses, minimize exposure to significant risks, and provide additional capacity for future growth. We enter into various agreements with reinsurers that cover individual risks, group risks or defined blocks of business, primarily on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics of coverages. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we reinsure other risks, as well as specific coverages. We obtain reinsurance for capital requirement purposes and also when the economic impact of the reinsurance agreement makes it appropriate to do so.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible.
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We reinsure our business through a diversified group of well-capitalized reinsurers. We analyze recent trends in arbitration and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. Additionally, we enter into reinsurance agreements for risk and capital management purposes with other affiliates and several affiliated captive reinsurers. Captive reinsurers are affiliated insurance companies licensed under specific provisions of insurance law of their respective jurisdictions, such as the Special Purpose Financial Captive law adopted by several states including Vermont and Delaware, and have a very narrow business plan that specifically restricts the majority or all of their activity to reinsuring business from their affiliates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions.”
U.S.
For certain policies within our Group Benefits business, we generally retain most of the risk and only cede particular risk on certain client arrangements. The majority of our reinsurance activity within this business relates to the following client agreements:
• | Employer sponsored captive programs: through these programs, employers buy a group life insurance policy with the condition that a portion of the risk is reinsured back to a captive insurer sponsored by the client. |
• | Risk-sharing agreements: through these programs, clients require that we reinsure a portion of the risk back to third parties, such as minority-owned reinsurers. |
• | Multinational pooling: through these agreements, employers buy many group insurance policies which are aggregated in a single insurer via reinsurance. |
For our Retirement and Income Solutions business, we have periodically engaged in reinsurance activities on an opportunistic basis. There were no significant transactions during the periods presented. In April 1996 and December 1997 the Company entered into two long-term transactions representing approximately $1.5 billion of reserve transfers on structured settlement policies. Through these transactions, 100% of certain risks were transferred, such as payments contingent upon the beneficiary living at the time payment is owed, beginning in 2017 for certain policies, and non-contingent payments guaranteed for a certain minimum number of years, for other policies.
MetLife Holdings
For our life products, we have historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. We currently reinsure 90% of the mortality risk in excess of $2 million for most products. In addition to reinsuring mortality risk as described above, we reinsure other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. On a case by case basis, we may retain up to $20 million per life and reinsure 100% of amounts in excess of the amount we retain. We evaluate our reinsurance programs routinely and may increase or decrease our retention at any time.
For annuities, we reinsure 100% of the living and death benefit guarantees issued in connection with certain variable annuities issued since 2004 to an affiliate and portions of the living and death benefit guarantees issued in connection with our variable annuities issued prior to 2004 to affiliated and unaffiliated reinsurers. Under these reinsurance agreements, we pay a reinsurance premium generally based on fees associated with the guarantees collected from policyholders, and receive reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations. We also assume 90% of the fixed annuities by certain affiliates and 100% of certain variable annuity risks issued by an affiliate.
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Catastrophe Coverage
We have exposure to catastrophes which could contribute to significant fluctuations in our results of operations. We use excess reinsurance agreements, under which the direct writing company reinsures risk in excess of a specific dollar value for each policy within a class of policies, to provide greater diversification of risk and minimize exposure to larger risks. Such excess reinsurance agreements include retention reinsurance agreements and quota share reinsurance agreements. Retention reinsurance agreements provide for a portion of a risk to remain with the direct writing company, and quota share reinsurance agreements provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies. Our life insurance products, particularly group life, subject us to catastrophe risk which we do not reinsure other than through our ongoing mortality reinsurance program which transfers risk at the individual policy level.
Reinsurance Recoverables
For information regarding ceded reinsurance recoverable balances, included in premiums, reinsurance and other receivables in the consolidated balance sheets, see Note 6 of the Notes to the Consolidated Financial Statements.
11
Part II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
Overview
The Company is a provider of life insurance, annuities, employee benefits and asset management. In anticipation of the proposed Separation, in the third quarter of 2016, the Company reorganized its businesses into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. See “— Other Key Information" for further information on the Company’s segments and the Separation. See also “Business — Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability.
Other Key Information
On February 28, 2016, MetLife, Inc. entered into a purchase agreement with MassMutual pursuant to which MassMutual will acquire MetLife’s U.S. Retail advisor force, the MetLife Premier Client Group, together with its affiliated broker-dealer, MetLife Securities, Inc., a wholly-owned subsidiary of MetLife, Inc., and certain related assets. As part of the transaction, MetLife, Inc. and MassMutual have also agreed to enter into a product development agreement under which MetLife’s U.S. Retail business will be the exclusive developer of certain annuity products to be issued by MassMutual. The transaction is subject to certain closing conditions, including regulatory approval.
On January 12, 2016, MetLife, Inc. announced its plan to pursue the Separation. Additionally, on July 21, 2016, MetLife, Inc. announced that following the Separation, the separated business will be rebranded as “Brighthouse Financial.” On October 5, 2016, Brighthouse Financial, Inc., a subsidiary of MetLife, Inc. (“Brighthouse”), filed a registration statement on Form 10 (the “Form 10”) with the SEC. The information statement filed as an exhibit to the Form 10 disclosed that MetLife, Inc. intends to include MetLife USA, NELICO, a wholly-owned subsidiary of Metropolitan Life Insurance Company, First MetLife Investors Insurance Company, MetLife Advisers, LLC and certain captive reinsurance companies in the proposed separated business and distribute at least 80.1% of the shares of Brighthouse’s common stock on a pro rata basis to the holders of MetLife, Inc. common stock. The ultimate form and timing of the Separation will be influenced by a number of factors, including regulatory considerations and economic conditions. MetLife continues to evaluate and pursue structural alternatives for the proposed Separation. MetLife expects that the life insurance closed block and the life and annuity business sold through Metropolitan Life Insurance Company will not be a part of Brighthouse Financial. The Separation remains subject to certain conditions including, among others, obtaining final approval from the MetLife, Inc. Board of Directors, receipt of a favorable ruling from the IRS and an opinion from MetLife’s tax advisor regarding certain U.S. federal income tax matters, and an SEC declaration of the effectiveness of the Form 10.
Segment Information
Based on the proposed Separation, in the third quarter of 2016, the Company reorganized its businesses as follows:
• | The businesses of the Company that MetLife, Inc. plans to separate and include in Brighthouse Financial are reflected in Corporate & Other. |
• | The businesses in the Company’s former Retail segment that MetLife, Inc. does not plan to separate are reflected in a new segment, MetLife Holdings. This segment also includes the long-term care business, reported as part of the Company’s former Group, Voluntary & Worksite Benefit (“GVWB”) segment. |
• | The Retirement and Income Solutions business (which represents most of the segment formerly known as Corporate Benefit Funding), and the Group Benefits business (consisting of the remaining components of the Company’s former GVWB segment, including the individual disability insurance business previously reported in the former Retail segment), are reflected in a new segment, U.S. |
These changes were applied retrospectively and did not have an impact on total consolidated net income or operating earnings in the prior periods, however, they may have resulted in changes to the underlying components of earnings as discussed in the consolidated results of operations. See Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments.
13
Results of Operations
Consolidated Results
Business Overview. Overall sales declined from 2014 levels; however, sales experience was positive across various products within our businesses for the year ended December 31, 2015 as compared to 2014. The introduction of new variable annuity products in late 2014 and early 2015, as well as pricing actions and our continued focus on our enhanced underwriting programs, all contributed to higher sales in our MetLife Holdings segment. For our U.S. segment, sales declined due to the timing of our funding agreements and lower sales of stable value products. In addition, sales were lower, as improved sales of voluntary products were more than offset by lower sales of our core group products. Despite the decline in funding ratios for defined benefit pension plans of S&P 500 companies, we experienced an increase in sales of pension risk transfers. However, more competitive pricing in the market drove a decrease in structured settlement annuity sales.
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Revenues | |||||||
Premiums | $ | 21,934 | $ | 21,384 | |||
Universal life and investment-type product policy fees | 2,584 | 2,466 | |||||
Net investment income | 11,577 | 11,893 | |||||
Other revenues | 1,536 | 1,808 | |||||
Net investment gains (losses) | 259 | 143 | |||||
Net derivative gains (losses) | 881 | 1,037 | |||||
Total revenues | 38,771 | 38,731 | |||||
Expenses | |||||||
Policyholder benefits and claims and policyholder dividends | 25,791 | 25,095 | |||||
Interest credited to policyholder account balances | 2,183 | 2,174 | |||||
Capitalization of DAC | (482 | ) | (424 | ) | |||
Amortization of DAC and VOBA | 742 | 695 | |||||
Interest expense on debt | 122 | 151 | |||||
Other expenses | 5,876 | 5,649 | |||||
Total expenses | 34,232 | 33,340 | |||||
Income (loss) from continuing operations before provision for income tax | 4,539 | 5,391 | |||||
Provision for income tax expense (benefit) | 1,782 | 1,532 | |||||
Income (loss) from continuing operations, net of income tax | 2,757 | 3,859 | |||||
Income (loss) from discontinued operations, net of income tax | — | (3 | ) | ||||
Net income (loss) | 2,757 | 3,856 | |||||
Less: Net income (loss) attributable to noncontrolling interests | — | (5 | ) | ||||
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 2,757 | $ | 3,861 |
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
During the year ended December 31, 2015, income (loss) from continuing operations, before provision for income tax, decreased $852 million ($1.1 billion, net of income tax) from 2014 primarily driven by a $557 million one-time tax charge and a $362 million ($235 million, net of income tax) one-time charge for interest on uncertain tax positions that were recorded under accounting guidance for the recognition of tax uncertainties related to the U.S. tax treatment of taxes paid by a wholly-owned United Kingdom (“U.K.”) investment subsidiary of Metropolitan Life Insurance Company.
14
Management of Investment Portfolio and Hedging Market Risks with Derivatives. We manage our investment portfolio using disciplined asset/liability management (“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. 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 currency exchange rates, credit spreads and equity market levels.
We purchase investments 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 currency exchange rates, 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, which creates volatility in earnings.
Certain direct or assumed variable annuity products with guaranteed minimum benefits 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). We use reinsurance and derivatives to hedge the market and other risks inherent in these variable annuity guarantees. Ceded reinsurance of direct variable annuity products with guaranteed minimum benefits generally 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 valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged, and can be a significant driver of net derivative gains (losses) and volatility in earnings, but does not have an economic impact on us.
15
Net Derivative Gains (Losses). Direct, assumed and ceded variable annuity embedded derivatives, as well as the associated freestanding derivatives, are referred to as “VA program derivatives” in the following table. All other embedded derivatives and all freestanding 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:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Non-VA program derivatives | |||||||
Interest rate | $ | 174 | $ | 730 | |||
Foreign currency exchange rate | 300 | 316 | |||||
Credit | 28 | 68 | |||||
Non-VA embedded derivatives | 487 | (498 | ) | ||||
Total non-VA program derivatives | 989 | 616 | |||||
VA program derivatives | |||||||
Embedded derivatives-direct and assumed guarantees: | |||||||
Market risks | 136 | (53 | ) | ||||
Nonperformance risk adjustment | 29 | 14 | |||||
Other risks | (280 | ) | (130 | ) | |||
Total | (115 | ) | (169 | ) | |||
Embedded derivatives-ceded reinsurance: | |||||||
Market and other risks | 50 | 506 | |||||
Nonperformance risk adjustment | (4 | ) | (9 | ) | |||
Total | 46 | 497 | |||||
Freestanding derivatives hedging direct and assumed embedded derivatives | (39 | ) | 93 | ||||
Total VA program derivatives | (108 | ) | 421 | ||||
Net derivative gains (losses) | $ | 881 | $ | 1,037 |
The favorable change in net derivative gains (losses) on non-VA program derivatives was $373 million ($242 million, net of income tax). This was primarily due to a change in the value of underlying assets and the recapture of a certain reinsurance agreement from an affiliate which favorably impacted non-VA embedded derivatives related to affiliated ceded reinsurance written on a coinsurance with funds withheld basis. This favorable change was partially offset by the unfavorable impact of mid- to long-term interest rates decreasing less in 2015 than in 2014, unfavorably impacting receive-fixed interest rate swaptions and interest rate swaps. 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 $529 million ($344 million, net of income tax). This was due to an unfavorable change of $549 million ($357 million, net of income tax) in market and other risks on direct and assumed variable annuity embedded derivatives, net of the impact of market and other risks on the ceded reinsurance embedded derivatives and net of freestanding derivatives hedging those risks, partially offset by a favorable change of $20 million ($13 million, net of income tax) related to the change in the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives, net of the impact of the nonperformance risk adjustment on the ceded variable annuity embedded derivatives. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged.
The foregoing unfavorable change of $549 million ($357 million, net of income tax) was primarily driven by changes in market factors, as well as by the recapture of certain variable annuities previously reinsured to an affiliate.
16
The primary changes in market factors are summarized as follows:
• | Long-term interest rates decreased less in 2015 than in 2014, contributing to a favorable change in our direct and assumed embedded derivatives and an unfavorable change in our ceded reinsurance assets, embedded derivatives and freestanding derivatives. For example, the 30-year U.S. swap rate decreased by 3% in 2015 and 31% in 2014. |
• | Key equity index levels decreased in 2015 and increased in 2014, contributing to an unfavorable change in our direct and assumed embedded derivatives and a favorable change in our ceded reinsurance assets and freestanding derivatives. For example, the S&P 500 Index decreased by 1% in 2015 and increased by 11% in 2014. |
We calculate the nonperformance risk adjustment as the change in the embedded derivative discounted at the risk-adjusted rate (which includes our own credit spread to the extent that the embedded derivative is in-the-money) less the change in the embedded derivative discounted at the risk-free rate. The favorable change in the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives of $15 million ($10 million, net of income tax) was primarily due to a favorable change of $7 million, before income tax, as a result of changes in capital market inputs, such as long-term interest rates and key equity index levels, on variable annuity guarantees, and a favorable change of $8 million, before income tax, related to changes in our own credit spread. The favorable change in the nonperformance risk adjustment on the ceded variable annuity embedded derivatives of $5 million ($3 million, net of income tax) was due to a favorable change of $10 million, before income tax, as a result of the impact of changes in capital market inputs, such as long-term interest rates and key equity index levels, on variable annuity guarantees, partially offset by an unfavorable change of $5 million, before income tax, related to changes in our own credit spread.
When equity index levels decrease in isolation, the direct and assumed variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk-adjusted rate yields a smaller loss than by discounting at the risk-free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When the risk-free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk-free interest rate had remained constant. Discounting this unfavorable change by the risk-adjusted rate yields a smaller loss than by discounting at the risk-free interest rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees when the reinsurer’s credit spread increases in isolation. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction.
Generally, a higher portion of the ceded reinsurance for GMIBs is accounted for as an embedded derivative as compared to the direct guarantees since the settlement provisions of the reinsurance agreements generally meet the accounting criteria of “net settlement.” This mismatch in accounting can lead to significant volatility in earnings, even though the risks inherent in these direct guarantees are fully covered by the ceded reinsurance.
Net Investment Gains (Losses). The favorable change in net investment gains (losses) of $116 million ($75 million, net of income tax) primarily reflects higher net gains on sales of real estate and real estate joint ventures. This favorable change was partially offset by higher impairments and net losses on sales and disposals of fixed maturity and equity securities.
Actuarial Assumption Review. Results for 2015 include a $163 million ($106 million, net of income tax), net of reinsurance, charge associated with our annual assumption review related to reserves and DAC, of which a $2 million loss ($1 million, net of income tax) was recognized in net derivative gains (losses). Of the $163 million charge, $60 million ($39 million, net of income tax) was related to reserves and $103 million ($67 million, net of income tax) was associated with DAC.
The foregoing $2 million loss ($4 million direct and assumed, $6 million ceded) recognized in net derivative gains (losses) associated with our annual assumption review was included within the market and other risks caption in the table above.
17
As a result of our annual assumption review, changes were made to economic, policyholder behavior and mortality assumptions, and operational updates were made as well. The most significant impacts were in the MetLife Holdings segment and are summarized as follows:
• | Changes in economic assumptions resulted in reserve increases, net of reinsurance, and unfavorable DAC for a net loss of $34 million ($22 million, net of income tax). |
• | Changes to policyholder behavior and mortality assumptions resulted in reserve increases, net of reinsurance, partially offset by favorable DAC for a net loss of $13 million ($9 million, net of income tax). |
• | The remaining updates resulted in reserve increases, net of reinsurance, and unfavorable DAC for a net loss of $116 million ($75 million, net of income tax). The most notable impact resulted from projection update of closed block results. |
Results for 2014 include a $172 million ($112 million, net of income tax) benefit, net of reinsurance, associated with our annual assumption review related to reserves and DAC, of which $57 million ($37 million, net of income tax) was recognized in net derivative gains (losses). Of the $172 million benefit, $130 million ($85 million, net of income tax) was associated with DAC and $42 million ($27 million, net of income tax) was related to reserves.
Taxes. Income tax expense for the year ended December 31, 2015 was $1.8 billion, or 39% of income (loss) from continuing operations before provision for income tax, compared with $1.5 billion, or 28% of income (loss) from continuing operations before provision for income tax, for the year ended December 31, 2014. The Company’s 2015 effective tax rate differs from the U.S. statutory rate of 35% primarily due to the aforementioned tax charge of $557 million recorded under accounting guidance for the recognition of tax uncertainties. In addition, the 2015 and 2014 effective tax rates differ from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing.
Operating Earnings. As more fully described in “— Non-GAAP and Other Financial Disclosures,” 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, 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 should not be viewed as a substitute for income (loss) from continuing operations, net of income tax. Operating earnings decreased $1.1 billion, net of income tax, to $2.4 billion, net of income tax, for the year ended December 31, 2015 from $3.5 billion, net of income tax, for the year ended December 31, 2014.
18
Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings
Year Ended December 31, 2015
U.S. | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | |||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 1,893 | $ | 1,086 | $ | (222 | ) | $ | 2,757 | ||||||
Less: Net investment gains (losses) | 264 | (38 | ) | 33 | 259 | ||||||||||
Less: Net derivative gains (losses) | 98 | 227 | 556 | 881 | |||||||||||
Less: Other adjustments to continuing operations (1) | (148 | ) | (372 | ) | (19 | ) | (539 | ) | |||||||
Less: Provision for income tax (expense) benefit | (74 | ) | 64 | (199 | ) | (209 | ) | ||||||||
Operating earnings | $ | 1,753 | $ | 1,205 | $ | (593 | ) | $ | 2,365 |
Year Ended December 31, 2014
U.S. | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | |||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 2,075 | $ | 1,807 | $ | (23 | ) | $ | 3,859 | ||||||
Less: Net investment gains (losses) | 151 | 9 | (17 | ) | 143 | ||||||||||
Less: Net derivative gains (losses) | 492 | 723 | (178 | ) | 1,037 | ||||||||||
Less: Other adjustments to continuing operations (1) | (123 | ) | (419 | ) | (43 | ) | (585 | ) | |||||||
Less: Provision for income tax (expense) benefit | (182 | ) | (109 | ) | 81 | (210 | ) | ||||||||
Operating earnings | $ | 1,737 | $ | 1,603 | $ | 134 | $ | 3,474 |
(1) See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments.
19
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
Year Ended December 31, 2015
U.S. | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | |||||||||||||||
Total revenues | $ | 25,246 | $ | 11,847 | $ | 1,678 | $ | 38,771 | |||||||
Less: Net investment gains (losses) | 264 | (38 | ) | 33 | 259 | ||||||||||
Less: Net derivative gains (losses) | 98 | 227 | 556 | 881 | |||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | — | — | — | — | |||||||||||
Less: Other adjustments to revenues (1) | (163 | ) | (200 | ) | 7 | (356 | ) | ||||||||
Total operating revenues | $ | 25,047 | $ | 11,858 | $ | 1,082 | $ | 37,987 | |||||||
Total expenses | $ | 22,298 | $ | 10,270 | $ | 1,664 | $ | 34,232 | |||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | — | 110 | 7 | 117 | |||||||||||
Less: Other adjustments to expenses (1) | (15 | ) | 62 | 19 | 66 | ||||||||||
Total operating expenses | $ | 22,313 | $ | 10,098 | $ | 1,638 | $ | 34,049 |
Year Ended December 31, 2014
U.S. | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | |||||||||||||||
Total revenues | $ | 24,840 | $ | 12,712 | $ | 1,179 | $ | 38,731 | |||||||
Less: Net investment gains (losses) | 151 | 9 | (17 | ) | 143 | ||||||||||
Less: Net derivative gains (losses) | 492 | 723 | (178 | ) | 1,037 | ||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | — | (15 | ) | — | (15 | ) | |||||||||
Less: Other adjustments to revenues (1) | (110 | ) | (297 | ) | 4 | (403 | ) | ||||||||
Total operating revenues | $ | 24,307 | $ | 12,292 | $ | 1,370 | $ | 37,969 | |||||||
Total expenses | $ | 21,629 | $ | 10,034 | $ | 1,677 | $ | 33,340 | |||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | — | 72 | 26 | 98 | |||||||||||
Less: Other adjustments to expenses (1) | 13 | 35 | 21 | 69 | |||||||||||
Total operating expenses | $ | 21,616 | $ | 9,927 | $ | 1,630 | $ | 33,173 |
______________
(1) See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments.
20
Consolidated Results — Operating
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Unless otherwise stated, all amounts discussed below are net of income tax.
Overview. The primary drivers of the decrease in operating earnings were: (i) a tax charge and a related charge for interest on uncertain tax positions in 2015, (ii) lower investment yields, (iii) an adjustment to better align the allocation of acquisition expenses with affiliates’ sales revenue that decreased 2014 expenses, (iv) an unfavorable impact from our annual review of actuarial assumptions and (v) the prior period favorable reserve adjustment related to disability premium waivers in our life business, partially offset by (vi) higher net investment income from portfolio growth. Our financial results include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses.
Business Growth. We benefited from higher sales and business growth across many of our products. An increase in our investment portfolio from deposits and funding agreement issuances, as well as increased premiums in our U.S. segment and positive net flows in our MetLife Holdings segment generated higher net investment income. This was partially offset by the related increase in interest credited expense. Higher costs associated with our variable annuity GMDBs drove lower operating earnings. Operating earnings also decreased in 2015 as a result of the disposition of our former broker-dealer subsidiary, NES, in the fourth quarter of 2014. In our MetLife Holdings segment, negative net flows from the direct deferred variable annuity business decreased average separate account balances and, consequently, lower asset-based fee income. However, this was offset by higher asset-based fee income in our deferred annuities business as a result of the recapture of a ceded variable annuity reinsurance agreement from an affiliate. The changes in business growth discussed above resulted in a $21 million increase in operating earnings.
Market Factors. Investment yields were negatively impacted by the adverse impact of the sustained low interest rate environment on fixed maturity securities and mortgage loans, as well as by lower returns on other limited partnership interests and our securities lending program. These decreases were partially offset by higher income on currency derivatives and higher returns on real estate investments. Many of our funding agreement and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. In our MetLife Holdings segment, an increase in asset-based fee income resulted in an increase in operating earnings. The changes in market factors discussed above resulted in a $316 million decrease in operating earnings.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Less favorable mortality experience in our MetLife Holdings segment, as well as less favorable morbidity experience in our U.S segment were almost entirely offset by favorable mortality experience in our U.S segment, as well as favorable morbidity in our MetLife Holdings segment, which resulted in a slight decrease in operating earnings. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both 2015 and 2014, resulted in a net operating earnings decrease of $73 million and were primarily related to unfavorable DAC unlockings in our MetLife Holdings segment. Refinements to DAC and certain insurance-related liabilities that were recorded in both 2015 and 2014 resulted in a net decrease of $52 million in operating earnings. The 2014 refinements include favorable reserve adjustments related to disability premium waivers and a charge related to delayed settlement interest on unclaimed funds held by state governments, in our MetLife Holdings segment and Corporate & Other.
Expenses. In 2015, other expenses include the aforementioned $235 million charge for interest on uncertain tax positions. In addition, an adjustment that decreased 2014 expenses by $140 million to better align the allocation of acquisition expenses with affiliates’ sales revenue resulted in a decrease in operating earnings in 2015. These were partially offset by a $203 million decrease in expenses, which was primarily the result of a $117 million accrual in 2014 to increase the litigation reserve related to asbestos and lower costs associated with corporate initiatives and projects.
Taxes. The Company’s 2015 effective tax rate differs from the U.S. statutory rate of 35% primarily due to the aforementioned tax charge of $557 million recorded under accounting guidance for the recognition of tax uncertainties, partially offset by tax benefits of $9 million as compared to 2014, primarily as a result of the higher utilization of tax preferenced investments. In addition, the Company’s 2015 and 2014 effective tax rates differ from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for investments in low income housing.
21
Segment Results and Corporate & Other
U.S.
Business Overview. A decrease in sales was primarily driven by the timing of our funding agreement issuances and lower sales of stable value products in the Retirement and Income Solutions business. Net funding agreement issuances were higher in 2014 to take advantage of favorable market conditions in advance of scheduled contract maturities. Funding ratios for defined benefit pension plans of S&P 500 companies continued to fall in 2015, limiting their ability to engage in full pension plan buyouts. However, we expect that customers may choose to close out portions of pension plans over time, with the largest volume of business generally occurring near the end of any year. Despite the decline in funding ratios for defined benefit pension plans of S&P 500 companies, higher pension risk transfers resulted in an increase in premiums for our Retirement and Income solutions business. This increase was partially offset by the impact of more competitive pricing in the market, which drove a decrease in structured settlement annuity sales. Changes in premiums for our Retirement and Income Solutions business were almost entirely offset by the related changes in policyholder benefits and claims. In our Group Benefits business, improved sales of voluntary products were more than offset by lower sales of core group products.
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Operating revenues | |||||||
Premiums | $ | 17,340 | $ | 16,771 | |||
Universal life and investment-type product policy fees | 941 | 907 | |||||
Net investment income | 6,037 | 5,927 | |||||
Other revenues | 729 | 702 | |||||
Total operating revenues | 25,047 | 24,307 | |||||
Operating expenses | |||||||
Policyholder benefits and claims and policyholder dividends | 18,384 | 17,825 | |||||
Interest credited to policyholder account balances | 1,212 | 1,164 | |||||
Capitalization of DAC | (71 | ) | (78 | ) | |||
Amortization of DAC and VOBA | 59 | 54 | |||||
Interest expense on debt | 5 | 12 | |||||
Other expenses | 2,724 | 2,639 | |||||
Total operating expenses | 22,313 | 21,616 | |||||
Provision for income tax expense (benefit) | 981 | 954 | |||||
Operating earnings | $ | 1,753 | $ | 1,737 |
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Unless otherwise stated, all amounts discussed below are net of income tax.
Business Growth. A $129 million increase in operating earnings was attributable to business growth. Growth in premiums, deposits and funding agreement issuances in 2015, as well as an increase in allocated equity, resulted in higher average invested assets, improving net investment income. However, consistent with the growth in average invested assets from increased premiums, deposits and funding agreement issuances, interest credited on long-duration contracts increased. An increase in the annual assessment of the PPACA fee increased other expenses in 2015; however, the impact of the assessment was significantly offset by a related increase in premiums from our dental business. The remaining increase in other operating expenses, mainly the result of growth across the segment, was more than offset by the remaining increase in premiums, fees and other revenues.
22
Market Factors. The sustained low interest rate environment drove lower investment yields on our fixed maturity securities, mortgage loans and our securities lending program. In addition, weaker equity markets in 2015 resulted in lower returns on other limited partnership interests. These unfavorable changes were partially offset by higher returns on interest rate and currency derivatives and alternative investments. Many of our funding agreements and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as existing business with terms that can fluctuate. The combined impact of lower investment returns partially offset by lower interest credited expense, resulted in a decrease in operating earnings of $106 million.
Underwriting and Other Insurance Adjustments. Less favorable reserve development in our dental business was partially offset by favorable morbidity experience in our individual and group disability businesses, resulting in a $28 million decrease in operating earnings. Less favorable mortality in our structured settlement business, was partially offset by more favorable mortality from our income annuity and specialized life insurance products, and resulted in an $8 million decrease in operating earnings. Our life and AD&D businesses experienced favorable mortality in 2015, mainly due to favorable claims experience, which resulted in a $45 million increase in operating earnings. Refinements to certain insurance and other liabilities, which were recorded in both 2015 and 2014, resulted in a $12 million decrease in operating earnings.
MetLife Holdings
Business Overview. Life sales increased 17% driven by increases in our term life products (due to pricing actions), universal life products (due to new products introduced in 2014 and 2015) and whole life products (due to a continued focus on our enhanced underwriting programs). Annuity sales increased 10% as a result of new variable annuity products introduced in late 2014 and early 2015. A significant portion of our operating earnings is driven by separate account balances. Most directly, these balances determine asset-based fee income but they also impact DAC amortization and asset-based commissions. Separate account balances are driven by sales, movements in the market, surrenders, withdrawals, benefit payments, transfers and policy charges. Separate account balances have declined due to market performance along with the impact of negative net flows, as benefits, surrenders and withdrawals exceeded sales. Although we have discontinued selling our long-term care product, we continue to collect premiums and administer the existing block of business, which contributed to asset growth in the segment.
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Operating revenues | |||||||
Premiums | $ | 4,527 | $ | 4,523 | |||
Universal life and investment-type product policy fees | 1,294 | 1,257 | |||||
Net investment income | 5,902 | 6,105 | |||||
Other revenues | 135 | 407 | |||||
Total operating revenues | 11,858 | 12,292 | |||||
Operating expenses | |||||||
Policyholder benefits and claims and policyholder dividends | 7,218 | 7,102 | |||||
Interest credited to policyholder account balances | 933 | 966 | |||||
Capitalization of DAC | (409 | ) | (325 | ) | |||
Amortization of DAC and VOBA | 527 | 467 | |||||
Interest expense on debt | 4 | 8 | |||||
Other expenses | 1,825 | 1,709 | |||||
Total operating expenses | 10,098 | 9,927 | |||||
Provision for income tax expense (benefit) | 555 | 762 | |||||
Operating earnings | $ | 1,205 | $ | 1,603 |
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Unless otherwise stated, all amounts discussed below are net of income tax.
23
Business Growth. In our deferred variable annuity business, negative net flows decreased average separate account balances and, consequently, lowered asset-based fee income. In addition, higher costs associated with our variable annuity GMDBs decreased operating earnings. These decreases were partially offset by the impact of a recapture in 2014 of a ceded variable annuity reinsurance agreement from an affiliate, which resulted in an increase in certain asset-based fees and lower interest credited expense. In our life and long-term care businesses, higher interest credited expense decreased operating earnings, but was partially offset by an increase in income from a larger invested asset base due to a higher amount of allocated equity as compared to 2014 and an increase in assets from our long-term care business. Operating earnings also decreased in 2015 as a result of the disposition of our former broker-dealer subsidiary, NES, in the fourth quarter of 2014. The combined impact of the items discussed above decreased operating earnings by $64 million.
Market Factors. A $52 million decrease in operating earnings was attributable to market factors, including equity markets and interest rates. While separate account fund returns were down slightly on a full year basis, the positive returns in the first half of the year drove an increase in our average separate account balances which resulted in an increase in asset-based fee income. Lower returns on other limited partnership interests and interest rate derivatives decreased operating earnings. The sustained low interest rate environment resulted in a decline in net investment income on our fixed maturity securities and mortgage loans as proceeds from maturing investments were reinvested at lower yields. This reduction in current period income from lower yields was partially offset by a decrease in DAC amortization.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Less favorable mortality experience in both our universal life and traditional life businesses resulted in a decrease of $28 million in operating earnings. Favorable morbidity experience in our long-term care business, due to higher net closures and the impact of lapses on certain insurance-related liabilities, increased operating earnings by $16 million. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both 2015 and 2014, resulted in a net operating earnings decrease of $67 million and were primarily related to unfavorable DAC unlockings in the life businesses. Refinements to DAC and certain insurance-related liabilities that were recorded in both 2015 and 2014 resulted in a decrease in operating earnings of $27 million. The 2014 refinements include favorable reserve adjustments related to disability premium waivers and a charge related to delayed settlement interest on unclaimed funds held by state governments, all in our life business.
Expenses. An adjustment that decreased 2014 expenses by $140 million to better align the allocation of acquisition expenses with affiliates’ sales revenue resulted in a decrease in operating earnings in 2015. In addition, an increase in expenses, mainly due to higher employee-related costs, resulted in a $31 million decrease in operating earnings.
Corporate & Other
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Operating revenues | |||||||
Premiums | $ | 67 | $ | 90 | |||
Universal life and investment-type product policy fees | 249 | 248 | |||||
Net investment income | 94 | 333 | |||||
Other revenues | 672 | 699 | |||||
Total operating revenues | 1,082 | 1,370 | |||||
Operating expenses | |||||||
Policyholder benefits and claims and policyholder dividends | 125 | 123 | |||||
Interest credited to policyholder account balances | 34 | 33 | |||||
Capitalization of DAC | (2 | ) | (21 | ) | |||
Amortization of DAC and VOBA | 44 | 58 | |||||
Interest expense on debt | 113 | 130 | |||||
Other expenses | 1,324 | 1,307 | |||||
Total operating expenses | 1,638 | 1,630 | |||||
Provision for income tax expense (benefit) | 37 | (394 | ) | ||||
Operating earnings | $ | (593 | ) | $ | 134 |
The table below presents operating earnings by source, net of income tax:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Other business activities | $ | 89 | $ | 123 | |||
Other net investment income | (10 | ) | 150 | ||||
Interest expense on debt | (73 | ) | (85 | ) | |||
Acquisition costs | — | (2 | ) | ||||
Corporate initiatives and projects | (72 | ) | (122 | ) | |||
Incremental tax benefit (expense) | (232 | ) | 303 | ||||
Other | (295 | ) | (233 | ) | |||
Operating earnings | $ | (593 | ) | $ | 134 |
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Unless otherwise stated, all amounts discussed below are net of income tax.
Other Business Activities. Operating earnings from other business activities decreased $34 million, primarily due to the 2014 reserve adjustment related to disability premium waivers in our life business, lower asset-based fees and the unfavorable impact from an affiliated ceded reinsurance treaty effective in the fourth quarter of 2014, all within our Brighthouse Financial business. In addition, the impact of our annual actuarial assumption review, which occurred in both periods, contributed to the decrease in operating earnings. These decreases were partially offset by lower employee-related costs and lower DAC amortization.
Other Net Investment Income. A $160 million decrease in other net investment income was 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. Other net investment income was also impacted by the sustained low interest rate environment, which drove lower investment yields on fixed maturity securities. In addition, lower returns on alternative investments were partially offset by improved returns on real estate investments.
Corporate Initiatives and Projects. Expenses associated with corporate initiatives and projects decreased by $50 million, primarily due to lower relocation costs, severance and consulting expenses associated with certain enterprise-wide initiatives.
Incremental Tax Benefit (Expense). Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. Our 2015 results include the aforementioned tax charge of $557 million which was recorded under accounting guidance for the recognition of tax uncertainties. In addition, in 2015 we had higher utilization of tax preferenced investments and other tax benefits, which improved operating earnings by $22 million over 2014.
Other. The financial results of Corporate & Other include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses. Our 2015 results include the aforementioned charge of $235 million for interest on uncertain tax positions recorded under accounting guidance for the recognition of tax uncertainties and a $7 million charge associated with company use real estate. These increases in expenses were partially offset by lower reinsurance costs of $26 million and a $21 million one-time tax refund received for a favorable outcome on prior year tax audits. Our results for 2014 include a $117 million accrual to increase the litigation reserve related to asbestos.
Non-GAAP and Other Financial Disclosures
In this report, the Company presents certain measures of its performance that are not calculated in accordance with GAAP. We believe that these non-GAAP financial measures enhance the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business.
The following non-GAAP financial measures should not be viewed as substitutes for the most directly comparable financial measures calculated in accordance with GAAP:
Non-GAAP financial measures: | Comparable GAAP financial measures: | ||
(i) | operating revenues | (i) | revenues |
(ii) | operating expenses | (ii) | expenses |
(iii) | operating earnings | (iii) | income (loss) from continuing operations, net of income tax |
See “— Results of Operations” for reconciliations of these measures to the most directly comparable historical GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is not accessible on a forward-looking basis because we believe it is not possible without unreasonable efforts to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a material impact on net income.
Our definitions of the various non-GAAP and other financial measures discussed in this report may differ from those used by other companies:
Operating earnings
This measure is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, operating earnings is also our GAAP measure of segment performance. Operating earnings allows analysis of our performance and facilitates comparisons to industry results.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues and operating expenses
These financial measures focus on our primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and divested businesses and certain entities required to be consolidated under GAAP. Also, these measures exclude results of discontinued operations and other businesses that have been or will be sold or exited by MetLife and are referred to as divested businesses. Operating revenues also excludes net investment gains (losses) and net derivative gains (losses).
24
The following additional adjustments are made to 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 GMIB fees (“GMIB Fees”); and |
• | Net investment income: (i) includes investment hedge adjustments which represent earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain 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, and (iv) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP. |
The following additional adjustments are made to 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) 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 earned income on derivatives and amortization of premium on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment; |
• | Amortization of DAC and 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; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other operating expenses excludes costs related to noncontrolling interests and goodwill impairments. |
The tax impact of the adjustments mentioned are calculated net of the U.S. or foreign statutory tax rate, which could differ from the Company’s effective tax rate.
The following additional information is relevant to an understanding of our performance results:
• | 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. |
• | Allocated equity is the portion of common stockholders’ equity that MetLife’s management allocates to each of its segments and sub-segments based on local capital requirements and economic capital. See “— Economic Capital.” |
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements, Notes and Schedules
Page | |
Financial Statements at December 31, 2015 and 2014 and for the Years Ended December 31, 2015, 2014 and 2013: | |
Financial Statement Schedules at December 31, 2015 and 2014 and for the Years Ended December 31, 2015, 2014 and 2013: | |
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Metropolitan Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Metropolitan Life Insurance Company and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index to Consolidated Financial Statements, Notes and Schedules. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Metropolitan Life Insurance Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 24, 2016
(except with respect to segment changes described in Note 2, and subsequent events described in Note 20, as to which the date is December 1, 2016)
26
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Balance Sheets
December 31, 2015 and 2014
(In millions, except share and per share data)
2015 | 2014 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $168,361 and $173,604, respectively; includes $103 and $160, respectively, relating to variable interest entities) | $ | 175,686 | $ | 188,911 | ||||
Equity securities available-for-sale, at estimated fair value (cost: $1,985 and $1,926, respectively) | 1,949 | 2,065 | ||||||
Trading and fair value option securities, at estimated fair value (includes $404 and $654, respectively, of actively traded securities; and $13 and $15, respectively, relating to variable interest entities) | 431 | 705 | ||||||
Mortgage loans (net of valuation allowances of $257 and $258, respectively; includes $314 and $308, respectively, under the fair value option) | 53,722 | 49,059 | ||||||
Policy loans | 8,134 | 8,491 | ||||||
Real estate and real estate joint ventures (includes $0 and $8, respectively, relating to variable interest entities; includes $42 and $78, respectively, of real estate held-for-sale) | 6,008 | 7,874 | ||||||
Other limited partnership interests (includes $27 and $34, respectively, relating to variable interest entities) | 4,088 | 4,926 | ||||||
Short-term investments, principally at estimated fair value | 5,595 | 4,474 | ||||||
Other invested assets (includes $43 and $56, respectively, relating to variable interest entities) | 16,869 | 14,209 | ||||||
Total investments | 272,482 | 280,714 | ||||||
Cash and cash equivalents, principally at estimated fair value (includes $1 and $2, respectively, relating to variable interest entities) | 4,651 | 1,993 | ||||||
Accrued investment income (includes $1 and $3, respectively, relating to variable interest entities) | 2,250 | 2,293 | ||||||
Premiums, reinsurance and other receivables (includes $2 and $2, respectively, relating to variable interest entities) | 23,722 | 23,439 | ||||||
Deferred policy acquisition costs and value of business acquired | 6,043 | 5,975 | ||||||
Current income tax recoverable | 36 | — | ||||||
Other assets (includes $3 and $4, respectively, relating to variable interest entities) | 4,397 | 4,469 | ||||||
Separate account assets | 135,939 | 139,335 | ||||||
Total assets | $ | 449,520 | $ | 458,218 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Future policy benefits | $ | 118,914 | $ | 117,402 | ||||
Policyholder account balances | 94,420 | 95,902 | ||||||
Other policy-related balances | 7,201 | 5,840 | ||||||
Policyholder dividends payable | 624 | 615 | ||||||
Policyholder dividend obligation | 1,783 | 3,155 | ||||||
Payables for collateral under securities loaned and other transactions | 21,937 | 24,167 | ||||||
Short-term debt | 100 | 100 | ||||||
Long-term debt (includes $61 and $91, respectively, at estimated fair value, relating to variable interest entities) | 1,715 | 2,027 | ||||||
Current income tax payable | — | 44 | ||||||
Deferred income tax liability | 2,888 | 3,835 | ||||||
Other liabilities (includes $2 and $17, respectively, relating to variable interest entities) | 32,755 | 33,447 | ||||||
Separate account liabilities | 135,939 | 139,335 | ||||||
Total liabilities | 418,276 | 425,869 | ||||||
Contingencies, Commitments and Guarantees (Note 17) | ||||||||
Equity | ||||||||
Metropolitan Life Insurance Company stockholder’s equity: | ||||||||
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 494,466,664 shares issued and outstanding | 5 | 5 | ||||||
Additional paid-in capital | 14,444 | 14,448 | ||||||
Retained earnings | 13,738 | 12,470 | ||||||
Accumulated other comprehensive income (loss) | 2,685 | 5,034 | ||||||
Total Metropolitan Life Insurance Company stockholder’s equity | 30,872 | 31,957 | ||||||
Noncontrolling interests | 372 | 392 | ||||||
Total equity | 31,244 | 32,349 | ||||||
Total liabilities and equity | $ | 449,520 | $ | 458,218 |
See accompanying notes to the consolidated financial statements.
27
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Operations
For the Years Ended December 31, 2015, 2014 and 2013
(In millions)
2015 | 2014 | 2013 | |||||||||
Revenues | |||||||||||
Premiums | $ | 21,934 | $ | 21,384 | $ | 20,475 | |||||
Universal life and investment-type product policy fees | 2,584 | 2,466 | 2,363 | ||||||||
Net investment income | 11,577 | 11,893 | 11,785 | ||||||||
Other revenues | 1,536 | 1,808 | 1,699 | ||||||||
Net investment gains (losses): | |||||||||||
Other-than-temporary impairments on fixed maturity securities | (49 | ) | (16 | ) | (81 | ) | |||||
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | (5 | ) | (10 | ) | (47 | ) | |||||
Other net investment gains (losses) | 313 | 169 | 176 | ||||||||
Total net investment gains (losses) | 259 | 143 | 48 | ||||||||
Net derivative gains (losses) | 881 | 1,037 | (1,070 | ) | |||||||
Total revenues | 38,771 | 38,731 | 35,300 | ||||||||
Expenses | |||||||||||
Policyholder benefits and claims | 24,527 | 23,855 | 23,032 | ||||||||
Interest credited to policyholder account balances | 2,183 | 2,174 | 2,253 | ||||||||
Policyholder dividends | 1,264 | 1,240 | 1,205 | ||||||||
Other expenses | 6,258 | 6,071 | 5,988 | ||||||||
Total expenses | 34,232 | 33,340 | 32,478 | ||||||||
Income (loss) from continuing operations before provision for income tax | 4,539 | 5,391 | 2,822 | ||||||||
Provision for income tax expense (benefit) | 1,782 | 1,532 | 681 | ||||||||
Income (loss) from continuing operations, net of income tax | 2,757 | 3,859 | 2,141 | ||||||||
Income (loss) from discontinued operations, net of income tax | — | (3 | ) | 1 | |||||||
Net income (loss) | 2,757 | 3,856 | 2,142 | ||||||||
Less: Net income (loss) attributable to noncontrolling interests | — | (5 | ) | (7 | ) | ||||||
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 2,757 | $ | 3,861 | $ | 2,149 |
See accompanying notes to the consolidated financial statements.
28
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2015, 2014 and 2013
(In millions)
2015 | 2014 | 2013 | ||||||||||
Net income (loss) | $ | 2,757 | $ | 3,856 | $ | 2,142 | ||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized investment gains (losses), net of related offsets | (4,434 | ) | 4,165 | (3,337 | ) | |||||||
Unrealized gains (losses) on derivatives | 559 | 1,288 | (691 | ) | ||||||||
Foreign currency translation adjustments | (101 | ) | (44 | ) | 22 | |||||||
Defined benefit plans adjustment | 342 | (1,001 | ) | 1,191 | ||||||||
Other comprehensive income (loss), before income tax | (3,634 | ) | 4,408 | (2,815 | ) | |||||||
Income tax (expense) benefit related to items of other comprehensive income (loss) | 1,285 | (1,532 | ) | 965 | ||||||||
Other comprehensive income (loss), net of income tax | (2,349 | ) | 2,876 | (1,850 | ) | |||||||
Comprehensive income (loss) | 408 | 6,732 | 292 | |||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest, net of income tax | — | (5 | ) | (7 | ) | |||||||
Comprehensive income (loss) attributable to Metropolitan Life Insurance Company | $ | 408 | $ | 6,737 | $ | 299 |
See accompanying notes to the consolidated financial statements.
29
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Equity
For the Years Ended December 31, 2015, 2014 and 2013
(In millions)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Metropolitan Life Insurance Company Stockholder’s Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||
Balance at December 31, 2012 | $ | 5 | $ | 14,510 | $ | 8,631 | $ | 4,008 | $ | 27,154 | $ | 292 | $ | 27,446 | |||||||||||||
Capital contributions from MetLife, Inc. | 3 | 3 | 3 | ||||||||||||||||||||||||
Excess tax benefits related to stock-based compensation | 2 | 2 | 2 | ||||||||||||||||||||||||
Dividends paid to MetLife, Inc. | (1,428 | ) | (1,428 | ) | (1,428 | ) | |||||||||||||||||||||
Change in equity of noncontrolling interests | — | (35 | ) | (35 | ) | ||||||||||||||||||||||
Net income (loss) | 2,149 | 2,149 | (7 | ) | 2,142 | ||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | (1,850 | ) | (1,850 | ) | (1,850 | ) | |||||||||||||||||||||
Balance at December 31, 2013 | 5 | 14,515 | 9,352 | 2,158 | 26,030 | 250 | 26,280 | ||||||||||||||||||||
Capital contributions from MetLife, Inc. | 4 | 4 | 4 | ||||||||||||||||||||||||
Returns of capital | (76 | ) | (76 | ) | (76 | ) | |||||||||||||||||||||
Excess tax benefits related to stock-based compensation | 5 | 5 | 5 | ||||||||||||||||||||||||
Dividends paid to MetLife, Inc. | (708 | ) | (708 | ) | (708 | ) | |||||||||||||||||||||
Dividend of subsidiary (Note 3) | (35 | ) | (35 | ) | (35 | ) | |||||||||||||||||||||
Change in equity of noncontrolling interests | — | 147 | 147 | ||||||||||||||||||||||||
Net income (loss) | 3,861 | 3,861 | (5 | ) | 3,856 | ||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 2,876 | 2,876 | 2,876 | ||||||||||||||||||||||||
Balance at December 31, 2014 | 5 | 14,448 | 12,470 | 5,034 | 31,957 | 392 | 32,349 | ||||||||||||||||||||
Capital contributions from MetLife, Inc. | 4 | 4 | 4 | ||||||||||||||||||||||||
Returns of capital | (11 | ) | (11 | ) | (11 | ) | |||||||||||||||||||||
Excess tax benefits related to stock-based compensation | 3 | 3 | 3 | ||||||||||||||||||||||||
Dividends paid to MetLife, Inc. | (1,489 | ) | (1,489 | ) | (1,489 | ) | |||||||||||||||||||||
Change in equity of noncontrolling interests | — | (20 | ) | (20 | ) | ||||||||||||||||||||||
Net income (loss) | 2,757 | 2,757 | 2,757 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | (2,349 | ) | (2,349 | ) | (2,349 | ) | |||||||||||||||||||||
Balance at December 31, 2015 | $ | 5 | $ | 14,444 | $ | 13,738 | $ | 2,685 | $ | 30,872 | $ | 372 | $ | 31,244 |
See accompanying notes to the consolidated financial statements.
30
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015, 2014 and 2013
(In millions)
2015 | 2014 | 2013 | |||||||||
Cash flows from operating activities | |||||||||||
Net income (loss) | $ | 2,757 | $ | 3,856 | $ | 2,142 | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization expenses | 474 | 460 | 429 | ||||||||
Amortization of premiums and accretion of discounts associated with investments, net | (848 | ) | (664 | ) | (738 | ) | |||||
(Gains) losses on investments and from sales of businesses, net | (259 | ) | (138 | ) | (49 | ) | |||||
(Gains) losses on derivatives, net | (426 | ) | (902 | ) | 1,059 | ||||||
(Income) loss from equity method investments, net of dividends or distributions | 320 | 374 | 195 | ||||||||
Interest credited to policyholder account balances | 2,183 | 2,174 | 2,253 | ||||||||
Universal life and investment-type product policy fees | (2,584 | ) | (2,466 | ) | (2,363 | ) | |||||
Change in trading and fair value option securities | 278 | 2 | 25 | ||||||||
Change in accrued investment income | 113 | 242 | 108 | ||||||||
Change in premiums, reinsurance and other receivables | (135 | ) | 711 | (368 | ) | ||||||
Change in deferred policy acquisition costs and value of business acquired, net | 260 | 271 | (82 | ) | |||||||
Change in income tax | 257 | 229 | 334 | ||||||||
Change in other assets | 763 | 465 | 471 | ||||||||
Change in insurance-related liabilities and policy-related balances | 2,628 | 2,672 | 3,032 | ||||||||
Change in other liabilities | (499 | ) | (1,086 | ) | (381 | ) | |||||
Other, net | (16 | ) | 1 | (7 | ) | ||||||
Net cash provided by (used in) operating activities | 5,266 | 6,201 | 6,060 | ||||||||
Cash flows from investing activities | |||||||||||
Sales, maturities and repayments of: | |||||||||||
Fixed maturity securities | 82,744 | 63,068 | 71,396 | ||||||||
Equity securities | 651 | 186 | 206 | ||||||||
Mortgage loans | 11,189 | 11,605 | 10,655 | ||||||||
Real estate and real estate joint ventures | 2,734 | 976 | 87 | ||||||||
Other limited partnership interests | 1,185 | 375 | 449 | ||||||||
Purchases of: | |||||||||||
Fixed maturity securities | (76,594 | ) | (69,256 | ) | (70,760 | ) | |||||
Equity securities | (694 | ) | (173 | ) | (461 | ) | |||||
Mortgage loans | (16,268 | ) | (14,769 | ) | (12,032 | ) | |||||
Real estate and real estate joint ventures | (823 | ) | (1,876 | ) | (1,427 | ) | |||||
Other limited partnership interests | (668 | ) | (773 | ) | (675 | ) | |||||
Cash received in connection with freestanding derivatives | 1,039 | 740 | 560 | ||||||||
Cash paid in connection with freestanding derivatives | (1,012 | ) | (1,050 | ) | (1,171 | ) | |||||
Dividend of subsidiary | — | (49 | ) | — | |||||||
Receipts on loans to affiliates | — | 75 | — | ||||||||
Issuances of loans to affiliates | — | (100 | ) | — | |||||||
Purchases of loans to affiliates | — | (437 | ) | — | |||||||
Net change in policy loans | 357 | (70 | ) | (57 | ) | ||||||
Net change in short-term investments | (1,117 | ) | 1,472 | 900 | |||||||
Net change in other invested assets | (603 | ) | (254 | ) | (460 | ) | |||||
Net change in property, equipment and leasehold improvements | 23 | (140 | ) | (76 | ) | ||||||
Other, net | — | 17 | — | ||||||||
Net cash provided by (used in) investing activities | $ | 2,143 | $ | (10,433 | ) | $ | (2,866 | ) |
See accompanying notes to the consolidated financial statements.
31
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.) — (continued)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015, 2014 and 2013
(In millions)
2015 | 2014 | 2013 | |||||||||
Cash flows from financing activities | |||||||||||
Policyholder account balances: | |||||||||||
Deposits | $ | 60,216 | $ | 54,902 | $ | 50,018 | |||||
Withdrawals | (61,248 | ) | (51,210 | ) | (52,020 | ) | |||||
Net change in payables for collateral under securities loaned and other transactions | (2,230 | ) | 3,071 | (1,365 | ) | ||||||
Net change in short-term debt | — | (320 | ) | 75 | |||||||
Long-term debt issued | 907 | 4 | 481 | ||||||||
Long-term debt repaid | (673 | ) | (390 | ) | (27 | ) | |||||
Cash received in connection with redeemable noncontrolling interests | — | — | 774 | ||||||||
Cash paid in connection with noncontrolling interests | (159 | ) | — | — | |||||||
Dividends paid to MetLife, Inc. | (1,489 | ) | (708 | ) | (1,428 | ) | |||||
Returns of capital | (11 | ) | — | — | |||||||
Other, net | (64 | ) | (222 | ) | (5 | ) | |||||
Net cash provided by (used in) financing activities | (4,751 | ) | 5,127 | (3,497 | ) | ||||||
Change in cash and cash equivalents | 2,658 | 895 | (303 | ) | |||||||
Cash and cash equivalents, beginning of year | 1,993 | 1,098 | 1,401 | ||||||||
Cash and cash equivalents, end of year | $ | 4,651 | $ | 1,993 | $ | 1,098 | |||||
Supplemental disclosures of cash flow information | |||||||||||
Net cash paid (received) for: | |||||||||||
Interest | $ | 123 | $ | 150 | $ | 152 | |||||
Income tax | $ | 1,217 | $ | 1,304 | $ | 822 | |||||
Non-cash transactions: | |||||||||||
Capital contributions from MetLife, Inc. | $ | 4 | $ | 4 | $ | 3 | |||||
Fixed maturity securities received in connection with pension risk transfer transactions | $ | 903 | $ | — | $ | — | |||||
Deconsolidation of real estate investment vehicles (1): | |||||||||||
Reduction of redeemable noncontrolling interests | $ | — | $ | 774 | $ | — | |||||
Reduction of long-term debt | $ | 543 | $ | 413 | $ | — | |||||
Reduction of real estate and real estate joint ventures | $ | 389 | $ | 1,132 | $ | — | |||||
Increase in noncontrolling interests | $ | 153 | $ | — | $ | — | |||||
Issuance of short-term debt | $ | — | $ | 245 | $ | — | |||||
Returns of capital | $ | — | $ | 76 | $ | — | |||||
Disposal of subsidiary: | |||||||||||
Assets disposed | $ | — | $ | 69 | $ | — | |||||
Liabilities disposed | — | (34 | ) | — | |||||||
Net assets disposed | — | 35 | — | ||||||||
Cash disposed | — | (49 | ) | — | |||||||
Dividend of interests in subsidiary | — | 14 | — | ||||||||
Loss on dividend of interests in subsidiary | $ | — | $ | — | $ | — |
______________
(1) | For the year ended December 31, 2015, amounts represent the impact of the consolidation of a real estate investment vehicle, offset by the subsequent deconsolidation of such real estate investment vehicle. See Note 8 for information on the 2014 amounts. |
See accompanying notes to the consolidated financial statements.
32
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Metropolitan Life Insurance Company and its subsidiaries (collectively, “MLIC” or the “Company”) is a provider of life insurance, annuities, employee benefits and asset management. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). In anticipation of MetLife, Inc.’s plan to separate a substantial portion of its former Retail segment, as well as certain portions of its former Corporate Benefit Funding segment and Corporate & Other (the “Separation”), in the third quarter of 2016, the Company reorganized its businesses into two segments: U.S. and MetLife Holdings. See Note 2 for further information on the reorganization of the Company’s segments in the third quarter of 2016, which was applied retrospectively.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the consolidated financial statements. 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 the Company’s business and operations. Actual results could differ from estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of Metropolitan Life Insurance Company and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
Discontinued Operations
The results of operations of a component of the Company that has either been disposed of or is classified as held-for-sale are reported in discontinued operations if certain criteria are met. Effective January 1, 2014, the Company adopted new guidance regarding reporting of discontinued operations for disposals or classifications as held-for-sale that have not been previously reported on the consolidated financial statements. A disposal of a component is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.
Separate Accounts
Separate accounts are established in conformity with insurance laws. Generally, the assets of the separate accounts cannot be used to settle the liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if:
• | such separate accounts are legally recognized; |
• | assets supporting the contract liabilities are legally insulated from the Company’s general account liabilities; |
• | investments are directed by the contractholder; and |
• | all investment performance, net of contract fees and assessments, is passed through to the contractholder. |
The Company reports separate account assets at their fair value, which is based on the estimated fair values of the underlying assets comprising the individual separate account portfolios. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line on the statements of operations. Separate accounts credited with a contractual investment return are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses and the accounting for these investments is consistent with the methodologies described herein for similar financial instruments held within the general account.
33
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company’s revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Such fees are included in universal life and investment-type product policy fees on the statements of operations.
Reclassifications
Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation as discussed throughout the Notes to the Consolidated Financial Statements.
Summary of Significant Accounting Policies
The following are the Company’s significant accounting policies with references to notes providing additional information on such policies and critical accounting estimates relating to such policies.
Accounting Policy | Note |
Insurance | 4 |
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles | 5 |
Reinsurance | 6 |
Investments | 8 |
Derivatives | 9 |
Fair Value | 10 |
Employee Benefit Plans | 15 |
Income Tax | 16 |
Litigation Contingencies | 17 |
Insurance
Future Policy Benefit Liabilities and Policyholder Account Balances
The Company establishes liabilities for amounts payable under insurance policies. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of business basis. For long duration insurance contracts, assumptions such as mortality, morbidity and interest rates are “locked in” upon the issuance of new business. However, significant adverse changes in experience on such contracts may require the establishment of premium deficiency reserves. Such reserves are determined based on the then current assumptions and do not include a provision for adverse deviation.
Premium deficiency reserves may also be established for short duration contracts to provide for expected future losses. These reserves are based on actuarial estimates of the amount of loss inherent in that period, including losses incurred for which claims have not been reported. The provisions for unreported claims are calculated using studies that measure the historical length of time between the incurred date of a claim and its eventual reporting to the Company. Anticipated investment income is considered in the calculation of premium deficiency losses for short duration contracts.
Liabilities for universal and variable life secondary guarantees and paid-up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing deferred policy acquisition costs (“DAC”), and are thus subject to the same variability and risk as further discussed herein. The assumptions of investment performance and volatility for variable products are consistent with historical experience of appropriate underlying equity indices, such as the Standard & Poor’s Ratings Services (“S&P”) 500 Index. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
34
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company regularly reviews its estimates of liabilities for future policy benefits and compares them with its actual experience. Differences result in changes to the liability balances with related charges or credits to benefit expenses in the period in which the changes occur.
Policyholder account balances relate to contracts or contract features where the Company has no significant insurance risk.
The Company issues directly and assumes through 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. These guarantees are accounted for as insurance liabilities or as embedded derivatives depending on how and when the benefit is paid. Specifically, a guarantee is accounted for as an embedded derivative if a guarantee is paid without requiring (i) the occurrence of specific insurable event, or (ii) the policyholder to annuitize. Alternatively, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence of a specific insurable event, or (ii) annuitization. In certain cases, a guarantee may have elements of both an insurance liability and an embedded derivative and in such cases the guarantee is split and accounted for under both models.
Guarantees accounted for as insurance liabilities in future policy benefits include guaranteed minimum death benefits (“GMDBs”), the portion of guaranteed minimum income benefits (“GMIBs”) that require annuitization, and the life-contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”).
Guarantees accounted for as embedded derivatives in policyholder account balances include the non life-contingent portion of GMWBs, guaranteed minimum accumulation benefits (“GMABs”) and the portion of GMIBs that do not require annuitization. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, unearned revenue liabilities, premiums received in advance, policyholder dividends due and unpaid, policyholder dividends left on deposit and obligations assumed under structured settlement assignments.
The liability for policy and contract claims generally relates to incurred but not reported death, disability, long-term care and dental claims, as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company’s estimated ultimate cost of settling all claims. The Company derives estimates for the development of incurred but not reported claims principally from analyses of historical patterns of claims by business line. The methods used to determine these estimates are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made.
The unearned revenue liability relates to universal life-type and investment-type products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized using the product’s estimated gross profits and margins, similar to DAC as discussed further herein. Such amortization is recorded in universal life and investment-type product policy fees.
The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premiums received in advance and applies the cash received to premiums when due.
See Note 4 for additional information on obligations assumed under structured settlement assignments.
Recognition of Insurance Revenues and Deposits
Premiums related to traditional life and annuity contracts with life contingencies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided to recognize profits over the estimated lives of the insurance policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into earnings in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments.
35
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Premiums related to non-medical health and disability contracts are recognized on a pro rata basis over the applicable contract term.
Deposits related to universal life-type and investment-type products are credited to policyholder account balances. Revenues from such contracts consist of fees for mortality, policy administration and surrender charges and are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged to earnings include interest credited and benefit claims incurred in excess of related policyholder account balances.
Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. Such costs include:
• | incremental direct costs of contract acquisition, such as commissions; |
• | the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed; and |
• | other essential direct costs that would not have been incurred had a policy not been acquired or renewed. |
All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections.
DAC and VOBA are amortized as follows:
Products: | In proportion to the following over estimated lives of the contracts: | ||
• | Nonparticipating and non-dividend-paying traditional contracts: | Actual and expected future gross premiums. | |
• | Term insurance | ||
• | Nonparticipating whole life insurance | ||
• | Traditional group life insurance | ||
• | Non-medical health insurance | ||
• | Participating, dividend-paying traditional contracts | Actual and expected future gross margins. | |
• | Fixed and variable universal life contracts | Actual and expected future gross profits. | |
• | Fixed and variable deferred annuity contracts |
See Note 5 for additional information on DAC and VOBA amortization. Amortization of DAC and VOBA is included in other expenses.
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the financial statements for reporting purposes.
36
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company generally has two different types of sales inducements which are included in other assets: (i) the policyholder receives a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize DAC. The amortization of sales inducements is included in policyholder benefits and claims. Each year, or more frequently if circumstances indicate a potential recoverability issue exists, the Company reviews deferred sales inducements (“DSI”) to determine the recoverability of the asset.
Value of distribution agreements acquired (“VODA”) is reported in other assets and represents the present value of expected future profits associated with the expected future business derived from the distribution agreements acquired as part of a business combination. Value of customer relationships acquired (“VOCRA”) is also reported in other assets and represents the present value of the expected future profits associated with the expected future business acquired through existing customers of the acquired company or business. The VODA and VOCRA associated with past business combinations are amortized over useful lives ranging from 10 to 30 years and such amortization is included in other expenses. Each year, or more frequently if circumstances indicate a possible impairment exists, the Company reviews VODA and VOCRA to determine whether the asset is impaired.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC when there is a gain at inception on the ceding entity and to other liabilities when there is a loss at inception. The net cost of reinsurance is recognized as a component of other expenses when there is a gain at inception and as policyholder benefits and claims when there is a loss and is subsequently amortized on a basis consistent with the methodology used for amortizing DAC related to the underlying reinsured contracts. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums; and ceded (assumed) premiums, reinsurance and other receivables (future policy benefits) are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums. Unearned premiums are reflected as a component of premiums, reinsurance and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of insurance protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting, amounts paid (received) in excess of the related insurance liabilities ceded (assumed) are recognized immediately as a loss and are reported in the appropriate line item within the statement of operations. Any gain on such retroactive agreement is deferred and is amortized as part of DAC, primarily using the recovery method.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
37
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The funds withheld liability represents amounts withheld by the Company in accordance with the terms of the reinsurance agreements. The Company withholds the funds rather than transferring the underlying investments and, as a result, records funds withheld liability within other liabilities. The Company recognizes interest on funds withheld, included in other expenses, at rates defined by the terms of the agreement which may be contractually specified or directly related to the investment portfolio.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in premiums, reinsurance and other receivables with changes in estimated fair value reported in net derivative gains (losses).
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate. Certain assumed GMWB, GMAB and GMIB are also accounted for as embedded derivatives with changes in estimated fair value reported in net derivative gains (losses).
Investments
Net Investment Income and Net Investment Gains (Losses)
Income from investments is reported within net investment income, unless otherwise stated herein. Gains and losses on sales of investments, impairment losses and changes in valuation allowances are reported within net investment gains (losses), unless otherwise stated herein.
Fixed Maturity and Equity Securities
The majority of the Company’s fixed maturity and equity securities are classified as available-for-sale (“AFS”) and are reported at their estimated fair value. Unrealized investment gains and losses on these securities are recorded as a separate component of other comprehensive income (loss) (“OCI”), net of policy-related amounts and deferred income taxes. All security transactions are recorded on a trade date basis. Investment gains and losses on sales are determined on a specific identification basis.
Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premiums and accretion of discounts. Dividends on equity securities are recognized when declared.
The Company periodically evaluates fixed maturity and equity securities for impairment. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in estimated fair value, as well as an analysis of the gross unrealized losses by severity and/or age as described in Note 8 “— Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities.”
For fixed maturity securities in an unrealized loss position, an other-than-temporary impairment (“OTTI”) is recognized in earnings when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than-credit factors (“noncredit loss”) is recorded in OCI.
38
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
With respect to equity securities, the Company considers in its OTTI analysis its intent and ability to hold a particular equity security for a period of time sufficient to allow for the recovery of its estimated fair value to an amount equal to or greater than cost. If a sale decision is made for an equity security and recovery to an amount at least equal to cost prior to the sale is not expected, the security will be deemed to be other-than-temporarily impaired in the period that the sale decision was made and an OTTI loss will be recorded in earnings. The OTTI loss recognized is the entire difference between the security’s cost and its estimated fair value.
Trading and Fair Value Option Securities
Trading and fair value option (“FVO”) securities are stated at estimated fair value and include investments that are actively purchased and sold (“Actively traded securities”) and investments for which the FVO has been elected (“FVO securities”).
Changes in estimated fair value of these securities are included in net investment income, except for certain securities included in FVO securities where changes are included in net investment gains (losses).
Mortgage Loans
The Company disaggregates its mortgage loan investments into three portfolio segments: commercial, agricultural and residential. The accounting policies that are applicable to all portfolio segments are presented below and the accounting policies related to each of the portfolio segments are included in Note 8.
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and are net of valuation allowances. Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premiums and accretion of discounts.
Also included in mortgage loans are residential mortgage loans for which the FVO was elected. These mortgage loans are stated at estimated fair value. Changes in estimated fair value are recognized in net investment income.
Policy Loans
Policy loans are stated at unpaid principal balances. Interest income is recorded as earned using the contractual interest rate. Generally, accrued interest is capitalized on the policy’s anniversary date. Valuation allowances are not established for policy loans, as they are fully collateralized by the cash surrender value of the underlying insurance policies. Any unpaid principal and accrued interest is deducted from the cash surrender value or the death benefit prior to settlement of the insurance policy.
Real Estate
Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset (typically 20 to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks.
Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition for a reasonable price in comparison to its estimated fair value is classified as held-for-sale. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Real Estate Joint Ventures and Other Limited Partnership Interests
The Company uses the equity method of accounting for equity securities when it has significant influence or at least 20% interest and for real estate joint ventures and other limited partnership interests (“investees”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations, but does not have a controlling financial interest. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period.
39
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company uses the cost method of accounting for investments in which it has virtually no influence over the investee’s operations. The Company recognizes distributions on cost method investments as earned or received. Because of the nature and structure of these cost method investments, they do not meet the characteristics of an equity security in accordance with applicable accounting standards.
The Company routinely evaluates its equity method and cost method investments for impairment. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. The Company considers its cost method investments for impairment when the carrying value of such investments exceeds the net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when determining whether the cost method investment is impaired.
Short-term Investments
Short-term investments include securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase and are stated at estimated fair value or amortized cost, which approximates estimated fair value. Short-term investments also include investments in affiliated money market pools.
Other Invested Assets
Other invested assets consist principally of the following:
• | Freestanding derivatives with positive estimated fair values which are described in “— Derivatives” below. |
• | Tax credit and renewable energy partnerships which derive a significant source of investment return in the form of income tax credits or other tax incentives. Where tax credits are guaranteed by a creditworthy third party, the investment is accounted for under the effective yield method. Otherwise, the investment is accounted for under the equity method. |
• | Loans to affiliates which are stated at unpaid principal balance and adjusted for any unamortized premium or discount. |
• | Leveraged leases which are recorded net of non-recourse debt. Income is recognized by applying the leveraged lease’s estimated rate of return to the net investment in the lease. The Company regularly reviews residual values for impairment. |
• | Annuities funding structured settlement claims represent annuities funding claims assumed by the Company in its capacity as a structured settlements assignment company. The annuities are stated at their contract value, which represents the present value of the future periodic claim payments to be provided. The net investment income recognized reflects the amortization of discount of the annuity at its implied effective interest rate. See Note 4. |
• | Direct financing leases gross investment is equal to the minimum lease payments plus the unguaranteed residual value. Income is recorded by applying the pre-tax internal rate of return to the investment balance. The Company regularly reviews lease receivables for impairment. |
• | Funds withheld represent a receivable for amounts contractually withheld by ceding companies in accordance with reinsurance agreements. The Company recognizes interest on funds withheld at rates defined by the terms of the agreement which may be contractually specified or directly related to the underlying investments. |
• | Investment in an operating joint venture that engages in insurance underwriting activities accounted for under the equity method. |
Securities Lending Program
Securities lending transactions, whereby blocks of securities are loaned to third parties, primarily brokerage firms and commercial banks, are treated as financing arrangements and the associated liability is recorded at the amount of cash received. The Company obtains collateral at the inception of the loan, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, and maintains it at a level greater than or equal to 100% for the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. The Company is liable to return to the counterparties the cash collateral received. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the Company’s financial statements. The Company monitors the estimated fair value of the securities loaned on a daily basis and additional collateral is obtained as necessary throughout the duration of the loan. Income and expenses associated with securities lending transactions are reported as investment income and investment expense, respectively, within net investment income.
40
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
Statement of Operations Presentation: | Derivative: | |
Policyholder benefits and claims | • | Economic hedges of variable annuity guarantees included in future policy benefits |
Net investment income | • | Economic hedges of equity method investments in joint ventures |
• | All derivatives held in relation to trading portfolios |
Hedge Accounting
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
• | Fair value hedge (a hedge of the estimated fair value of a recognized asset or liability) - in net derivative gains (losses), consistent with the change in estimated fair value of the hedged item attributable to the designated risk being hedged. |
• | Cash flow hedge (a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability) - effectiveness in OCI (deferred gains or losses on the derivative are reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item); ineffectiveness in net derivative gains (losses). |
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported on the statement of operations within interest income or interest expense to match the location of the hedged item.
In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
41
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in net derivative gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company sells variable annuities and issues certain insurance products and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
• | the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value recorded in earnings; |
• | the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and |
• | a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument. |
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of assets and liabilities.
42
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Employee Benefit Plans
The Company sponsors and administers various qualified and nonqualified defined benefit pension plans and other postretirement employee benefit plans covering eligible employees and sales representatives who meet specified eligibility requirements of the sponsor and its participating affiliates. A December 31 measurement date is used for all of the Company’s defined benefit pension and other postretirement benefit plans.
The Company recognizes the funded status of each of its defined pension and postretirement benefit plans, measured as the difference between the fair value of plan assets and the benefit obligation, which is the projected benefit obligation (“PBO”) for pension benefits and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits in other assets or other liabilities.
Actuarial gains and losses result from differences between the actual experience and the assumed experience on plan assets or PBO during a particular period and are recorded in accumulated OCI (“AOCI”). To the extent such gains and losses exceed 10% of the greater of the PBO or the estimated fair value of plan assets, the excess is amortized into net periodic benefit costs over the average projected future service years of the active employees. In addition, prior service costs (credit) are recognized in AOCI at the time of the amendment and then amortized to net periodic benefit costs over the average projected future service years of the active employees affected by the change.
Net periodic benefit costs are determined using management estimates and actuarial assumptions and are comprised of service cost, interest cost, settlement and curtailment costs, expected return on plan assets, amortization of net actuarial (gains) losses, and amortization of prior service costs (credit). Fair value is used to determine the expected return on plan assets.
The Company also sponsors defined contribution plans for substantially all U.S. employees under which a portion of participant contributions is matched. Applicable matching contributions are made each payroll period. Accordingly, the Company recognizes compensation cost for current matching contributions. As all contributions are transferred currently as earned to the defined contribution plans, no liability for matching contributions is recognized on the balance sheets.
Income Tax
Metropolitan Life Insurance Company and its includable subsidiaries join with MetLife, Inc. and its includable subsidiaries in filing a consolidated U.S. life and non-life federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended. Current taxes (and the benefits of tax attributes such as losses) are allocated to Metropolitan Life Insurance Company and its subsidiaries under the consolidated tax return regulations and a tax sharing agreement. Under the consolidated tax return regulations, MetLife, Inc. has elected the “percentage method” (and 100% under such method) of reimbursing companies for tax attributes, e.g., net operating losses. As a result, 100% of tax attributes are reimbursed by MetLife, Inc. to the extent that consolidated federal income tax of the consolidated federal tax return group is reduced in a year by tax attributes. On an annual basis, each of the profitable subsidiaries pays to MetLife, Inc. the federal income tax which it would have paid based upon that year’s taxable income. If Metropolitan Life Insurance Company or its includable subsidiaries has current or prior deductions and credits (including but not limited to losses) which reduce the consolidated tax liability of the consolidated federal tax return group, the deductions and credits are characterized as realized (or realizable) by Metropolitan Life Insurance Company and its includable subsidiaries when those tax attributes are realized (or realizable) by the consolidated federal tax return group, even if Metropolitan Life Insurance Company or its includable subsidiaries would not have realized the attributes on a stand-alone basis under a “wait and see” method.
The Company’s accounting for income taxes represents management’s best estimate of various events and transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.
43
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination the Company considers many factors, including:
• | the nature, frequency, and amount of cumulative financial reporting income and losses in recent years; |
• | the jurisdiction in which the deferred tax asset was generated; |
• | the length of time that carryforward can be utilized in the various taxing jurisdiction; |
• | future taxable income exclusive of reversing temporary differences and carryforwards; |
• | future reversals of existing taxable temporary differences; |
• | taxable income in prior carryback years; and |
• | tax planning strategies. |
The Company may be required to change its provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, the effect of changes in tax laws, tax regulations, or interpretations of such laws or regulations, is recognized in net income tax expense (benefit) in the period of change.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Unrecognized tax benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings in the period that such determination is made.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax expense.
Litigation Contingencies
The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company’s financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Except as otherwise disclosed in Note 17, legal costs are recognized as incurred. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected on the Company’s financial statements.
Other Accounting Policies
Stock-Based Compensation
Stock-based compensation recognized on the Company’s consolidated results of operations is allocated from MetLife, Inc. The accounting policies described below represent those that MetLife, Inc. applies in determining such allocated expenses.
MetLife, Inc. grants certain employees and directors stock-based compensation awards under various plans that are subject to specific vesting conditions. With the exception of performance shares granted in 2015, 2014 and 2013 which are re-measured quarterly, the cost of all stock-based transactions is measured at fair value at grant date and recognized over the period during which a grantee is required to provide services in exchange for the award. Although the terms of MetLife, Inc.’s stock-based plans do not accelerate vesting upon retirement, or the attainment of retirement eligibility, the requisite service period subsequent to attaining such eligibility is considered non-substantive. Accordingly, MetLife, Inc. recognizes compensation expense related to stock-based awards over the shorter of the requisite service period or the period to attainment of retirement eligibility. An estimation of future forfeitures of stock-based awards is incorporated into the determination of compensation expense when recognizing expense over the requisite service period.
44
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at amortized cost, which approximates estimated fair value.
Property, Equipment, Leasehold Improvements and Computer Software
Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, as appropriate. The estimated life is generally 40 years for company occupied real estate property, from one to 25 years for leasehold improvements, and from three to seven years for all other property and equipment. The cost basis of the property, equipment and leasehold improvements was $1.2 billion and $1.3 billion at December 31, 2015 and 2014, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $720 million and $721 million at December 31, 2015 and 2014, respectively. Related depreciation and amortization expense was $159 million, $123 million and $115 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software was $1.4 billion and $1.2 billion at December 31, 2015 and 2014, respectively. Accumulated amortization of capitalized software was $1.0 billion and $882 million at December 31, 2015 and 2014, respectively. Related amortization expense was $150 million, $145 million and $144 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Other Revenues
Other revenues include, in addition to items described elsewhere herein, advisory fees, broker-dealer commissions and fees, administrative service fees, and changes in account value relating to corporate-owned life insurance (“COLI”). Such fees and commissions are recognized in the period in which services are performed. Under certain COLI contracts, if the Company reports certain unlikely adverse results in its financial statements, withdrawals would not be immediately available and would be subject to market value adjustment, which could result in a reduction of the account value.
Policyholder Dividends
Policyholder dividends are approved annually by Metropolitan Life Insurance Company and its insurance subsidiaries’ boards of directors. The aggregate amount of policyholder dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management’s judgment as to the appropriate level of statutory surplus to be retained by Metropolitan Life Insurance Company and its insurance subsidiaries.
Foreign Currency
Assets, liabilities and operations of foreign affiliates and subsidiaries are recorded based on the functional currency of each entity. The determination of the functional currency is made based on the appropriate economic and management indicators. The local currencies of foreign operations are the functional currencies. Assets and liabilities of foreign affiliates and subsidiaries are translated from the functional currency to U.S. dollars at the exchange rates in effect at each year-end and revenues and expenses are translated at the average exchange rates during the year. The resulting translation adjustments are charged or credited directly to OCI, net of applicable taxes. Gains and losses from foreign currency transactions, including the effect of re-measurement of monetary assets and liabilities to the appropriate functional currency, are reported as part of net investment gains (losses) in the period in which they occur.
45
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill, which is included in other assets, represents the future economic benefits arising from net assets acquired in a business combination that are not individually identified and recognized. Goodwill is calculated as the excess of cost over the estimated fair value of such net assets acquired, is not amortized, and is tested for impairment based on a fair value approach at least annually or more frequently if events or circumstances indicate that there may be justification for conducting an interim test. The Company performs its annual goodwill impairment testing during the third quarter of each year based upon data as of the close of the second quarter. Goodwill associated with a business acquisition is not tested for impairment during the year the business is acquired unless there is a significant identified impairment event.
The impairment test is performed at the reporting unit level, which is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, there may be an indication of impairment. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business combination. The excess of the carrying value of goodwill over the implied fair value of goodwill would be recognized as an impairment and recorded as a charge against net income.
On an ongoing basis, the Company evaluates potential triggering events that may affect the estimated fair value of the Company’s reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have an impact on the estimated fair value of these reporting units and could result in future impairments of goodwill.
Adoption of New Accounting Pronouncements
Effective November 18, 2014, the Company adopted new guidance on when, if ever, the cost of acquiring an entity should be used to establish a new accounting basis (“pushdown”) in the acquired entity’s separate financial statements. The guidance provides an acquired entity and its subsidiaries with an irrevocable option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. If a reporting entity elects to apply pushdown accounting, its stand-alone financial statements would reflect the acquirer’s new basis in the acquired entity’s assets and liabilities. The election to apply pushdown accounting should be determined by an acquired entity for each individual change-in-control event in which an acquirer obtains control of the acquired entity; however, an entity that does not elect to apply pushdown accounting in the period of a change-in-control can later elect to retrospectively apply pushdown accounting to the most recent change-in-control transaction as a change in accounting principle. The new guidance did not have a material impact on the consolidated financial statements upon adoption.
Effective January 1, 2014, the Company adopted new guidance regarding the presentation of an unrecognized tax benefit. The new guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, when the carryforwards are not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the applicable tax law does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. The adoption was prospectively applied and resulted in a reduction to other liabilities and a corresponding increase to deferred income tax liability in the amount of $190 million.
Effective January 1, 2014, the Company adopted new guidance on other expenses. The objective of this standard is to address how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. The amendments in this standard specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using the straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. In accordance with the adoption of the new accounting pronouncement, on January 1, 2014, the Company recorded $55 million in other liabilities, and a corresponding deferred cost, in other assets.
46
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Effective July 17, 2013, the Company adopted guidance regarding derivatives that permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury and London Interbank Offered Rate (“LIBOR”). Also, this new guidance removes the restriction on using different benchmark rates for similar hedges. The new guidance did not have a material impact on the consolidated financial statements upon adoption.
Effective January 1, 2013, the Company adopted guidance regarding comprehensive income that requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The adoption was prospectively applied and resulted in additional disclosures in Note 13.
Effective January 1, 2013, the Company adopted guidance regarding balance sheet offsetting disclosures which requires an entity to disclose information about offsetting and related arrangements for derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions, to enable users of its financial statements to understand the effects of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The adoption was retrospectively applied and resulted in additional disclosures related to derivatives in Note 9.
Future Adoption of New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on leasing transactions (Accounting Standards Update (“ASU”) 2016-02, Leases - Topic 842). The new guidance is effective for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires a modified retrospective transition approach which includes a number of optional practical expedients. Early adoption is permitted. The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. Consistent with current guidance, leases would be classified as finance or operating leases. However, unlike current guidance, the new guidance will require both types of leases to be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In January 2016, the FASB issued new guidance (ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities) on the recognition and measurement of financial instruments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. The new guidance changes the current accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the FVO that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In May 2015, the FASB issued new guidance on short-duration insurance contracts (ASU 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts). The amendments in this new guidance are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The new guidance should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The new guidance requires insurance entities to provide users of financial statements with more transparent information about initial claim estimates and subsequent adjustments to these estimates, including information on: (i) reconciling from the claim development table to the balance sheet liability, (ii) methodologies and judgments in estimating claims, and (iii) the timing, and frequency of claims. The adoption will not have an impact on the Company’s consolidated financial statements other than expanded disclosures in Note 4.
47
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
In May 2015, the FASB issued new guidance on fair value measurement (ASU 2015‑07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)), effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and which should be applied retrospectively to all periods presented. Earlier application is permitted. The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV per share (or its equivalent) practical expedient. In addition, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued new guidance on accounting for fees paid in a cloud computing arrangement (ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement), effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the new guidance is permitted and an entity can elect to adopt the guidance either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The new guidance provides that all software licenses included in cloud computing arrangements be accounted for consistent with other licenses of intangible assets. However, if a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract, the accounting for which did not change. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued certain amendments to the consolidation analysis to improve consolidation guidance for legal entities (ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in this ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard (ASU 2014‑09, Revenue from Contracts with Customers (Topic 606)), effective for fiscal years beginning after December 15, 2016 and interim periods within those years and should be applied retrospectively. In August 2015, the FASB amended the guidance to defer the effective date by one year, effective for the fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance will supersede nearly all existing revenue recognition guidance under GAAP; however, it will not impact the accounting for insurance contracts, leases, financial instruments and guarantees. For those contracts that are impacted by the new guidance, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
48
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information
In anticipation of the Separation, in the third quarter of 2016, the Company reorganized its businesses into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. These changes were applied retrospectively and did not have an impact on total consolidated net income (loss) or operating earnings in the prior periods.
On January 12, 2016, MetLife, Inc. announced its plan to pursue the Separation. Additionally, on July 21, 2016, MetLife, Inc. announced that following the Separation, the separated business will be rebranded as “Brighthouse Financial.” On October 5, 2016, Brighthouse Financial, Inc., a subsidiary of MetLife, Inc. (“Brighthouse”), filed a registration statement on Form 10 (the “Form 10”) with the U.S. Securities and Exchange Commission (“SEC”). The information statement filed as an exhibit to the Form 10, disclosed that MetLife, Inc. intends to include MetLife Insurance Company USA (“MetLife USA”), New England Life Insurance Company (“NELICO”), a wholly-owned subsidiary of Metropolitan Life Insurance Company, First MetLife Investors Insurance Company (“First MetLife”), MetLife Advisers, LLC and certain captive reinsurance companies in the proposed separated business and distribute at least 80.1% of the shares of Brighthouse’s common stock on a pro rata basis to the holders of MetLife, Inc. common stock.
The ultimate form and timing of the Separation will be influenced by a number of factors, including regulatory considerations and economic conditions. MetLife continues to evaluate and pursue structural alternatives for the proposed Separation. The Separation remains subject to certain conditions, including among others, obtaining final approval from the MetLife, Inc. Board of Directors, receipt of a favorable ruling from the Internal Revenue Service (“IRS”) and an opinion from MetLife’s tax advisor regarding certain U.S. federal income tax matters, and an SEC declaration of the effectiveness of the Form 10.
U.S.
The U.S. segment offers a broad range of protection products and services aimed at serving the financial needs of customers throughout their lives. These products are sold to corporations and their respective employees, other institutions and their respective members, as well as individuals. The U.S. segment is organized into two businesses: Group Benefits and Retirement and Income Solutions.
• | The Group Benefits business offers insurance products and services which include life, dental, group short- and long-term disability, individual disability, accidental death and dismemberment, critical illness, vision and accident & health coverages, as well as prepaid legal plans. This business also sells administrative services-only arrangements to some employers. |
• | The Retirement and Income Solutions business offers a broad range of annuity and investment products, including guaranteed interest contracts and other stable value products, income annuities and separate account contracts for the investment management of defined benefit and defined contribution plan assets. This business also includes structured settlements and certain products to fund postretirement benefits and company-, bank- or trust-owned life insurance used to finance nonqualified benefit programs for executives. |
MetLife Holdings
The MetLife Holdings segment consists of operations relating to products and businesses no longer actively marketed by the Company in the U.S. These products and businesses include variable life, universal life, term life, whole life, variable annuities, fixed annuities and index-linked annuities. The MetLife Holdings segment also includes the Company’s discontinued long-term care businesses.
Corporate & Other
Corporate & Other contains the excess capital, as well as certain charges and activities, not allocated to the segments, including enterprise-wide strategic initiative restructuring charges and various start-up businesses (including the investment management business through which the Company offers fee-based investment management services to institutional clients, as well as the direct to consumer portion of the U.S. Direct business). Corporate & Other also includes the Company’s ancillary international operations, the businesses of the Company that MetLife, Inc. plans to separate and include in Brighthouse Financial and interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. In addition, Corporate & Other includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
49
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)
Financial Measures and Segment Accounting Policies
Operating earnings is used by management to evaluate performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is also the Company’s GAAP measure of segment performance and is reported below. Operating earnings should not be viewed as a substitute for income (loss) from continuing operations, net of income tax. The Company believes the presentation of operating earnings as the Company measures it for management purposes enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings allows analysis of the Company’s performance and facilitates comparisons to industry results.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
The financial measures of operating revenues and operating expenses focus on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and divested businesses and certain entities required to be consolidated under GAAP. 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 GMIB fees (“GMIB Fees”); and |
• | Net investment income: (i) includes investment hedge adjustments which represent earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain 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 and (iv) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP. |
The following 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) 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 earned income on derivatives and amortization of premium on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment; |
• | Amortization of DAC and 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; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other expenses excludes costs related to noncontrolling interests and goodwill impairments. |
The tax impact of the adjustments mentioned above are calculated net of the U.S. or foreign statutory tax rate, which could differ from the Company’s effective tax rate.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the years ended December 31, 2015, 2014 and 2013 and at December 31, 2015 and 2014. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for operating earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
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 MetLife’s and the Company’s business.
50
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)
MetLife’s economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of diversification benefits among risk types. MetLife’s management is responsible for the ongoing production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
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.
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company’s product pricing.
Operating Results | ||||||||||||||||||||||||
Year Ended December 31, 2015 | U.S. | MetLife Holdings | Corporate & Other | Total | Adjustments | Total Consolidated | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Premiums | $ | 17,340 | $ | 4,527 | $ | 67 | $ | 21,934 | $ | — | $ | 21,934 | ||||||||||||
Universal life and investment-type product policy fees | 941 | 1,294 | 249 | 2,484 | 100 | 2,584 | ||||||||||||||||||
Net investment income | 6,037 | 5,902 | 94 | 12,033 | (456 | ) | 11,577 | |||||||||||||||||
Other revenues | 729 | 135 | 672 | 1,536 | — | 1,536 | ||||||||||||||||||
Net investment gains (losses) | — | — | — | — | 259 | 259 | ||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | 881 | 881 | ||||||||||||||||||
Total revenues | 25,047 | 11,858 | 1,082 | 37,987 | 784 | 38,771 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 18,384 | 7,218 | 125 | 25,727 | 64 | 25,791 | ||||||||||||||||||
Interest credited to policyholder account balances | 1,212 | 933 | 34 | 2,179 | 4 | 2,183 | ||||||||||||||||||
Capitalization of DAC | (71 | ) | (409 | ) | (2 | ) | (482 | ) | — | (482 | ) | |||||||||||||
Amortization of DAC and VOBA | 59 | 527 | 44 | 630 | 112 | 742 | ||||||||||||||||||
Interest expense on debt | 5 | 4 | 113 | 122 | — | 122 | ||||||||||||||||||
Other expenses | 2,724 | 1,825 | 1,324 | 5,873 | 3 | 5,876 | ||||||||||||||||||
Total expenses | 22,313 | 10,098 | 1,638 | 34,049 | 183 | 34,232 | ||||||||||||||||||
Provision for income tax expense (benefit) | 981 | 555 | 37 | 1,573 | 209 | 1,782 | ||||||||||||||||||
Operating earnings | $ | 1,753 | $ | 1,205 | $ | (593 | ) | 2,365 | ||||||||||||||||
Adjustments to: | ||||||||||||||||||||||||
Total revenues | 784 | |||||||||||||||||||||||
Total expenses | (183 | ) | ||||||||||||||||||||||
Provision for income tax (expense) benefit | (209 | ) | ||||||||||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 2,757 | $ | 2,757 |
At December 31, 2015 | U.S | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Total assets | $ | 231,653 | $ | 178,734 | $ | 39,133 | $ | 449,520 | ||||||||
Separate account assets | $ | 79,540 | $ | 48,478 | $ | 7,921 | $ | 135,939 | ||||||||
Separate account liabilities | $ | 79,540 | $ | 48,478 | $ | 7,921 | $ | 135,939 |
51
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)
Operating Results | ||||||||||||||||||||||||
Year Ended December 31, 2014 | U.S. | MetLife Holdings | Corporate & Other | Total | Adjustments | Total Consolidated | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Premiums | $ | 16,771 | $ | 4,523 | $ | 90 | $ | 21,384 | $ | — | $ | 21,384 | ||||||||||||
Universal life and investment-type product policy fees | 907 | 1,257 | 248 | 2,412 | 54 | 2,466 | ||||||||||||||||||
Net investment income | 5,927 | 6,105 | 333 | 12,365 | (472 | ) | 11,893 | |||||||||||||||||
Other revenues | 702 | 407 | 699 | 1,808 | — | 1,808 | ||||||||||||||||||
Net investment gains (losses) | — | — | — | — | 143 | 143 | ||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | 1,037 | 1,037 | ||||||||||||||||||
Total revenues | 24,307 | 12,292 | 1,370 | 37,969 | 762 | 38,731 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 17,825 | 7,102 | 123 | 25,050 | 45 | 25,095 | ||||||||||||||||||
Interest credited to policyholder account balances | 1,164 | 966 | 33 | 2,163 | 11 | 2,174 | ||||||||||||||||||
Capitalization of DAC | (78 | ) | (325 | ) | (21 | ) | (424 | ) | — | (424 | ) | |||||||||||||
Amortization of DAC and VOBA | 54 | 467 | 58 | 579 | 116 | 695 | ||||||||||||||||||
Interest expense on debt | 12 | 8 | 130 | 150 | 1 | 151 | ||||||||||||||||||
Other expenses | 2,639 | 1,709 | 1,307 | 5,655 | (6 | ) | 5,649 | |||||||||||||||||
Total expenses | 21,616 | 9,927 | 1,630 | 33,173 | 167 | 33,340 | ||||||||||||||||||
Provision for income tax expense (benefit) | 954 | 762 | (394 | ) | 1,322 | 210 | 1,532 | |||||||||||||||||
Operating earnings | $ | 1,737 | $ | 1,603 | $ | 134 | 3,474 | |||||||||||||||||
Adjustments to: | ||||||||||||||||||||||||
Total revenues | 762 | |||||||||||||||||||||||
Total expenses | (167 | ) | ||||||||||||||||||||||
Provision for income tax (expense) benefit | (210 | ) | ||||||||||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 3,859 | $ | 3,859 |
At December 31, 2014 | U.S. | MetLife Holdings | Corporate & Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Total assets | $ | 234,314 | $ | 183,508 | $ | 40,396 | $ | 458,218 | ||||||||
Separate account assets | $ | 79,602 | $ | 50,905 | $ | 8,828 | $ | 139,335 | ||||||||
Separate account liabilities | $ | 79,602 | $ | 50,905 | $ | 8,828 | $ | 139,335 |
52
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)
Operating Results | ||||||||||||||||||||||||
Year Ended December 31, 2013 | U.S. | MetLife Holdings | Corporate & Other | Total | Adjustments | Total Consolidated | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Premiums | $ | 15,969 | $ | 4,450 | $ | 56 | $ | 20,475 | $ | — | $ | 20,475 | ||||||||||||
Universal life and investment-type product policy fees | 899 | 1,139 | 258 | 2,296 | 67 | 2,363 | ||||||||||||||||||
Net investment income | 5,704 | 5,936 | 577 | 12,217 | (432 | ) | 11,785 | |||||||||||||||||
Other revenues | 675 | 306 | 718 | 1,699 | — | 1,699 | ||||||||||||||||||
Net investment gains (losses) | — | — | — | — | 48 | 48 | ||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | (1,070 | ) | (1,070 | ) | ||||||||||||||||
Total revenues | 23,247 | 11,831 | 1,609 | 36,687 | (1,387 | ) | 35,300 | |||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 17,134 | 6,967 | 126 | 24,227 | 10 | 24,237 | ||||||||||||||||||
Interest credited to policyholder account balances | 1,240 | 963 | 33 | 2,236 | 17 | 2,253 | ||||||||||||||||||
Capitalization of DAC | (75 | ) | (481 | ) | (6 | ) | (562 | ) | — | (562 | ) | |||||||||||||
Amortization of DAC and VOBA | 54 | 390 | 47 | 491 | (230 | ) | 261 | |||||||||||||||||
Interest expense on debt | 11 | 7 | 132 | 150 | 3 | 153 | ||||||||||||||||||
Other expenses | 2,486 | 2,229 | 1,390 | 6,105 | 31 | 6,136 | ||||||||||||||||||
Total expenses | 20,850 | 10,075 | 1,722 | 32,647 | (169 | ) | 32,478 | |||||||||||||||||
Provision for income tax expense (benefit) | 844 | 566 | (294 | ) | 1,116 | (435 | ) | 681 | ||||||||||||||||
Operating earnings | $ | 1,553 | $ | 1,190 | $ | 181 | 2,924 | |||||||||||||||||
Adjustments to: | ||||||||||||||||||||||||
Total revenues | (1,387 | ) | ||||||||||||||||||||||
Total expenses | 169 | |||||||||||||||||||||||
Provision for income tax (expense) benefit | 435 | |||||||||||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 2,141 | $ | 2,141 |
The following table presents total premiums, universal life and investment-type product policy fees and other revenues by major product groups of the Company’s segments, as well as Corporate & Other:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Life insurance | $ | 13,811 | $ | 13,865 | $ | 13,482 | |||||
Accident & health insurance | 7,475 | 7,247 | 6,873 | ||||||||
Annuities | 4,548 | 4,352 | 4,007 | ||||||||
Non-insurance | 220 | 194 | 175 | ||||||||
Total | $ | 26,054 | $ | 25,658 | $ | 24,537 |
Substantially all of the Company’s consolidated premiums, universal life and investment-type product policy fees and other revenues originated in the U.S.
Revenues derived from one U.S. customer were $2.7 billion, $2.8 billion and $2.5 billion for the years ended December 31, 2015, 2014 and 2013, respectively, which represented 10%, 11% and 10%, respectively, of consolidated premiums, universal life and investment-type product policy fees and other revenues. Revenues derived from any other customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2015, 2014 and 2013.
53
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
3. Dispositions
In December 2014, Metropolitan Life Insurance Company distributed to MetLife, Inc., as a dividend, all of the issued and outstanding shares of common stock of its wholly-owned, broker-dealer subsidiary, New England Securities Corporation (“NES”). The net book value of NES at the time of the dividend was $35 million, which was recorded as a dividend of retained earnings of $35 million. As of the date of the dividend payment, the Company no longer consolidates the assets, liabilities and operations of NES.
4. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, are comprised of future policy benefits, policyholder account balances and other policy-related balances. Information regarding insurance liabilities by segment, as well as Corporate & Other, was as follows at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
U.S. | $ | 119,806 | $ | 119,717 | |||
MetLife Holdings | 98,346 | 97,032 | |||||
Corporate & Other | 2,383 | 2,395 | |||||
Total | $ | 220,535 | $ | 219,144 |
See Note 6 for discussion of affiliated reinsurance liabilities included in the table above.
Future policy benefits are measured as follows:
Product Type: | Measurement Assumptions: |
Participating life | Aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate, ranging from 3% to 7%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends. |
Nonparticipating life | Aggregate of the present value of expected future benefit payments and related expenses less the present value of expected future net premiums. Assumptions as to mortality and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2% to 11%. |
Individual and group traditional fixed annuities after annuitization | Present value of expected future payments. Interest rate assumptions used in establishing such liabilities range from 2% to 11%. |
Non-medical health insurance | The net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities range from 4% to 7%. |
Disabled lives | Present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rate assumptions used in establishing such liabilities range from 2% to 8%. |
Participating business represented 5% of the Company’s life insurance in-force at both December 31, 2015 and 2014. Participating policies represented 27%, 27% and 28% of gross traditional life insurance premiums for the years ended December 31, 2015, 2014 and 2013, respectively.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium payments; and (ii) credited interest, ranging from less than 1% to 13%, less expenses, mortality charges and withdrawals.
54
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
Guarantees
The Company issues variable annuity products with guaranteed minimum benefits. GMABs, the non-life-contingent portion of GMWBs and the portion of certain GMIBs that does not require annuitization are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 9. Guarantees accounted for as insurance liabilities include:
Guarantee: | Measurement Assumptions: | ||||
GMDBs | • | A return of purchase payment upon death even if the account value is reduced to zero. | • | Present value of expected death benefits in excess of the projected account balance recognizing the excess ratably over the accumulation period based on the present value of total expected assessments. | |
• | An enhanced death benefit may be available for an additional fee. | • | Assumptions are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. | ||
• | Investment performance and volatility assumptions are consistent with the historical experience of the appropriate underlying equity index, such as the S&P 500 Index. | ||||
• | Benefit assumptions are based on the average benefits payable over a range of scenarios. | ||||
GMIBs | • | After a specified period of time determined at the time of issuance of the variable annuity contract, a minimum accumulation of purchase payments, even if the account value is reduced to zero, that can be annuitized to receive a monthly income stream that is not less than a specified amount. | • | Present value of expected income benefits in excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation period based on present value of total expected assessments. | |
• | Certain contracts also provide for a guaranteed lump sum return of purchase premium in lieu of the annuitization benefit. | • | Assumptions are consistent with those used for estimating GMDB liabilities. | ||
• | Calculation incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder. | ||||
GMWBs | • | A return of purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that cumulative withdrawals in a contract year do not exceed a certain limit. | • | Expected value of the life contingent payments and expected assessments using assumptions consistent with those used for estimating the GMDB liabilities. | |
• | Certain contracts include guaranteed withdrawals that are life contingent. |
The Company also issues other annuity contracts that apply a lower rate on funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize. These guarantees include benefits that are payable in the event of death, maturity or at annuitization. Certain other annuity contracts contain guaranteed annuitization benefits that may be above what would be provided by the current account value of the contract. Additionally, the Company issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid-up benefit.
55
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
Information regarding the liabilities for guarantees (excluding base policy liabilities and embedded derivatives) relating to annuity and universal and variable life contracts was as follows:
Annuity Contracts | Universal and Variable Life Contracts | ||||||||||||||||||
GMDBs | GMIBs | Secondary Guarantees | Paid-Up Guarantees | Total | |||||||||||||||
(In millions) | |||||||||||||||||||
Direct | |||||||||||||||||||
Balance at January 1, 2013 | $ | 109 | $ | 332 | $ | 340 | $ | 68 | $ | 849 | |||||||||
Incurred guaranteed benefits | 44 | 58 | 77 | 6 | 185 | ||||||||||||||
Paid guaranteed benefits | (5 | ) | — | — | — | (5 | ) | ||||||||||||
Balance at December 31, 2013 | 148 | 390 | 417 | 74 | 1,029 | ||||||||||||||
Incurred guaranteed benefits | 51 | 68 | 124 | 8 | 251 | ||||||||||||||
Paid guaranteed benefits | (3 | ) | — | — | — | (3 | ) | ||||||||||||
Balance at December 31, 2014 | 196 | 458 | 541 | 82 | 1,277 | ||||||||||||||
Incurred guaranteed benefits | 37 | 80 | 86 | 9 | 212 | ||||||||||||||
Paid guaranteed benefits | (1 | ) | — | — | — | (1 | ) | ||||||||||||
Balance at December 31, 2015 | $ | 232 | $ | 538 | $ | 627 | $ | 91 | $ | 1,488 | |||||||||
Ceded | |||||||||||||||||||
Balance at January 1, 2013 | $ | 86 | $ | 110 | $ | 265 | $ | 47 | $ | 508 | |||||||||
Incurred guaranteed benefits | 39 | 14 | 49 | 4 | 106 | ||||||||||||||
Paid guaranteed benefits | (5 | ) | — | — | — | (5 | ) | ||||||||||||
Balance at December 31, 2013 | 120 | 124 | 314 | 51 | 609 | ||||||||||||||
Incurred guaranteed benefits (1) | (80 | ) | (100 | ) | (9 | ) | 6 | (183 | ) | ||||||||||
Paid guaranteed benefits | (3 | ) | — | — | — | (3 | ) | ||||||||||||
Balance at December 31, 2014 | 37 | 24 | 305 | 57 | 423 | ||||||||||||||
Incurred guaranteed benefits | 14 | 2 | 49 | 6 | 71 | ||||||||||||||
Paid guaranteed benefits | (1 | ) | — | — | — | (1 | ) | ||||||||||||
Balance at December 31, 2015 | $ | 50 | $ | 26 | $ | 354 | $ | 63 | $ | 493 | |||||||||
Net | |||||||||||||||||||
Balance at January 1, 2013 | $ | 23 | $ | 222 | $ | 75 | $ | 21 | $ | 341 | |||||||||
Incurred guaranteed benefits | 5 | 44 | 28 | 2 | 79 | ||||||||||||||
Paid guaranteed benefits | — | — | — | — | — | ||||||||||||||
Balance at December 31, 2013 | 28 | 266 | 103 | 23 | 420 | ||||||||||||||
Incurred guaranteed benefits | 131 | 168 | 133 | 2 | 434 | ||||||||||||||
Paid guaranteed benefits | — | — | — | — | — | ||||||||||||||
Balance at December 31, 2014 | 159 | 434 | 236 | 25 | 854 | ||||||||||||||
Incurred guaranteed benefits | 23 | 78 | 37 | 3 | 141 | ||||||||||||||
Paid guaranteed benefits | — | — | — | — | — | ||||||||||||||
Balance at December 31, 2015 | $ | 182 | $ | 512 | $ | 273 | $ | 28 | $ | 995 |
______________
(1) | See Note 6. |
56
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
Information regarding the Company’s guarantee exposure, which includes direct business, but excludes offsets from hedging or reinsurance, if any, was as follows at:
December 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
In the Event of Death | At Annuitization | In the Event of Death | At Annuitization | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Annuity Contracts (1) | ||||||||||||||||||||||||
Variable Annuity Guarantees | ||||||||||||||||||||||||
Total account value (2) | $ | 59,858 | $ | 27,648 | $ | 62,810 | $ | 29,474 | ||||||||||||||||
Separate account value | $ | 48,216 | $ | 26,530 | $ | 51,077 | $ | 28,347 | ||||||||||||||||
Net amount at risk | $ | 1,698 | (3 | ) | $ | 379 | (4 | ) | $ | 702 | (3 | ) | $ | 244 | (4 | ) | ||||||||
Average attained age of contractholders | 65 years | 63 years | 65 years | 63 years | ||||||||||||||||||||
Other Annuity Guarantees | ||||||||||||||||||||||||
Total account value (2) | N/A | $ | 406 | N/A | $ | 456 | ||||||||||||||||||
Net amount at risk | N/A | $ | 144 | (5 | ) | N/A | $ | 153 | (5 | ) | ||||||||||||||
Average attained age of contractholders | N/A | 56 years | N/A | 55 years |
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Secondary Guarantees | Paid-Up Guarantees | Secondary Guarantees | Paid-Up Guarantees | ||||||||||||
(In millions) | |||||||||||||||
Universal and Variable Life Contracts (1) | |||||||||||||||
Total account value (2) | $ | 8,166 | $ | 1,052 | $ | 8,213 | $ | 1,091 | |||||||
Net amount at risk (6) | $ | 75,994 | $ | 7,658 | $ | 78,758 | $ | 8,164 | |||||||
Average attained age of policyholders | 55 years | 61 years | 54 years | 60 years |
______________
(1) | The Company’s annuity and life contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive. |
(2) | Includes the contractholder’s investments in the general account and separate account, if applicable. |
(3) | Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death. |
(4) | Defined as the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved. |
(5) | Defined as either the excess of the upper tier, adjusted for a profit margin, less the lower tier, as of the balance sheet date or the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. These amounts represent the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date. |
(6) | Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date. |
57
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
Account balances of contracts with guarantees were invested in separate account asset classes as follows at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Fund Groupings: | |||||||
Equity | $ | 23,701 | $ | 24,995 | |||
Balanced | 21,082 | 22,759 | |||||
Bond | 4,454 | 4,561 | |||||
Money Market | 132 | 150 | |||||
Total | $ | 49,369 | $ | 52,465 |
Obligations Assumed Under Structured Settlement Assignments
The Company assumes structured settlement claim obligations as an assignment company. These liabilities are measured at the present value of the periodic claims to be provided and reported as other policy-related balances. The Company receives a fee for assuming these claim obligations and, as the assignee of the claim, is legally obligated to ensure periodic payments are made to the claimant. The Company purchases annuities from affiliates to fund these periodic payment claim obligations and designates payments to be made directly to the claimant by the affiliated annuity writer. These annuities funding structured settlement claims are recorded as an investment. See Note 1.
See Note 8 for additional information on obligations assumed under structured settlement assignments.
Obligations Under Funding Agreements
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 years ended December 31, 2015, 2014 and 2013, the Company issued $35.1 billion, $36.7 billion and $26.8 billion, respectively, and repaid $35.5 billion, $31.7 billion and $25.1 billion, respectively, of such funding agreements. At December 31, 2015 and 2014, liabilities for funding agreements outstanding, which are included in policyholder account balances, were $29.5 billion and $30.3 billion, respectively.
Metropolitan Life Insurance Company and General American Life Insurance Company (“GALIC”), a subsidiary, are members of regional banks in the Federal Home Loan Bank (“FHLB”) system (“FHLBanks”). Holdings of common stock of FHLBanks, included in equity securities, were as follows at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
FHLB of NY | $ | 666 | $ | 661 | |||
FHLB of Des Moines | $ | 40 | $ | 50 |
58
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
The Company has also entered into funding agreements with FHLBanks and the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the U.S. (“Farmer Mac”). The liability for such funding agreements is included in policyholder account balances. Information related to such funding agreements was as follows at:
Liability | Collateral | ||||||||||||||||
December 31, | |||||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||
(In millions) | |||||||||||||||||
FHLB of NY (1) | $ | 12,570 | $ | 12,570 | $ | 14,085 | (2) | $ | 15,255 | (2) | |||||||
Farmer Mac (3) | $ | 2,550 | $ | 2,550 | $ | 2,643 | $ | 2,932 | |||||||||
FHLB of Des Moines (1) | $ | 750 | $ | 1,000 | $ | 851 | (2) | $ | 1,141 | (2) |
______________
(1) | Represents funding agreements issued to the applicable FHLBank in exchange for cash and for which such FHLBank has been granted a lien on certain assets, some of which are in the custody of such FHLBank, including residential mortgage-backed securities (“RMBS”), to collateralize obligations under advances evidenced by funding agreements. The Company is permitted to withdraw any portion of the collateral in the custody of such FHLBank as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by the Company, such FHLBank’s recovery on the collateral is limited to the amount of the Company’s liability to such FHLBank. |
(2) | Advances are collateralized by mortgage-backed securities. The amount of collateral presented is at estimated fair value. |
(3) | Represents funding agreements issued to certain SPEs that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by Farmer Mac. The obligations under these 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 collateral presented is at carrying value. |
Liabilities for Unpaid Claims and Claim Expenses
Information regarding the liabilities for unpaid claims and claim expenses relating to group accident and non-medical health policies and contracts, which are reported in future policy benefits and other policy-related balances, was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Balance at January 1, | $ | 7,310 | $ | 7,022 | $ | 6,826 | |||||
Less: Reinsurance recoverables | 286 | 290 | 301 | ||||||||
Net balance at January 1, | 7,024 | 6,732 | 6,525 | ||||||||
Incurred related to: | |||||||||||
Current year | 5,316 | 5,099 | 4,762 | ||||||||
Prior years | 13 | — | (12 | ) | |||||||
Total incurred | 5,329 | 5,099 | 4,750 | ||||||||
Paid related to: | |||||||||||
Current year | (3,415 | ) | (3,228 | ) | (3,035 | ) | |||||
Prior years | (1,684 | ) | (1,579 | ) | (1,508 | ) | |||||
Total paid | (5,099 | ) | (4,807 | ) | (4,543 | ) | |||||
Net balance at December 31, | 7,254 | 7,024 | 6,732 | ||||||||
Add: Reinsurance recoverables | 273 | 286 | 290 | ||||||||
Balance at December 31, | $ | 7,527 | $ | 7,310 | $ | 7,022 |
59
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)
Separate Accounts
Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $79.7 billion and $83.8 billion at December 31, 2015 and 2014, respectively, for which the policyholder assumes all investment risk, and separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $56.2 billion and $55.5 billion at December 31, 2015 and 2014, respectively. The latter category consisted primarily of guaranteed interest contracts. The average interest rate credited on these contracts was 2.40% and 2.25% at December 31, 2015 and 2014, respectively.
For the years ended December 31, 2015, 2014 and 2013, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts.
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
See Note 1 for a description of capitalized acquisition costs.
Nonparticipating and Non-Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts (term insurance, nonparticipating whole life insurance, traditional group life insurance, and non-medical health insurance) over the appropriate premium paying period in proportion to the actual and expected future gross premiums that were set at contract issue. The expected premiums are based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance, or policy acquisition (as it relates to VOBA), include provisions for adverse deviation, and are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
Participating, Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. For participating contracts within the closed block (dividend-paying traditional contracts) future gross margins are also dependent upon changes in the policyholder dividend obligation. See Note 7. Of these factors, the Company anticipates that investment returns, expenses, persistency and other factor changes, as well as policyholder dividend scales, are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins. When expected future gross margins are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross margins are above the previously estimated expected future gross margins. Each period, the Company also reviews the estimated gross margins for each block of business to determine the recoverability of DAC and VOBA balances.
60
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Fixed and Variable Universal Life Contracts and Fixed and Variable Deferred Annuity Contracts
The Company amortizes DAC and VOBA related to these contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties, the effect of any hedges used and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns, expenses and persistency are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits. When expected future gross profits are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross profits are above the previously estimated expected future gross profits. Each period, the Company also reviews the estimated gross profits for each block of business to determine the recoverability of DAC and VOBA balances.
Factors Impacting Amortization
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC and VOBA. Returns that are higher than the Company’s long-term expectation produce higher account balances, which increases the Company’s future fee expectations and decreases future benefit payment expectations on minimum death and living benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company’s long-term expectation. The Company’s practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. The Company monitors these events and only changes the assumption when its long-term expectation changes.
The Company also periodically reviews other long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency and expenses to administer business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such modification, referred to as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Amortization of DAC and VOBA is attributed to net investment gains (losses) and net derivative gains (losses), and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses had been recognized.
61
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Information regarding DAC and VOBA was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
DAC | |||||||||||
Balance at January 1, | $ | 5,905 | $ | 6,338 | $ | 5,752 | |||||
Capitalizations | 482 | 424 | 562 | ||||||||
Amortization related to: | |||||||||||
Net investment gains (losses) and net derivative gains (losses) | (111 | ) | (104 | ) | 227 | ||||||
Other expenses | (624 | ) | (583 | ) | (478 | ) | |||||
Total amortization | (735 | ) | (687 | ) | (251 | ) | |||||
Unrealized investment gains (losses) | 325 | (170 | ) | 495 | |||||||
Other (1) | — | — | (220 | ) | |||||||
Balance at December 31, | 5,977 | 5,905 | 6,338 | ||||||||
VOBA | |||||||||||
Balance at January 1, | 70 | 78 | 80 | ||||||||
Amortization related to: | |||||||||||
Other expenses | (7 | ) | (8 | ) | (10 | ) | |||||
Total amortization | (7 | ) | (8 | ) | (10 | ) | |||||
Unrealized investment gains (losses) | 3 | — | 8 | ||||||||
Balance at December 31, | 66 | 70 | 78 | ||||||||
Total DAC and VOBA | |||||||||||
Balance at December 31, | $ | 6,043 | $ | 5,975 | $ | 6,416 |
______________
(1) | The year ended December 31, 2013 includes ($220) million that was reclassified to DAC from other liabilities. The amounts reclassified related to affiliated reinsurance agreements accounted for using the deposit method of accounting and represented the DAC amortization on the expense allowances assumed on the agreements from inception. These amounts were previously included in the calculated value of the deposit payable on these agreements and were recorded within other liabilities. |
Information regarding total DAC and VOBA by segment, as well as Corporate & Other, was as follows at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
U.S. | $ | 418 | $ | 406 | |||
MetLife Holdings | 5,000 | 4,894 | |||||
Corporate & Other | 625 | 675 | |||||
Total | $ | 6,043 | $ | 5,975 |
62
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Information regarding other intangibles was as follows:
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In millions) | ||||||||||||
DSI | ||||||||||||
Balance at January 1, | $ | 122 | $ | 175 | $ | 180 | ||||||
Capitalization | 8 | 10 | 15 | |||||||||
Amortization | (21 | ) | (28 | ) | (20 | ) | ||||||
Unrealized investment gains (losses) | 21 | (35 | ) | — | ||||||||
Balance at December 31, | $ | 130 | $ | 122 | $ | 175 | ||||||
VODA and VOCRA | ||||||||||||
Balance at January 1, | $ | 295 | $ | 325 | $ | 353 | ||||||
Amortization | (30 | ) | (30 | ) | (28 | ) | ||||||
Balance at December 31, | $ | 265 | $ | 295 | $ | 325 | ||||||
Accumulated amortization | $ | 192 | $ | 162 | $ | 132 |
The estimated future amortization expense to be reported in other expenses for the next five years is as follows:
VOBA | VODA and VOCRA | |||||||
(In millions) | ||||||||
2016 | $ | 4 | $ | 30 | ||||
2017 | $ | 6 | $ | 28 | ||||
2018 | $ | 5 | $ | 26 | ||||
2019 | $ | 5 | $ | 24 | ||||
2020 | $ | 5 | $ | 21 |
6. Reinsurance
The Company enters into reinsurance agreements primarily as a purchaser of reinsurance for its various insurance products and also as a provider of reinsurance for some insurance products issued by affiliated and unaffiliated companies. The Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide additional capacity for future growth.
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed in Note 8.
U.S.
For certain policies within the Group Benefits business, the Company generally retains most of the risk and only cedes particular risks on certain client arrangements. The majority of the Company’s reinsurance activity within this business relates to client agreements for employer sponsored captive programs, risk-sharing agreements and multinational pooling.
The Company’s Retirement and Income Solutions business has periodically engaged in reinsurance activities on an opportunistic basis. The impact of these activities on the financial results of this business has not been significant and there were no significant transactions during the periods presented.
63
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
MetLife Holdings
For its life products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. The Company currently reinsures 90% of the mortality risk in excess of $2 million for most products. In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. On a case by case basis, the Company may retain up to $20 million per life and reinsure 100% of amounts in excess of the amount the Company retains. The Company evaluates its reinsurance programs routinely and may increase or decrease its retention at any time.
For annuities, the Company reinsures 100% of the living and death benefit guarantees issued in connection with certain variable annuities issued since 2004 to an affiliate and portions of the living and death benefit guarantees issued in connection with its variable annuities issued prior to 2004 to affiliated and unaffiliated reinsurers. Under these reinsurance agreements, the Company pays a reinsurance premium generally based on fees associated with the guarantees collected from policyholders, and receives reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. The Company also assumes 90% of the fixed annuities issued by certain affiliates and 100% of certain variable annuity risks issued by an affiliate.
Catastrophe Coverage
The Company has exposure to catastrophes which could contribute to significant fluctuations in the Company’s results of operations. The Company uses excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks.
Reinsurance Recoverables
The Company reinsures its business through a diversified group of well-capitalized reinsurers. The Company analyzes recent trends in arbitration and litigation outcomes in disputes, if any, with its reinsurers. The Company monitors ratings and evaluates the financial strength of its reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. The Company generally secures large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. These reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, which at December 31, 2015 and 2014, were not significant.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $2.4 billion and $2.3 billion of unsecured unaffiliated reinsurance recoverable balances at December 31, 2015 and 2014, respectively.
At December 31, 2015, the Company had $5.4 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $4.2 billion, or 78%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.6 billion of net unaffiliated ceded reinsurance recoverables which were unsecured. At December 31, 2014, the Company had $5.4 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $4.4 billion, or 82%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.8 billion of net unaffiliated ceded reinsurance recoverables which were unsecured.
The Company has reinsured with an unaffiliated third-party reinsurer, 59.25% of the closed block through a modified coinsurance agreement. The Company accounts for this agreement under the deposit method of accounting. The Company, having the right of offset, has offset the modified coinsurance deposit with the deposit recoverable.
64
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
The amounts on the consolidated statements of operations include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Premiums | |||||||||||
Direct premiums | $ | 21,497 | $ | 20,963 | $ | 20,290 | |||||
Reinsurance assumed | 1,679 | 1,673 | 1,469 | ||||||||
Reinsurance ceded | (1,242 | ) | (1,252 | ) | (1,284 | ) | |||||
Net premiums | $ | 21,934 | $ | 21,384 | $ | 20,475 | |||||
Universal life and investment-type product policy fees | |||||||||||
Direct universal life and investment-type product policy fees | $ | 3,050 | $ | 3,029 | $ | 2,913 | |||||
Reinsurance assumed | 58 | 48 | 41 | ||||||||
Reinsurance ceded | (524 | ) | (611 | ) | (591 | ) | |||||
Net universal life and investment-type product policy fees | $ | 2,584 | $ | 2,466 | $ | 2,363 | |||||
Other revenues | |||||||||||
Direct other revenues | $ | 875 | $ | 1,040 | $ | 970 | |||||
Reinsurance assumed | 5 | 2 | (2 | ) | |||||||
Reinsurance ceded | 656 | 766 | 731 | ||||||||
Net other revenues | $ | 1,536 | $ | 1,808 | $ | 1,699 | |||||
Policyholder benefits and claims | |||||||||||
Direct policyholder benefits and claims | $ | 24,541 | $ | 23,978 | $ | 23,305 | |||||
Reinsurance assumed | 1,454 | 1,416 | 1,225 | ||||||||
Reinsurance ceded | (1,468 | ) | (1,539 | ) | (1,498 | ) | |||||
Net policyholder benefits and claims | $ | 24,527 | $ | 23,855 | $ | 23,032 | |||||
Interest credited to policyholder account balances | |||||||||||
Direct interest credited to policyholder account balances | $ | 2,240 | $ | 2,227 | $ | 2,322 | |||||
Reinsurance assumed | 33 | 35 | 35 | ||||||||
Reinsurance ceded | (90 | ) | (88 | ) | (104 | ) | |||||
Net interest credited to policyholder account balances | $ | 2,183 | $ | 2,174 | $ | 2,253 | |||||
Other expenses | |||||||||||
Direct other expenses | $ | 5,448 | $ | 5,132 | $ | 5,028 | |||||
Reinsurance assumed | 340 | 399 | 427 | ||||||||
Reinsurance ceded | 470 | 540 | 533 | ||||||||
Net other expenses | $ | 6,258 | $ | 6,071 | $ | 5,988 |
65
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
The amounts on the consolidated balance sheets include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows at:
December 31, | |||||||||||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||||||||||
Direct | Assumed | Ceded | Total Balance Sheet | Direct | Assumed | Ceded | Total Balance Sheet | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Premiums, reinsurance and other receivables | $ | 1,957 | $ | 667 | $ | 21,098 | $ | 23,722 | $ | 1,711 | $ | 649 | $ | 21,079 | $ | 23,439 | |||||||||||||||
Deferred policy acquisition costs and value of business acquired | 5,973 | 458 | (388 | ) | 6,043 | 6,002 | 391 | (418 | ) | 5,975 | |||||||||||||||||||||
Total assets | $ | 7,930 | $ | 1,125 | $ | 20,710 | $ | 29,765 | $ | 7,713 | $ | 1,040 | $ | 20,661 | $ | 29,414 | |||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||
Future policy benefits | $ | 116,389 | $ | 2,530 | $ | (5 | ) | $ | 118,914 | $ | 115,143 | $ | 2,259 | $ | — | $ | 117,402 | ||||||||||||||
Policyholder account balances | 94,080 | 340 | — | 94,420 | 95,601 | 301 | — | 95,902 | |||||||||||||||||||||||
Other policy-related balances | 6,766 | 392 | 43 | 7,201 | 5,353 | 455 | 32 | 5,840 | |||||||||||||||||||||||
Other liabilities | 10,384 | 6,843 | 15,528 | 32,755 | 10,350 | 7,020 | 16,077 | 33,447 | |||||||||||||||||||||||
Total liabilities | $ | 227,619 | $ | 10,105 | $ | 15,566 | $ | 253,290 | $ | 226,447 | $ | 10,035 | $ | 16,109 | $ | 252,591 |
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on reinsurance were $13.6 billion and $13.8 billion at December 31, 2015 and 2014, respectively. The deposit liabilities on reinsurance were $6.5 billion and $6.8 billion at December 31, 2015 and 2014, respectively.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain MetLife, Inc. subsidiaries, including MetLife USA, First MetLife, MetLife Reinsurance Company of Charleston (“MRC”), MetLife Reinsurance Company of Vermont and Metropolitan Tower Life Insurance Company, all of which are related parties.
66
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
Information regarding the significant effects of affiliated reinsurance included on the consolidated statements of operations was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Premiums | |||||||||||
Reinsurance assumed | $ | 701 | $ | 681 | $ | 451 | |||||
Reinsurance ceded | (40 | ) | (36 | ) | (45 | ) | |||||
Net premiums | $ | 661 | $ | 645 | $ | 406 | |||||
Universal life and investment-type product policy fees | |||||||||||
Reinsurance assumed | $ | 58 | $ | 48 | $ | 40 | |||||
Reinsurance ceded | (141 | ) | (240 | ) | (221 | ) | |||||
Net universal life and investment-type product policy fees | $ | (83 | ) | $ | (192 | ) | $ | (181 | ) | ||
Other revenues | |||||||||||
Reinsurance assumed | $ | 5 | $ | 2 | $ | (2 | ) | ||||
Reinsurance ceded | 607 | 713 | 675 | ||||||||
Net other revenues | $ | 612 | $ | 715 | $ | 673 | |||||
Policyholder benefits and claims | |||||||||||
Reinsurance assumed | $ | 652 | $ | 623 | $ | 402 | |||||
Reinsurance ceded | (106 | ) | (197 | ) | (144 | ) | |||||
Net policyholder benefits and claims | $ | 546 | $ | 426 | $ | 258 | |||||
Interest credited to policyholder account balances | |||||||||||
Reinsurance assumed | $ | 32 | $ | 33 | $ | 31 | |||||
Reinsurance ceded | (90 | ) | (88 | ) | (102 | ) | |||||
Net interest credited to policyholder account balances | $ | (58 | ) | $ | (55 | ) | $ | (71 | ) | ||
Other expenses | |||||||||||
Reinsurance assumed | $ | 245 | $ | 298 | $ | 326 | |||||
Reinsurance ceded | 578 | 680 | 653 | ||||||||
Net other expenses | $ | 823 | $ | 978 | $ | 979 |
Information regarding the significant effects of affiliated reinsurance included on the consolidated balance sheets was as follows at:
December 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Assumed | Ceded | Assumed | Ceded | |||||||||||||
(In millions) | ||||||||||||||||
Assets | ||||||||||||||||
Premiums, reinsurance and other receivables | $ | 280 | $ | 15,466 | $ | 257 | $ | 15,453 | ||||||||
Deferred policy acquisition costs and value of business acquired | 439 | (193 | ) | 370 | (231 | ) | ||||||||||
Total assets | $ | 719 | $ | 15,273 | $ | 627 | $ | 15,222 | ||||||||
Liabilities | ||||||||||||||||
Future policy benefits | $ | 1,436 | $ | (5 | ) | $ | 1,146 | $ | — | |||||||
Policyholder account balances | 326 | — | 288 | — | ||||||||||||
Other policy-related balances | 187 | 43 | 264 | 32 | ||||||||||||
Other liabilities | 6,463 | 13,000 | 6,610 | 13,545 | ||||||||||||
Total liabilities | $ | 8,412 | $ | 13,038 | $ | 8,308 | $ | 13,577 |
67
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
The Company ceded two blocks of business to two affiliates on a 75% coinsurance with funds withheld basis. Certain contractual features of these agreements qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivatives related to the funds withheld associated with these reinsurance agreements are included within other liabilities and increased the funds withheld balance by $8 million and $20 million at December 31, 2015 and 2014, respectively. Net derivative gains (losses) associated with these embedded derivatives were $12 million, ($39) million and $40 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company ceded risks to an affiliate related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their estimated fair value are also included within net derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and other receivables and were $712 million and $657 million at December 31, 2015 and 2014, respectively. Net derivative gains (losses) associated with the embedded derivatives were $47 million, $497 million and ($1.7) billion for the years ended December 31, 2015, 2014 and 2013, respectively.
Certain contractual features of the closed block reinsurance agreement with MRC create an embedded derivative, which is separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement was included within other liabilities and increased the funds withheld balance by $694 million and $1.1 billion at December 31, 2015 and 2014, respectively. Net derivative gains (losses) associated with the embedded derivative were $404 million, ($389) million and $664 million for the years ended December 31, 2015, 2014 and 2013, respectively.
In November 2014, MetLife Insurance Company of Connecticut (“MICC”), a wholly-owned subsidiary of MetLife, Inc., re-domesticated from Connecticut to Delaware, changed its name to MetLife Insurance Company USA and merged with its subsidiary, MetLife Investors USA Insurance Company, and its affiliate, MetLife Investors Insurance Company, each a U.S. insurance company that issued variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. (“Exeter”), a former offshore, captive reinsurance subsidiary of MetLife, Inc. and affiliate of MICC that mainly reinsured guarantees associated with variable annuity products (the “Mergers”). The surviving entity of the Mergers was MetLife USA. Effective January 1, 2014, following receipt of New York State Department of Financial Services approval, MICC withdrew its license to issue insurance policies and annuity contracts in New York.
Prior to the Mergers, certain related party transactions were consummated as summarized below. See Notes 8 and 9 for information regarding additional related party transactions.
• | In January 2014, the Company entered into an agreement with MICC which reinsured all existing New York insurance policies and annuity contracts that include a separate account feature. As a result of this reinsurance agreement, the significant effects to the Company were increases in other invested assets of $192 million, in other liabilities of $572 million and in future policy benefits of $128 million at December 31, 2014. The Company received a one-time payment of cash and cash equivalents and total investments of $494 million from MICC. Certain contractual features of this agreement qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company's consolidated balance sheets. The embedded derivative related to this agreement is included within policyholder account balances and was $4 million at both December 31, 2015 and 2014. Net derivative gains (losses) associated with the embedded derivative were less than ($1) million and ($4) million for the years ended December 31, 2015 and 2014, respectively. |
• | In October 2014, the Company recaptured a block of universal life secondary guarantee business ceded to Exeter on a 75% coinsurance with funds withheld basis. As a result of this recapture, the significant effects to the Company were decreases in premiums, reinsurance and other receivables of $492 million, and in other liabilities of $432 million, as well as increases in DAC of $30 million and in other policy-related balances of $9 million. |
68
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)
• | In November 2014, the Company partially recaptured risks related to guaranteed minimum benefit guarantees on certain variable annuities previously ceded to Exeter. As a result of this recapture, the significant effects to the Company were decreases in premiums, reinsurance and other receivables of $719 million, and in other liabilities of $447 million, as well as increases in DAC of $7 million and in cash and cash equivalents of $324 million. There was also an increase in net income of $54 million which was reflected in other income. |
• | In November 2014, the Company entered into an agreement to assume 100% of certain variable annuities including guaranteed minimum benefit guarantees on a modified coinsurance basis from First MetLife. As a result of this reinsurance agreement, the significant effects to the Company were decreases in other liabilities of $269 million at December 31, 2014. The Company made a one-time payment of cash and cash equivalents to First MetLife of $218 million at December 31, 2014. Certain contractual features of this agreement qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company's consolidated balance sheets. The embedded derivative related to this agreement is included within policyholder account balances and was $122 million and $68 million at December 31, 2015 and 2014, respectively. Net derivative gains (losses) associated with the embedded derivative were ($54) million and ($38) million for the years ended December 31, 2015 and 2014, respectively. |
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $2.2 billion and $2.1 billion of unsecured affiliated reinsurance recoverable balances at December 31, 2015 and 2014, respectively.
Affiliated reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on affiliated reinsurance were $11.7 billion at both December 31, 2015 and 2014. The deposit liabilities on affiliated reinsurance were $6.5 billion and $6.7 billion at December 31, 2015 and 2014, respectively.
69
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
7. Closed Block
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life Insurance Company converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance approving Metropolitan Life Insurance Company’s plan of reorganization, as amended (the “Plan of Reorganization”). On the Demutualization Date, Metropolitan Life Insurance Company established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life Insurance Company. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience.
The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force. The expected life of the closed block is over 100 years.
The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the Demutualization Date (adjusted to eliminate the impact of related amounts in AOCI) represents the estimated maximum future earnings from the closed block expected to result from operations attributed to the closed block after income taxes. Earnings of the closed block are recognized in income over the period the policies and contracts in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block are greater than the expected cumulative earnings of the closed block, the Company will pay the excess of the actual cumulative earnings of the closed block over the expected cumulative earnings to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block are less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings.
Experience within the closed block, in particular mortality and investment yields, as well as realized and unrealized gains and losses, directly impact the policyholder dividend obligation. Amortization of the closed block DAC, which resides outside of the closed block, is based upon cumulative actual and expected earnings within the closed block. Accordingly, the Company’s net income continues to be sensitive to the actual performance of the closed block.
70
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
7. Closed Block (continued)
Closed block assets, liabilities, revenues and expenses are combined on a line-by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item.
Information regarding the closed block liabilities and assets designated to the closed block was as follows at:
December 31, | ||||||||
2015 | 2014 | |||||||
(In millions) | ||||||||
Closed Block Liabilities | ||||||||
Future policy benefits | $ | 41,278 | $ | 41,667 | ||||
Other policy-related balances | 249 | 265 | ||||||
Policyholder dividends payable | 468 | 461 | ||||||
Policyholder dividend obligation | 1,783 | 3,155 | ||||||
Current income tax payable | — | 1 | ||||||
Other liabilities | 380 | 646 | ||||||
Total closed block liabilities | 44,158 | 46,195 | ||||||
Assets Designated to the Closed Block | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value | 27,556 | 29,199 | ||||||
Equity securities available-for-sale, at estimated fair value | 111 | 91 | ||||||
Mortgage loans | 6,022 | 6,076 | ||||||
Policy loans | 4,642 | 4,646 | ||||||
Real estate and real estate joint ventures | 462 | 666 | ||||||
Other invested assets | 1,066 | 1,065 | ||||||
Total investments | 39,859 | 41,743 | ||||||
Cash and cash equivalents | 236 | 227 | ||||||
Accrued investment income | 474 | 477 | ||||||
Premiums, reinsurance and other receivables | 56 | 67 | ||||||
Current income tax recoverable | 11 | — | ||||||
Deferred income tax assets | 234 | 289 | ||||||
Total assets designated to the closed block | 40,870 | 42,803 | ||||||
Excess of closed block liabilities over assets designated to the closed block | 3,288 | 3,392 | ||||||
Amounts included in AOCI: | ||||||||
Unrealized investment gains (losses), net of income tax | 1,382 | 2,291 | ||||||
Unrealized gains (losses) on derivatives, net of income tax | 76 | 28 | ||||||
Allocated to policyholder dividend obligation, net of income tax | (1,159 | ) | (2,051 | ) | ||||
Total amounts included in AOCI | 299 | 268 | ||||||
Maximum future earnings to be recognized from closed block assets and liabilities | $ | 3,587 | $ | 3,660 |
Information regarding the closed block policyholder dividend obligation was as follows:
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 3,155 | $ | 1,771 | $ | 3,828 | ||||||
Change in unrealized investment and derivative gains (losses) | (1,372 | ) | 1,384 | (2,057 | ) | |||||||
Balance at December 31, | $ | 1,783 | $ | 3,155 | $ | 1,771 |
71
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
7. Closed Block (continued)
Information regarding the closed block revenues and expenses was as follows:
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In millions) | ||||||||||||
Revenues | ||||||||||||
Premiums | $ | 1,850 | $ | 1,918 | $ | 1,987 | ||||||
Net investment income | 1,982 | 2,093 | 2,130 | |||||||||
Net investment gains (losses) | (23 | ) | 7 | 25 | ||||||||
Net derivative gains (losses) | 27 | 20 | (6 | ) | ||||||||
Total revenues | 3,836 | 4,038 | 4,136 | |||||||||
Expenses | ||||||||||||
Policyholder benefits and claims | 2,564 | 2,598 | 2,702 | |||||||||
Policyholder dividends | 1,015 | 988 | 979 | |||||||||
Other expenses | 143 | 155 | 165 | |||||||||
Total expenses | 3,722 | 3,741 | 3,846 | |||||||||
Revenues, net of expenses before provision for income tax expense (benefit) | 114 | 297 | 290 | |||||||||
Provision for income tax expense (benefit) | 41 | 104 | 101 | |||||||||
Revenues, net of expenses and provision for income tax expense (benefit) | $ | 73 | $ | 193 | $ | 189 |
Metropolitan Life Insurance Company charges the closed block with federal income taxes, state and local premium taxes and other state or local taxes, as well as investment management expenses relating to the closed block as provided in the Plan of Reorganization. Metropolitan Life Insurance Company also charges the closed block for expenses of maintaining the policies included in the closed block.
8. Investments
See Note 10 for information about the fair value hierarchy for investments and the related valuation methodologies.
Investment Risks and Uncertainties
Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of impairments, the recognition of income on certain investments and the potential consolidation of VIEs. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the consolidated financial statements.
The determination of valuation allowances and impairments is highly subjective and is based upon periodic evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
The recognition of income on certain investments (e.g. structured securities, including mortgage-backed securities, asset-backed securities (“ABS”), certain structured investment transactions and trading and FVO securities) is dependent upon certain factors such as prepayments and defaults, and changes in such factors could result in changes in amounts to be earned.
72
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Fixed Maturity and Equity Securities AFS
Fixed Maturity and Equity Securities AFS by Sector
The following table presents the fixed maturity and equity securities AFS by sector. Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities and non-redeemable preferred stock is reported within equity securities. Included within fixed maturity securities are structured securities including RMBS, commercial mortgage-backed securities (“CMBS”) and ABS.
December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||||||||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses | Gains | Temporary Losses | OTTI Losses | ||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||
Fixed maturity securities | |||||||||||||||||||||||||||||||||||||||
U.S. corporate | $ | 59,305 | $ | 3,763 | $ | 1,511 | $ | — | $ | 61,557 | $ | 59,532 | $ | 6,246 | $ | 421 | $ | — | $ | 65,357 | |||||||||||||||||||
U.S. Treasury and agency | 36,183 | 3,638 | 128 | — | 39,693 | 34,391 | 4,698 | 19 | — | 39,070 | |||||||||||||||||||||||||||||
Foreign corporate | 27,218 | 1,005 | 1,427 | 1 | 26,795 | 28,395 | 1,934 | 511 | — | 29,818 | |||||||||||||||||||||||||||||
RMBS | 23,195 | 1,008 | 252 | 36 | 23,915 | 26,893 | 1,493 | 157 | 66 | 28,163 | |||||||||||||||||||||||||||||
State and political subdivision | 6,070 | 935 | 29 | 2 | 6,974 | 5,329 | 1,197 | 6 | — | 6,520 | |||||||||||||||||||||||||||||
CMBS | 6,547 | 114 | 82 | — | 6,579 | 7,705 | 241 | 33 | — | 7,913 | |||||||||||||||||||||||||||||
ABS | 6,665 | 40 | 138 | — | 6,567 | 8,206 | 102 | 82 | — | 8,226 | |||||||||||||||||||||||||||||
Foreign government | 3,178 | 536 | 108 | — | 3,606 | 3,153 | 761 | 70 | — | 3,844 | |||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 168,361 | $ | 11,039 | $ | 3,675 | $ | 39 | $ | 175,686 | $ | 173,604 | $ | 16,672 | $ | 1,299 | $ | 66 | $ | 188,911 | |||||||||||||||||||
Equity securities | |||||||||||||||||||||||||||||||||||||||
Common stock | $ | 1,298 | $ | 46 | $ | 101 | $ | — | $ | 1,243 | $ | 1,236 | $ | 142 | $ | 26 | $ | — | $ | 1,352 | |||||||||||||||||||
Non-redeemable preferred stock | 687 | 59 | 40 | — | 706 | 690 | 53 | 30 | — | 713 | |||||||||||||||||||||||||||||
Total equity securities | $ | 1,985 | $ | 105 | $ | 141 | $ | — | $ | 1,949 | $ | 1,926 | $ | 195 | $ | 56 | $ | — | $ | 2,065 |
The Company held non-income producing fixed maturity securities with an estimated fair value of $3 million and $6 million with unrealized gains (losses) of less than $1 million and $5 million at December 31, 2015 and 2014, respectively.
Methodology for Amortization of Premium and Accretion of Discount on Structured Securities
Amortization of premium and accretion of discount on structured securities considers the estimated timing and amount of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the originally anticipated and the actual prepayments received and currently anticipated. Prepayment assumptions for single class and multi-class mortgage-backed and ABS are estimated using inputs obtained from third-party specialists and based on management’s knowledge of the current market. For credit-sensitive mortgage-backed and ABS and certain prepayment-sensitive securities, the effective yield is recalculated on a prospective basis. For all other mortgage-backed and ABS, the effective yield is recalculated on a retrospective basis.
73
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at December 31, 2015:
Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years Through Ten Years | Due After Ten Years | Structured Securities | Total Fixed Maturity Securities | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Amortized cost | $ | 6,323 | $ | 38,390 | $ | 34,613 | $ | 52,628 | $ | 36,407 | $ | 168,361 | |||||||||||
Estimated fair value | $ | 6,252 | $ | 39,432 | $ | 35,000 | $ | 57,941 | $ | 37,061 | $ | 175,686 |
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured securities (RMBS, CMBS and ABS) are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity and Equity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity and equity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position.
December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months | Less than 12 Months | Equal to or Greater than 12 Months | ||||||||||||||||||||||||||||
Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
(In millions, except number of securities) | |||||||||||||||||||||||||||||||
Fixed maturity securities | |||||||||||||||||||||||||||||||
U.S. corporate | $ | 17,480 | $ | 1,078 | $ | 2,469 | $ | 433 | $ | 8,950 | $ | 260 | $ | 2,251 | $ | 161 | |||||||||||||||
U.S. Treasury and agency | 11,683 | 125 | 248 | 3 | 3,933 | 6 | 982 | 13 | |||||||||||||||||||||||
Foreign corporate | 8,823 | 669 | 4,049 | 759 | 7,052 | 397 | 1,165 | 114 | |||||||||||||||||||||||
RMBS | 6,065 | 158 | 1,769 | 130 | 3,141 | 63 | 1,900 | 160 | |||||||||||||||||||||||
State and political subdivision | 767 | 26 | 15 | 5 | 26 | — | 76 | 6 | |||||||||||||||||||||||
CMBS | 2,266 | 42 | 509 | 40 | 772 | 20 | 461 | 13 | |||||||||||||||||||||||
ABS | 3,211 | 54 | 1,817 | 84 | 3,147 | 45 | 732 | 37 | |||||||||||||||||||||||
Foreign government | 961 | 91 | 87 | 17 | 327 | 32 | 265 | 38 | |||||||||||||||||||||||
Total fixed maturity securities | $ | 51,256 | $ | 2,243 | $ | 10,963 | $ | 1,471 | $ | 27,348 | $ | 823 | $ | 7,832 | $ | 542 | |||||||||||||||
Equity securities | |||||||||||||||||||||||||||||||
Common stock | $ | 182 | $ | 99 | $ | 19 | $ | 2 | $ | 98 | $ | 26 | $ | 1 | $ | — | |||||||||||||||
Non-redeemable preferred stock | 56 | 2 | 132 | 38 | 32 | — | 139 | 30 | |||||||||||||||||||||||
Total equity securities | $ | 238 | $ | 101 | $ | 151 | $ | 40 | $ | 130 | $ | 26 | $ | 140 | $ | 30 | |||||||||||||||
Total number of securities in an unrealized loss position | 4,167 | 807 | 1,997 | 642 |
74
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below cost or amortized cost; (ii) the potential for impairments when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) with respect to fixed maturity securities, whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (vii) with respect to structured securities, changes in forecasted cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security; (viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated fixed maturity securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
The methodology and significant inputs used to determine the amount of credit loss on fixed maturity securities are as follows:
• | The Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security prior to impairment. |
• | When determining collectability and the period over which value is expected to recover, the Company applies considerations utilized in its overall impairment evaluation process which incorporates information regarding the specific security, fundamentals of the industry and geographic area in which the security issuer operates, and overall macroeconomic conditions. Projected future cash flows are estimated using assumptions derived from management’s best estimates of likely scenario-based outcomes after giving consideration to a variety of variables that include, but are not limited to: payment terms of the security; the likelihood that the issuer can service the interest and principal payments; the quality and amount of any credit enhancements; the security’s position within the capital structure of the issuer; possible corporate restructurings or asset sales by the issuer; and changes to the rating of the security or the issuer by rating agencies. |
• | Additional considerations are made when assessing the unique features that apply to certain structured securities including, but not limited to: the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying loans or assets backing a particular security, and the payment priority within the tranche structure of the security. |
• | When determining the amount of the credit loss for U.S. and foreign corporate securities, foreign government securities and state and political subdivision securities, the estimated fair value is considered the recovery value when available information does not indicate that another value is more appropriate. When information is identified that indicates a recovery value other than estimated fair value, management considers in the determination of recovery value the same considerations utilized in its overall impairment evaluation process as described above, as well as any private and public sector programs to restructure such securities. |
With respect to securities that have attributes of debt and equity (perpetual hybrid securities), consideration is given in the OTTI analysis as to whether there has been any deterioration in the credit of the issuer and the likelihood of recovery in value of the securities that are in a severe and extended unrealized loss position. Consideration is also given as to whether any perpetual hybrid securities, with an unrealized loss, regardless of credit rating, have deferred any dividend payments. When an OTTI loss has occurred, the OTTI loss is the entire difference between the perpetual hybrid security’s cost and its estimated fair value with a corresponding charge to earnings.
The cost or amortized cost of fixed maturity and equity securities is adjusted for OTTI in the period in which the determination is made. The Company does not change the revised cost basis for subsequent recoveries in value.
75
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
In periods subsequent to the recognition of OTTI on a fixed maturity security, the Company accounts for the impaired security as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted over the remaining term of the fixed maturity security in a prospective manner based on the amount and timing of estimated future cash flows.
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at December 31, 2015. Future OTTI 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, collateral valuation, interest rates and credit spreads. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities increased $2.3 billion during the year ended December 31, 2015 to $3.7 billion. The increase in gross unrealized losses for the year ended December 31, 2015 was primarily attributable to widening credit spreads, an increase in interest rates and, to a lesser extent, the impact of weakening foreign currencies on non-functional currency denominated fixed maturity securities.
At December 31, 2015, $271 million of the total $3.7 billion of gross unrealized losses were from 50 fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Investment Grade Fixed Maturity Securities
Of the $271 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $187 million, or 69%, were related to gross unrealized losses on 27 investment grade fixed maturity securities. Unrealized losses on investment grade fixed maturity securities are principally related to widening credit spreads and, with respect to fixed-rate fixed maturity securities, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities
Of the $271 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $84 million, or 31%, were related to gross unrealized losses on 23 below investment grade fixed maturity securities. Unrealized losses on below investment grade fixed maturity securities are principally related to U.S. and foreign corporate securities (primarily utility and industrial securities) and non-agency RMBS (primarily alternative residential mortgage loans) and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over lower oil prices in the energy sector and valuations of residential real estate supporting non-agency RMBS. Management evaluates U.S. and foreign corporate securities based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issuers and evaluates non-agency RMBS based on actual and projected cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security and the payment priority within the tranche structure of the security.
Equity Securities
Gross unrealized losses on equity securities increased $85 million during the year ended December 31, 2015 to $141 million. Of the $141 million, $31 million were from eight securities with gross unrealized losses of 20% or more of cost for 12 months or greater. Of the $31 million, 68% were rated A or better, and all were from financial services industry investment grade non-redeemable preferred stock.
76
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
(In millions) | (In millions) | ||||||||||||
Mortgage loans | |||||||||||||
Commercial | $ | 33,440 | 62.3 | % | $ | 32,482 | 66.2 | % | |||||
Agricultural | 11,663 | 21.7 | 11,033 | 22.5 | |||||||||
Residential | 8,562 | 15.9 | 5,494 | 11.2 | |||||||||
Subtotal | 53,665 | 99.9 | 49,009 | 99.9 | |||||||||
Valuation allowances | (257 | ) | (0.5 | ) | (258 | ) | (0.5 | ) | |||||
Subtotal mortgage loans, net | 53,408 | 99.4 | 48,751 | 99.4 | |||||||||
Residential — FVO | 314 | 0.6 | 308 | 0.6 | |||||||||
Total mortgage loans, net | $ | 53,722 | 100.0 | % | $ | 49,059 | 100.0 | % |
The Company originates and acquires unaffiliated mortgage loans and simultaneously sells a portion to affiliates under master participation agreements. The aggregate amount of unaffiliated mortgage loan participation interests sold by the Company to affiliates during the years ended December 31, 2015, 2014 and 2013 were $3.0 billion, $1.9 billion and $2.3 billion, respectively. In connection with the mortgage loan participations, the Company collected mortgage loan principal and interest payments from unaffiliated borrowers on behalf of affiliates and remitted such receipts to the affiliates in the amount of $1.8 billion, $1.3 billion and $1.8 billion during the years ended December 31, 2015, 2014 and 2013, respectively.
Purchases of mortgage loans from third parties were $3.9 billion and $4.7 billion for the years ended December 31, 2015 and 2014, respectively.
Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on residential — FVO is presented in Note 10. The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis.
Mortgage Loans, Valuation Allowance and Impaired Loans by Portfolio Segment
Mortgage loans by portfolio segment, by method of evaluation of credit loss, impaired mortgage loans including those modified in a troubled debt restructuring, and the related valuation allowances, were as follows at and for the years ended:
Evaluated Individually for Credit Losses | Evaluated Collectively for Credit Losses | Impaired Loans | |||||||||||||||||||||||||||||||||
Impaired Loans with a Valuation Allowance | Impaired Loans without a Valuation Allowance | ||||||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Valuation Allowances | Unpaid Principal Balance | Recorded Investment | Recorded Investment | Valuation Allowances | Carrying Value | Average Recorded Investment | |||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 57 | $ | 57 | $ | 33,383 | $ | 165 | $ | 57 | $ | 120 | |||||||||||||||||
Agricultural | 45 | 43 | 3 | 22 | 21 | 11,599 | 34 | 61 | 60 | ||||||||||||||||||||||||||
Residential | — | — | — | 141 | 131 | 8,431 | 55 | 131 | 84 | ||||||||||||||||||||||||||
Total | $ | 45 | $ | 43 | $ | 3 | $ | 220 | $ | 209 | $ | 53,413 | $ | 254 | $ | 249 | $ | 264 | |||||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||||||||||
Commercial | $ | 75 | $ | 75 | $ | 24 | $ | 84 | $ | 84 | $ | 32,323 | $ | 158 | $ | 135 | $ | 298 | |||||||||||||||||
Agricultural | 47 | 45 | 2 | 14 | 13 | 10,975 | 33 | 56 | 76 | ||||||||||||||||||||||||||
Residential | — | — | — | 40 | 37 | 5,457 | 41 | 37 | 17 | ||||||||||||||||||||||||||
Total | $ | 122 | $ | 120 | $ | 26 | $ | 138 | $ | 134 | $ | 48,755 | $ | 232 | $ | 228 | $ | 391 |
77
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The average recorded investment for impaired commercial, agricultural and residential mortgage loans was $430 million, $151 million and $2 million, respectively, for the year ended December 31, 2013.
Valuation Allowance Rollforward by Portfolio Segment
The changes in the valuation allowance, by portfolio segment, were as follows:
Commercial | Agricultural | Residential | Total | ||||||||||||
(In millions) | |||||||||||||||
Balance at January 1, 2013 | $ | 256 | $ | 48 | $ | — | $ | 304 | |||||||
Provision (release) | (43 | ) | 3 | 19 | (21 | ) | |||||||||
Charge-offs, net of recoveries | — | (11 | ) | — | (11 | ) | |||||||||
Balance at December 31, 2013 | 213 | 40 | 19 | 272 | |||||||||||
Provision (release) | (8 | ) | (4 | ) | 27 | 15 | |||||||||
Charge-offs, net of recoveries | (23 | ) | (1 | ) | (5 | ) | (29 | ) | |||||||
Balance at December 31, 2014 | 182 | 35 | 41 | 258 | |||||||||||
Provision (release) | 2 | 2 | 30 | 34 | |||||||||||
Charge-offs, net of recoveries | (19 | ) | — | (16 | ) | (35 | ) | ||||||||
Balance at December 31, 2015 | $ | 165 | $ | 37 | $ | 55 | $ | 257 |
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
Commercial and Agricultural Mortgage Loan Portfolio Segments
The Company typically uses several years of historical experience in establishing non-specific valuation allowances which captures multiple economic cycles. For evaluations of commercial mortgage loans, in addition to historical experience, management considers factors that include the impact of a rapid change to the economy, which may not be reflected in the loan portfolio, and recent loss and recovery trend experience as compared to historical loss and recovery experience. For evaluations of agricultural mortgage loans, in addition to historical experience, management considers factors that include increased stress in certain sectors, which may be evidenced by higher delinquency rates, or a change in the number of higher risk loans. On a quarterly basis, management incorporates the impact of these current market events and conditions on historical experience in determining the non-specific valuation allowance established for commercial and agricultural mortgage loans.
78
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
All commercial mortgage loans are reviewed on an ongoing basis which 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, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt service coverage ratios. All agricultural mortgage loans are monitored on an ongoing basis. The monitoring process for agricultural mortgage loans is generally similar to the commercial mortgage loan monitoring process, with a focus on higher risk loans, including reviews on a geographic and property-type basis. Higher risk loans are reviewed individually on an ongoing basis for potential credit loss and specific valuation allowances are established using the methodology described above. Quarterly, the remaining loans are reviewed on a pool basis by aggregating groups of loans that have similar risk characteristics for potential credit loss, and non-specific valuation allowances are established as described above using inputs that are unique to each segment of the loan portfolio.
For commercial mortgage loans, the primary credit quality indicator is the debt service coverage ratio, which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. The Company also reviews the loan-to-value ratio of its commercial mortgage loan portfolio. Loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio and the values utilized in calculating the ratio are updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of the Company’s ongoing review of its commercial mortgage loan portfolio.
For agricultural mortgage loans, the Company’s primary credit quality indicator is the loan-to-value ratio. The values utilized in calculating this ratio are developed in connection with the ongoing review of the agricultural mortgage loan portfolio and are routinely updated.
Residential Mortgage Loan Portfolio Segment
The Company’s residential mortgage loan portfolio is comprised primarily of closed end, amortizing residential mortgage loans. For evaluations of residential mortgage loans, the key inputs of expected frequency and expected loss reflect current market conditions, with expected frequency adjusted, when appropriate, for differences from market conditions and the Company’s historical experience. In contrast to the commercial and agricultural mortgage loan portfolios, residential mortgage loans are smaller-balance homogeneous loans that are collectively evaluated for impairment. Non-specific valuation allowances are established using the evaluation framework described above for pools of loans with similar risk characteristics from inputs that are unique to the residential segment of the loan portfolio. Loan specific valuation allowances are only established on residential mortgage loans when they have been restructured and are established using the methodology described above for all loan portfolio segments.
For residential mortgage loans, the Company’s primary credit quality indicator is whether the loan is performing or nonperforming. The Company generally defines nonperforming residential mortgage loans as those that are 60 or more days past due and/or in non-accrual status which is assessed monthly. Generally, nonperforming residential mortgage loans have a higher risk of experiencing a credit loss.
79
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans was as follows at:
Recorded Investment | Estimated Fair Value | % of Total | |||||||||||||||||||||||
Debt Service Coverage Ratios | Total | % of Total | |||||||||||||||||||||||
> 1.20x | 1.00x - 1.20x | < 1.00x | |||||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||
Loan-to-value ratios | |||||||||||||||||||||||||
Less than 65% | $ | 28,828 | $ | 909 | $ | 408 | $ | 30,145 | 90.2 | % | $ | 30,996 | 90.5 | % | |||||||||||
65% to 75% | 2,550 | 138 | 61 | 2,749 | 8.2 | 2,730 | 8.0 | ||||||||||||||||||
76% to 80% | — | — | — | — | — | — | — | ||||||||||||||||||
Greater than 80% | 208 | 115 | 223 | 546 | 1.6 | 519 | 1.5 | ||||||||||||||||||
Total | $ | 31,586 | $ | 1,162 | $ | 692 | $ | 33,440 | 100.0 | % | $ | 34,245 | 100.0 | % | |||||||||||
December 31, 2014 | |||||||||||||||||||||||||
Loan-to-value ratios | |||||||||||||||||||||||||
Less than 65% | $ | 26,810 | $ | 746 | $ | 761 | $ | 28,317 | 87.2 | % | $ | 29,860 | 87.7 | % | |||||||||||
65% to 75% | 2,783 | 391 | 86 | 3,260 | 10.0 | 3,322 | 9.8 | ||||||||||||||||||
76% to 80% | 109 | — | 8 | 117 | 0.4 | 121 | 0.3 | ||||||||||||||||||
Greater than 80% | 384 | 256 | 148 | 788 | 2.4 | 736 | 2.2 | ||||||||||||||||||
Total | $ | 30,086 | $ | 1,393 | $ | 1,003 | $ | 32,482 | 100.0 | % | $ | 34,039 | 100.0 | % |
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(In millions) | (In millions) | ||||||||||||
Loan-to-value ratios | |||||||||||||
Less than 65% | $ | 10,975 | 94.1 | % | $ | 10,462 | 94.8 | % | |||||
65% to 75% | 609 | 5.2 | 469 | 4.2 | |||||||||
76% to 80% | 21 | 0.2 | 17 | 0.2 | |||||||||
Greater than 80% | 58 | 0.5 | 85 | 0.8 | |||||||||
Total | $ | 11,663 | 100.0 | % | $ | 11,033 | 100.0 | % |
The estimated fair value of agricultural mortgage loans was $11.9 billion and $11.4 billion at December 31, 2015 and 2014, respectively.
80
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans was as follows at:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(In millions) | (In millions) | ||||||||||||
Performance indicators | |||||||||||||
Performing | $ | 8,261 | 96.5 | % | $ | 5,345 | 97.3 | % | |||||
Nonperforming | 301 | 3.5 | 149 | 2.7 | |||||||||
Total | $ | 8,562 | 100.0 | % | $ | 5,494 | 100.0 | % |
The estimated fair value of residential mortgage loans was $8.8 billion and $5.6 billion at December 31, 2015 and 2014, respectively.
Past Due and Interest Accrual Status of Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both December 31, 2015 and 2014. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage loans — 90 days. The past due and accrual status of mortgage loans at recorded investment, prior to valuation allowances, by portfolio segment, were as follows at:
Past Due | Nonaccrual Status | ||||||||||||||
December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||
(In millions) | |||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 75 | |||||||
Agricultural | 103 | 1 | 46 | 41 | |||||||||||
Residential | 301 | 149 | 301 | 149 | |||||||||||
Total | $ | 404 | $ | 150 | $ | 347 | $ | 265 |
Mortgage Loans Modified in a Troubled Debt Restructuring
For a small portion of the mortgage loan portfolio, classified as troubled debt restructurings, concessions are granted related to borrowers experiencing financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates, and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining any impairment or changes in the specific valuation allowance. During the years ended December 31, 2015 and 2014, the Company did not have a significant amount of mortgage loans modified in a troubled debt restructuring.
Other Invested Assets
Other invested assets is comprised primarily of freestanding derivatives with positive estimated fair values (see Note 9) tax credit and renewable energy partnerships, loans to affiliates, leveraged leases, annuities funding structured settlement claims and direct financing leases. See “— Related Party Investment Transactions” for information regarding loans to affiliates and annuities funding structured settlement claims.
Tax Credit Partnerships
The carrying value of tax credit partnerships was $1.6 billion at both December 31, 2015 and 2014. Losses from tax credit partnerships included within net investment income were $163 million, $152 million, and $137 million for the years ended December 31, 2015, 2014 and 2013, respectively.
81
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Leveraged and Direct Financing Leases
Investment in leveraged and direct financing leases consisted of the following at:
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Leveraged Leases | Direct Financing Leases | Leveraged Leases | Direct Financing Leases | ||||||||||||
(In millions) | |||||||||||||||
Rental receivables, net | $ | 1,238 | $ | 376 | $ | 1,320 | $ | 406 | |||||||
Estimated residual values | 755 | 57 | 827 | 57 | |||||||||||
Subtotal | 1,993 | 433 | 2,147 | 463 | |||||||||||
Unearned income | (615 | ) | (159 | ) | (686 | ) | (178 | ) | |||||||
Investment in leases, net of non-recourse debt | $ | 1,378 | $ | 274 | $ | 1,461 | $ | 285 |
Rental receivables are generally due in periodic installments. The payment periods for leveraged leases generally range from one to 15 years but in certain circumstances can be over 30 years, while the payment periods for direct financing leases range from one to 21 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming rental receivables as those that are 90 days or more past due. At December 31, 2015 and 2014, all leveraged lease receivables and direct financing rental receivables were performing.
The deferred income tax liability related to leveraged leases was $1.3 billion at both December 31, 2015 and 2014.
The components of income from investments in leveraged and direct financing leases, excluding net investment gains (losses), were as follows:
Years Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
Leveraged Leases | Direct Financing Leases | Leveraged Leases | Direct Financing Leases | Leveraged Leases | Direct Financing Leases | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Income from investment in leases | $ | 48 | $ | 20 | $ | 51 | $ | 19 | $ | 60 | $ | 17 | |||||||||||
Less: Income tax expense on leases | 17 | 7 | 18 | 7 | 21 | 6 | |||||||||||||||||
Investment income after income tax | $ | 31 | $ | 13 | $ | 33 | $ | 12 | $ | 39 | $ | 11 |
Cash Equivalents
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 $3.9 billion and $1.0 billion at December 31, 2015 and 2014, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity and equity securities AFS and the effect on DAC, VOBA, DSI, future policy benefits and the policyholder dividend obligation, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in AOCI.
82
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Fixed maturity securities | $ | 7,331 | $ | 15,374 | $ | 8,521 | |||||
Fixed maturity securities with noncredit OTTI losses in AOCI | (39 | ) | (66 | ) | (149 | ) | |||||
Total fixed maturity securities | 7,292 | 15,308 | 8,372 | ||||||||
Equity securities | 27 | 173 | 83 | ||||||||
Derivatives | 2,208 | 1,649 | 361 | ||||||||
Other | 137 | 87 | 5 | ||||||||
Subtotal | 9,664 | 17,217 | 8,821 | ||||||||
Amounts allocated from: | |||||||||||
Future policy benefits | (7 | ) | (1,964 | ) | (610 | ) | |||||
DAC and VOBA related to noncredit OTTI losses recognized in AOCI | — | (3 | ) | 5 | |||||||
DAC, VOBA and DSI | (572 | ) | (918 | ) | (721 | ) | |||||
Policyholder dividend obligation | (1,783 | ) | (3,155 | ) | (1,771 | ) | |||||
Subtotal | (2,362 | ) | (6,040 | ) | (3,097 | ) | |||||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | 14 | 25 | 51 | ||||||||
Deferred income tax benefit (expense) | (2,542 | ) | (3,928 | ) | (2,070 | ) | |||||
Net unrealized investment gains (losses) | 4,774 | 7,274 | 3,705 | ||||||||
Net unrealized investment gains (losses) attributable to noncontrolling interests | (1 | ) | (1 | ) | (1 | ) | |||||
Net unrealized investment gains (losses) attributable to Metropolitan Life Insurance Company | $ | 4,773 | $ | 7,273 | $ | 3,704 |
The changes in fixed maturity securities with noncredit OTTI losses included in AOCI were as follows:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Balance at January 1, | $ | (66 | ) | $ | (149 | ) | |
Noncredit OTTI losses and subsequent changes recognized | 5 | 10 | |||||
Securities sold with previous noncredit OTTI loss | 105 | 41 | |||||
Subsequent changes in estimated fair value | (83 | ) | 32 | ||||
Balance at December 31, | $ | (39 | ) | $ | (66 | ) |
83
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The changes in net unrealized investment gains (losses) were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Balance at January 1, | $ | 7,273 | $ | 3,704 | $ | 6,339 | |||||
Fixed maturity securities on which noncredit OTTI losses have been recognized | 27 | 83 | 107 | ||||||||
Unrealized investment gains (losses) during the year | (7,580 | ) | 8,313 | (11,205 | ) | ||||||
Unrealized investment gains (losses) relating to: | |||||||||||
Future policy benefits | 1,957 | (1,354 | ) | 4,510 | |||||||
DAC and VOBA related to noncredit OTTI losses recognized in AOCI | 3 | (8 | ) | (7 | ) | ||||||
DAC, VOBA and DSI | 346 | (197 | ) | 510 | |||||||
Policyholder dividend obligation | 1,372 | (1,384 | ) | 2,057 | |||||||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | (11 | ) | (26 | ) | (35 | ) | |||||
Deferred income tax benefit (expense) | 1,386 | (1,858 | ) | 1,428 | |||||||
Net unrealized investment gains (losses) | 4,773 | 7,273 | 3,704 | ||||||||
Net unrealized investment gains (losses) attributable to noncontrolling interests | — | — | — | ||||||||
Balance at December 31, | $ | 4,773 | $ | 7,273 | $ | 3,704 | |||||
Change in net unrealized investment gains (losses) | $ | (2,500 | ) | $ | 3,569 | $ | (2,635 | ) | |||
Change in net unrealized investment gains (losses) attributable to noncontrolling interests | — | — | — | ||||||||
Change in net unrealized investment gains (losses) attributable to Metropolitan Life Insurance Company | $ | (2,500 | ) | $ | 3,569 | $ | (2,635 | ) |
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both December 31, 2015 and 2014.
Securities Lending
Elements of the securities lending program are presented below at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Securities on loan: (1) | |||||||
Amortized cost | $ | 16,257 | $ | 19,099 | |||
Estimated fair value | $ | 17,700 | $ | 21,185 | |||
Cash collateral on deposit from counterparties (2) | $ | 18,053 | $ | 21,635 | |||
Security collateral on deposit from counterparties (3) | $ | 22 | $ | 19 | |||
Reinvestment portfolio — estimated fair value | $ | 18,138 | $ | 22,046 |
______________
(1) | Included within fixed maturity securities and short-term investments. |
(2) | Included within payables for collateral under securities loaned and other transactions. |
(3) | Security collateral on deposit from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the consolidated financial statements. |
84
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:
December 31, 2015 | ||||||||||||||||||
Remaining Tenor of Securities Lending Agreements | ||||||||||||||||||
Open (1) | 1 Month or Less | 1 to 6 Months | Total | % of Total | ||||||||||||||
(In millions) | ||||||||||||||||||
Cash collateral liability by loaned security type | ||||||||||||||||||
U.S. Treasury and agency | $ | 6,260 | $ | 7,421 | $ | 4,303 | $ | 17,984 | 99.6 | % | ||||||||
U.S. corporate | 1 | 41 | — | 42 | 0.3 | |||||||||||||
Agency RMBS | — | 6 | 21 | 27 | 0.1 | |||||||||||||
Foreign corporate | — | — | — | — | — | |||||||||||||
Foreign government | — | — | — | — | — | |||||||||||||
Total | $ | 6,261 | $ | 7,468 | $ | 4,324 | $ | 18,053 | 100.0 | % |
December 31, 2014 | ||||||||||||||||||
Remaining Tenor of Securities Lending Agreements | ||||||||||||||||||
Open (1) | 1 Month or Less | 1 to 6 Months | Total | % of Total | ||||||||||||||
(In millions) | ||||||||||||||||||
Cash collateral liability by loaned security type | ||||||||||||||||||
U.S. Treasury and agency | $ | 7,346 | $ | 7,401 | $ | 3,912 | $ | 18,659 | 86.2 | % | ||||||||
U.S. corporate | 109 | 148 | — | 257 | 1.2 | |||||||||||||
Agency RMBS | — | 387 | 2,015 | 2,402 | 11.1 | |||||||||||||
Foreign corporate | 152 | 89 | — | 241 | 1.1 | |||||||||||||
Foreign government | 22 | 54 | — | 76 | 0.4 | |||||||||||||
Total | $ | 7,629 | $ | 8,079 | $ | 5,927 | $ | 21,635 | 100.0 | % |
______________
(1) | The related loaned security could be returned to the Company on the next business day which would require the Company to immediately return the cash collateral. |
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2015 was $6.1 billion, over 99% of which were U.S. Treasury and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement.
The reinvestment portfolio acquired with the cash collateral consisted principally of fixed maturity securities (including U.S. Treasury and agency, agency RMBS, ABS, U.S. and foreign corporate securities) with 66% invested in U.S. Treasury and agency securities, agency RMBS, cash equivalents, short-term investments or held in cash. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put back to the Company.
85
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value for all asset classes, except mortgage loans, which are presented at carrying value at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Invested assets on deposit (regulatory deposits) | $ | 1,245 | $ | 1,421 | |||
Invested assets pledged as collateral (1) | 19,011 | 20,712 | |||||
Total invested assets on deposit and pledged as collateral | $ | 20,256 | $ | 22,133 |
______________
(1) | The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4), and derivative transactions (see Note 9). |
See “— Securities Lending” for information regarding securities on loan and Note 7 for information regarding investments designated to the closed block.
Purchased Credit Impaired Investments
Investments acquired with evidence of credit quality deterioration since origination and for which it is probable at the acquisition date that the Company will be unable to collect all contractually required payments are classified as purchased credit impaired (“PCI”) investments. For each investment, the excess of the cash flows expected to be collected as of the acquisition date over its acquisition date fair value is referred to as the accretable yield and is recognized as net investment income on an effective yield basis. If subsequently, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected to be collected, the accretable yield is adjusted prospectively. The excess of the contractually required payments (including interest) as of the acquisition date over the cash flows expected to be collected as of the acquisition date is referred to as the nonaccretable difference, and this amount is not expected to be realized as net investment income. Decreases in cash flows expected to be collected can result in OTTI.
86
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The Company’s PCI fixed maturity securities were as follows at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Outstanding principal and interest balance (1) | $ | 5,139 | $ | 4,614 | |||
Carrying value (2) | $ | 3,937 | $ | 3,651 |
______________
(1) | Represents the contractually required payments, which is the sum of contractual principal, whether or not currently due, and accrued interest. |
(2) | Estimated fair value plus accrued interest. |
The following table presents information about PCI fixed maturity securities acquired during the periods indicated:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Contractually required payments (including interest) | $ | 1,401 | $ | 820 | |||
Cash flows expected to be collected (1) | $ | 1,222 | $ | 644 | |||
Fair value of investments acquired | $ | 905 | $ | 433 |
______________
(1) | Represents undiscounted principal and interest cash flow expectations, at the date of acquisition. |
The following table presents activity for the accretable yield on PCI fixed maturity securities for:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Accretable yield, January 1, | $ | 1,883 | $ | 2,431 | |||
Investments purchased | 317 | 211 | |||||
Accretion recognized in earnings | (276 | ) | (217 | ) | |||
Disposals | (48 | ) | (47 | ) | |||
Reclassification (to) from nonaccretable difference | (92 | ) | (495 | ) | |||
Accretable yield, December 31, | $ | 1,784 | $ | 1,883 |
Collectively Significant Equity Method Investments
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests consisting of leveraged buy-out funds, hedge funds, private equity funds, joint ventures and other funds. The portion of these investments accounted for under the equity method had a carrying value of $10.2 billion at December 31, 2015. The Company’s maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus unfunded commitments of $3.4 billion at December 31, 2015. Except for certain real estate joint ventures, the Company’s investments in real estate funds and other limited partnership interests are generally of a passive nature in that the Company does not participate in the management of the entities.
As described in Note 1, the Company generally records its share of earnings in its equity method investments using a three-month lag methodology and within net investment income. Aggregate net investment income from these equity method investments exceeded 10% of the Company’s consolidated pre-tax income (loss) from continuing operations for only one of the three most recent annual periods: 2013. The Company is providing the following aggregated summarized financial data for such equity method investments, for the most recent annual periods, in order to provide comparative information. This aggregated summarized financial data does not represent the Company’s proportionate share of the assets, liabilities, or earnings of such entities.
87
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
The aggregated summarized financial data presented below reflects the latest available financial information and is as of, and for, the years ended December 31, 2015, 2014 and 2013. Aggregate total assets of these entities totaled $397.9 billion and $351.0 billion at December 31, 2015 and 2014, respectively. Aggregate total liabilities of these entities totaled $64.1 billion and $32.1 billion at December 31, 2015 and 2014, respectively. Aggregate net income (loss) of these entities totaled $23.4 billion, $33.7 billion and $25.0 billion for the years ended December 31, 2015, 2014 and 2013, respectively. Aggregate net income (loss) from the underlying entities in which the Company invests is primarily comprised of investment income, including recurring investment income and realized and unrealized investment gains (losses).
Variable Interest Entities
The Company has invested in certain structured transactions (including consolidated securitization entities (“CSEs”)) that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. The Company generally uses a qualitative approach to determine whether it is the primary beneficiary. However, for VIEs that are investment companies or apply measurement principles consistent with those utilized by investment companies, the primary beneficiary is based on a risks and rewards model and is defined as the entity that will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual returns if no single entity absorbs a majority of expected losses, or both. The Company reassesses its involvement with VIEs on a quarterly basis. The use of different methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the consolidated financial statements.
Consolidated VIEs
Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
The following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at December 31, 2015 and 2014.
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Total Assets | Total Liabilities | Total Assets | Total Liabilities | ||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities (1) | $ | 104 | $ | 50 | $ | 163 | $ | 78 | |||||||
Other investments (2) | 89 | 13 | 121 | 30 | |||||||||||
Total | $ | 193 | $ | 63 | $ | 284 | $ | 108 |
______________
(1) | The Company consolidates certain fixed maturity securities purchased in an investment structure which was partially funded with affiliated long-term debt. The long-term debt bears interest primarily at variable rates, payable on a bi-annual basis. Interest expense related to these obligations, included in other expenses, was $2 million for each of the years ended December 31, 2015, 2014 and 2013. |
(2) | Other investments is comprised of other invested assets, other limited partnership interests, CSEs reported within FVO securities and real estate joint ventures. The Company consolidates CSEs which are entities that are structured as collateralized debt obligations. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its remaining investment in these entities of less than $1 million at estimated fair value at both December 31, 2015 and 2014. The long-term debt bears interest primarily at variable rates, payable on a bi-annual basis. Interest expense related to these obligations, included in other expenses, was less than $1 million, $1 million and $3 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
88
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Effective March 31, 2014, as a result of a quarterly reassessment in the first quarter of 2014, the Company deconsolidated an open ended core real estate fund, based on the terms of a revised partnership agreement. At December 31, 2013, the Company had consolidated this real estate fund. Assets of the real estate fund are a real estate investment trust which holds primarily traditional core income-producing real estate which has associated liabilities that are primarily non-recourse debt secured by certain real estate assets of the fund. As a result of the deconsolidation in 2014, supplemental disclosures of cash flow information on the consolidated statements of cash flows for the year ended December 31, 2014 includes reductions in redeemable noncontrolling interests, long-term debt and real estate and real estate joint ventures.
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Carrying Amount | Maximum Exposure to Loss (1) | Carrying Amount | Maximum Exposure to Loss (1) | ||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities AFS: | |||||||||||||||
Structured securities (RMBS, CMBS and ABS) (2) | $ | 37,061 | $ | 37,061 | $ | 44,302 | $ | 44,302 | |||||||
U.S. and foreign corporate | 1,593 | 1,593 | 1,919 | 1,919 | |||||||||||
Other limited partnership interests | 2,874 | 3,672 | 3,722 | 4,833 | |||||||||||
Other invested assets | 1,564 | 2,116 | 1,683 | 2,003 | |||||||||||
Real estate joint ventures | 31 | 44 | 52 | 74 | |||||||||||
Total | $ | 43,123 | $ | 44,486 | $ | 51,678 | $ | 53,131 |
______________
(1) | The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by creditworthy third parties. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties of $179 million and $212 million at December 31, 2015 and 2014, respectively. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. |
(2) | For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity. |
As described in Note 17, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during the years ended December 31, 2015, 2014 and 2013.
89
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Investment income: | |||||||||||
Fixed maturity securities | $ | 7,930 | $ | 8,260 | $ | 8,279 | |||||
Equity securities | 91 | 86 | 78 | ||||||||
Trading and FVO securities — Actively traded and FVO general account securities (1) | (15 | ) | 23 | 43 | |||||||
Mortgage loans | 2,514 | 2,378 | 2,405 | ||||||||
Policy loans | 435 | 448 | 440 | ||||||||
Real estate and real estate joint ventures | 743 | 725 | 699 | ||||||||
Other limited partnership interests | 519 | 721 | 633 | ||||||||
Cash, cash equivalents and short-term investments | 25 | 26 | 32 | ||||||||
Operating joint venture | 9 | 2 | (4 | ) | |||||||
Other | 202 | 61 | 21 | ||||||||
Subtotal | 12,453 | 12,730 | 12,626 | ||||||||
Less: Investment expenses | 876 | 838 | 844 | ||||||||
Subtotal, net | 11,577 | 11,892 | 11,782 | ||||||||
FVO CSEs — interest income: | |||||||||||
Securities | — | 1 | 3 | ||||||||
Subtotal | — | 1 | 3 | ||||||||
Net investment income | $ | 11,577 | $ | 11,893 | $ | 11,785 |
______________
(1) | Changes in estimated fair value subsequent to purchase for securities still held as of the end of the respective years included in net investment income were ($18) million, ($14) million and $4 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses.
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 actively traded securities and the execution of short sale agreements. FVO securities include certain fixed maturity and equity securities held-for-investment by the general account to support asset/liability management strategies for certain insurance products and securities held by CSEs.
90
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Total gains (losses) on fixed maturity securities: | |||||||||||
Total OTTI losses recognized — by sector and industry: | |||||||||||
U.S. and foreign corporate securities — by industry: | |||||||||||
Consumer | $ | (21 | ) | $ | (6 | ) | $ | (12 | ) | ||
Utility | (15 | ) | — | (48 | ) | ||||||
Finance | — | — | (4 | ) | |||||||
Communications | — | — | (2 | ) | |||||||
Total U.S. and foreign corporate securities | (36 | ) | (6 | ) | (66 | ) | |||||
RMBS | (17 | ) | (20 | ) | (62 | ) | |||||
State and political subdivision | (1 | ) | — | — | |||||||
OTTI losses on fixed maturity securities recognized in earnings | (54 | ) | (26 | ) | (128 | ) | |||||
Fixed maturity securities — net gains (losses) on sales and disposals | (114 | ) | (99 | ) | 177 | ||||||
Total gains (losses) on fixed maturity securities | (168 | ) | (125 | ) | 49 | ||||||
Total gains (losses) on equity securities: | |||||||||||
Total OTTI losses recognized — by sector: | |||||||||||
Common stock | (37 | ) | (5 | ) | (2 | ) | |||||
Non-redeemable preferred stock | — | (16 | ) | (17 | ) | ||||||
OTTI losses on equity securities recognized in earnings | (37 | ) | (21 | ) | (19 | ) | |||||
Equity securities — net gains (losses) on sales and disposals | — | 42 | 6 | ||||||||
Total gains (losses) on equity securities | (37 | ) | 21 | (13 | ) | ||||||
Trading and FVO securities — FVO general account securities | — | 1 | 11 | ||||||||
Mortgage loans | (90 | ) | (36 | ) | 31 | ||||||
Real estate and real estate joint ventures | 430 | 252 | (15 | ) | |||||||
Other limited partnership interests | (66 | ) | (69 | ) | (41 | ) | |||||
Other | (18 | ) | (108 | ) | 5 | ||||||
Subtotal | 51 | (64 | ) | 27 | |||||||
FVO CSEs: | |||||||||||
Securities | — | — | 2 | ||||||||
Long-term debt — related to securities | — | (1 | ) | (2 | ) | ||||||
Non-investment portfolio gains (losses) | 208 | 208 | 21 | ||||||||
Subtotal | 208 | 207 | 21 | ||||||||
Total net investment gains (losses) | $ | 259 | $ | 143 | $ | 48 |
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of affiliated net investment gains (losses) related to transfers of invested assets to affiliates.
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $125 million, $132 million and less than $1 million for the years ended December 31, 2015, 2014 and 2013, respectively.
91
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
Sales or Disposals and Impairments of Fixed Maturity and Equity Securities
Investment gains and losses on sales of securities are determined on a specific identification basis. Proceeds from sales or disposals of fixed maturity and equity securities and the components of fixed maturity and equity securities net investment gains (losses) were as shown in the table below.
Years Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
Fixed Maturity Securities | Equity Securities | ||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Proceeds | $ | 60,957 | $ | 44,906 | $ | 45,538 | $ | 105 | $ | 128 | $ | 144 | |||||||||||
Gross investment gains | $ | 584 | $ | 260 | $ | 556 | $ | 28 | $ | 46 | $ | 25 | |||||||||||
Gross investment losses | (698 | ) | (359 | ) | (379 | ) | (28 | ) | (4 | ) | (19 | ) | |||||||||||
OTTI losses | (54 | ) | (26 | ) | (128 | ) | (37 | ) | (21 | ) | (19 | ) | |||||||||||
Net investment gains (losses) | $ | (168 | ) | $ | (125 | ) | $ | 49 | $ | (37 | ) | $ | 21 | $ | (13 | ) |
Credit Loss Rollforward
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was recognized in OCI:
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Balance at January 1, | $ | 263 | $ | 277 | |||
Additions: | |||||||
Initial impairments — credit loss OTTI on securities not previously impaired | 14 | 1 | |||||
Additional impairments — credit loss OTTI on securities previously impaired | 15 | 15 | |||||
Reductions: | |||||||
Sales (maturities, pay downs or prepayments) of securities previously impaired as credit loss OTTI | (102 | ) | (30 | ) | |||
Increase in cash flows — accretion of previous credit loss OTTI | (2 | ) | — | ||||
Balance at December 31, | $ | 188 | $ | 263 |
Related Party Investment Transactions
The Company transfers invested assets, primarily consisting of fixed maturity securities, to and from affiliates. Invested assets transferred to and from affiliates were as follows:
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In millions) | ||||||||||||
Estimated fair value of invested assets transferred to affiliates | $ | 1,003 | $ | 97 | $ | 781 | ||||||
Amortized cost of invested assets transferred to affiliates | $ | 941 | $ | 89 | $ | 688 | ||||||
Net investment gains (losses) recognized on transfers | $ | 62 | $ | 8 | $ | 93 | ||||||
Estimated fair value of invested assets transferred from affiliates | $ | 237 | $ | 882 | $ | 882 |
In 2013, prior to the Mergers, the Company transferred invested assets to and from MICC of $751 million and $739 million, respectively, related to the establishment of a custodial account to secure certain policyholder liabilities, which is included in the table above. See Note 6 for additional information on the Mergers.
92
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)
In July 2014, prior to the Mergers, the Company purchased from certain affiliates MetLife, Inc. affiliated loans with an unpaid principal balance of $400 million and estimated fair value of $437 million, which are included in the table above. The unpaid principal balance of MetLife, Inc. affiliated loans held by the Company totals $1.9 billion, bear interest at the following fixed rates, payable semiannually, and are due as follows: $250 million at 7.44% due on September 30, 2016, $500 million at 3.54% due on June 30, 2019, $250 million at 3.57% due on October 1, 2019, $445 million at 5.64% due on July 15, 2021 and $480 million at 5.86% due on December 16, 2021. The carrying value of these MetLife, Inc. affiliated loans totaled $2.0 billion at both December 31, 2015 and 2014 which are included in other invested assets. Net investment income from these affiliated loans was $95 million, $92 million and $90 million for the years ended December 31, 2015, 2014 and 2013, respectively.
As a structured settlements assignment company, the Company purchases annuities from affiliates to fund the periodic structured settlement claim payment obligations it assumes. Each annuity purchased is contractually designated to the assumed claim obligation it funds. The aggregate annuity contract values recorded, for which the Company has also recorded an unpaid claim obligation of equal amounts, were $1.3 billion at December 31, 2015. The related net investment income and corresponding policyholder benefits and claims recognized were $63 million for the year ended December 31, 2015.
The Company had a surplus note outstanding from American Life Insurance Company, an affiliate, which was included in other invested assets, totaling $100 million at both December 31, 2015 and 2014. The loan, which bears interest at a fixed rate of 3.17%, payable semiannually, is due on June 30, 2020. Net investment income from this surplus note was $3 million and less than $1 million for the years ended December 31, 2015 and 2014, respectively.
The Company provides investment administrative services to certain affiliates. The related investment administrative service charges to these affiliates were $157 million, $179 million and $172 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company also earned additional affiliated net investment income of $4 million for each of the years ended December 31, 2015, 2014 and 2013.
See “— Mortgage Loans — Mortgage Loans by Portfolio Segment” for discussion of mortgage loan participation agreements with affiliates.
9. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 10 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps and structured interest rate swaps to synthetically replicate investment risks and returns which are not readily available in the cash market.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair value, cash flow and nonqualifying hedging relationships.
93
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The Company uses structured interest rate swaps to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. Treasury, agency, or other fixed maturity security. Structured interest rate swaps are included in interest rate swaps and are not designated as hedging instruments.
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow hedging relationships.
To a lesser extent, the Company uses exchange-traded interest rate futures in nonqualifying hedging relationships.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency exchange rate derivatives, including foreign currency swaps and foreign currency forwards, to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and nonqualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in nonqualifying hedging relationships.
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional amount in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations, repudiation, moratorium, involuntary restructuring or governmental intervention. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. Treasury securities, agency securities or other fixed maturity securities. These credit default swaps are not designated as hedging instruments.
The Company also enters into certain purchased and written credit default swaps held in relation to trading portfolios for the purpose of generating profits on short-term differences in price. These credit default swaps are not designated as hedging instruments.
94
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these transactions as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, equity variance swaps, exchange-traded equity futures and total rate of return swaps (“TRRs”).
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company utilizes equity index options in nonqualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps in nonqualifying hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.
TRRs are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and the LIBOR, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. The Company uses TRRs to hedge its equity market guarantees in certain of its insurance products. TRRs can be used as hedges or to synthetically create investments. The Company utilizes TRRs in nonqualifying hedging relationships.
95
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
Primary Risks Managed by Derivatives
The following table presents the gross notional amount, estimated fair value and primary underlying risk exposure of the Company’s derivatives, excluding embedded derivatives, held at:
Primary Underlying Risk Exposure | December 31, | ||||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||||
Estimated Fair Value | Estimated Fair Value | ||||||||||||||||||||||||
Gross Notional Amount | Assets | Liabilities | Gross Notional Amount | Assets | Liabilities | ||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||
Derivatives Designated as Hedging Instruments | |||||||||||||||||||||||||
Fair value hedges: | |||||||||||||||||||||||||
Interest rate swaps | Interest rate | $ | 5,089 | $ | 2,177 | $ | 11 | $ | 5,632 | $ | 2,031 | $ | 18 | ||||||||||||
Foreign currency swaps | Foreign currency exchange rate | 2,133 | 61 | 159 | 2,709 | 65 | 101 | ||||||||||||||||||
Subtotal | 7,222 | 2,238 | 170 | 8,341 | 2,096 | 119 | |||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Interest rate swaps | Interest rate | 1,960 | 426 | — | 2,191 | 447 | — | ||||||||||||||||||
Interest rate forwards | Interest rate | 70 | 15 | — | 70 | 18 | — | ||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | 18,743 | 1,132 | 1,376 | 14,895 | 501 | 614 | ||||||||||||||||||
Subtotal | 20,773 | 1,573 | 1,376 | 17,156 | 966 | 614 | |||||||||||||||||||
Total qualifying hedges | 27,995 | 3,811 | 1,546 | 25,497 | 3,062 | 733 | |||||||||||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments | |||||||||||||||||||||||||
Interest rate swaps | Interest rate | 51,489 | 2,613 | 1,197 | 56,394 | 2,213 | 1,072 | ||||||||||||||||||
Interest rate floors | Interest rate | 13,701 | 252 | 10 | 36,141 | 319 | 108 | ||||||||||||||||||
Interest rate caps | Interest rate | 55,136 | 67 | 2 | 41,227 | 134 | 1 | ||||||||||||||||||
Interest rate futures | Interest rate | 2,023 | — | 2 | 70 | — | — | ||||||||||||||||||
Interest rate options | Interest rate | 2,295 | 227 | 4 | 6,399 | 379 | 15 | ||||||||||||||||||
Synthetic GICs | Interest rate | 4,216 | — | — | 4,298 | — | — | ||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | 8,095 | 600 | 94 | 8,774 | 359 | 176 | ||||||||||||||||||
Foreign currency forwards | Foreign currency exchange rate | 3,014 | 83 | 36 | 3,985 | 92 | 80 | ||||||||||||||||||
Credit default swaps — purchased | Credit | 819 | 28 | 8 | 857 | 8 | 11 | ||||||||||||||||||
Credit default swaps — written | Credit | 6,577 | 51 | 11 | 7,419 | 130 | 5 | ||||||||||||||||||
Equity futures | Equity market | 1,452 | 15 | — | 954 | 10 | — | ||||||||||||||||||
Equity index options | Equity market | 7,364 | 326 | 349 | 7,698 | 328 | 352 | ||||||||||||||||||
Equity variance swaps | Equity market | 5,676 | 62 | 160 | 5,678 | 60 | 146 | ||||||||||||||||||
TRRs | Equity market | 952 | 11 | 9 | 911 | 10 | 33 | ||||||||||||||||||
Total non-designated or nonqualifying derivatives | 162,809 | 4,335 | 1,882 | 180,805 | 4,042 | 1,999 | |||||||||||||||||||
Total | $ | 190,804 | $ | 8,146 | $ | 3,428 | $ | 206,302 | $ | 7,104 | $ | 2,732 |
Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both December 31, 2015 and 2014. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps that are used to synthetically create credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
96
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Freestanding derivatives and hedging gains (losses) (1) | $ | 463 | $ | 1,207 | $ | (1,205 | ) | ||||
Embedded derivatives gains (losses) | 418 | (170 | ) | 135 | |||||||
Total net derivative gains (losses) | $ | 881 | $ | 1,037 | $ | (1,070 | ) |
______________
(1) | Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships, which are not presented elsewhere in this note. |
The following table presents earned income on derivatives:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Qualifying hedges: | |||||||||||
Net investment income | $ | 227 | $ | 162 | $ | 129 | |||||
Interest credited to policyholder account balances | 28 | 106 | 148 | ||||||||
Nonqualifying hedges: | |||||||||||
Net investment income | (5 | ) | (4 | ) | (6 | ) | |||||
Net derivative gains (losses) | 518 | 484 | 450 | ||||||||
Policyholder benefits and claims | 2 | 8 | — | ||||||||
Total | $ | 770 | $ | 756 | $ | 721 |
97
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
Nonqualifying Derivatives and Derivatives for Purposes Other Than Hedging
The following table presents the amount and location of gains (losses) recognized in income for derivatives that were not designated or qualifying as hedging instruments:
Net Derivative Gains (Losses) | Net Investment Income (1) | Policyholder Benefits and Claims (2) | |||||||||
(In millions) | |||||||||||
Year Ended December 31, 2015 | |||||||||||
Interest rate derivatives | $ | (243 | ) | $ | — | $ | — | ||||
Foreign currency exchange rate derivatives | 678 | — | — | ||||||||
Credit derivatives — purchased | 17 | (3 | ) | — | |||||||
Credit derivatives — written | (57 | ) | — | — | |||||||
Equity derivatives | (152 | ) | (11 | ) | — | ||||||
Total | $ | 243 | $ | (14 | ) | $ | — | ||||
Year Ended December 31, 2014 | |||||||||||
Interest rate derivatives | $ | 314 | $ | — | $ | — | |||||
Foreign currency exchange rate derivatives | 554 | — | — | ||||||||
Credit derivatives — purchased | (2 | ) | — | — | |||||||
Credit derivatives — written | (1 | ) | — | — | |||||||
Equity derivatives | 11 | (10 | ) | (10 | ) | ||||||
Total | $ | 876 | $ | (10 | ) | $ | (10 | ) | |||
Year Ended December 31, 2013 | |||||||||||
Interest rate derivatives | $ | (1,753 | ) | $ | — | $ | — | ||||
Foreign currency exchange rate derivatives | (69 | ) | — | — | |||||||
Credit derivatives — purchased | (6 | ) | (14 | ) | — | ||||||
Credit derivatives — written | 100 | 1 | — | ||||||||
Equity derivatives | — | (22 | ) | — | |||||||
Total | $ | (1,728 | ) | $ | (35 | ) | $ | — |
______________
(1) | Changes in estimated fair value related to economic hedges of equity method investments in joint ventures and derivatives held in relation to trading portfolios. |
(2) | Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits. |
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate assets and liabilities to floating rate assets and liabilities; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets and liabilities.
98
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges within net derivative gains (losses). The following table presents the amount of such net derivative gains (losses):
Derivatives in Fair Value Hedging Relationships | Hedged Items in Fair Value Hedging Relationships | Net Derivative Gains (Losses) Recognized for Derivatives | Net Derivative Gains (Losses) Recognized for Hedged Items | Ineffectiveness Recognized in Net Derivative Gains (Losses) | ||||||||||
(In millions) | ||||||||||||||
Year Ended December 31, 2015 | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | 4 | $ | — | $ | 4 | |||||||
Policyholder liabilities (1) | (4 | ) | (6 | ) | (10 | ) | ||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | 14 | (5 | ) | 9 | |||||||||
Foreign-denominated policyholder account balances (2) | (240 | ) | 231 | (9 | ) | |||||||||
Total | $ | (226 | ) | $ | 220 | $ | (6 | ) | ||||||
Year Ended December 31, 2014 | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | 4 | $ | (1 | ) | $ | 3 | ||||||
Policyholder liabilities (1) | 649 | (635 | ) | 14 | ||||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | 13 | (11 | ) | 2 | |||||||||
Foreign-denominated policyholder account balances (2) | (283 | ) | 270 | (13 | ) | |||||||||
Total | $ | 383 | $ | (377 | ) | $ | 6 | |||||||
Year Ended December 31, 2013 | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | 34 | $ | (33 | ) | $ | 1 | ||||||
Policyholder liabilities (1) | (800 | ) | 807 | 7 | ||||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | 13 | (12 | ) | 1 | |||||||||
Foreign-denominated policyholder account balances (2) | (98 | ) | 112 | 14 | ||||||||||
Total | $ | (851 | ) | $ | 874 | $ | 23 |
______________
(1) | Fixed rate liabilities reported in policyholder account balances or future policy benefits. |
(2) | Fixed rate or floating rate liabilities. |
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments; and (v) interest rate forwards to hedge forecasted fixed-rate borrowings.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). These amounts were $14 million and ($14) million for the years ended December 31, 2015 and 2014, respectively, and were not significant for the year ended December 31, 2013.
At December 31, 2015 and 2014, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed five years and six years, respectively.
99
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
At December 31, 2015 and 2014, the balance in AOCI associated with cash flow hedges was $2.2 billion and $1.6 billion, respectively.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity:
Derivatives in Cash Flow Hedging Relationships | Amount of Gains (Losses)Deferred in AOCI on Derivatives | Amount and Location of Gains (Losses) Reclassified from AOCI into Income (Loss) | Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives | |||||||||||||
(Effective Portion) | (Effective Portion) | (Ineffective Portion) | ||||||||||||||
Net Derivative Gains (Losses) | Net Investment Income | Net Derivative Gains (Losses) | ||||||||||||||
(In millions) | ||||||||||||||||
Year Ended December 31, 2015 | ||||||||||||||||
Interest rate swaps | $ | 76 | $ | 83 | $ | 11 | $ | 2 | ||||||||
Interest rate forwards | (3 | ) | 4 | 2 | — | |||||||||||
Foreign currency swaps | (92 | ) | (679 | ) | (1 | ) | 7 | |||||||||
Credit forwards | — | 1 | 1 | — | ||||||||||||
Total | $ | (19 | ) | $ | (591 | ) | $ | 13 | $ | 9 | ||||||
Year Ended December 31, 2014 | ||||||||||||||||
Interest rate swaps | $ | 587 | $ | 41 | $ | 9 | $ | 3 | ||||||||
Interest rate forwards | 34 | (8 | ) | 2 | — | |||||||||||
Foreign currency swaps | (15 | ) | (725 | ) | (2 | ) | 2 | |||||||||
Credit forwards | — | — | 1 | — | ||||||||||||
Total | $ | 606 | $ | (692 | ) | $ | 10 | $ | 5 | |||||||
Year Ended December 31, 2013 | ||||||||||||||||
Interest rate swaps | $ | (511 | ) | $ | 20 | $ | 8 | $ | (3 | ) | ||||||
Interest rate forwards | (43 | ) | 1 | 2 | — | |||||||||||
Foreign currency swaps | (120 | ) | (15 | ) | (3 | ) | 2 | |||||||||
Credit forwards | (3 | ) | — | 1 | — | |||||||||||
Total | $ | (677 | ) | $ | 6 | $ | 8 | $ | (1 | ) |
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At December 31, 2015, $93 million of deferred net gains (losses) on derivatives in AOCI was expected to be reclassified to earnings within the next 12 months.
Credit Derivatives
In connection with synthetically created credit investment transactions and credit default swaps held in relation to the trading portfolio, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the nonqualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $6.6 billion and $7.4 billion at December 31, 2015 and 2014, respectively. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps. At December 31, 2015 and 2014, the Company would have received $40 million and $125 million, respectively, to terminate all of these contracts.
100
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
December 31, | ||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||
Rating Agency Designation of Referenced Credit Obligations (1) | Estimated Fair Value of Credit Default Swaps | Maximum Amount of Future Payments under Credit Default Swaps | Weighted Average Years to Maturity (2) | Estimated Fair Value of Credit Default Swaps | Maximum Amount of Future Payments under Credit Default Swaps | Weighted Average Years to Maturity (2) | ||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||
Aaa/Aa/A | ||||||||||||||||||||||
Single name credit default swaps (corporate) | $ | 2 | $ | 245 | 2.5 | $ | 5 | $ | 415 | 2.2 | ||||||||||||
Credit default swaps referencing indices | 5 | 1,366 | 3.3 | 10 | 1,566 | 2.7 | ||||||||||||||||
Subtotal | 7 | 1,611 | 3.2 | 15 | 1,981 | 2.6 | ||||||||||||||||
Baa | ||||||||||||||||||||||
Single name credit default swaps (corporate) | 5 | 752 | 2.6 | 15 | 1,002 | 2.8 | ||||||||||||||||
Credit default swaps referencing indices | 21 | 3,452 | 4.8 | 59 | 3,687 | 4.5 | ||||||||||||||||
Subtotal | 26 | 4,204 | 4.4 | 74 | 4,689 | 4.1 | ||||||||||||||||
Ba | ||||||||||||||||||||||
Single name credit default swaps (corporate) | (2 | ) | 60 | 2.2 | — | 60 | 3.0 | |||||||||||||||
Credit default swaps referencing indices | (1 | ) | 100 | 1.0 | (1 | ) | 100 | 2.0 | ||||||||||||||
Subtotal | (3 | ) | 160 | 1.4 | (1 | ) | 160 | 2.4 | ||||||||||||||
B | ||||||||||||||||||||||
Single name credit default swaps (corporate) | — | — | — | — | — | — | ||||||||||||||||
Credit default swaps referencing indices | 10 | 602 | 4.9 | 37 | 589 | 4.9 | ||||||||||||||||
Subtotal | 10 | 602 | 4.9 | 37 | 589 | 4.9 | ||||||||||||||||
Total | $ | 40 | $ | 6,577 | 4.1 | $ | 125 | $ | 7,419 | 3.8 |
______________
(1) | The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used. |
(2) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts. |
The Company has also entered into credit default swaps to purchase credit protection on certain of the referenced credit obligations in the table above. As a result, the maximum amounts of potential future recoveries available to offset the $6.6 billion and $7.4 billion from the table above were $70 million and $60 million at December 31, 2015 and 2014, respectively.
Written credit default swaps held in relation to the trading portfolio amounted to $20 million and $15 million in gross notional amount and ($2) million and $1 million in estimated fair value at December 31, 2015 and 2014, respectively.
101
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives.
See Note 10 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
December 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement | Assets | Liabilities | Assets | Liabilities | ||||||||||||
(In millions) | ||||||||||||||||
Gross estimated fair value of derivatives: | ||||||||||||||||
OTC-bilateral (1) | $ | 7,368 | $ | 2,667 | $ | 6,497 | $ | 2,092 | ||||||||
OTC-cleared (1) | 909 | 783 | 740 | 682 | ||||||||||||
Exchange-traded | 15 | 2 | 10 | — | ||||||||||||
Total gross estimated fair value of derivatives (1) | 8,292 | 3,452 | 7,247 | 2,774 | ||||||||||||
Amounts offset on the consolidated balance sheets | — | — | — | — | ||||||||||||
Estimated fair value of derivatives presented on the consolidated balance sheets (1) | 8,292 | 3,452 | 7,247 | 2,774 | ||||||||||||
Gross amounts not offset on the consolidated balance sheets: | ||||||||||||||||
Gross estimated fair value of derivatives: (2) | ||||||||||||||||
OTC-bilateral | (2,117 | ) | (2,117 | ) | (1,742 | ) | (1,742 | ) | ||||||||
OTC-cleared | (776 | ) | (776 | ) | (638 | ) | (638 | ) | ||||||||
Exchange-traded | — | — | — | — | ||||||||||||
Cash collateral: (3), (4) | ||||||||||||||||
OTC-bilateral | (3,705 | ) | (3 | ) | (2,470 | ) | (2 | ) | ||||||||
OTC-cleared | (119 | ) | — | (97 | ) | (40 | ) | |||||||||
Exchange-traded | — | — | — | — | ||||||||||||
Securities collateral: (5) | ||||||||||||||||
OTC-bilateral | (1,345 | ) | (541 | ) | (2,161 | ) | (333 | ) | ||||||||
OTC-cleared | — | — | — | (3 | ) | |||||||||||
Exchange-traded | — | — | — | — | ||||||||||||
Net amount after application of master netting agreements and collateral | $ | 230 | $ | 15 | $ | 139 | $ | 16 |
______________
102
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
(1) | At December 31, 2015 and 2014, derivative assets included income or expense accruals reported in accrued investment income or in other liabilities of $146 million and $143 million, respectively, and derivative liabilities included income or expense accruals reported in accrued investment income or in other liabilities of $24 million and $42 million, respectively. |
(2) | Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals. |
(3) | Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet. In certain instances, cash collateral pledged to the Company as initial margin for OTC-bilateral derivatives is held in separate custodial accounts and is not recorded on the Company’s balance sheet because the account title is in the name of the counterparty (but segregated for the benefit of the Company). The amount of this off-balance sheet collateral was $0 and $138 million at December 31, 2015 and 2014, respectively. |
(4) | The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At December 31, 2015 and 2014, the Company received excess cash collateral of $17 million and $0, respectively, and provided excess cash collateral of $58 million and $31 million, respectively, which is not included in the table above due to the foregoing limitation. |
(5) | Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at December 31, 2015 none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31, 2015 and 2014, the Company received excess securities collateral with an estimated fair value of $71 million and $243 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2015 and 2014, the Company provided excess securities collateral with an estimated fair value of $81 million and $57 million, respectively, for its OTC-bilateral derivatives, and $239 million and $155 million, respectively, for its OTC-cleared derivatives, and $15 million and $17 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation. |
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the estimated fair value of that counterparty’s derivatives reaches a pre-determined threshold. Certain of these arrangements also include financial strength-contingent provisions that provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the financial strength ratings of Metropolitan Life Insurance Company, or its subsidiaries, as applicable, and/or the credit ratings of the counterparty. In addition, certain of the Company’s netting agreements for derivatives contain provisions that require both Metropolitan Life Insurance Company, or its subsidiaries, as applicable, and the counterparty to maintain a specific investment grade financial strength or credit rating from each of Moody’s and S&P. If a party’s financial strength or credit ratings were to fall below that specific investment grade financial strength or credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
103
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that are in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. The table also presents the incremental collateral that Metropolitan Life Insurance Company, or its subsidiaries, as applicable, would be required to provide if there was a one-notch downgrade in such companies’ financial strength rating at the reporting date or if such companies’ financial strength rating sustained a downgrade to a level that triggered full overnight collateralization or termination of the derivative position at the reporting date. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
December 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Derivatives Subject to Financial Strength- Contingent Provisions | Derivatives Not Subject to Financial Strength- Contingent Provisions | Total | Derivatives Subject to Financial Strength- Contingent Provisions | Derivatives Not Subject to Financial Strength- Contingent Provisions | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Estimated fair value of derivatives in a net liability position (1) | $ | 547 | $ | 3 | $ | 550 | $ | 334 | $ | 4 | $ | 338 | ||||||||||||
Estimated Fair Value of Collateral Provided | ||||||||||||||||||||||||
Fixed maturity securities | $ | 622 | $ | — | $ | 622 | $ | 390 | $ | — | $ | 390 | ||||||||||||
Cash | $ | — | $ | 4 | $ | 4 | $ | — | $ | 2 | $ | 2 | ||||||||||||
Fair Value of Incremental Collateral Provided Upon | ||||||||||||||||||||||||
One-notch downgrade in financial strength rating | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Downgrade in financial strength rating to a level that triggers full overnight collateralization or termination of the derivative position | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
______________
(1) | After taking into consideration the existence of netting agreements. |
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; affiliated ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; affiliated assumed reinsurance of guaranteed minimum benefits related to GMWBs, GMABs, and certain GMIBs; funds withheld on ceded reinsurance and affiliated funds withheld on ceded reinsurance; funding agreements with equity or bond indexed crediting rates; and certain debt and equity securities.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
December 31, | |||||||||
Balance Sheet Location | 2015 | 2014 | |||||||
(In millions) | |||||||||
Net embedded derivatives within asset host contracts: | |||||||||
Ceded guaranteed minimum benefits | Premiums, reinsurance and other receivables | $ | 712 | $ | 657 | ||||
Options embedded in debt or equity securities | Investments | (142 | ) | (150 | ) | ||||
Net embedded derivatives within asset host contracts | $ | 570 | $ | 507 | |||||
Net embedded derivatives within liability host contracts: | |||||||||
Direct guaranteed minimum benefits | Policyholder account balances | $ | (284 | ) | $ | (548 | ) | ||
Assumed guaranteed minimum benefits | Policyholder account balances | 126 | 72 | ||||||
Funds withheld on ceded reinsurance | Other liabilities | 687 | 1,200 | ||||||
Other | Policyholder account balances | (3 | ) | 7 | |||||
Net embedded derivatives within liability host contracts | $ | 526 | $ | 731 |
104
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)
The following table presents changes in estimated fair value related to embedded derivatives:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net derivative gains (losses) (1), (2) | $ | 418 | $ | (170 | ) | $ | 135 |
______________
(1) | The valuation of direct and assumed guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $29 million, $14 million and ($42) million for the years ended December 31, 2015, 2014 and 2013, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were ($4) million, ($9) million and $125 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
(2) | See Note 6 for discussion of affiliated net derivative gains (losses). |
Related Party Freestanding Derivative Transactions
In November 2014, as part of the settlement of related party reinsurance transactions, the Company acquired derivatives from an affiliate. The estimated fair value of freestanding derivative assets and liabilities acquired were $740 million and $754 million, respectively. See Note 6 for additional information regarding related party reinsurance transactions in connection with the Mergers.
105
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value
When developing estimated fair values, the Company considers three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs, giving priority to observable inputs. The Company categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input with the lowest level in its valuation. The input levels are as follows:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities. |
Level 2 | Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. These inputs can include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other significant inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 | Unobservable inputs that are supported by little or no market activity and are significant to the determination of estimated fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. |
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell securities, or the price ultimately realized for these securities, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain securities.
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
106
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below.
December 31, 2015 | |||||||||||||||
Fair Value Hierarchy | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||
(In millions) | |||||||||||||||
Assets | |||||||||||||||
Fixed maturity securities: | |||||||||||||||
U.S. corporate | $ | — | $ | 56,848 | $ | 4,709 | $ | 61,557 | |||||||
U.S. Treasury and agency | 23,015 | 16,678 | — | 39,693 | |||||||||||
Foreign corporate | — | 23,222 | 3,573 | 26,795 | |||||||||||
RMBS | — | 20,585 | 3,330 | 23,915 | |||||||||||
State and political subdivision | — | 6,941 | 33 | 6,974 | |||||||||||
CMBS | — | 6,361 | 218 | 6,579 | |||||||||||
ABS | — | 5,699 | 868 | 6,567 | |||||||||||
Foreign government | — | 3,331 | 275 | 3,606 | |||||||||||
Total fixed maturity securities | 23,015 | 139,665 | 13,006 | 175,686 | |||||||||||
Equity securities | 424 | 1,197 | 328 | 1,949 | |||||||||||
Trading and FVO securities: | |||||||||||||||
Actively traded securities | — | 400 | 4 | 404 | |||||||||||
FVO general account securities | — | — | 15 | 15 | |||||||||||
FVO securities held by CSEs | — | 2 | 10 | 12 | |||||||||||
Total trading and FVO securities | — | 402 | 29 | 431 | |||||||||||
Short-term investments | 1,513 | 3,882 | 200 | 5,595 | |||||||||||
Residential mortgage loans — FVO | — | — | 314 | 314 | |||||||||||
Derivative assets: (1) | |||||||||||||||
Interest rate | — | 5,762 | 15 | 5,777 | |||||||||||
Foreign currency exchange rate | — | 1,876 | — | 1,876 | |||||||||||
Credit | — | 72 | 7 | 79 | |||||||||||
Equity market | 15 | 282 | 117 | 414 | |||||||||||
Total derivative assets | 15 | 7,992 | 139 | 8,146 | |||||||||||
Net embedded derivatives within asset host contracts (2) | — | — | 712 | 712 | |||||||||||
Separate account assets (3) | 23,498 | 110,921 | 1,520 | 135,939 | |||||||||||
Total assets | $ | 48,465 | $ | 264,059 | $ | 16,248 | $ | 328,772 | |||||||
Liabilities | |||||||||||||||
Derivative liabilities: (1) | |||||||||||||||
Interest rate | $ | 2 | $ | 1,224 | $ | — | $ | 1,226 | |||||||
Foreign currency exchange rate | — | 1,665 | — | 1,665 | |||||||||||
Credit | — | 17 | 2 | 19 | |||||||||||
Equity market | — | 358 | 160 | 518 | |||||||||||
Total derivative liabilities | 2 | 3,264 | 162 | 3,428 | |||||||||||
Net embedded derivatives within liability host contracts (2) | — | — | 526 | 526 | |||||||||||
Long-term debt | — | 50 | 36 | 86 | |||||||||||
Long-term debt of CSEs — FVO | — | — | 11 | 11 | |||||||||||
Trading liabilities (4) | 103 | 50 | — | 153 | |||||||||||
Total liabilities | $ | 105 | $ | 3,364 | $ | 735 | $ | 4,204 |
107
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
December 31, 2014 | |||||||||||||||
Fair Value Hierarchy | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||
(In millions) | |||||||||||||||
Assets | |||||||||||||||
Fixed maturity securities: | |||||||||||||||
U.S. corporate | $ | — | $ | 60,420 | $ | 4,937 | $ | 65,357 | |||||||
U.S. Treasury and agency | 21,625 | 17,445 | — | 39,070 | |||||||||||
Foreign corporate | — | 26,227 | 3,591 | 29,818 | |||||||||||
RMBS | — | 24,534 | 3,629 | 28,163 | |||||||||||
State and political subdivision | — | 6,520 | — | 6,520 | |||||||||||
CMBS | — | 7,464 | 449 | 7,913 | |||||||||||
ABS | — | 6,734 | 1,492 | 8,226 | |||||||||||
Foreign government | — | 3,642 | 202 | 3,844 | |||||||||||
Total fixed maturity securities | 21,625 | 152,986 | 14,300 | 188,911 | |||||||||||
Equity securities | 584 | 1,266 | 215 | 2,065 | |||||||||||
Trading and FVO securities: | |||||||||||||||
Actively traded securities | 22 | 627 | 5 | 654 | |||||||||||
FVO general account securities | — | 22 | 14 | 36 | |||||||||||
FVO securities held by CSEs | — | 3 | 12 | 15 | |||||||||||
Total trading and FVO securities | 22 | 652 | 31 | 705 | |||||||||||
Short-term investments (5) | 860 | 3,091 | 230 | 4,181 | |||||||||||
Residential mortgage loans — FVO | — | — | 308 | 308 | |||||||||||
Derivative assets: (1) | |||||||||||||||
Interest rate | — | 5,524 | 17 | 5,541 | |||||||||||
Foreign currency exchange rate | — | 1,010 | 7 | 1,017 | |||||||||||
Credit | — | 125 | 13 | 138 | |||||||||||
Equity market | 10 | 279 | 119 | 408 | |||||||||||
Total derivative assets | 10 | 6,938 | 156 | 7,104 | |||||||||||
Net embedded derivatives within asset host contracts (2) | — | — | 657 | 657 | |||||||||||
Separate account assets (3) | 26,119 | 111,601 | 1,615 | 139,335 | |||||||||||
Total assets | $ | 49,220 | $ | 276,534 | $ | 17,512 | $ | 343,266 | |||||||
Liabilities | |||||||||||||||
Derivative liabilities: (1) | |||||||||||||||
Interest rate | $ | — | $ | 1,214 | $ | — | $ | 1,214 | |||||||
Foreign currency exchange rate | — | 971 | — | 971 | |||||||||||
Credit | — | 15 | 1 | 16 | |||||||||||
Equity market | — | 382 | 149 | 531 | |||||||||||
Total derivative liabilities | — | 2,582 | 150 | 2,732 | |||||||||||
Net embedded derivatives within liability host contracts (2) | — | 7 | 724 | 731 | |||||||||||
Long-term debt | — | 82 | 35 | 117 | |||||||||||
Long-term debt of CSEs — FVO | — | — | 13 | 13 | |||||||||||
Trading liabilities (4) | 215 | 24 | — | 239 | |||||||||||
Total liabilities | $ | 215 | $ | 2,695 | $ | 922 | $ | 3,832 |
______________
(1) | Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables. |
108
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
(2) | Net embedded derivatives within asset host contracts are presented primarily within premiums, reinsurance and other receivables on the consolidated balance sheets. Net embedded derivatives within liability host contracts are presented within policyholder account balances and other liabilities on the consolidated balance sheets. At December 31, 2015 and 2014, debt and equity securities also included embedded derivatives of ($142) million and ($150) million, respectively. |
(3) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the estimated fair value of separate account assets. |
(4) | Trading liabilities are presented within other liabilities on the consolidated balance sheets. |
(5) | Short-term investments as presented in the tables above differ from the amounts presented on the consolidated balance sheets because certain short-term investments are not measured at estimated fair value on a recurring basis. |
The following describes the valuation methodologies used to measure assets and liabilities at fair value. The description includes the valuation techniques and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy.
Investments
Valuation Controls and Procedures
On behalf of the Company and MetLife, Inc.’s Chief Investment Officer and Chief Financial Officer, a pricing and valuation committee that is independent of the trading and investing functions and comprised of senior management, provides oversight of control systems and valuation policies for securities, mortgage loans and derivatives. On a quarterly basis, this committee reviews and approves new transaction types and markets, ensures that observable market prices and market-based parameters are used for valuation, wherever possible, and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. This committee also provides oversight of the selection of independent third-party pricing providers and the controls and procedures to evaluate third-party pricing. Periodically, the Chief Accounting Officer reports to the Audit Committee of the Board of Directors of each of MetLife, Inc. and Metropolitan Life Insurance Company regarding compliance with fair value accounting standards.
The Company reviews its valuation methodologies on an ongoing basis and revises those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with fair value accounting standards through controls designed to ensure valuations represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. The Company ensures that prices received from independent brokers, also referred to herein as “consensus pricing,” represent a reasonable estimate of fair value by considering such pricing relative to the Company’s knowledge of the current market dynamics and current pricing for similar financial instruments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio. For example, fixed maturity securities priced using independent non-binding broker quotations represent less than 1% of the total estimated fair value of fixed maturity securities and 5% of the total estimated fair value of Level 3 fixed maturity securities at December 31, 2015.
The Company also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained, or an internally developed valuation is prepared. Internally developed valuations of current estimated fair value, which reflect internal estimates of liquidity and nonperformance risks, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio; accordingly, overrides were not material. This is, in part, because internal estimates of liquidity and nonperformance risks are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used.
Securities, Short-term Investments, Long-term Debt, Long-term Debt of CSEs — FVO and Trading Liabilities
When available, the estimated fair value of these financial instruments is based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, giving priority to observable inputs. The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. When observable inputs are not available, the market standard valuation methodologies rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs can be based in large part on management’s judgment or estimation and cannot be supported by reference to market activity. Even though these inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such securities and are considered appropriate given the circumstances.
The estimated fair value of FVO securities held by CSEs, long-term debt, long-term debt of CSEs — FVO and trading liabilities is determined on a basis consistent with the methodologies described herein for securities.
109
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
The valuation of most instruments listed below is determined using independent pricing sources, matrix pricing, discounted cash flow methodologies or other similar techniques that use either observable market inputs or unobservable inputs.
Instrument | Level 2 Observable Inputs | Level 3 Unobservable Inputs | |||
Fixed Maturity Securities | |||||
U.S. corporate and Foreign corporate securities | |||||
Valuation Techniques: Principally the market and income approaches. | Valuation Techniques: Principally the market approach. | ||||
Key Inputs: | Key Inputs: | ||||
• | quoted prices in markets that are not active | • | illiquidity premium | ||
• | benchmark yields; spreads off benchmark yields; new issuances; issuer rating | • | delta spread adjustments to reflect specific credit-related issues | ||
• | trades of identical or comparable securities; duration | • | credit spreads | ||
• | Privately-placed securities are valued using the additional key inputs: | • | quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 | ||
• | market yield curve; call provisions | ||||
• | observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer | • | independent non-binding broker quotations | ||
• | delta spread adjustments to reflect specific credit-related issues | ||||
U.S. Treasury and agency, State and political subdivision and Foreign government securities | |||||
Valuation Techniques: Principally the market approach. | Valuation Techniques: Principally the market approach. | ||||
Key Inputs: | Key Inputs: | ||||
• | quoted prices in markets that are not active | • | independent non-binding broker quotations | ||
• | benchmark U.S. Treasury yield or other yields | • | quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 | ||
• | the spread off the U.S. Treasury yield curve for the identical security | ||||
• | issuer ratings and issuer spreads; broker-dealer quotes | • | credit spreads | ||
• | comparable securities that are actively traded | ||||
Structured securities comprised of RMBS, CMBS and ABS | |||||
Valuation Techniques: Principally the market and income approaches. | Valuation Techniques: Principally the market and income approaches. | ||||
Key Inputs: | Key Inputs: | ||||
• | quoted prices in markets that are not active | • | credit spreads | ||
• | spreads for actively traded securities; spreads off benchmark yields | • | quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 | ||
• | expected prepayment speeds and volumes | ||||
• | current and forecasted loss severity; ratings; geographic region | • | independent non-binding broker quotations | ||
• | weighted average coupon and weighted average maturity | ||||
• | average delinquency rates; debt-service coverage ratios | ||||
• | issuance-specific information, including, but not limited to: | ||||
• | collateral type; structure of the security; vintage of the loans | ||||
• | payment terms of the underlying assets | ||||
• | payment priority within the tranche; deal performance |
110
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Instrument | Level 2 Observable Inputs | Level 3 Unobservable Inputs | |||
Equity Securities | |||||
Valuation Techniques: Principally the market approach. | Valuation Techniques: Principally the market and income approaches. | ||||
Key Input: | Key Inputs: | ||||
• | quoted prices in markets that are not considered active | • | credit ratings; issuance structures | ||
• | quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 | ||||
• | independent non-binding broker quotations | ||||
Trading and FVO securities and Short-term investments | |||||
• | Trading and FVO securities and short-term investments are of a similar nature and class to the fixed maturity and equity securities described above; accordingly, the valuation techniques and observable inputs used in their valuation are also similar to those described above. | • | Trading and FVO securities and short-term investments are of a similar nature and class to the fixed maturity and equity securities described above; accordingly, the valuation techniques and unobservable inputs used in their valuation are also similar to those described above. | ||
Mortgage Loans — FVO | |||||
Residential mortgage loans — FVO | |||||
• | N/A | Valuation Techniques: Principally the market approach, including matrix pricing or other similar techniques. | |||
Key Inputs: Inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data | |||||
Separate Account Assets (1) | |||||
Mutual funds and hedge funds without readily determinable fair values as prices are not published publicly | |||||
Key Input: | • | N/A | |||
• | quoted prices or reported NAV provided by the fund managers | ||||
Other limited partnership interests | |||||
• | N/A | Valuation Techniques: Valued giving consideration to the underlying holdings of the partnerships and by applying a premium or discount, if appropriate. | |||
Key Inputs: | |||||
• | liquidity; bid/ask spreads; performance record of the fund manager | ||||
• | other relevant variables that may impact the exit value of the particular partnership interest |
______________
(1) | Estimated fair value equals carrying value, based on the value of the underlying assets, including: mutual fund interests, fixed maturity securities, equity securities, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. Fixed maturity securities, equity securities, derivatives, short-term investments and cash and cash equivalents are similar in nature to the instruments described under “— Securities, Short-term Investments, Other Investments, Long-term Debt of CSEs — FVO and Trading Liabilities” and “— Derivatives — Freestanding Derivatives Valuation Techniques and Key Inputs.” |
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives, or through the use of pricing models for OTC-bilateral and OTC-cleared derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. The valuation controls and procedures for derivatives are described in “— Investments.”
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Freestanding Derivatives Valuation Techniques and Key Inputs
Level 2
This level includes all types of derivatives utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivatives with unobservable inputs as described in Level 3.
Level 3
These valuation methodologies generally use the same inputs as described in the corresponding sections for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
111
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Freestanding derivatives are principally valued using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. Key inputs are as follows:
Instrument | Interest Rate | Foreign Currency Exchange Rate | Credit | Equity Market | ||||
Inputs common to Level 2 and Level 3 by instrument type | • | swap yield curve | • | swap yield curve | • | swap yield curve | • | swap yield curve |
• | basis curves | • | basis curves | • | credit curves | • | spot equity index levels | |
• | interest rate volatility (1) | • | currency spot rates | • | recovery rates | • | dividend yield curves | |
• | cross currency basis curves | • | equity volatility (1) | |||||
Level 3 | • | swap yield curve (2) | • | swap yield curve (2) | • | swap yield curve (2) | • | dividend yield curves (2) |
• | basis curves (2) | • | basis curves (2) | • | credit curves (2) | • | equity volatility (1), (2) | |
• | cross currency basis curves (2) | • | credit spreads | • | correlation between model inputs (1) | |||
• | currency correlation | • | repurchase rates | |||||
• | independent non-binding broker quotations |
(1) | Option-based only. |
(2) | Extrapolation beyond the observable limits of the curve(s). |
112
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Embedded Derivatives
Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees, certain affiliated ceded reinsurance agreements related to such variable annuity guarantees, equity or bond indexed crediting rates within certain funding agreements and those related to funds withheld on ceded reinsurance agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
The Company’s actuarial department calculates the fair value of these embedded derivatives, which are estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife, Inc.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The Company ceded the risk associated with certain of the GMIBs, GMABs and GMWBs previously described. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also ceded directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives) but where the reinsurance agreement contains an embedded derivative. These embedded derivatives are included within premiums, reinsurance and other receivables on the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
113
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described in “— Investments — Securities, Short-term Investments, Long-term Debt of CSEs — FVO and Trading Liabilities.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
The estimated fair value of the embedded equity and bond indexed derivatives contained in certain funding agreements is determined using market standard swap valuation models and observable market inputs, including a nonperformance risk adjustment. The estimated fair value of these embedded derivatives are included, along with their funding agreements host, within policyholder account balances with changes in estimated fair value recorded in net derivative gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
Embedded Derivatives Within Asset and Liability Host Contracts
Level 3 Valuation Techniques and Key Inputs:
Direct and assumed guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curve, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curve and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Reinsurance ceded on certain guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those described above in “— Direct and assumed guaranteed minimum benefits” and also include counterparty credit spreads.
Embedded derivatives within funds withheld related to certain ceded reinsurance
These embedded derivatives are principally valued using the income approach. The valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers into or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
For assets and liabilities measured at estimated fair value and still held at December 31, 2015, transfers between Levels 1 and 2 were not significant. For assets and liabilities measured at estimated fair value and still held at December 31, 2014, there were no transfers between Levels 1 and 2.
114
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
December 31, 2015 | December 31, 2014 | Impact of Increase in Input on Estimated Fair Value (2) | |||||||||||||||||
Valuation Techniques | Significant Unobservable Inputs | Range | Weighted Average (1) | Range | Weighted Average (1) | ||||||||||||||
Fixed maturity securities (3) | |||||||||||||||||||
U.S. corporate and foreign corporate | • | Matrix pricing | • | Delta spread adjustments (4) | (65) | - | 240 | 37 | (40) | - | 240 | 39 | Decrease | ||||||
• | Offered quotes (5) | 39 | - | 96 | 60 | 64 | - | 130 | 96 | Increase | |||||||||
• | Market pricing | • | Quoted prices (5) | — | - | 385 | 125 | — | - | 590 | 126 | Increase | |||||||
• | Consensus pricing | • | Offered quotes (5) | 100 | - | 119 | 103 | 98 | - | 126 | 101 | Increase | |||||||
RMBS | • | Market pricing | • | Quoted prices (5) | 19 | - | 121 | 92 | 22 | - | 120 | 97 | Increase (6) | ||||||
ABS | • | Market pricing | • | Quoted prices (5) | 16 | - | 103 | 100 | 15 | - | 110 | 100 | Increase (6) | ||||||
• | Consensus pricing | • | Offered quotes (5) | 97 | - | 105 | 99 | 56 | - | 106 | 98 | Increase (6) | |||||||
Derivatives | |||||||||||||||||||
Interest rate | • | Present value techniques | • | Swap yield (7) | 307 | - | 307 | 290 | - | 290 | Increase (11) | ||||||||
Foreign currency exchange rate | • | Present value techniques | • | Correlation (8) | — | - | — | 40% | - | 55% | Increase (11) | ||||||||
Credit | • | Present value techniques | • | Credit spreads (9) | 98 | - | 100 | 98 | - | 100 | Decrease (9) | ||||||||
• | Consensus pricing | • | Offered quotes (10) | ||||||||||||||||
Equity market | • | Present value techniques or option pricing models | • | Volatility (12) | 17% | - | 36% | 15% | - | 27% | Increase (11) | ||||||||
• | Correlation (8) | 70% | - | 70% | 70% | - | 70% | ||||||||||||
Embedded derivatives | |||||||||||||||||||
Direct, assumed and ceded guaranteed minimum benefits | • | Option pricing techniques | • | Mortality rates: | |||||||||||||||
Ages 0 - 40 | 0% | - | 0.09% | 0% | - | 0.10% | Decrease (13) | ||||||||||||
Ages 41 - 60 | 0.04% | - | 0.65% | 0.04% | - | 0.65% | Decrease (13) | ||||||||||||
Ages 61 - 115 | 0.26% | - | 100% | 0.26% | - | 100% | Decrease (13) | ||||||||||||
• | Lapse rates: | ||||||||||||||||||
Durations 1 - 10 | 0.25% | - | 100% | 0.50% | - | 100% | Decrease (14) | ||||||||||||
Durations 11 - 20 | 3% | - | 100% | 3% | - | 100% | Decrease (14) | ||||||||||||
Durations 21 - 116 | 3% | - | 100% | 3% | - | 100% | Decrease (14) | ||||||||||||
• | Utilization rates | 0% | - | 25% | 20% | - | 50% | Increase (15) | |||||||||||
• | Withdrawal rates | 0.25% | - | 10% | 0.07% | - | 10% | (16) | |||||||||||
• | Long-term equity volatilities | 17.40% | - | 25% | 17.40% | - | 25% | Increase (17) | |||||||||||
• | Nonperformance risk spread | 0.04% | - | 0.52% | 0.03% | - | 0.46% | Decrease (18) |
______________
(1) | The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities. |
115
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
(2) | The impact of a decrease in input would have the opposite impact on the estimated fair value. For embedded derivatives, changes to direct guaranteed minimum benefits are based on liability positions and changes to ceded guaranteed minimum benefits are based on asset positions. |
(3) | Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations. |
(4) | Range and weighted average are presented in basis points. |
(5) | Range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par. |
(6) | Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates. |
(7) | Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curve is utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation. |
(8) | Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases) in correlation in isolation will increase (decrease) the significance of the change in valuations. |
(9) | Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps. |
(10) | At both December 31, 2015 and 2014, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value. |
(11) | Changes are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions. |
(12) | Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the unobservable input used in the valuation. |
(13) | Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
(14) | Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
(15) | The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
(16) | The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value. |
116
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
(17) | Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
(18) | Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative. |
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets and embedded derivatives within funds withheld related to certain ceded reinsurance, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The residential mortgage loans — FVO, long-term debt, and long-term debt of CSEs — FVO are valued using independent non-binding broker quotations and internal models including matrix pricing and discounted cash flow methodologies using current interest rates. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table. The valuation techniques and significant unobservable inputs used in the fair value measurement for the more significant assets measured at estimated fair value on a nonrecurring basis and determined using significant unobservable inputs (Level 3) are summarized in “— Nonrecurring Fair Value Measurements.”
117
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||
Fixed Maturity Securities | |||||||||||||||||||||||||||
Corporate (1) | U.S. Treasury and Agency | Structured (2) | State and Political Subdivision | Foreign Government | Equity Securities | Trading and FVO Securities (3) | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Balance, January 1, 2014 | $ | 8,467 | $ | 62 | $ | 5,469 | $ | — | $ | 274 | $ | 328 | $ | 26 | |||||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | (5 | ) | — | 12 | — | (49 | ) | 7 | — | ||||||||||||||||||
Total realized/unrealized gains (losses) included in AOCI | 218 | — | 103 | — | 22 | 2 | — | ||||||||||||||||||||
Purchases (6) | 1,763 | — | 2,740 | — | — | 19 | 5 | ||||||||||||||||||||
Sales (6) | (1,154 | ) | — | (1,306 | ) | — | (115 | ) | (59 | ) | (8 | ) | |||||||||||||||
Issuances (6) | — | — | — | — | — | — | — | ||||||||||||||||||||
Settlements (6) | — | — | — | — | — | — | — | ||||||||||||||||||||
Transfers into Level 3 (7) | 206 | — | 84 | — | 70 | — | 13 | ||||||||||||||||||||
Transfers out of Level 3 (7) | (967 | ) | (62 | ) | (1,532 | ) | — | — | (82 | ) | (5 | ) | |||||||||||||||
Balance, December 31, 2014 | 8,528 | — | 5,570 | — | 202 | 215 | 31 | ||||||||||||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | 38 | — | 101 | — | 1 | 12 | (1 | ) | |||||||||||||||||||
Total realized/unrealized gains (losses) included in AOCI | (399 | ) | — | (67 | ) | — | (1 | ) | (53 | ) | — | ||||||||||||||||
Purchases (6) | 1,546 | — | 1,393 | 33 | 120 | 127 | — | ||||||||||||||||||||
Sales (6) | (1,018 | ) | — | (1,205 | ) | — | (1 | ) | (61 | ) | (1 | ) | |||||||||||||||
Issuances (6) | — | — | — | — | — | — | — | ||||||||||||||||||||
Settlements (6) | — | — | — | — | — | — | — | ||||||||||||||||||||
Transfers into Level 3 (7) | 635 | — | 32 | — | — | 88 | — | ||||||||||||||||||||
Transfers out of Level 3 (7) | (1,048 | ) | — | (1,408 | ) | — | (46 | ) | — | — | |||||||||||||||||
Balance, December 31, 2015 | $ | 8,282 | $ | — | $ | 4,416 | $ | 33 | $ | 275 | $ | 328 | $ | 29 | |||||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2013: (8) | $ | (39 | ) | $ | — | $ | 31 | $ | — | $ | 4 | $ | (17 | ) | $ | 5 | |||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2014: (8) | $ | (4 | ) | $ | — | $ | 42 | $ | — | $ | 1 | $ | (5 | ) | $ | — | |||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2015: (8) | $ | 7 | $ | — | $ | 102 | $ | — | $ | 1 | $ | — | $ | — | |||||||||||||
Gains (Losses) Data for the year ended December 31, 2013 | |||||||||||||||||||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | $ | (56 | ) | $ | — | $ | 31 | $ | — | $ | 6 | $ | (10 | ) | $ | 11 | |||||||||||
Total realized/unrealized gains (losses) included in AOCI | $ | (33 | ) | $ | (3 | ) | $ | 115 | $ | — | $ | (45 | ) | $ | 79 | $ | — |
118
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||
Short-term Investments | Residential Mortgage Loans - FVO | Separate Account Assets (9) | Net Derivatives (10) | Net Embedded Derivatives (11) | Long-term Debt | Long-term Debt of CSEs - FVO | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Balance, January 1, 2014 | $ | 175 | $ | 338 | $ | 1,209 | $ | 36 | $ | 48 | $ | (43 | ) | $ | (28 | ) | |||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | (1 | ) | 20 | 102 | 1 | (144 | ) | — | (1 | ) | |||||||||||||||||
Total realized/unrealized gains (losses) included in AOCI | — | — | — | 40 | — | — | — | ||||||||||||||||||||
Purchases (6) | 230 | 124 | 527 | 111 | — | — | — | ||||||||||||||||||||
Sales (6) | (156 | ) | (120 | ) | (376 | ) | — | — | — | — | |||||||||||||||||
Issuances (6) | — | — | 81 | (159 | ) | — | (30 | ) | — | ||||||||||||||||||
Settlements (6) | — | (54 | ) | (28 | ) | (23 | ) | 29 | 20 | 16 | |||||||||||||||||
Transfers into Level 3 (7) | — | — | 144 | — | — | — | — | ||||||||||||||||||||
Transfers out of Level 3 (7) | (18 | ) | — | (44 | ) | — | — | 18 | — | ||||||||||||||||||
Balance, December 31, 2014 | 230 | 308 | 1,615 | 6 | (67 | ) | (35 | ) | (13 | ) | |||||||||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | — | 20 | 15 | (27 | ) | 447 | — | — | |||||||||||||||||||
Total realized/unrealized gains (losses) included in AOCI | — | — | — | (2 | ) | — | — | — | |||||||||||||||||||
Purchases (6) | 200 | 136 | 348 | 3 | — | — | — | ||||||||||||||||||||
Sales (6) | — | (121 | ) | (344 | ) | — | — | — | — | ||||||||||||||||||
Issuances (6) | — | — | 98 | — | — | (38 | ) | — | |||||||||||||||||||
Settlements (6) | — | (29 | ) | (60 | ) | (3 | ) | (194 | ) | 37 | 2 | ||||||||||||||||
Transfers into Level 3 (7) | — | — | 1 | — | — | — | — | ||||||||||||||||||||
Transfers out of Level 3 (7) | (230 | ) | — | (153 | ) | — | — | — | — | ||||||||||||||||||
Balance, December 31, 2015 | $ | 200 | $ | 314 | $ | 1,520 | $ | (23 | ) | $ | 186 | $ | (36 | ) | $ | (11 | ) | ||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2013: (8) | $ | 1 | $ | 1 | $ | — | $ | (29 | ) | $ | 115 | $ | — | $ | (2 | ) | |||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2014: (8) | $ | — | $ | 20 | $ | — | $ | 8 | $ | (115 | ) | $ | — | $ | (1 | ) | |||||||||||
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2015: (8) | $ | — | $ | 20 | $ | — | $ | (24 | ) | $ | 461 | $ | — | $ | — | ||||||||||||
Gains (Losses) Data for the year ended December 31, 2013 | |||||||||||||||||||||||||||
Total realized/unrealized gains (losses) included in net income (loss) (4) (5) | $ | (23 | ) | $ | 1 | $ | 42 | $ | (35 | ) | $ | 102 | $ | — | $ | (2 | ) | ||||||||||
Total realized/unrealized gains (losses) included in AOCI | $ | 19 | $ | — | $ | — | $ | (44 | ) | $ | — | $ | — | $ | — |
______________
(1) | Comprised of U.S. and foreign corporate securities. |
(2) | Comprised of RMBS, CMBS, and ABS. |
(3) | Comprised of Actively traded securities, FVO general account securities and FVO securities held by CSEs. |
(4) | Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses), while changes in estimated fair value of residential mortgage loans — FVO are included in net investment income. Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income for net derivatives and net embedded derivatives are reported in net derivatives gains (losses). |
(5) | Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward. |
119
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
(6) | Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements. |
(7) | Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward. |
(8) | Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses). |
(9) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income. For the purpose of this disclosure, these changes are presented within net investment gains (losses). |
(10) | Freestanding derivative assets and liabilities are presented net for purposes of the rollforward. |
(11) | Embedded derivative assets and liabilities are presented net for purposes of the rollforward. |
Fair Value Option
The following table presents information for residential mortgage loans, which are accounted for under the FVO, and were initially measured at fair value.
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Unpaid principal balance | $ | 436 | $ | 436 | |||
Difference between estimated fair value and unpaid principal balance | (122 | ) | (128 | ) | |||
Carrying value at estimated fair value | $ | 314 | $ | 308 | |||
Loans in non-accrual status | $ | 122 | $ | 125 |
The following table presents information for long-term debt, which is accounted for under the FVO, and was initially measured at fair value.
Long-term Debt | Long-term Debt of CSEs - FVO | ||||||||||||||
December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||
(In millions) | |||||||||||||||
Contractual principal balance | $ | 82 | $ | 115 | $ | 24 | $ | 26 | |||||||
Difference between estimated fair value and contractual principal balance | 4 | 2 | (13 | ) | (13 | ) | |||||||||
Carrying value at estimated fair value (1) | $ | 86 | $ | 117 | $ | 11 | $ | 13 |
______________
(1) | Changes in estimated fair value are recognized in net investment gains (losses). Interest expense is recognized in other expenses. |
120
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods and still held at the reporting dates (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
At December 31, | Years Ended December 31, | ||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
Carrying Value After Measurement | Gains (Losses) | ||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Mortgage loans (1) | $ | 40 | $ | 94 | $ | 175 | $ | (1 | ) | $ | 2 | $ | 24 | ||||||||||
Other limited partnership interests (2) | $ | 57 | $ | 109 | $ | 71 | $ | (31 | ) | $ | (70 | ) | $ | (40 | ) |
______________
(1) | Estimated fair values for impaired mortgage loans are based on independent broker quotations or valuation models using unobservable inputs or, if the loans are in foreclosure or are otherwise determined to be collateral dependent, are based on the estimated fair value of the underlying collateral or the present value of the expected future cash flows. |
(2) | For these cost method investments, estimated fair value is determined from information provided in the financial statements of the underlying entities including NAV data. These investments include private equity and debt funds that typically invest primarily in various strategies including domestic and international leveraged buyout funds; power, energy, timber and infrastructure development funds; venture capital funds; and below investment grade debt and mezzanine debt funds. Distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. Unfunded commitments for these investments at both December 31, 2015 and 2014 were not significant. |
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions, short-term debt and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.
121
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
December 31, 2015 | ||||||||||||||||||||
Fair Value Hierarchy | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Mortgage loans | $ | 53,408 | $ | — | $ | — | $ | 54,969 | $ | 54,969 | ||||||||||
Policy loans | $ | 8,134 | $ | — | $ | 330 | $ | 9,539 | $ | 9,869 | ||||||||||
Real estate joint ventures | $ | 12 | $ | — | $ | — | $ | 39 | $ | 39 | ||||||||||
Other limited partnership interests | $ | 467 | $ | — | $ | — | $ | 553 | $ | 553 | ||||||||||
Other invested assets | $ | 2,372 | $ | — | $ | 2,197 | $ | 202 | $ | 2,399 | ||||||||||
Premiums, reinsurance and other receivables | $ | 13,879 | $ | — | $ | 229 | $ | 14,610 | $ | 14,839 | ||||||||||
Liabilities | ||||||||||||||||||||
Policyholder account balances | $ | 71,331 | $ | — | $ | — | $ | 73,506 | $ | 73,506 | ||||||||||
Long-term debt | $ | 1,618 | $ | — | $ | 1,912 | $ | — | $ | 1,912 | ||||||||||
Other liabilities | $ | 19,545 | $ | — | $ | 323 | $ | 19,882 | $ | 20,205 | ||||||||||
Separate account liabilities | $ | 60,767 | $ | — | $ | 60,767 | $ | — | $ | 60,767 |
December 31, 2014 | ||||||||||||||||||||
Fair Value Hierarchy | ||||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Mortgage loans | $ | 48,751 | $ | — | $ | — | $ | 50,992 | $ | 50,992 | ||||||||||
Policy loans | $ | 8,491 | $ | — | $ | 796 | $ | 9,614 | $ | 10,410 | ||||||||||
Real estate joint ventures | $ | 30 | $ | — | $ | — | $ | 54 | $ | 54 | ||||||||||
Other limited partnership interests | $ | 635 | $ | — | $ | — | $ | 819 | $ | 819 | ||||||||||
Other invested assets | $ | 2,385 | $ | — | $ | 2,270 | $ | 220 | $ | 2,490 | ||||||||||
Premiums, reinsurance and other receivables | $ | 13,845 | $ | — | $ | 94 | $ | 14,607 | $ | 14,701 | ||||||||||
Liabilities | ||||||||||||||||||||
Policyholder account balances | $ | 73,225 | $ | — | $ | — | $ | 75,481 | $ | 75,481 | ||||||||||
Long-term debt | $ | 1,897 | $ | — | $ | 2,029 | $ | 268 | $ | 2,297 | ||||||||||
Other liabilities | $ | 20,139 | $ | — | $ | 609 | $ | 20,133 | $ | 20,742 | ||||||||||
Separate account liabilities | $ | 60,840 | $ | — | $ | 60,840 | $ | — | $ | 60,840 |
122
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:
Mortgage Loans
The estimated fair value of mortgage loans is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing for similar loans.
Policy Loans
Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity determined through experience studies of the past performance of policyholder repayment behavior for similar loans. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk, as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. Policy loans with variable interest rates are classified within Level 2 and the estimated fair value approximates carrying value due to the absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material change in estimated fair value due to changes in market interest rates.
Real Estate Joint Ventures and Other Limited Partnership Interests
The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments.
Other Invested Assets
These other invested assets are principally comprised of loans to affiliates. The estimated fair value of loans to affiliates is determined by discounting the expected future cash flows using market interest rates currently available for instruments with similar terms and remaining maturities.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables are principally comprised of certain amounts recoverable under reinsurance agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivatives and amounts receivable for securities sold but not yet settled.
Amounts recoverable under ceded reinsurance agreements, which the Company has determined do not transfer significant risk such that they are accounted for using the deposit method of accounting, have been classified as Level 3. The valuation is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using interest rates determined to reflect the appropriate credit standing of the assuming counterparty.
The amounts on deposit for derivative settlements, classified within Level 2, essentially represent the equivalent of demand deposit balances and amounts due for securities sold are generally received over short periods such that the estimated fair value approximates carrying value.
Policyholder Account Balances
These policyholder account balances include investment contracts which primarily include certain funding agreements, fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts (“TCA”). The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates adding a spread to reflect the nonperformance risk in the liability.
123
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)
Long-term Debt
The estimated fair value of long-term debt is principally determined using market standard valuation methodologies.
Valuations of instruments classified as Level 2 are based primarily on quoted prices in markets that are not active or using matrix pricing that use standard market observable inputs such as quoted prices in markets that are not active and observable yields and spreads in the market. Instruments valued using discounted cash flow methodologies use standard market observable inputs including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues.
Valuations of instruments classified as Level 3 are based primarily on discounted cash flow methodologies that utilize unobservable discount rates that can vary significantly based upon the specific terms of each individual arrangement.
Other Liabilities
Other liabilities consist primarily of interest payable, amounts due for securities purchased but not yet settled, funds withheld amounts payable, which are contractually withheld by the Company in accordance with the terms of the reinsurance agreements, and amounts payable under certain assumed reinsurance agreements, which are recorded using the deposit method of accounting. The Company evaluates the specific terms, facts and circumstances of each instrument to determine the appropriate estimated fair values, which are not materially different from the carrying values, with the exception of certain deposit type reinsurance payables. For such payables, the estimated fair value is determined as the present value of expected future cash flows, which are discounted using an interest rate determined to reflect the appropriate credit standing of the assuming counterparty.
Separate Account Liabilities
Separate account liabilities represent those balances due to policyholders under contracts that are classified as investment contracts.
Separate account liabilities classified as investment contracts primarily represent variable annuities with no significant mortality risk to the Company such that the death benefit is equal to the account balance, funding agreements related to group life contracts and certain contracts that provide for benefit funding.
Since separate account liabilities are fully funded by cash flows from the separate account assets which are recognized at estimated fair value as described in the section “— Recurring Fair Value Measurements,” the value of those assets approximates the estimated fair value of the related separate account liabilities. The valuation techniques and inputs for separate account liabilities are similar to those described for separate account assets.
11. Goodwill
Goodwill, which is included in other assets, is the excess of cost over the estimated fair value of net assets acquired. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. The goodwill impairment process requires a comparison of the estimated fair value of a reporting unit to its carrying value. The Company tests goodwill for impairment by either performing a qualitative assessment or a two-step quantitative test. The qualitative assessment is an assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect not to perform the qualitative assessment for some or all of its reporting units and perform a two-step quantitative impairment test. In performing the two-step quantitative impairment test, the Company may use a market multiple valuation approach and a discounted cash flow valuation approach. For reporting units which are particularly sensitive to market assumptions, the Company may use additional valuation methodologies to estimate the reporting units’ fair values.
124
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
11. Goodwill (continued)
The market multiple valuation approach utilizes market multiples of companies with similar businesses and the projected operating earnings of the reporting unit. The discounted cash flow valuation approach requires judgments about revenues, operating earnings projections, capital market assumptions and discount rates. The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected operating earnings, current book value, the level of economic capital required to support the mix of business, long-term growth rates, comparative market multiples, control premium, the account value of in-force business, projections of new and renewal business, as well as margins on such business, the level of interest rates, credit spreads, equity market levels, and the discount rate that the Company believes is appropriate for the respective reporting unit.
The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Declines in the estimated fair value of the Company’s reporting units could result in goodwill impairments in future periods which could materially adversely affect the Company’s results of operations or financial position.
For the 2015 annual goodwill impairment tests, the Company utilized the qualitative assessment for all of its reporting units and determined it was not more likely than not that the fair value of any of the reporting units was less than its carrying amount, and, therefore no further testing was needed for these reporting units.
In anticipation of the Separation, in the third quarter of 2016, the Company reorganized its businesses into two segments: U.S. and MetLife Holdings.
Information regarding goodwill by segment, was as follows:
U.S. | MetLife Holdings | Total | |||||||||
(In millions) | |||||||||||
Balance at January 1, 2013 | |||||||||||
Goodwill | $ | 70 | $ | 41 | $ | 111 | |||||
Accumulated impairment | — | (10 | ) | (10 | ) | ||||||
Total goodwill, net | 70 | 31 | 101 | ||||||||
Balance at December 31, 2013 | |||||||||||
Goodwill | 70 | 41 | 111 | ||||||||
Accumulated impairment | — | (10 | ) | (10 | ) | ||||||
Total goodwill, net | 70 | 31 | 101 | ||||||||
Balance at December 31, 2014 | |||||||||||
Goodwill | 70 | 41 | 111 | ||||||||
Accumulated impairment | — | (10 | ) | (10 | ) | ||||||
Total goodwill, net | 70 | 31 | 101 | ||||||||
Balance at December 31, 2015 | |||||||||||
Goodwill | 70 | 41 | 111 | ||||||||
Accumulated impairment | — | (10 | ) | (10 | ) | ||||||
Total goodwill, net | $ | 70 | $ | 31 | $ | 101 |
125
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Long-term and Short-term Debt
Long-term and short-term debt outstanding was as follows:
Interest Rates (1) | Maturity | December 31, | ||||||||||||||||
Range | Weighted Average | 2015 | 2014 | |||||||||||||||
(In millions) | ||||||||||||||||||
Surplus notes - affiliated | 3.00% | - | 7.38% | 6.59 | % | 2037 | $ | 695 | $ | 883 | ||||||||
Surplus notes | 7.63% | - | 7.88% | 7.80 | % | 2024 | - | 2025 | 502 | 701 | ||||||||
Mortgage loans - affiliated | 2.13% | - | 7.26% | 4.10 | % | — | — | 242 | ||||||||||
Senior notes - affiliated | 0.92% | - | 2.78% | 2.09 | % | 2021 | - | 2022 | 50 | 78 | ||||||||
Other notes | 1.36% | - | 8.00% | 3.12 | % | 2016 | - | 2030 | 457 | 110 | ||||||||
Total long-term debt (2) | 1,704 | 2,014 | ||||||||||||||||
Total short-term debt | 100 | 100 | ||||||||||||||||
Total | $ | 1,804 | $ | 2,114 |
______________
(1) | Range of interest rates and weighted average interest rates are for the year ended December 31, 2015. |
(2) | Excludes $11 million and $13 million of long-term debt relating to CSEs — FVO at December 31, 2015 and 2014, respectively. See Note 10. |
The aggregate maturities of long-term debt at December 31, 2015 for the next five years and thereafter are $20 million in 2016, $0 in each of 2017 through 2019, $350 million in 2020 and $1.3 billion thereafter.
Mortgage loans are collateralized and rank highest in priority, followed by unsecured senior debt which consists of senior notes and other notes. Payments of interest and principal on the Company’s surplus notes are subordinate to all other obligations and may be made only with the prior approval of the insurance department of the state of domicile.
Debt Issuance - Other Notes
In December 2015, MetLife Private Equity Holdings, LLC (“MPEH”), a wholly-owned indirect investment subsidiary of Metropolitan Life Insurance Company, entered into a five-year credit agreement (the “MPEH Credit Agreement”) and borrowed $350 million under term loans that mature in December 2020. The loans bear interest at a variable rate of three-month LIBOR plus 3.70%, payable quarterly. In connection with the borrowing, $6 million of costs were incurred which have been capitalized and included in other assets. These costs are being amortized over the term of the loans. Additionally, the MPEH Credit Agreement provides for MPEH to borrow up to $100 million on a revolving basis at a variable rate of three-month LIBOR plus 3.70%, payable quarterly. There were no revolving loans outstanding under the MPEH Credit Agreement at December 31, 2015. Term loans and revolving loans borrowed under the MPEH Credit Agreement are non-recourse to Metropolitan Life Insurance Company.
126
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Long-term and Short-term Debt (continued)
Debt Repayments
In December 2015, a wholly-owned real estate subsidiary of the Company repaid in cash $110 million of its mortgage loans issued to MetLife USA due in January 2016.
In November 2015, the Company repaid in cash, at maturity, $188 million of surplus notes issued to MetLife Mexico S.A., an affiliate. The redemption was approved by the New York Superintendent of Financial Services (the “Superintendent”).
In November 2015, the Company repaid in cash, at maturity, $200 million of surplus notes. The redemption was approved by the Superintendent.
During 2015, a wholly-owned real estate subsidiary of the Company repaid in cash $132 million of its 7.26% mortgage loans issued to MetLife USA due in January 2020.
In November 2014, a wholly-owned real estate subsidiary of the Company repaid in cash $60 million of its 7.01% mortgage loans issued to MetLife USA due in January 2020. It also repaid in cash $60 million of its 4.67% mortgage loans issued to MetLife USA due in January 2017.
In September 2014, the Company repaid in cash, at maturity, $217 million of surplus notes issued to MetLife Mexico S.A. The redemption was approved by the Superintendent.
Short-term Debt
Short-term debt with maturities of one year or less was as follows:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Commercial paper | $ | 100 | $ | 100 | |||
Average daily balance | $ | 100 | $ | 109 | |||
Average days outstanding | 68 days | 69 days |
During the years ended December 31, 2015, 2014 and 2013, the weighted average interest rate on short-term debt was 0.15%, 0.10% and 0.12%, respectively.
Interest Expense
Interest expense related to long-term and short-term debt included in other expenses was $122 million, $150 million and $150 million for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts include $67 million, $88 million and $91 million of interest expense related to affiliated debt for the years ended December 31, 2015, 2014 and 2013, respectively. Such amounts do not include interest expense on long-term debt related to CSEs. See Note 8.
Credit and Committed Facilities
At December 31, 2015, MetLife, Inc. and MetLife Funding, Inc., a wholly-owned subsidiary of Metropolitan Life Insurance Company (“MetLife Funding”), maintained a $4.0 billion unsecured credit facility (the “Credit Facility”), and Missouri Reinsurance, Inc. (“MoRe”), a wholly-owned subsidiary of Metropolitan Life Insurance Company, along with MetLife, Inc., maintained a $210 million committed facility (the “Committed Facility”). When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements.
127
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Long-term and Short-term Debt (continued)
Credit Facility
The Credit Facility is used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. Total fees associated with the Credit Facility were $4 million, $4 million and $3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and were included in other expenses.
Information on the Credit Facility at December 31, 2015 was as follows:
Borrower(s) | Expiration | Maximum Capacity | Letters of Credit Issued (1) | Drawdowns | Unused Commitments | |||||||||||||
(In millions) | ||||||||||||||||||
MetLife, Inc. and MetLife Funding, Inc. | May 2019 (2) | $ | 4,000 | $ | 484 | $ | — | $ | 3,516 |
______________
(1) | MetLife, Inc. and MetLife Funding, are severally liable for their respective obligations under the Credit Facility. MetLife Funding is not an applicant under letters of credit outstanding as of December 31, 2015 and is not responsible for any reimbursement obligations under such letters of credit. |
(2) | All borrowings under the Credit Facility must be repaid by May 30, 2019, except that letters of credit outstanding on that date may remain outstanding until no later than May 30, 2020. |
Committed Facility
The Committed Facility is used for collateral for certain of its affiliated reinsurance liabilities. Total fees associated with the Committed Facility was $4 million, $4 million and $3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and was included in other expenses. Information on the Committed Facility at December 31, 2015 was as follows:
Account Party/Borrower(s) | Expiration | Maximum Capacity | Letters of Credit Issued (1) | Drawdowns | Unused Commitments | |||||||||||||
(In millions) | ||||||||||||||||||
MetLife, Inc. and Missouri Reinsurance, Inc. | June 2016 (2) | $ | 210 | $ | 210 | $ | — | $ | — |
______________
(1) | MoRe had outstanding $210 million in letters of credit at December 31, 2015. |
(2) | Capacity at December 31, 2015 of $210 million decreases in March 2016 and June 2016 to $200 million and $0, respectively. |
In addition to the Committed Facility, see also “— Debt Issuance — Other Notes” for information about the undrawn line of credit facility in the amount of $100 million.
Debt and Facility Covenants
Certain of the Company’s debt instruments, as well as the Credit Facility and Committed Facility, contain various administrative, reporting, legal and financial covenants. The Company believes it was in compliance with all applicable covenants at December 31, 2015.
13. Equity
Stock-Based Compensation Plans
Overview
In accordance with a service agreement with an affiliate, the Company was allocated a proportionate share of stock-based compensation expenses. The stock-based compensation expenses recognized by the Company are related to awards under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan and the MetLife, Inc. 2015 Stock and Incentive Compensation Plan (together, the “Stock Plans”), payable in shares of MetLife, Inc. common stock (“Shares”), or options to purchase MetLife, Inc. common stock. The Company does not issue any awards payable in its common stock or options to purchase its common stock.
128
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Equity (continued)
Description of Plan — General Terms
Under the Stock Plans, awards granted to employees and agents may be in the form of Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Shares or Performance Share Units, Cash-Based Awards and Stock-Based Awards (each as defined in the Stock Plans with reference to Shares).
Compensation expense related to awards under the Stock Plans is recognized based on the number of awards expected to vest, which represents the awards granted less expected forfeitures over the life of the award, as estimated at the date of grant. Unless a material deviation from the assumed forfeiture rate is observed during the term in which the awards are expensed, any adjustment necessary to reflect differences in actual experience is recognized in the period the award becomes payable or exercisable.
Compensation expense related to awards under the Stock Plans is principally related to the issuance of Stock Options, Performance Shares and Restricted Stock Units. The majority of the awards granted by MetLife, Inc. each year under the Stock Plans are made in the first quarter of each year.
The expense related to stock-based compensation included in other expenses was $85 million, $100 million and $122 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Statutory Equity and Income
The states of domicile of Metropolitan Life Insurance Company and its U.S. insurance subsidiaries impose risk-based capital (“RBC”) requirements that were developed by the National Association of Insurance Commissioners (“NAIC”). Regulatory compliance is determined by a ratio of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”) to its authorized control level RBC, calculated in the manner prescribed by the NAIC (“ACL RBC”), based on the statutory-based filed financial statements. Companies below specific trigger levels or ratios are classified by their respective levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences is twice ACL RBC. The RBC ratios for Metropolitan Life Insurance Company and its U.S. insurance subsidiaries were each in excess of 350% for all periods presented.
Metropolitan Life Insurance Company’s foreign insurance operations are regulated by applicable authorities of the countries in which each entity operates and are subject to minimum capital and solvency requirements in those countries before corrective actions commences. The aggregate required capital and surplus of Metropolitan Life Insurance Company’s foreign insurance operations was $31 million and the aggregate actual regulatory capital and surplus was $488 million as of the date of the most recent required capital adequacy calculation for each jurisdiction. Each of those foreign insurance operations exceeded minimum capital and solvency requirements of their respective countries for all periods presented.
Metropolitan Life Insurance Company and its U.S. insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile. The NAIC has adopted the Codification of Statutory Accounting Principles (“Statutory Codification”). Statutory Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the effect of Statutory Codification on the statutory capital and surplus of Metropolitan Life Insurance Company and its U.S. insurance subsidiaries.
Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt, reporting of reinsurance agreements and valuing securities on a different basis.
In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus. The most significant assets not admitted by the Company are net deferred income tax assets resulting from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within three years.
Metropolitan Life Insurance Company and its U.S. insurance subsidiaries have no material state prescribed accounting practices, except as described below.
New York has adopted certain prescribed accounting practices, primarily consisting of the continuous Commissioners’ Annuity Reserve Valuation Method, which impacts deferred annuities, and the New York Special Consideration Letter, which mandates certain assumptions in asset adequacy testing. The collective impact of these prescribed accounting practices decreased the statutory capital and surplus of MLIC for the years ended December 31, 2015 and 2014 by an amount of $1.2 billion and $2.3 billion, respectively, in excess of the amount of the decrease had capital and surplus been measured under NAIC guidance.
129
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Equity (continued)
The tables below present amounts from Metropolitan Life Insurance Company and its U.S. insurance subsidiaries, which are derived from the statutory–basis financial statements as filed with the insurance regulators.
Statutory net income (loss) was as follows:
Years Ended December 31, | ||||||||||||||
Company | State of Domicile | 2015 | 2014 | 2013 | ||||||||||
(In millions) | ||||||||||||||
Metropolitan Life Insurance Company | New York | $ | 3,703 | $ | 1,487 | $ | 369 | |||||||
New England Life Insurance Company | Massachusetts | $ | 157 | $ | 303 | $ | 103 | |||||||
General American Life Insurance Company | Missouri | $ | 204 | $ | 129 | $ | 60 |
Statutory capital and surplus was as follows at:
December 31, | ||||||||
Company | 2015 | 2014 | ||||||
(In millions) | ||||||||
Metropolitan Life Insurance Company | $ | 14,485 | $ | 12,008 | ||||
New England Life Insurance Company | $ | 632 | $ | 675 | ||||
General American Life Insurance Company | $ | 984 | $ | 867 |
Dividend Restrictions
The table below sets forth the dividends permitted to be paid by Metropolitan Life Insurance Company to MetLife, Inc. without insurance regulatory approval and dividends paid:
2016 | 2015 | 2014 | ||||||||||||
Company | Permitted Without Approval | Paid (1) | Paid (1) | |||||||||||
(In millions) | ||||||||||||||
Metropolitan Life Insurance Company (3) | $ | 3,753 | $ | 1,489 | $ | 821 | (2) |
______________
(1) | Reflects all amounts paid, including those requiring regulatory approval. |
(2) | During December 2014, Metropolitan Life Insurance Company distributed shares of an affiliate to MetLife, Inc. as an in-kind dividend of $113 million, as calculated on a statutory basis. |
(3) | As discussed below, the New York Insurance Law was amended, permitting Metropolitan Life Insurance Company to pay dividends without prior regulatory approval under one of two alternative formulations beginning in 2016. The dividend amount that Metropolitan Life Insurance Company may pay during 2016 under the new formulation is reflected in the table above. |
130
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Equity (continued)
Effective for dividends paid during 2016 and going forward, the New York Insurance Law was amended permitting Metropolitan Life Insurance Company without prior insurance regulatory clearance, to pay stockholder dividends to MetLife, Inc. in any calendar year based on either of two standards. Under one standard, Metropolitan Life Insurance Company is permitted, without prior insurance regulatory clearance, to pay dividends out of earned surplus (defined as positive “unassigned funds (surplus)” excluding 85% of the change in net unrealized capital gains or losses (less capital gains tax), for the immediately preceding calendar year), in an amount up to the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains), not to exceed 30% of surplus to policyholders as of the end of the immediately preceding calendar year. In addition, under this standard, Metropolitan Life Insurance Company may not, without prior insurance regulatory clearance, pay any dividends in any calendar year immediately following a calendar year for which its net gain from operations, excluding realized capital gains, was negative. Under the second standard, if dividends are paid out of other than earned surplus, Metropolitan Life Insurance Company may, without prior insurance regulatory clearance, pay an amount up to the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). In addition, Metropolitan Life Insurance Company will be permitted to pay a dividend to MetLife, Inc. in excess of the amounts allowed under both standards only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent either approves the distribution of the dividend or does not disapprove the dividend within 30 days of its filing. Under New York Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.
The table below sets forth the dividends permitted to be paid by Metropolitan Life Insurance Company’s insurance subsidiaries without regulatory approval and dividends paid:
2016 | 2015 | 2014 | ||||||||||||
Company | Permitted Without Approval (1) | Paid (2) | Paid (2) | |||||||||||
(In millions) | ||||||||||||||
New England Life Insurance Company | $ | 156 | $ | 199 | $ | 227 | (3) | |||||||
General American Life Insurance Company | $ | 136 | $ | — | $ | — |
______________
(1) | Reflects dividend amounts that may be paid during 2016 without prior regulatory approval. However, because dividend tests may be based on dividends previously paid over a rolling 12-month period, if paid before a specified date during 2016, some or all of such dividends may require regulatory approval. |
(2) | Includes all amounts paid, including those requiring regulatory approval. |
(3) | During December 2014, NELICO distributed shares of an affiliate to Metropolitan Life Insurance Company as an extraordinary in-kind dividend of $113 million, as calculated on a statutory basis. Also during December 2014, NELICO paid an extraordinary cash dividend to Metropolitan Life Insurance Company in the amount of $114 million. |
Under Massachusetts State Insurance Law, NELICO is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to Metropolitan Life Insurance Company as long as the aggregate amount of the dividend, when aggregated with all other dividends paid in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year. NELICO will be permitted to pay a dividend to Metropolitan Life Insurance Company in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Massachusetts Commissioner of Insurance (the “Massachusetts Commissioner”) and the Massachusetts Commissioner either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the last filed annual statutory statement requires insurance regulatory approval. Under Massachusetts State Insurance Law, the Massachusetts Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.
131
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Equity (continued)
Under Missouri State Insurance Law, GALIC is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to Metropolitan Life Insurance Company as long as the amount of such dividend when aggregated with all other dividends in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding net realized capital gains). GALIC will be permitted to pay a dividend to Metropolitan Life Insurance Company in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Missouri Director of Insurance (the “Missouri Director”) and the Missouri Director either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, unassigned funds (surplus) as of the last filed annual statutory statement requires insurance regulatory approval. Under Missouri State Insurance Law, the Missouri Director has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.
For the years ended December 31, 2015 and 2014, Metropolitan Life Insurance Company received dividends from non-insurance subsidiaries of $159 million and $95 million, respectively.
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI attributable to Metropolitan Life Insurance Company, was as follows:
Unrealized Investment Gains (Losses), Net of Related Offsets (1) | Unrealized Gains (Losses) on Derivatives | Foreign Currency Translation Adjustments | Defined Benefit Plans Adjustment | Total | |||||||||||||||
(In millions) | |||||||||||||||||||
Balance at December 31, 2012 | $ | 5,654 | $ | 685 | $ | 18 | $ | (2,349 | ) | $ | 4,008 | ||||||||
OCI before reclassifications | (3,321 | ) | (677 | ) | 22 | 1,396 | (2,580 | ) | |||||||||||
Deferred income tax benefit (expense) | 1,145 | 237 | (9 | ) | (490 | ) | 883 | ||||||||||||
AOCI before reclassifications, net of income tax | 3,478 | 245 | 31 | (1,443 | ) | 2,311 | |||||||||||||
Amounts reclassified from AOCI | (16 | ) | (14 | ) | — | (205 | ) | (235 | ) | ||||||||||
Deferred income tax benefit (expense) | 6 | 5 | — | 71 | 82 | ||||||||||||||
Amounts reclassified from AOCI, net of income tax | (10 | ) | (9 | ) | — | (134 | ) | (153 | ) | ||||||||||
Balance at December 31, 2013 | 3,468 | 236 | 31 | (1,577 | ) | 2,158 | |||||||||||||
OCI before reclassifications | 4,095 | 606 | (44 | ) | (1,181 | ) | 3,476 | ||||||||||||
Deferred income tax benefit (expense) | (1,409 | ) | (212 | ) | 10 | 406 | (1,205 | ) | |||||||||||
AOCI before reclassifications, net of income tax | 6,154 | 630 | (3 | ) | (2,352 | ) | 4,429 | ||||||||||||
Amounts reclassified from AOCI | 70 | 682 | — | 180 | 932 | ||||||||||||||
Deferred income tax benefit (expense) | (24 | ) | (239 | ) | — | (64 | ) | (327 | ) | ||||||||||
Amounts reclassified from AOCI, net of income tax | 46 | 443 | — | 116 | 605 | ||||||||||||||
Balance at December 31, 2014 | 6,200 | 1,073 | (3 | ) | (2,236 | ) | 5,034 | ||||||||||||
OCI before reclassifications | (4,839 | ) | (19 | ) | (101 | ) | 113 | (4,846 | ) | ||||||||||
Deferred income tax benefit (expense) | 1,715 | 6 | 30 | (40 | ) | 1,711 | |||||||||||||
AOCI before reclassifications, net of income tax | 3,076 | 1,060 | (74 | ) | (2,163 | ) | 1,899 | ||||||||||||
Amounts reclassified from AOCI | 405 | 578 | — | 229 | 1,212 | ||||||||||||||
Deferred income tax benefit (expense) | (144 | ) | (202 | ) | — | (80 | ) | (426 | ) | ||||||||||
Amounts reclassified from AOCI, net of income tax | 261 | 376 | — | 149 | 786 | ||||||||||||||
Balance at December 31, 2015 | $ | 3,337 | $ | 1,436 | $ | (74 | ) | $ | (2,014 | ) | $ | 2,685 |
______________
(1) | See Note 8 for information on offsets to investments related to future policy benefits, DAC, VOBA and DSI, and the policyholder dividend obligation. |
132
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Equity (continued)
Information regarding amounts reclassified out of each component of AOCI was as follows:
AOCI Components | Amounts Reclassified from AOCI | Consolidated Statement of Operations and Comprehensive Income (Loss) Locations | ||||||||||||
Years Ended December 31, | ||||||||||||||
2015 | 2014 | 2013 | ||||||||||||
(In millions) | ||||||||||||||
Net unrealized investment gains (losses): | ||||||||||||||
Net unrealized investment gains (losses) | $ | (208 | ) | $ | (103 | ) | $ | (9 | ) | Net investment gains (losses) | ||||
Net unrealized investment gains (losses) | 31 | 40 | 53 | Net investment income | ||||||||||
Net unrealized investment gains (losses) | (228 | ) | (7 | ) | (28 | ) | Net derivative gains (losses) | |||||||
Net unrealized investment gains (losses), before income tax | (405 | ) | (70 | ) | 16 | |||||||||
Income tax (expense) benefit | 144 | 24 | (6 | ) | ||||||||||
Net unrealized investment gains (losses), net of income tax | $ | (261 | ) | $ | (46 | ) | $ | 10 | ||||||
Unrealized gains (losses) on derivatives - cash flow hedges: | ||||||||||||||
Interest rate swaps | $ | 83 | $ | 41 | $ | 20 | Net derivative gains (losses) | |||||||
Interest rate swaps | 11 | 9 | 8 | Net investment income | ||||||||||
Interest rate forwards | 4 | (8 | ) | 1 | Net derivative gains (losses) | |||||||||
Interest rate forwards | 2 | 2 | 2 | Net investment income | ||||||||||
Foreign currency swaps | (679 | ) | (725 | ) | (15 | ) | Net derivative gains (losses) | |||||||
Foreign currency swaps | (1 | ) | (2 | ) | (3 | ) | Net investment income | |||||||
Credit forwards | 1 | — | — | Net derivative gains (losses) | ||||||||||
Credit forwards | 1 | 1 | 1 | Net investment income | ||||||||||
Gains (losses) on cash flow hedges, before income tax | (578 | ) | (682 | ) | 14 | |||||||||
Income tax (expense) benefit | 202 | 239 | (5 | ) | ||||||||||
Gains (losses) on cash flow hedges, net of income tax | $ | (376 | ) | $ | (443 | ) | $ | 9 | ||||||
Defined benefit plans adjustment: (1) | ||||||||||||||
Amortization of net actuarial gains (losses) | $ | (233 | ) | $ | (180 | ) | $ | 274 | ||||||
Amortization of prior service (costs) credit | 4 | — | (69 | ) | ||||||||||
Amortization of defined benefit plan items, before income tax | (229 | ) | (180 | ) | 205 | |||||||||
Income tax (expense) benefit | 80 | 64 | (71 | ) | ||||||||||
Amortization of defined benefit plan items, net of income tax | $ | (149 | ) | $ | (116 | ) | $ | 134 | ||||||
Total reclassifications, net of income tax | $ | (786 | ) | $ | (605 | ) | $ | 153 |
_______________
(1) | These AOCI components are included in the computation of net periodic benefit costs. See Note 15. |
133
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Other Expenses
Information on other expenses was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Compensation | $ | 2,056 | $ | 2,257 | $ | 2,392 | |||||
Pension, postretirement and postemployment benefit costs | 241 | 322 | 364 | ||||||||
Commissions | 685 | 828 | 781 | ||||||||
Volume-related costs | 221 | 70 | 253 | ||||||||
Affiliated interest costs on ceded and assumed reinsurance | 807 | 1,009 | 1,033 | ||||||||
Capitalization of DAC | (482 | ) | (424 | ) | (562 | ) | |||||
Amortization of DAC and VOBA | 742 | 695 | 261 | ||||||||
Interest expense on debt | 122 | 151 | 153 | ||||||||
Premium taxes, licenses and fees | 355 | 328 | 263 | ||||||||
Professional services | 1,133 | 1,013 | 989 | ||||||||
Rent and related expenses, net of sublease income | 87 | 128 | 143 | ||||||||
Other (1) | 291 | (306 | ) | (82 | ) | ||||||
Total other expenses | $ | 6,258 | $ | 6,071 | $ | 5,988 |
______________
(1) | See Note 16 for information on the charge related to income tax for the year ended December 31, 2015. |
Capitalization of DAC and Amortization of DAC and VOBA
See Note 5 for additional information on DAC and VOBA including impacts of capitalization and amortization. See also Note 7 for a description of the DAC amortization impact associated with the closed block.
Interest Expense on Debt
Interest expense on debt includes interest expense (see Note 12) and interest expense related to CSEs (see Note 8).
Affiliated Expenses
Commissions, capitalization of DAC and amortization of DAC and VOBA include the impact of affiliated reinsurance transactions. See Notes 6, 12 and 19 for a discussion of affiliated expenses included in the table above.
Restructuring Charges
MetLife commenced an enterprise-wide strategic initiative in 2012. This global strategy focuses on leveraging MetLife’s scale to improve the value it provides to customers and shareholders in order to reduce costs, enhance revenues, achieve efficiencies and reinvest in its technology, platforms and functionality to improve its current operations and develop new capabilities.
134
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Other Expenses (continued)
These restructuring charges are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported in Corporate & Other. Information regarding restructuring charges was as follows:
Years Ended December 31, | |||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||
Severance | Lease and Asset Impairment | Total | Severance | Lease and Asset Impairment | Total | Severance | Lease and Asset Impairment | Total | |||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||
Balance at January 1, | $ | 31 | $ | 6 | $ | 37 | $ | 39 | $ | 6 | $ | 45 | $ | 22 | $ | — | $ | 22 | |||||||||||||||||
Restructuring charges | 52 | 4 | 56 | 66 | 8 | 74 | 87 | 16 | 103 | ||||||||||||||||||||||||||
Cash payments | (66 | ) | (6 | ) | (72 | ) | (74 | ) | (8 | ) | (82 | ) | (70 | ) | (10 | ) | (80 | ) | |||||||||||||||||
Balance at December 31, | $ | 17 | $ | 4 | $ | 21 | $ | 31 | $ | 6 | $ | 37 | $ | 39 | $ | 6 | $ | 45 | |||||||||||||||||
Total restructuring charges incurred since inception of initiative | $ | 306 | $ | 46 | $ | 352 | $ | 254 | $ | 42 | $ | 296 | $ | 188 | $ | 34 | $ | 222 |
Management estimates further restructuring charges including severance, as well as lease and asset impairments, through the year ending December 31, 2016 to be $5 million.
15. Employee Benefit Plans
Pension and Other Postretirement Benefit Plans
The Company sponsors and administers various U.S. qualified and nonqualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits that are primarily based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as earnings credits, determined annually based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. The nonqualified pension plans provide supplemental benefits in excess of limits applicable to a qualified plan. Participating affiliates are allocated an equitable share of net expense related to the plans, proportionate to other expenses being allocated to these affiliates.
The Company also provides certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Employees of the Company who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for the Company may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total costs of postretirement medical benefits. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits. Participating affiliates are allocated a proportionate share of net expense and contributions related to the postemployment and other postretirement plans.
135
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
Obligations and Funded Status
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Pension Benefits (1) | Other Postretirement Benefits | Pension Benefits (1) | Other Postretirement Benefits | ||||||||||||
(In millions) | |||||||||||||||
Change in benefit obligations | |||||||||||||||
Benefit obligations at January 1, | $ | 10,262 | $ | 2,129 | $ | 8,130 | $ | 1,861 | |||||||
Service costs | 217 | 15 | 183 | 14 | |||||||||||
Interest costs | 404 | 88 | 413 | 92 | |||||||||||
Plan participants’ contributions | — | 30 | — | 30 | |||||||||||
Net actuarial (gains) losses | (626 | ) | (233 | ) | 1,461 | 264 | |||||||||
Settlements and curtailments | — | — | (13 | ) | (6 | ) | |||||||||
Change in benefits and other | — | (14 | ) | 574 | (16 | ) | |||||||||
Benefits paid | (497 | ) | (109 | ) | (486 | ) | (109 | ) | |||||||
Effect of foreign currency translation | — | (1 | ) | — | (1 | ) | |||||||||
Benefit obligations at December 31, | 9,760 | 1,905 | 10,262 | 2,129 | |||||||||||
Change in plan assets | |||||||||||||||
Estimated fair value of plan assets at January 1, | 8,750 | 1,426 | 7,305 | 1,352 | |||||||||||
Actual return on plan assets | (138 | ) | 3 | 1,018 | 112 | ||||||||||
Change in benefits and other | — | — | 523 | — | |||||||||||
Plan participants’ contributions | — | 30 | — | 30 | |||||||||||
Employer contributions | 375 | 22 | 390 | 41 | |||||||||||
Benefits paid | (497 | ) | (109 | ) | (486 | ) | (109 | ) | |||||||
Estimated fair value of plan assets at December 31, | 8,490 | 1,372 | 8,750 | 1,426 | |||||||||||
Over (under) funded status at December 31, | $ | (1,270 | ) | $ | (533 | ) | $ | (1,512 | ) | $ | (703 | ) | |||
Amounts recognized on the consolidated balance sheets | |||||||||||||||
Other assets | $ | — | $ | — | $ | — | $ | — | |||||||
Other liabilities | (1,270 | ) | (533 | ) | (1,512 | ) | (703 | ) | |||||||
Net amount recognized | $ | (1,270 | ) | $ | (533 | ) | $ | (1,512 | ) | $ | (703 | ) | |||
AOCI | |||||||||||||||
Net actuarial (gains) losses | $ | 2,894 | $ | 221 | $ | 3,034 | $ | 420 | |||||||
Prior service costs (credit) | (1 | ) | (14 | ) | (2 | ) | (10 | ) | |||||||
AOCI, before income tax | $ | 2,893 | $ | 207 | $ | 3,032 | $ | 410 | |||||||
Accumulated benefit obligation | $ | 9,439 | N/A | $ | 9,729 | N/A |
_____________
(1) | Includes nonqualified unfunded plans, for which the aggregate PBO was $1.1 billion and $1.3 billion at December 31, 2015 and 2014, respectively. |
136
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
Information for pension plans with PBOs in excess of plan assets and accumulated benefit obligations (“ABO”) in excess of plan assets was as follows at:
December 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
PBO Exceeds Estimated Fair Value of Plan Assets | ABO Exceeds Estimated Fair Value of Plan Assets | ||||||||||||||
(In millions) | |||||||||||||||
Projected benefit obligations | $ | 9,759 | $ | 10,241 | $ | 1,832 | $ | 1,981 | |||||||
Accumulated benefit obligations | $ | 9,439 | $ | 9,709 | $ | 1,751 | $ | 1,789 | |||||||
Estimated fair value of plan assets | $ | 8,490 | $ | 8,719 | $ | 646 | $ | 676 |
Net Periodic Benefit Costs
The components of net periodic benefit costs and other changes in plan assets and benefit obligations recognized in OCI were as follows:
Years Ended December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Net periodic benefit costs | |||||||||||||||||||||||
Service costs | $ | 217 | $ | 15 | $ | 200 | $ | 14 | $ | 214 | $ | 17 | |||||||||||
Interest costs | 404 | 88 | 437 | 92 | 366 | 85 | |||||||||||||||||
Settlement and curtailment costs | — | — | 14 | 2 | — | — | |||||||||||||||||
Expected return on plan assets | (538 | ) | (80 | ) | (475 | ) | (75 | ) | (453 | ) | (74 | ) | |||||||||||
Amortization of net actuarial (gains) losses | 190 | 43 | 169 | 11 | 219 | 51 | |||||||||||||||||
Amortization of prior service costs (credit) | (1 | ) | (3 | ) | 1 | (1 | ) | 6 | (69 | ) | |||||||||||||
Allocated to affiliates | (59 | ) | (18 | ) | (54 | ) | (11 | ) | (12 | ) | — | ||||||||||||
Total net periodic benefit costs (credit) | 213 | 45 | 292 | 32 | 340 | 10 | |||||||||||||||||
Other changes in plan assets and benefit obligations recognized in OCI | |||||||||||||||||||||||
Net actuarial (gains) losses | 50 | (156 | ) | 996 | 222 | (492 | ) | (532 | ) | ||||||||||||||
Prior service costs (credit) | — | (7 | ) | (18 | ) | (12 | ) | — | — | ||||||||||||||
Amortization of net actuarial (gains) losses | (190 | ) | (43 | ) | (169 | ) | (11 | ) | (219 | ) | (55 | ) | |||||||||||
Amortization of prior service (costs) credit | 1 | 3 | (1 | ) | 1 | (6 | ) | 75 | |||||||||||||||
Total recognized in OCI | (139 | ) | (203 | ) | 808 | 200 | (717 | ) | (512 | ) | |||||||||||||
Total recognized in net periodic benefit costs and OCI | $ | 74 | $ | (158 | ) | $ | 1,100 | $ | 232 | $ | (377 | ) | $ | (502 | ) |
The estimated net actuarial (gains) losses and prior service costs (credit) for the defined benefit pension plans and other postretirement benefit plans that will be amortized from AOCI into net periodic benefit costs over the next year are $193 million and ($1) million, and $13 million and ($7) million, respectively.
137
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
Assumptions
Assumptions used in determining benefit obligations were as follows:
Pension Benefits | Other Postretirement Benefits | |||||
December 31, 2015 | ||||||
Weighted average discount rate | 4.50% | 4.60% | ||||
Rate of compensation increase | 2.25 | % | - | 8.50% | N/A | |
December 31, 2014 | ||||||
Weighted average discount rate | 4.10% | 4.10% | ||||
Rate of compensation increase | 2.25 | % | - | 8.50% | N/A |
Assumptions used in determining net periodic benefit costs were as follows:
Pension Benefits | Other Postretirement Benefits | |||||
Year Ended December 31, 2015 | ||||||
Weighted average discount rate | 4.10% | 4.10% | ||||
Weighted average expected rate of return on plan assets | 6.25% | 5.70% | ||||
Rate of compensation increase | 2.25 | % | - | 8.50% | N/A | |
Year Ended December 31, 2014 | ||||||
Weighted average discount rate | 5.15% | 5.15% | ||||
Weighted average expected rate of return on plan assets | 6.25% | 5.70% | ||||
Rate of compensation increase | 3.50 | % | - | 7.50% | N/A | |
Year Ended December 31, 2013 | ||||||
Weighted average discount rate | 4.20% | 4.20% | ||||
Weighted average expected rate of return on plan assets | 6.24% | 5.76% | ||||
Rate of compensation increase | 3.50 | % | - | 7.50% | N/A |
The weighted average discount rate is determined annually based on the yield, measured on a yield to worst basis, of a hypothetical portfolio constructed of high quality debt instruments available on the valuation date, which would provide the necessary future cash flows to pay the aggregate PBO when due.
The weighted average expected rate of return on plan assets is based on anticipated performance of the various asset sectors in which the plan invests, weighted by target allocation percentages. Anticipated future performance is based on long-term historical returns of the plan assets by sector, adjusted for the Company’s long-term expectations on the performance of the markets. While the precise expected rate of return derived using this approach will fluctuate from year to year, the Company’s policy is to hold this long-term assumption constant as long as it remains within reasonable tolerance from the derived rate.
The weighted average expected rate of return on plan assets for use in that plan’s valuation in 2016 is currently anticipated to be 6.00% for pension benefits and 5.52% for other postretirement benefits.
138
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
The assumed healthcare costs trend rates used in measuring the APBO and net periodic benefit costs were as follows:
December 31, | |||||||||||
2015 | 2014 | ||||||||||
Before Age 65 | Age 65 and older | Before Age 65 | Age 65 and older | ||||||||
Following year | 6.3 | % | 10.3 | % | 6.4 | % | 6.4 | % | |||
Ultimate rate to which cost increase is assumed to decline | 4.2 | % | 4.6 | % | 4.4 | % | 4.7 | % | |||
Year in which the ultimate trend rate is reached | 2086 | 2091 | 2094 | 2089 |
Assumed healthcare costs trend rates may have a significant effect on the amounts reported for healthcare plans. A 1% change in assumed healthcare costs trend rates would have the following effects as of December 31, 2015:
One Percent Increase | One Percent Decrease | ||||||
(In millions) | |||||||
Effect on total of service and interest costs components | $ | 15 | $ | (12 | ) | ||
Effect of accumulated postretirement benefit obligations | $ | 253 | $ | (207 | ) |
As of December 31, 2014, the improved mortality rate assumption used for all U.S. pension and postretirement benefit plans is the RP-2000 healthy mortality table projected generationally using 175% of Scale AA. The mortality rate assumption was revised based upon the results of a comprehensive study of MetLife’s demographic experience and reflects the current best estimate of expected mortality rates for MetLife’s participant population. Prior to December 31, 2014, the mortality rate assumption used to value the benefit obligations and net periodic benefit cost for these plans was the RP-2000 healthy mortality table projected generationally using 100% of Scale AA.
Plan Assets
The Company provides employees with benefits under various Employee Retirement Income Security Act of 1974 (“ERISA”) benefit plans. These include qualified pension plans, postretirement medical plans and certain retiree life insurance coverage. The assets of the Company’s qualified pension plans are held in an insurance group annuity contract, and the vast majority of the assets of the postretirement medical plan and backing the retiree life coverage are held in a trust which largely utilizes insurance contracts to hold the assets. All of these contracts are issued by the Company’s insurance affiliates, and the assets under the contracts are held in insurance separate accounts that have been established by the Company. The underlying assets of the separate accounts are principally comprised of cash and cash equivalents, short-term investments, fixed maturity and equity securities, derivatives, real estate, private equity investments and hedge fund investments.
The insurance contract provider engages investment management firms (“Managers”) to serve as sub-advisors for the separate accounts based on the specific investment needs and requests identified by the plan fiduciary. These Managers have portfolio management discretion over the purchasing and selling of securities and other investment assets pursuant to the respective investment management agreements and guidelines established for each insurance separate account. The assets of the qualified pension plans and postretirement medical plans (the “Invested Plans”) are well diversified across multiple asset categories and across a number of different Managers, with the intent of minimizing risk concentrations within any given asset category or with any of the given Managers.
139
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
The Invested Plans, other than those held in participant directed investment accounts, are managed in accordance with investment policies consistent with the longer-term nature of related benefit obligations and within prudent risk parameters. Specifically, investment policies are oriented toward (i) maximizing the Invested Plan’s funded status; (ii) minimizing the volatility of the Invested Plan’s funded status; (iii) generating asset returns that exceed liability increases; and (iv) targeting rates of return in excess of a custom benchmark and industry standards over appropriate reference time periods. These goals are expected to be met through identifying appropriate and diversified asset classes and allocations, ensuring adequate liquidity to pay benefits and expenses when due and controlling the costs of administering and managing the Invested Plan’s investments. Independent investment consultants are periodically used to evaluate the investment risk of Invested Plan’s assets relative to liabilities, analyze the economic and portfolio impact of various asset allocations and management strategies and to recommend asset allocations.
Derivative contracts may be used to reduce investment risk, to manage duration and to replicate the risk/return profile of an asset or asset class. Derivatives may not be used to leverage a portfolio in any manner, such as to magnify exposure to an asset, asset class, interest rates or any other financial variable. Derivatives are also prohibited for use in creating exposures to securities, currencies, indices or any other financial variable that is otherwise restricted.
The table below summarizes the actual weighted average allocation of the estimated fair value of total plan assets by asset class at December 31 for the years indicated and the approved target allocation by major asset class at December 31, 2015 for the Invested Plans:
December 31, | |||||||||||||||||
2015 | 2014 | ||||||||||||||||
Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||||
Target | Actual Allocation | Target | Actual Allocation | Actual Allocation | Actual Allocation | ||||||||||||
Asset Class | |||||||||||||||||
Fixed maturity securities | 80 | % | 71 | % | 76 | % | 73 | % | 69 | % | 71 | % | |||||
Equity securities | 10 | % | 14 | % | 24 | % | 25 | % | 15 | % | 27 | % | |||||
Alternative securities (1) | 10 | % | 15 | % | — | % | 2 | % | 16 | % | 2 | % | |||||
Total assets | 100 | % | 100 | % | 100 | % | 100 | % |
______________
(1) | Alternative securities primarily include derivative assets, money market securities, short-term investments and other investments. Other postretirement benefits do not include postretirement life’s target and actual allocation of plan assets that are all in short-term investments. |
Estimated Fair Value
The pension and other postretirement benefit plan assets are categorized into a three-level fair value hierarchy, as described in Note 10, based upon the significant input with the lowest level in its valuation. The Level 2 asset category includes certain separate accounts that are primarily invested in liquid and readily marketable securities. The estimated fair value of such separate accounts is based upon reported NAV provided by fund managers and this value represents the amount at which transfers into and out of the respective separate account are effected. These separate accounts provide reasonable levels of price transparency and can be corroborated through observable market data. Directly held investments are primarily invested in U.S. and foreign government and corporate securities. The Level 3 asset category includes separate accounts that are invested in assets that provide little or no price transparency due to the infrequency with which the underlying assets trade and generally require additional time to liquidate in an orderly manner. Accordingly, the values for separate accounts invested in these alternative asset classes are based on inputs that cannot be readily derived from or corroborated by observable market data.
140
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
The pension and other postretirement plan assets measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy are summarized as follows:
December 31, 2015 | |||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||
Fair Value Hierarchy | Fair Value Hierarchy | ||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||
Corporate | $ | — | $ | 2,905 | $ | 78 | $ | 2,983 | $ | 18 | $ | 280 | $ | 1 | $ | 299 | |||||||||||||||
U.S. government bonds | 994 | 493 | — | 1,487 | 193 | 12 | — | 205 | |||||||||||||||||||||||
Foreign bonds | — | 677 | 17 | 694 | — | 61 | — | 61 | |||||||||||||||||||||||
Federal agencies | — | 228 | — | 228 | — | 34 | — | 34 | |||||||||||||||||||||||
Municipals | — | 302 | — | 302 | — | 55 | — | 55 | |||||||||||||||||||||||
Other (1) | — | 354 | 7 | 361 | — | 47 | — | 47 | |||||||||||||||||||||||
Total fixed maturity securities | 994 | 4,959 | 102 | 6,055 | 211 | 489 | 1 | 701 | |||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||
Common stock - domestic | 751 | 24 | — | 775 | 126 | — | — | 126 | |||||||||||||||||||||||
Common stock - foreign | 378 | — | — | 378 | 111 | — | — | 111 | |||||||||||||||||||||||
Total equity securities | 1,129 | 24 | — | 1,153 | 237 | — | — | 237 | |||||||||||||||||||||||
Other investments | — | 84 | 722 | 806 | — | — | — | — | |||||||||||||||||||||||
Short-term investments | 10 | 304 | — | 314 | 1 | 431 | — | 432 | |||||||||||||||||||||||
Money market securities | 9 | 49 | — | 58 | — | — | — | — | |||||||||||||||||||||||
Derivative assets | 26 | 3 | 75 | 104 | 2 | — | — | 2 | |||||||||||||||||||||||
Total assets | $ | 2,168 | $ | 5,423 | $ | 899 | $ | 8,490 | $ | 451 | $ | 920 | $ | 1 | $ | 1,372 |
141
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
December 31, 2014 | |||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||
Fair Value Hierarchy | Fair Value Hierarchy | ||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||
Corporate | $ | — | $ | 2,638 | $ | 80 | $ | 2,718 | $ | 42 | $ | 244 | $ | 3 | $ | 289 | |||||||||||||||
U.S. government bonds | 1,605 | 223 | — | 1,828 | 169 | 12 | — | 181 | |||||||||||||||||||||||
Foreign bonds | — | 718 | 17 | 735 | — | 68 | — | 68 | |||||||||||||||||||||||
Federal agencies | — | 254 | — | 254 | — | 35 | — | 35 | |||||||||||||||||||||||
Municipals | — | 270 | — | 270 | — | 74 | — | 74 | |||||||||||||||||||||||
Other (1) | — | 188 | 8 | 196 | — | 63 | — | 63 | |||||||||||||||||||||||
Total fixed maturity securities | 1,605 | 4,291 | 105 | 6,001 | 211 | 496 | 3 | 710 | |||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||
Common stock - domestic | 951 | — | — | 951 | 188 | — | — | 188 | |||||||||||||||||||||||
Common stock - foreign | 394 | — | — | 394 | 80 | — | — | 80 | |||||||||||||||||||||||
Total equity securities | 1,345 | — | — | 1,345 | 268 | — | — | 268 | |||||||||||||||||||||||
Other investments | — | 24 | 743 | 767 | — | — | — | — | |||||||||||||||||||||||
Short-term investments | 189 | 273 | — | 462 | 14 | 433 | — | 447 | |||||||||||||||||||||||
Money market securities | 29 | 56 | — | 85 | — | — | — | — | |||||||||||||||||||||||
Derivative assets | 11 | 7 | 72 | 90 | — | 1 | — | 1 | |||||||||||||||||||||||
Total assets | $ | 3,179 | $ | 4,651 | $ | 920 | $ | 8,750 | $ | 493 | $ | 930 | $ | 3 | $ | 1,426 |
______________
(1) | Other primarily includes mortgage-backed securities, collateralized mortgage obligations and ABS. |
142
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
A rollforward of all pension and other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs was as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
Pension Benefits | |||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities | ||||||||||||||||||||||
Corporate | Foreign Bonds | Other (1) | Common Stock - Domestic | Other Investments | Derivative Assets | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Balance, January 1, 2014 | $ | 55 | $ | 10 | $ | 19 | $ | 139 | $ | 563 | $ | 33 | |||||||||||
Realized gains (losses) | 3 | — | — | — | (13 | ) | (16 | ) | |||||||||||||||
Unrealized gains (losses) | — | — | — | — | 114 | 19 | |||||||||||||||||
Purchases, sales, issuances and settlements, net | 11 | 5 | (2 | ) | — | (104 | ) | 34 | |||||||||||||||
Transfers into and/or out of Level 3 | 11 | 2 | (9 | ) | (139 | ) | 183 | 2 | |||||||||||||||
Balance, December 31, 2014 | $ | 80 | $ | 17 | $ | 8 | $ | — | $ | 743 | $ | 72 | |||||||||||
Realized gains (losses) | 1 | — | — | — | — | (11 | ) | ||||||||||||||||
Unrealized gains (losses) | (5 | ) | — | 1 | — | 55 | (9 | ) | |||||||||||||||
Purchases, sales, issuances and settlements, net | 8 | 1 | (1 | ) | — | (76 | ) | 23 | |||||||||||||||
Transfers into and/or out of Level 3 | (6 | ) | (1 | ) | (1 | ) | — | — | — | ||||||||||||||
Balance, December 31, 2015 | $ | 78 | $ | 17 | $ | 7 | $ | — | $ | 722 | $ | 75 |
______________
(1) | Other includes ABS and collateralized mortgage obligations. |
Other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs were not significant for the years ended December 31, 2015 and 2014.
Expected Future Contributions and Benefit Payments
It is the Company’s practice to make contributions to the qualified pension plan to comply with minimum funding requirements of ERISA. In accordance with such practice, no contributions are required for 2016. The Company expects to make discretionary contributions to the qualified pension plan of $300 million in 2016. For information on employer contributions, see “— Obligations and Funded Status.”
Benefit payments due under the nonqualified pension plans are primarily funded from the Company’s general assets as they become due under the provision of the plans, therefore benefit payments equal employer contributions. The Company expects to make contributions of $65 million to fund the benefit payments in 2016.
Postretirement benefits are either: (i) not vested under law; (ii) a non-funded obligation of the Company; or (iii) both. Current regulations do not require funding for these benefits. The Company uses its general assets, net of participant’s contributions, to pay postretirement medical claims as they come due. As permitted under the terms of the governing trust document, the Company may be reimbursed from plan assets for postretirement medical claims paid from their general assets. The Company expects to make contributions of $50 million towards benefit obligations in 2016 to pay postretirement medical claims.
143
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Employee Benefit Plans (continued)
Gross benefit payments for the next 10 years, which reflect expected future service where appropriate, are expected to be as follows:
Pension Benefits | Other Postretirement Benefits | ||||||
(In millions) | |||||||
2016 | $ | 512 | $ | 84 | |||
2017 | $ | 534 | $ | 85 | |||
2018 | $ | 545 | $ | 88 | |||
2019 | $ | 563 | $ | 90 | |||
2020 | $ | 583 | $ | 93 | |||
2021-2025 | $ | 3,202 | $ | 501 |
Additional Information
As previously discussed, most of the assets of the pension benefit plans are held in a group annuity contract issued by the Company while some of the assets of the postretirement benefit plans are held in a trust which largely utilizes life insurance contracts issued by the Company to hold such assets. Total revenues from these contracts recognized on the consolidated statements of operations were $55 million, $50 million and $49 million for the years ended December 31, 2015, 2014 and 2013, respectively, and included policy charges and net investment income from investments backing the contracts and administrative fees. Total investment income (loss), including realized and unrealized gains (losses), credited to the account balances was ($130) million, $1.2 billion and $20 million for the years ended December 31, 2015, 2014 and 2013, respectively. The terms of these contracts are consistent in all material respects with those the Company offers to unaffiliated parties that are similarly situated.
Defined Contribution Plans
The Company sponsors defined contribution plans for substantially all Company employees under which a portion of employee contributions are matched. The Company contributed $72 million, $68 million and $84 million for the years ended December 31, 2015, 2014 and 2013, respectively.
16. Income Tax
The provision for income tax from continuing operations was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Current: | |||||||||||
Federal | $ | 1,384 | $ | 901 | $ | 789 | |||||
State and local | 20 | 3 | 2 | ||||||||
Foreign | 36 | 74 | 176 | ||||||||
Subtotal | 1,440 | 978 | 967 | ||||||||
Deferred: | |||||||||||
Federal | 315 | 538 | (411 | ) | |||||||
Foreign | 27 | 16 | 125 | ||||||||
Subtotal | 342 | 554 | (286 | ) | |||||||
Provision for income tax expense (benefit) | $ | 1,782 | $ | 1,532 | $ | 681 |
144
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Income Tax (continued)
The Company’s income (loss) from continuing operations before income tax expense (benefit) from domestic and foreign operations were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Income (loss) from continuing operations: | |||||||||||
Domestic | $ | 4,467 | $ | 5,335 | $ | 2,540 | |||||
Foreign | 72 | 56 | 282 | ||||||||
Total | $ | 4,539 | $ | 5,391 | $ | 2,822 |
The reconciliation of the income tax provision at the U.S. statutory rate to the provision for income tax as reported for continuing operations was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Tax provision at U.S. statutory rate | $ | 1,589 | $ | 1,887 | $ | 988 | |||||
Tax effect of: | |||||||||||
Dividend received deduction | (82 | ) | (82 | ) | (66 | ) | |||||
Tax-exempt income | (24 | ) | (40 | ) | (42 | ) | |||||
Prior year tax (1) | 558 | 11 | 29 | ||||||||
Low income housing tax credits | (221 | ) | (205 | ) | (190 | ) | |||||
Other tax credits | (68 | ) | (66 | ) | (44 | ) | |||||
Foreign tax rate differential | (4 | ) | — | 2 | |||||||
Change in valuation allowance | (1 | ) | — | (4 | ) | ||||||
Other, net | 35 | 27 | 8 | ||||||||
Provision for income tax expense (benefit) | $ | 1,782 | $ | 1,532 | $ | 681 |
______________
(1) As discussed further below, prior year tax includes a $557 million non-cash charge related to an uncertain tax position.
145
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Income Tax (continued)
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following at:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Deferred income tax assets: | |||||||
Policyholder liabilities and receivables | $ | 1,888 | $ | 1,577 | |||
Net operating loss carryforwards | 26 | 29 | |||||
Employee benefits | 922 | 1,015 | |||||
Tax credit carryforwards | 700 | 979 | |||||
Litigation-related and government mandated | 231 | 259 | |||||
Other | 438 | 309 | |||||
Total gross deferred income tax assets | 4,205 | 4,168 | |||||
Less: Valuation allowance | 21 | 22 | |||||
Total net deferred income tax assets | 4,184 | 4,146 | |||||
Deferred income tax liabilities: | |||||||
Investments, including derivatives | 3,025 | 2,402 | |||||
Intangibles | 53 | 72 | |||||
DAC | 1,461 | 1,568 | |||||
Net unrealized investment gains | 2,528 | 3,903 | |||||
Other | 5 | 36 | |||||
Total deferred income tax liabilities | 7,072 | 7,981 | |||||
Net deferred income tax asset (liability) | $ | (2,888 | ) | $ | (3,835 | ) |
The Company also has recorded a valuation allowance charge of $1 million related to certain state net operating loss carryforwards. The valuation allowance reflects management’s assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain state net operating loss carryforwards will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable.
The following table sets forth the domestic and state net operating loss carryforwards for tax purposes at December 31, 2015.
Net Operating Loss Carryforwards | |||||||
Domestic | State | ||||||
(In millions) | |||||||
Expiration | |||||||
2016-2020 | $ | — | $ | 31 | |||
2021-2025 | — | 50 | |||||
2026-2030 | — | 41 | |||||
2031-2035 | 14 | 12 | |||||
Indefinite | — | — | |||||
$ | 14 | $ | 134 |
146
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Income Tax (continued)
The following table sets forth the general business credits, foreign tax credits, and other credit carryforwards for tax purposes at December 31, 2015.
Tax Credit Carryforwards | |||||||||||
General Business Credits | Foreign Tax Credits | Other | |||||||||
(In millions) | |||||||||||
Expiration | |||||||||||
2016-2020 | $ | — | $ | — | $ | — | |||||
2021-2025 | — | 185 | — | ||||||||
2026-2030 | 103 | — | — | ||||||||
2031-2035 | 519 | — | — | ||||||||
Indefinite | — | — | 123 | ||||||||
$ | 622 | $ | 185 | $ | 123 |
The Company participates in a tax sharing agreement with MetLife, Inc., as described in Note 1. Pursuant to this tax sharing agreement, the amounts due to (from) affiliates included $124 million, ($24) million and $157 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company files income tax returns with the U.S. federal government and various state and local jurisdictions, as well as foreign jurisdictions. The Company is under continuous examination by the IRS and other tax authorities in jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction and subsidiary. The Company is no longer subject to U.S. federal, state, or local income tax examinations for years prior to 2007, except for i) 2000 through 2002 where the IRS disallowance relates to certain tax credits claimed - in April 2015, the Company received a Statutory Notice of Deficiency (the “Notice”) and paid the tax thereon in September 2015 (see additional details below); and ii) 2003 through 2006, where the IRS disallowance relates predominantly to certain tax credits claimed and the Company is engaged with IRS appeals. Management believes it has established adequate tax liabilities and final resolution for the years 2000 through 2006 is not expected to have a material impact on the Company’s consolidated financial statements.
The Company recorded a non-cash charge to net income of $792 million, net of tax, during the third quarter of 2015. The charge was related to an uncertain tax position and was comprised of a $557 million charge included in provision for income tax expense (benefit) and a $362 million ($235 million, net of tax) charge included in other expenses. This charge is the result of the Company’s consideration of recent decisions of the U.S. Court of Appeals for the Second Circuit upholding the disallowance of foreign tax credits claimed by other corporate entities not affiliated with the Company. The Company’s action relates to tax years from 2000 to 2009, during which MLIC held non-U.S. investments in support of its life insurance business through a United Kingdom investment subsidiary that was structured as a joint venture at the time.
There has been no change in the Company’s position on the disallowance of its foreign tax credits by the IRS. The Company continues to contest the disallowance of these foreign tax credits by the IRS as management believes the facts strongly support the Company’s position. The Company will defend its position vigorously and does not expect any additional charges related to this matter.
Also related to the aforementioned foreign tax credit matter, on April 9, 2015, the IRS issued the Notice to the Company. The Notice asserted that the Company owes additional taxes and interest for 2000 through 2002 primarily due to the disallowance of foreign tax credits. The transactions that are the subject of the Notice continue through 2009, and it is likely that the IRS will seek to challenge these later periods. On September 18, 2015, the Company paid the assessed tax and interest of $444 million for 2000 through 2002 and will subsequently file a claim for a refund. On November 19, 2015, $9 million of this amount was refunded from the IRS as an overpayment of interest.
147
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Income Tax (continued)
The Company’s liability for unrecognized tax benefits may increase or decrease in the next 12 months. A reasonable estimate of the increase or decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution of the pending issues will not result in a material change to its consolidated financial statements, although the resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Balance at January 1, | $ | 546 | $ | 532 | $ | 532 | |||||
Additions for tax positions of prior years (1) | 558 | 27 | 50 | ||||||||
Reductions for tax positions of prior years | — | (13 | ) | (4 | ) | ||||||
Additions for tax positions of current year | 4 | 3 | 3 | ||||||||
Settlements with tax authorities | (33 | ) | (3 | ) | (49 | ) | |||||
Balance at December 31, | $ | 1,075 | $ | 546 | $ | 532 | |||||
Unrecognized tax benefits that, if recognized would impact the effective rate | $ | 1,060 | $ | 497 | $ | 491 |
__________
(1) The significant increase in 2015 is related to the non-cash charge discussed above.
The Company classifies interest accrued related to unrecognized tax benefits in interest expense, included within other expenses, while penalties are included in income tax expense.
Interest was as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Interest recognized on the consolidated statements of operations (1) | $ | 382 | $ | 37 | $ | 17 | |||||
December 31, | |||||||||||
2015 | 2014 | ||||||||||
(In millions) | |||||||||||
Interest included in other liabilities on the consolidated balance sheets (1) | $ | 647 | $ | 265 |
___________
(1) The significant increase in 2015 is related to the non-cash charge discussed above.
The Company had no penalties for the years ended December 31, 2015, 2014 and 2013.
148
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Income Tax (continued)
The U.S. Treasury Department and the IRS have indicated that they intend to address through regulations the methodology to be followed in determining the dividends received deduction (“DRD”), related to variable life insurance and annuity contracts. The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between the actual tax expense and expected amount determined using the federal statutory tax rate of 35%. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other interested parties will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time. For the years ended December 31, 2015, 2014 and 2013, the Company recognized an income tax benefit of $76 million, $92 million and $53 million, respectively, related to the separate account DRD. The 2014 benefit included a benefit of $16 million related to a true-up of the 2013 tax return. The 2013 benefit included an expense of $7 million related to a true-up of the 2012 tax return.
17. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
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. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be reasonably estimated at December 31, 2015. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known to management, management does not believe any such charges are likely to have a material effect on the Company’s financial position.
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of December 31, 2015, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $420 million.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
149
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Asbestos-Related Claims
Metropolitan Life Insurance Company is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages. Metropolitan Life Insurance Company has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life Insurance Company issued liability or workers’ compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. The lawsuits principally have focused on allegations with respect to certain research, publication and other activities of one or more of Metropolitan Life Insurance Company’s employees during the period from the 1920’s through approximately the 1950’s and allege that Metropolitan Life Insurance Company learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Metropolitan Life Insurance Company believes that it should not have legal liability in these cases. The outcome of most asbestos litigation matters, however, is uncertain and can be impacted by numerous variables, including differences in legal rulings in various jurisdictions, the nature of the alleged injury and factors unrelated to the ultimate legal merit of the claims asserted against Metropolitan Life Insurance Company. Metropolitan Life Insurance Company employs a number of resolution strategies to manage its asbestos loss exposure, including seeking resolution of pending litigation by judicial rulings and settling individual or groups of claims or lawsuits under appropriate circumstances.
Claims asserted against Metropolitan Life Insurance Company have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. Metropolitan Life Insurance Company’s defenses (beyond denial of certain factual allegations) include that: (i) Metropolitan Life Insurance Company owed no duty to the plaintiffs — it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs did not rely on any actions of Metropolitan Life Insurance Company; (iii) Metropolitan Life Insurance Company’s conduct was not the cause of the plaintiffs’ injuries; (iv) plaintiffs’ exposure occurred after the dangers of asbestos were known; and (v) the applicable time with respect to filing suit has expired. During the course of the litigation, certain trial courts have granted motions dismissing claims against Metropolitan Life Insurance Company, while other trial courts have denied Metropolitan Life Insurance Company’s motions. There can be no assurance that Metropolitan Life Insurance Company will receive favorable decisions on motions in the future. While most cases brought to date have settled, Metropolitan Life Insurance Company intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
The approximate total number of asbestos personal injury claims pending against Metropolitan Life Insurance Company as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims at or during those years are set forth in the following table:
December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions, except number of claims) | |||||||||||
Asbestos personal injury claims at year end | 67,787 | 68,460 | 67,983 | ||||||||
Number of new claims during the year | 3,856 | 4,636 | 5,898 | ||||||||
Settlement payments during the year (1) | $ | 56.1 | $ | 46.0 | $ | 37.0 |
(1) | Settlement payments represent payments made by Metropolitan Life Insurance Company during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life Insurance Company’s attorneys’ fees and expenses. |
The number of asbestos cases that may be brought, the aggregate amount of any liability that Metropolitan Life Insurance Company may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.
150
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
The ability of Metropolitan Life Insurance Company to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict the numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against Metropolitan Life Insurance Company when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts.
The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company’s judgment, there is a future point after which losses cease to be probable and reasonably estimable. It is reasonably possible that the Company’s total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material effect on the Company’s financial position.
The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. Metropolitan Life Insurance Company’s recorded asbestos liability is based on its estimation of the following elements, as informed by the facts presently known to it, its understanding of current law and its past experiences: (i) the probable and reasonably estimable liability for asbestos claims already asserted against Metropolitan Life Insurance Company, including claims settled but not yet paid; (ii) the probable and reasonably estimable liability for asbestos claims not yet asserted against Metropolitan Life Insurance Company, but which Metropolitan Life Insurance Company believes are reasonably probable of assertion; and (iii) the legal defense costs associated with the foregoing claims. Significant assumptions underlying Metropolitan Life Insurance Company’s analysis of the adequacy of its recorded liability with respect to asbestos litigation include: (i) the number of future claims; (ii) the cost to resolve claims; and (iii) the cost to defend claims.
Metropolitan Life Insurance Company reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants and the jurisdictions in which claims are pending. As previously disclosed, in 2014, Metropolitan Life Insurance Company increased its recorded liability for asbestos-related claims to $690 million. Based upon its regular reevaluation of its exposure from asbestos litigation, Metropolitan Life Insurance Company has updated its liability analysis for asbestos-related claims through December 31, 2015.
Regulatory Matters
The Company receives and responds to subpoenas or other inquiries seeking a broad range of information from state regulators, including state insurance commissioners; state attorneys general or other state governmental authorities; federal regulators, including the SEC; federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority (“FINRA”). The issues involved in information requests and regulatory matters vary widely. The Company cooperates in these inquiries.
151
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
In the Matter of Chemform, Inc. Site, Pompano Beach, Broward County, Florida
In July 2010, the Environmental Protection Agency (“EPA”) advised Metropolitan Life Insurance Company that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted Metropolitan Life Insurance Company (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. The EPA is requesting payment of an amount under $1 million from Metropolitan Life Insurance Company and such third party for past costs and an additional amount for future environmental testing costs at the Chemform Site. In September 2012, the EPA, Metropolitan Life Insurance Company and the third party executed an Administrative Order on Consent under which Metropolitan Life Insurance Company and the third party have agreed to be responsible for certain environmental testing at the Chemform Site. The Company estimates that its costs for the environmental testing will not exceed $100,000. The September 2012 Administrative Order on Consent does not resolve the EPA’s claim for past clean-up costs. The EPA may seek additional costs if the environmental testing identifies issues. The Company estimates that the aggregate cost to resolve this matter will not exceed $1 million.
Sales Practices Regulatory Matters.
Regulatory authorities in a number of states and FINRA, and occasionally the SEC, have had investigations or inquiries relating to sales of individual life insurance policies or annuities or other products by Metropolitan Life Insurance Company, NELICO and GALIC. These investigations often focus on the conduct of particular financial services representatives and the sale of unregistered or unsuitable products or the misuse of client assets. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including restitution payments. The Company may continue to resolve investigations in a similar manner. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for these sales practices-related investigations or inquiries.
Unclaimed Property Litigation
West Virginia Lawsuits
On September 20, 2012, the West Virginia Treasurer filed an action against Metropolitan Life Insurance Company in West Virginia state court (West Virginia ex rel. John D. Perdue v. Metropolitan Life Insurance Company, Circuit Court of Putnam County, Civil Action No. 12-C-295) alleging that Metropolitan Life Insurance Company violated the West Virginia Uniform Unclaimed Property Act (the “Act”), seeking to compel compliance with the Act, and seeking payment of unclaimed property, interest, and penalties. On November 21, 2012 and January 9, 2013, the Treasurer filed substantially identical suits against NELICO and GALIC, respectively. On June 16, 2015, the West Virginia Supreme Court of Appeals reversed the Circuit Court’s order that had granted defendants’ motions to dismiss the actions and remanded them to the Circuit Court for further proceedings. The defendants intend to defend these actions vigorously.
Total Control Accounts Litigation
Metropolitan Life Insurance Company is a defendant in a lawsuit related to its use of retained asset accounts, known as TCA, as a settlement option for death benefits.
Owens v. Metropolitan Life Insurance Company (N.D. Ga., filed April 17, 2014)
Plaintiff filed this putative class action lawsuit on behalf of all persons for whom Metropolitan Life Insurance Company established a TCA to pay death benefits under an ERISA plan. The action alleges that Metropolitan Life Insurance Company’s use of the TCA as the settlement option for life insurance benefits under some group life insurance policies violates Metropolitan Life Insurance Company’s fiduciary duties under ERISA. As damages, plaintiff seeks disgorgement of profits that Metropolitan Life Insurance Company realized on accounts owned by members of the putative class. The court denied Metropolitan Life Insurance Company’s motion to dismiss the complaint. The Company intends to defend this action vigorously.
152
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Reinsurance Litigation
Robainas, et al. v. Metropolitan Life Ins. Co. (S.D.N.Y., December 16, 2014)
Plaintiffs filed this putative class action lawsuit on behalf of themselves and all persons and entities who, directly or indirectly, purchased, renewed or paid premiums on life insurance policies issued by Metropolitan Life Insurance Company from 2009 through 2014 (the “Policies”). Two similar actions were subsequently filed, Yale v. Metropolitan Life Ins. Co. (S.D.N.Y., January 12, 2015) and International Association of Machinists and Aerospace Workers District Lodge 15 v. Metropolitan Life Ins. Co. (E.D.N.Y., February 2, 2015). Both of these actions were consolidated with the Robainas action. The consolidated complaint alleges that Metropolitan Life Insurance Company inadequately disclosed in its statutory annual statements that certain reinsurance transactions with affiliated reinsurance companies were collateralized using “contractual parental guarantees,” and thereby allegedly misrepresented its financial condition and the adequacy of its reserves. The lawsuit sought recovery under Section 4226 of the New York Insurance Law of a statutory penalty in the amount of the premiums paid for the Policies. On October 9, 2015, the court granted Metropolitan Life Insurance Company’s motion to dismiss the consolidated complaint, finding that plaintiffs lacked Article III standing because they did not allege any concrete injury as a result of the alleged conduct. Plaintiffs appealed this decision to the Second Circuit Court of Appeals.
Intoccia v. Metropolitan Life Ins. Co. (S.D.N.Y., April 20, 2015)
Plaintiffs filed this putative class action on behalf of themselves and all persons and entities who, directly or indirectly, purchased, renewed or paid premiums for Guaranteed Benefits Insurance Riders attached to variable annuity contracts with Metropolitan Life Insurance Company from 2009 through 2015 (the “Annuities”). The court consolidated Weilert v. Metropolitan Life Ins. Co. (S.D.N.Y., April 30, 2015) with the Intoccia case, and the consolidated, amended complaint alleges that Metropolitan Life Insurance Company inadequately disclosed in its statutory annual statements that certain reinsurance transactions with affiliated reinsurance companies were collateralized using “contractual parental guarantees,” and thereby allegedly misrepresented its financial condition and the adequacy of its reserves. The lawsuits seek recovery under Section 4226 of the New York Insurance Law of a statutory penalty in the amount of the premiums paid for Guaranteed Benefits Insurance Riders attached to the Annuities. The Court granted Metropolitan Life Insurance Company’s motion to dismiss, adopting the reasoning of the Robainas decision. Plaintiffs appealed this decision to the Second Circuit Court of Appeals.
Other Litigation
McGuire v. Metropolitan Life Insurance Company (E.D. Mich., filed February 22, 2012)
This lawsuit was filed by the fiduciary for the Union Carbide Employees’ Pension Plan and alleges that Metropolitan Life Insurance Company, which issued annuity contracts to fund some of the benefits the Plan provides, engaged in transactions that ERISA prohibits and violated duties under ERISA and federal common law by determining that no dividends were payable with respect to the contracts from and after 1999. On August 8, 2014, the court denied the parties’ motions for summary judgment. The court has set a June 6, 2016 trial date.
153
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Sun Life Assurance Company of Canada Indemnity Claim
In 2006, Sun Life Assurance Company of Canada (“Sun Life”), as successor to the purchaser of Metropolitan Life Insurance Company’s Canadian operations, filed a lawsuit in Toronto, seeking a declaration that Metropolitan Life Insurance Company remains liable for “market conduct claims” related to certain individual life insurance policies sold by Metropolitan Life Insurance Company and that were transferred to Sun Life. Sun Life had asked that the court require Metropolitan Life Insurance Company to indemnify Sun Life for these claims pursuant to indemnity provisions in the sale agreement for the sale of Metropolitan Life Insurance Company’s Canadian operations entered into in June of 1998. In January 2010, the court found that Sun Life had given timely notice of its claim for indemnification but, because it found that Sun Life had not yet incurred an indemnifiable loss, granted Metropolitan Life Insurance Company’s motion for summary judgment. Both parties appealed but subsequently agreed to withdraw the appeal and consider the indemnity claim through arbitration. In September 2010, Sun Life notified Metropolitan Life Insurance Company that a purported class action lawsuit was filed against Sun Life in Toronto, Fehr v. Sun Life Assurance Co. (Super. Ct., Ontario, September 2010), alleging sales practices claims regarding the same individual policies sold by Metropolitan Life Insurance Company and transferred to Sun Life. An amended class action complaint in that case was served on Sun Life in May 2013, again without naming Metropolitan Life Insurance Company as a party. On August 30, 2011, Sun Life notified Metropolitan Life Insurance Company that a purported class action lawsuit was filed against Sun Life in Vancouver, Alamwala v. Sun Life Assurance Co. (Sup. Ct., British Columbia, August 2011), alleging sales practices claims regarding certain of the same policies sold by Metropolitan Life Insurance Company and transferred to Sun Life. Sun Life contends that Metropolitan Life Insurance Company is obligated to indemnify Sun Life for some or all of the claims in these lawsuits. These sales practices cases against Sun Life are ongoing and the Company is unable to estimate the reasonably possible loss or range of loss arising from this litigation.
Fauley v. Metropolitan Life Insurance Co., et al. (Circuit Court of the 19th Judicial Circuit, Lake County, Ill., July 3, 2014).
Plaintiffs filed this lawsuit against defendants, including Metropolitan Life Insurance Company and a former MetLife financial services representative, alleging that the defendants sent unsolicited fax advertisements to plaintiff and others in violation of the Telephone Consumer Protection Act, as amended by the Junk Fax Prevention Act, 47 U.S.C. § 227. The court issued a final order certifying a nationwide settlement class and approving a settlement under which Metropolitan Life Insurance Company has agreed to pay up to $23 million to resolve claims as to fax ads sent between August 23, 2008 and August 7, 2014. On March 23, 2016, the intermediate appellate court affirmed the trial court’s order.
Voshall v. Metropolitan Life Ins. Co. (Superior Court of the State of California, County of Los Angeles, April 8, 2015)
Plaintiff filed this putative class action lawsuit on behalf of himself and all persons covered under a long-term group disability income insurance policy issued by Metropolitan Life Insurance Company to public entities in California between April 8, 2011 and April 8, 2015. Plaintiff alleges that Metropolitan Life Insurance Company improperly reduced benefits by including cost of living adjustments and employee paid contributions in the employer retirement benefits and other income that reduces the benefit payable under such policies. Plaintiff asserts causes of action for declaratory relief, violation of the California Business & Professions Code, breach of contract and breach of the implied covenant of good faith and fair dealing. The Company intends to defend this action vigorously.
Martin v. Metropolitan Life Insurance Company, (Superior Court of the State of California, County of Contra Costa, filed December 17, 2015)
Plaintiffs filed this this putative class action lawsuit on behalf of themselves and all California persons who have been charged compound interest by Metropolitan Life Insurance Company in life insurance policy and/or premium loan balances within the last four years. Plaintiffs allege that Metropolitan Life Insurance Company has engaged in a pattern and practice of charging compound interest on life insurance policy and premium loans without the borrower authorizing such compounding, and that this constitutes an unlawful business practice under California law. Plaintiff asserts causes of action for declaratory relief, violation of California’s Unfair Competition Law and Usury Law, and unjust enrichment. Plaintiff seeks declaratory and injunctive relief, restitution of interest, and damages in an unspecified amount. The Company intends to defend this action vigorously.
154
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Lau v. Metropolitan Life Insurance Co. (S.D.N.Y. filed, December 3, 2015)
This putative class action lawsuit was filed by a single defined contribution plan participant on behalf of all ERISA plans whose assets were invested in Metropolitan Life Insurance Company’s “Group Annuity Contract Stable Value Funds” within the past six years. The suit alleges breaches of fiduciary duty under ERISA and challenges the “spread” with respect to the stable value fund group annuity products sold to retirement plans. The allegations focus on the methodology Metropolitan Life Insurance Company uses to establish and reset the crediting rate, the terms under which plan participants are permitted to transfer funds from a stable value option to another investment option, the procedures followed if an employer terminates a contract, and the level of disclosure provided. Plaintiff seeks declaratory and injunctive relief, as well as damages in an unspecified amount. The Company intends to defend this action vigorously.
Sales Practices Claims
Over the past several years, the Company has faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds, other products or the misuse of client assets. Some of the current cases seek substantial damages, including punitive and treble damages and attorneys’ fees. The Company continues to defend vigorously against the claims in these matters. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
Summary
Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed previously 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, investor 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.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to previously, 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 effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes 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 effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
Insolvency Assessments
Most of the jurisdictions in which the Company is admitted to transact business require insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
155
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Assets and liabilities held for insolvency assessments were as follows:
December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Other Assets: | |||||||
Premium tax offset for future discounted and undiscounted assessments | $ | 29 | $ | 34 | |||
Premium tax offsets currently available for paid assessments | 50 | 65 | |||||
$ | 79 | $ | 99 | ||||
Other Liabilities: | |||||||
Insolvency assessments | $ | 43 | $ | 50 |
Commitments
Leases
The Company, as lessee, has entered into various lease and sublease agreements for office space, information technology, aircrafts and other equipment. Future minimum gross rental payments relating to these lease arrangements are as follows:
Amount | ||||
(In millions) | ||||
2016 | $ | 241 | ||
2017 | 202 | |||
2018 | 189 | |||
2019 | 160 | |||
2020 | 154 | |||
Thereafter | 859 | |||
Total | $ | 1,805 |
Total minimum rentals to be received in the future under non-cancelable subleases were $93 million as of December 31, 2015.
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $4.2 billion and $3.9 billion at December 31, 2015 and 2014, respectively.
Commitments to Fund Partnership Investments, Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $4.4 billion and $3.6 billion at December 31, 2015 and 2014, respectively.
156
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
17. Contingencies, Commitments and Guarantees (continued)
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $800 million, with a cumulative maximum of $1.2 billion, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
The Company’s recorded liabilities were $4 million and $3 million at December 31, 2015 and 2014, respectively, for indemnities, guarantees and commitments.
157
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
18. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for 2015 and 2014 are summarized in the table below:
Three Months Ended | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||
(In millions) | |||||||||||||||
2015 | |||||||||||||||
Total revenues | $ | 9,862 | $ | 8,833 | $ | 10,772 | $ | 9,304 | |||||||
Total expenses | $ | 8,170 | $ | 7,945 | $ | 9,637 | $ | 8,480 | |||||||
Income (loss) from continuing operations, net of income tax | $ | 1,190 | $ | 668 | $ | 268 | $ | 631 | |||||||
Income (loss) from discontinued operations, net of income tax | $ | — | $ | — | $ | — | $ | — | |||||||
Net income (loss) | $ | 1,190 | $ | 668 | $ | 268 | $ | 631 | |||||||
Less: Net income (loss) attributable to noncontrolling interests | $ | 1 | $ | 6 | $ | (8 | ) | $ | 1 | ||||||
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 1,189 | $ | 662 | $ | 276 | $ | 630 | |||||||
2014 | |||||||||||||||
Total revenues | $ | 9,037 | $ | 9,252 | $ | 9,857 | $ | 10,585 | |||||||
Total expenses | $ | 7,889 | $ | 8,210 | $ | 8,017 | $ | 9,224 | |||||||
Income (loss) from continuing operations, net of income tax | $ | 828 | $ | 749 | $ | 1,303 | $ | 979 | |||||||
Income (loss) from discontinued operations, net of income tax | $ | (3 | ) | $ | — | $ | — | $ | — | ||||||
Net income (loss) | $ | 825 | $ | 749 | $ | 1,303 | $ | 979 | |||||||
Less: Net income (loss) attributable to noncontrolling interests | $ | 1 | $ | — | $ | (7 | ) | $ | 1 | ||||||
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 824 | $ | 749 | $ | 1,310 | $ | 978 |
19. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include personnel, policy administrative functions and distribution services. For certain agreements, charges are based on various performance measures or activity-based costing. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate. Expenses and fees incurred with affiliates related to these agreements, recorded in other expenses, were $2.1 billion, $2.1 billion and $2.4 billion for the years ended December 31, 2015, 2014 and 2013, respectively. Revenues received from affiliates related to these agreements, recorded in universal life and investment-type product policy fees, were $135 million, $129 million and $127 million for the years ended December 31, 2015, 2014 and 2013, respectively. Revenues received from affiliates related to these agreements, recorded in other revenues, were $151 million, $177 million and $142 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company also entered into agreements with affiliates to provide additional services necessary to conduct the affiliates’ activities. Typical services provided under these agreements include management, policy administrative functions, investment advice and distribution services. Expenses incurred by the Company related to these agreements, included in other expenses, were $1.5 billion, $1.8 billion and $1.4 billion for the years ended December 31, 2015, 2014 and 2013, respectively, and were reimbursed to the Company by these affiliates.
The Company had net payables to affiliates, related to the items discussed above, of $282 million and $169 million at December 31, 2015 and 2014, respectively.
See Notes 6, 8, 9, 12, 13 and 15 for additional information on related party transactions.
158
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
20. Subsequent Events
Dividends
In September 2016, the Company’s Board of Directors approved extraordinary dividends to MetLife, Inc. consisting of all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, GALIC and NELICO. The Company expects to distribute such dividends in the fourth quarter of 2016. At the dividend effective date, the Company’s stockholder’s equity will be reduced by the aggregate carrying amount of GALIC and NELICO’s assets in excess of their liabilities. The aggregate carrying amount of GALIC and NELICO’s assets in excess of their liabilities was $2.8 billion and $3.0 billion at December 31, 2015 and 2014, respectively.
On March 15, 2016, Metropolitan Life Insurance Company paid an ordinary cash dividend to MetLife, Inc. of $1.5 billion.
Sales Distribution Services
In July 2016, MetLife, Inc. completed the sale to Massachusetts Mutual Life Insurance Company (“MassMutual”) of MetLife, Inc.’s U.S. retail advisor force and certain assets associated with the MetLife Premier Client Group, including all of the issued and outstanding shares of MetLife Securities, Inc. MassMutual assumed all of the liabilities related to such assets and that arise or occur after the closing of the sale.
159
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule I
Consolidated Summary of Investments —
Other Than Investments in Related Parties
December 31, 2015
(In millions)
Types of Investments | Cost or Amortized Cost (1) | Estimated Fair Value | Amount at Which Shown on Balance Sheet | ||||||||
Fixed maturity securities: | |||||||||||
Bonds: | |||||||||||
U.S. Treasury and agency securities | $ | 36,183 | $ | 39,693 | $ | 39,693 | |||||
Public utilities | 10,186 | 10,681 | 10,681 | ||||||||
State and political subdivision securities | 6,070 | 6,974 | 6,974 | ||||||||
Foreign government securities | 3,178 | 3,606 | 3,606 | ||||||||
All other corporate bonds | 75,375 | 76,682 | 76,682 | ||||||||
Total bonds | 130,992 | 137,636 | 137,636 | ||||||||
Mortgage-backed and asset-backed securities | 36,407 | 37,061 | 37,061 | ||||||||
Redeemable preferred stock | 962 | 989 | 989 | ||||||||
Total fixed maturity securities | 168,361 | 175,686 | 175,686 | ||||||||
Trading and fair value option securities | 463 | 431 | 431 | ||||||||
Equity securities: | |||||||||||
Common stock: | |||||||||||
Industrial, miscellaneous and all other | 1,103 | 1,066 | 1,066 | ||||||||
Public utilities | 195 | 177 | 177 | ||||||||
Non-redeemable preferred stock | 687 | 706 | 706 | ||||||||
Total equity securities | 1,985 | 1,949 | 1,949 | ||||||||
Mortgage loans held-for-investment | 53,722 | 53,722 | |||||||||
Policy loans | 8,134 | 8,134 | |||||||||
Real estate and real estate joint ventures | 5,968 | 5,968 | |||||||||
Real estate acquired in satisfaction of debt | 40 | 40 | |||||||||
Other limited partnership interests | 4,088 | 4,088 | |||||||||
Short-term investments | 5,595 | 5,595 | |||||||||
Other invested assets | 16,869 | 16,869 | |||||||||
Total investments | $ | 265,225 | $ | 272,482 |
(1) | The Company’s trading and FVO securities portfolio is mainly comprised of fixed maturity and equity securities, including mutual funds and, to a lesser extent, short-term investments and cash and cash equivalents. Cost or amortized cost for fixed maturity securities and mortgage loans held-for-investment represents original cost reduced by repayments, valuation allowances and impairments from other-than-temporary declines in estimated fair value that are charged to earnings and adjusted for amortization of premiums or accretion of discounts; for equity securities, cost represents original cost reduced by impairments from other-than-temporary declines in estimated fair value; for real estate, cost represents original cost reduced by impairments and adjusted for valuation allowances and depreciation; for real estate joint ventures and other limited partnership interests, cost represents original cost reduced for impairments or original cost adjusted for equity in earnings and distributions. |
160
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information
December 31, 2015, 2014 and 2013
(In millions)
Segment | DAC and VOBA | Future Policy Benefits, Other Policy-Related Balances and Policyholder Dividend Obligation | Policyholder Account Balances | Policyholder Dividends Payable | Unearned Premiums (1), (2) | Unearned Revenue (1) | ||||||||||||||||||
2015 | ||||||||||||||||||||||||
U.S. | $ | 418 | $ | 56,090 | $ | 63,716 | $ | — | $ | 136 | $ | 33 | ||||||||||||
MetLife Holdings | 5,000 | 70,302 | 29,827 | 621 | 171 | 201 | ||||||||||||||||||
Corporate & Other | 625 | 1,506 | 877 | 3 | 1 | 321 | ||||||||||||||||||
Total | $ | 6,043 | $ | 127,898 | $ | 94,420 | $ | 624 | $ | 308 | $ | 555 | ||||||||||||
2014 | ||||||||||||||||||||||||
U.S. | $ | 406 | $ | 54,374 | $ | 65,343 | $ | — | $ | 176 | �� | $ | 41 | |||||||||||
MetLife Holdings | 4,894 | 70,522 | 29,665 | 612 | 179 | 204 | ||||||||||||||||||
Corporate & Other | 675 | 1,501 | 894 | 3 | 1 | 323 | ||||||||||||||||||
Total | $ | 5,975 | $ | 126,397 | $ | 95,902 | $ | 615 | $ | 356 | $ | 568 | ||||||||||||
2013 | ||||||||||||||||||||||||
U.S. | $ | 382 | $ | 50,042 | $ | 61,563 | $ | — | $ | 87 | $ | 31 | ||||||||||||
MetLife Holdings | 5,288 | 67,789 | 29,915 | 598 | 186 | 190 | ||||||||||||||||||
Corporate & Other | 746 | 1,574 | 1,020 | 3 | 1 | 317 | ||||||||||||||||||
Total | $ | 6,416 | $ | 119,405 | $ | 92,498 | $ | 601 | $ | 274 | $ | 538 |
______________
(1) | Amounts are included within the future policy benefits, other policy-related balances and policyholder dividend obligation column. |
(2) | Includes premiums received in advance. |
See Note 2 of the Notes to the Consolidated Financial Statements for information on the re-segmentation reporting changes during the third quarter of 2016, which were retrospectively applied.
161
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information — (continued)
December 31, 2015, 2014 and 2013
(In millions)
Segment | Premiums and Universal Life and Investment-Type Product Policy Fees | Net Investment Income | Policyholder Benefits and Claims and Interest Credited to Policyholder Account Balances | Amortization of DAC and VOBA Charged to Other Expenses | Other Operating Expenses (1) | |||||||||||||||
2015 | ||||||||||||||||||||
U.S. | $ | 18,281 | $ | 5,874 | $ | 19,582 | $ | 59 | $ | 2,658 | ||||||||||
MetLife Holdings | 5,910 | 5,613 | 6,962 | 631 | 2,678 | |||||||||||||||
Corporate & Other | 327 | 90 | 166 | 52 | 1,444 | |||||||||||||||
Total | $ | 24,518 | $ | 11,577 | $ | 26,710 | $ | 742 | $ | 6,780 | ||||||||||
2014 | ||||||||||||||||||||
U.S. | $ | 17,678 | $ | 5,817 | $ | 19,002 | $ | 54 | $ | 2,574 | ||||||||||
MetLife Holdings | 5,825 | 5,749 | 6,859 | 551 | 2,625 | |||||||||||||||
Corporate & Other | 347 | 327 | 168 | 90 | 1,417 | |||||||||||||||
Total | $ | 23,850 | $ | 11,893 | $ | 26,029 | $ | 695 | $ | 6,616 | ||||||||||
2013 | ||||||||||||||||||||
U.S. | $ | 16,868 | $ | 5,697 | $ | 18,371 | $ | 54 | $ | 2,423 | ||||||||||
MetLife Holdings | 5,647 | 5,521 | 6,764 | 232 | 2,952 | |||||||||||||||
Corporate & Other | 323 | 567 | 150 | (25 | ) | 1,557 | ||||||||||||||
Total | $ | 22,838 | $ | 11,785 | $ | 25,285 | $ | 261 | $ | 6,932 |
______________
(1) | Includes other expenses and policyholder dividends, excluding amortization of DAC and VOBA charged to other expenses. |
See Note 2 of the Notes to the Consolidated Financial Statements for information on the re-segmentation reporting changes during the third quarter of 2016, which were retrospectively applied.
162
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule IV
Consolidated Reinsurance
December 31, 2015, 2014 and 2013
(In millions)
Gross Amount | Ceded | Assumed | Net Amount | %��Amount Assumed to Net | |||||||||||||||
2015 | |||||||||||||||||||
Life insurance in-force | $ | 3,035,399 | $ | 361,355 | $ | 811,435 | $ | 3,485,479 | 23.3 | % | |||||||||
Insurance premium | |||||||||||||||||||
Life insurance (1) | $ | 14,449 | $ | 1,143 | $ | 1,638 | $ | 14,944 | 11.0 | % | |||||||||
Accident & health insurance | 7,048 | 99 | 41 | 6,990 | 0.6 | % | |||||||||||||
Total insurance premium | $ | 21,497 | $ | 1,242 | $ | 1,679 | $ | 21,934 | 7.7 | % | |||||||||
2014 | |||||||||||||||||||
Life insurance in-force | $ | 2,935,363 | $ | 372,886 | $ | 830,980 | $ | 3,393,457 | 24.5 | % | |||||||||
Insurance premium | |||||||||||||||||||
Life insurance (1) | $ | 14,135 | $ | 1,159 | $ | 1,630 | $ | 14,606 | 11.2 | % | |||||||||
Accident & health insurance | 6,828 | 93 | 43 | 6,778 | 0.6 | % | |||||||||||||
Total insurance premium | $ | 20,963 | $ | 1,252 | $ | 1,673 | $ | 21,384 | 7.8 | % | |||||||||
2013 | |||||||||||||||||||
Life insurance in-force | $ | 2,940,853 | $ | 401,576 | $ | 844,946 | $ | 3,384,223 | 25.0 | % | |||||||||
Insurance premium | |||||||||||||||||||
Life insurance (1) | $ | 13,820 | $ | 1,187 | $ | 1,423 | $ | 14,056 | 10.1 | % | |||||||||
Accident & health insurance | 6,470 | 97 | 46 | 6,419 | 0.7 | % | |||||||||||||
Total insurance premium | $ | 20,290 | $ | 1,284 | $ | 1,469 | $ | 20,475 | 7.2 | % |
______________
(1) | Includes annuities with life contingencies. |
For the year ended December 31, 2015, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $23.1 billion and $276.7 billion, respectively, and life insurance premiums of $40 million and $701 million, respectively. For the year ended December 31, 2014, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $23.9 billion and $277.9 billion, respectively, and life insurance premiums of $36 million and $681 million, respectively. For the year ended December 31, 2013, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $26.1 billion and $259.6 billion, respectively, and life insurance premiums of $45 million and $451 million, respectively.
163
Part IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated Financial Statements, Notes and Schedules.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to Consolidated Financial Statements, Notes and Schedules.
3. Exhibits
The exhibits are listed in the Exhibit Index which begins on page E-1.
164