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| MET > SEC Filings for MET > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
For purposes of this discussion, "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation incorporated in 1999 (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("MLIC"). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with the forward-looking statement information included below, "Risk Factors," "Selected Financial Data" and the Company's consolidated financial statements included elsewhere herein.
This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining MetLife's
actual future results. These statements are based on current expectations and
the current economic environment. They involve a number of risks and
uncertainties that are difficult to predict. These statements are not guarantees
of future performance. Actual results could differ materially from those
expressed or implied in the forward-looking statements. Risks, uncertainties,
and other factors that might cause such differences include the risks,
uncertainties and other factors identified in MetLife, Inc.'s filings with the
U.S. Securities and Exchange Commission ("SEC"). These factors include:
(i) difficult and adverse conditions in the global and domestic capital and
credit markets; (ii) continued volatility and further deterioration of the
capital and credit markets, which may affect the Company's ability to seek
financing or access its credit facilities; (iii) uncertainty about the
effectiveness of the U.S. government's plan to stabilize the financial system by
injecting capital into financial institutions, purchasing large amounts of
illiquid, mortgage-backed and other securities from financial institutions, or
otherwise; (iv) the impairment of other financial institutions; (v) potential
liquidity and other risks resulting from MetLife's participation in a securities
lending program and other transactions; (vi) exposure to financial and capital
market risk; (vii) changes in general economic conditions, including the
performance of financial markets and interest rates, which may affect the
Company's ability to raise capital, generate fee income and market-related
revenue and finance statutory reserve requirements and may require the Company
to pledge collateral or make payments related to declines in value of specified
assets; (viii) defaults on the Company's mortgage and consumer loans;
(ix) investment losses and defaults, and changes to investment valuations;
(x) impairments of goodwill and realized losses or market value impairments to
illiquid assets; (xi) unanticipated changes in industry trends; (xii) heightened
competition, including with respect to pricing, entry of new competitors,
consolidation of distributors, the development of new products by new and
existing competitors and for personnel; (xiii) discrepancies between actual
claims experience and assumptions used in setting prices for the Company's
products and establishing the liabilities for the Company's obligations for
future policy benefits and claims; (xiv) discrepancies between actual experience
and assumptions used in establishing liabilities related to other contingencies
or obligations; (xv) ineffectiveness of risk management policies and procedures,
including with respect to guaranteed benefit riders (which may be affected by
fair value adjustments arising from changes in our
own credit spread) on certain of the Company's variable annuity products;
(xvi) increased expenses relating to pension and post-retirement benefit plans,
(xvii) catastrophe losses; (xviii) changes in assumptions related to deferred
policy acquisition costs ("DAC"), value of business acquired ("VOBA") or
goodwill; (xix) downgrades in MetLife, Inc.'s and its affiliates' claims paying
ability, financial strength or credit ratings; (xx) economic, political,
currency and other risks relating to the Company's international operations;
(xx) availability and effectiveness of reinsurance or indemnification
arrangements, (xxi) regulatory, legislative or tax changes that may affect the
cost of, or demand for, the Company's products or services; (xxii) changes in
accounting standards, practices and/or policies; (xxiii) adverse results or
other consequences from litigation, arbitration or regulatory investigations;
(xxiv) deterioration in the experience of the "closed block" established in
connection with the reorganization of MLIC; (xxv) the effects of business
disruption or economic contraction due to terrorism, other hostilities, or
natural catastrophes; (xxvi) MetLife's ability to identify and consummate on
successful terms any future acquisitions, and to successfully integrate acquired
businesses with minimal disruption; (xxvii) MetLife, Inc.'s primary reliance, as
a holding company, on dividends from its subsidiaries to meet debt payment
obligations and the applicable regulatory restrictions on the ability of the
subsidiaries to pay such dividends; and (xxviii) other risks and uncertainties
described from time to time in MetLife, Inc.'s filings with the SEC.
MetLife, Inc. does not undertake any obligation to publicly correct or update any forward-looking statement if MetLife, Inc. later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife, Inc. makes on related subjects in reports to the SEC.
Executive Summary
MetLife is a leading provider of individual insurance, employee benefits and
financial services with operations throughout the United States and the regions
of Latin America, Europe, and Asia Pacific. Through its subsidiaries and
affiliates, MetLife offers life insurance, annuities, automobile and homeowners
insurance, retail banking and other financial services to individuals, as well
as group insurance and retirement & savings products and services to
corporations and other institutions. Subsequent to the disposition of
Reinsurance Group of America, Incorporated ("RGA") and the elimination of the
Reinsurance segment, MetLife is organized into four operating segments:
Institutional, Individual, Auto & Home and International, as well as Corporate &
Other.
Year Ended December 31, 2008 compared with the Year Ended December 31, 2007
The Company reported $3,084 million in net income available to common shareholders and net income per diluted common share of $4.14 for the year ended December 31, 2008 compared to $4,180 million in net income available to common shareholders and net income per diluted common share of $5.48 for the year ended December 31, 2007. Net income available to common shareholders decreased by $1,096 million, or 26%, for the year ended December 31, 2008 compared to the prior year.
The decrease in net income available to common shareholders was principally due to an increase in losses from discontinued operations of $516 million. This was primarily the result of the split-off of substantially all of the Company's interest in RGA in September 2008 whereby stockholders of the Company were offered the opportunity to exchange their shares of MetLife, Inc. common stock for shares of RGA Class B common stock based upon a pre-determined exchange ratio.
The decrease in net income available to common shareholders was also driven by an increase in other expenses of $972 million, net of income tax. The increase in other expenses was due to:
• Higher DAC amortization in the Individual segment related to lower expected future gross profits due to separate account balance decreases resulting from recent market declines, higher net investment gains primarily due to net derivative gains and the reduction on expected cumulative earnings of the closed block partially offset by a reduction in actual earnings of the closed block and changes in assumptions used to estimate future gross profits and margins. In addition, there is further offset in the Institutional segment due to a charge associated with the adoption of SOP 05-1 in the prior year.
• An increase in corporate expenses primarily related to an enterprise-wide cost reduction and revenue enhancement initiative. As a result of a strategic review begun in 2007, the Company launched an enterprise
initiative called Operational Excellence. This initiative began in April 2008 and management expects the initiative to be fully implemented by December 31, 2010. This initiative is focused on reducing complexity, leveraging scale, increasing productivity, improving the effectiveness of the Company's operations and providing a foundation for future growth. The Company recognized within Corporate & Other during the current period an initial accrual for post-employment related expenses.
• Higher legal costs in Corporate & Other principally driven by costs associated with the commutation of three asbestos insurance policies and higher expenses in the Institutional and International segments as well as Corporate & Other associated with business growth and higher corporate support expenses.
• Higher expenses in Corporate & Other relating to increased compensation, rent, and mortgage loan origination costs and servicing expenses associated with two acquisitions by MetLife Bank in 2008.
Premiums, fees and other revenues increased by $2,085 million, net of income tax, across all of the Company's operating segments but most notably within the Institutional and International segments due to business growth. Policyholder benefits and claims and policyholder dividends increased commensurately by $2,393 million, net of income tax; however, policyholder benefits and claims were also adversely impacted by an increase in catastrophe losses in the Auto & Home segment, a charge within the Institutional segment resulting from a liability adjustment in the group annuity business, and business growth.
Net investment losses decreased by $1,554 million, net of income tax, to a gain
of $1,178 million, net of income tax, for the year ended December 31, 2008 from
a loss of $376 million, net of income tax, for the comparable 2007 period. The
decrease in net investment losses is due to an increase in gains on derivatives
partially offset by losses primarily on fixed maturity and equity securities.
Derivative gains were driven by gains on freestanding derivatives that were
partially offset by losses on embedded derivatives primarily associated with
variable annuity riders. Gains on freestanding derivatives increased by
$4,225 million, net of income tax, and were primarily driven by: i) gains on
certain interest rate swaps, floors and swaptions which were economic hedges of
certain investment assets and liabilities, ii) gains from foreign currency
derivatives primarily due to the U.S. dollar strengthening as well as,
iii) gains primarily from equity options, financial futures, and interest rate
swaps hedging the embedded derivatives. The gains on these equity options,
financial futures, and interest rate swaps substantially offset the change in
the underlying embedded derivative liability that is hedged by these
derivatives. Losses on the embedded derivatives increased by $1,514 million, net
of income tax, and were driven by declining interest rates and poor equity
market performance throughout the year. These embedded derivative losses include
a $1,946 million, net of income tax, gain resulting from the effect of the
widening of the Company's own credit spread which is required to be used in the
valuation of these variable annuity rider embedded derivatives under
SFAS No. 157, Fair Value Measurements ("SFAS 157"), which became effective
January 1, 2008. The remaining change in net investment losses of
$1,157 million, net of income tax, is principally attributable to an increase in
losses on fixed maturity and equity securities, and, to a lesser degree, an
increase in losses on mortgage and consumer loans and other limited partnerships
offset by an increase in foreign currency transaction gains. The increase in
losses on fixed maturity and equity securities is primarily attributable to an
increase in impairments associated with financial services industry holdings
which experienced losses as a result of bankruptcies, FDIC receivership, and
Federal government assisted capital infusion transactions in the third and
fourth quarters of 2008. Losses on fixed maturity and equity securities were
also driven by an increase in credit related impairments on communication and
consumer sector security holdings, losses on asset-backed securities as well as
an increase in losses on fixed maturity security holdings where the Company
either lacked the intent to hold, or due to extensive credit widening, the
Company was uncertain of its intent to hold these fixed maturity securities for
a period of time sufficient to allow recovery of the market value decline.
Net investment income decreased by $1,149 million, or 10%, net of income tax, to $10,592 million for the year ended December 31, 2008 from $11,741 million for the comparable 2007 period. Management attributes $2,042 million, net of income tax, of this change to a decrease in yields, partially offset by an increase of $893 million due to growth in average invested assets. Average invested assets are calculated on a cost basis without unrealized gains and losses. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, short-term investments, fixed maturity securities, and mortgage loans, partially offset by improved securities lending results. Management anticipates that
the significant volatility in the equity, real estate and credit markets will continue in 2009 which could continue to impact net investment income and yields on other limited partnerships and real estate joint ventures. Net investment income increased due to an increase in average invested assets, on an amortized cost basis, primarily within short-term investments, other invested assets including derivatives, mortgage loans, other limited partnership interests, and real estate joint ventures.
A decrease in interest credited to policyholder account balances of $438 million, net of income tax, resulted from a decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, offset by an increase from growth in the average policyholder account balance, primarily the result of continued growth in the global GIC and funding agreement products all of which occurred within the Institutional segment. There was also a decrease in interest credited in the International segment as a result of a reduction in unit-linked policyholder liabilities reflecting the losses of the trading portfolio backing these liabilities.
Year Ended December 31, 2007 compared with the Year Ended December 31, 2006
The Company reported $4,180 million in net income available to common shareholders and earnings per diluted common share of $5.48 for the year ended December 31, 2007 compared to $6,159 million in net income available to common shareholders and earnings per diluted common share of $7.99 for the year ended December 31, 2006. Net income available to common shareholders decreased by $1,979 million, or 32%, for the year ended December 31, 2007 compared to the 2006 period.
The decrease in net income available to common shareholders was primarily due to a decrease in income from discontinued operations of $3,168 million, net of income tax. This decrease in income from discontinued operations was principally driven by a gain on the sale of the Peter Cooper Village and Stuyvesant Town properties in Manhattan, New York, that was recognized during the year ended December 31, 2006. Also contributing to the decrease was lower net investment income and net investment gains (losses) from discontinued operations related to real estate properties sold or held-for-sale during the year ended December 31, 2007 as compared to the year ended December 31, 2006. Lower income from discontinued operations related to the sale of MetLife Insurance Limited ("MetLife Australia") annuities and pension businesses to a third party in the third quarter of 2007 and lower income from discontinued operations related to the sale of SSRM Holdings, Inc. ("SSRM") resulting from a reduction in additional proceeds from the sale received during the year ended December 31, 2007 as compared to the year December 31, 2006. This decrease was partially offset by higher income from discontinued operations related to RGA, which was reclassified to discontinued operations in the third quarter of 2008 as a result of a tax-free split-off. RGA's income was higher in 2007, primarily due to an increase in premiums, net of an increase in policyholder benefits and claims, due to additional in-force business from facultative and automatic treaties and renewal premiums on existing blocks of business combined with an increase in net investment income, net of interest credited to policyholder account balances, due to higher invested assets. These increases in RGA's income were offset by an increase in net investment losses resulting from a decline in the estimated fair value of embedded derivatives associated with the reinsurance of annuity products on a funds withheld basis.
The decrease in net income available to common shareholders was also driven by an increase in other expenses of $580 million, net of income tax. The increase in other expenses was primarily due to higher amortization of deferred policy acquisition costs ("DAC") resulting from business growth, lower net investment losses in the current year and the net impact of revisions to management's assumption used to determine estimated gross profits and margins in both years. In addition, other expenses increased due to higher compensation, higher interest expense on debt and interest on tax contingencies, the net impact of revisions to certain liabilities in both periods, asset write-offs, higher general spending and expenses related to growth initiatives, partially offset by lower legal costs and integration costs incurred in 2006.
The net effect of increases in premiums, fees and other revenues of $1,046 million, net of income tax, across all of the Company's operating segments and increases in policyholder benefit and claims and policyholder dividends of $610 million, net of income tax, was attributable to overall business growth and increased net income available to common shareholders.
Net investment income increased by $1,180 million, net of income tax, or 11%, to $11,741 million for the year ended December 31, 2007 from $10,561 million for the comparable 2006 period. Management attributes $700 million of this increase to growth in the average asset base and $480 million to an increase in yields. Growth in the average asset base was primarily within fixed maturity securities, mortgage loans, real estate joint ventures and other limited partnership interests. Higher yields was primarily due to higher returns on fixed maturity securities, other limited partnership interests excluding hedge funds, equity securities and improved securities lending results, partially offset by lower returns on real estate joint ventures, cash, cash equivalents and short-term investments, hedge funds and mortgage loans.
Net investment losses decreased by $522 million to a loss of $376 million for the year ended December 31, 2007 from a loss of $898 million for the comparable 2006 period. The decrease in net investment losses was primarily due to a reduction of losses on fixed maturity securities resulting principally from the 2006 portfolio repositioning in a rising interest rate environment, increased gains from asset-based foreign currency transactions due to a decline in the U.S. dollar year over year against several major currencies and increased gains on equity securities, partially offset by increased losses from the mark-to-market on derivatives and reduced gains on real estate and real estate joint ventures.
An increase in interest credited to policyholder account balances associated with an increase in the average policyholder account balance decreased net income available to common shareholders by $365 million, net of income tax.
The remainder of the variance is due to the change in effective tax rates between periods.
Consolidated Company Outlook
The marketplace is still reacting and adapting to the unusual economic events that took place over the past year and management expects the volatility in the financial markets to continue in 2009. As a result, management expects a modest increase, on a constant exchange rate basis, in premiums, fees and other revenues in 2009, with mixed results across the various businesses. While the Company continues to gain market share in a number of product lines, premiums, fees and other revenues have and may continue to be impacted by the U.S. and global recession, which may be reflected by, but is not limited to:
• Lower fee income from separate account businesses, including variable annuity and life products in Individual Business.
• A potential reduction in payroll linked revenue from Institutional group insurance customers.
• A decline in demand for certain International and Institutional retirement & savings products.
• A decrease in Auto & Home premiums resulting from a depressed housing market and auto industry.
With the expectation of the turbulent financial markets continuing in 2009, management expects continued downward pressure on net income, specifically net investment income, as management expects lower returns from other limited partnerships, real estate joint ventures, and securities lending. In addition, the resulting impact of the financial markets on net investment gains (losses) and unrealized investment gains (losses) can and will vary greatly and therefore, it is difficult to predict. Also difficult to determine is the impact of own credit, as it varies significantly and this exposure is not hedged.
Certain insurance-related liabilities, specifically those associated with guarantees, are tied to market performance, which in times of depressed investment markets may require management to establish additional liabilities. However, many of the risks associated with these guarantees are hedged. The turbulent financial markets, sustained over a period of time, may also necessitate management to strengthen insurance liabilities that are not associated with guarantees. Management does not anticipate significant changes in the underlying trends that drive underwriting results, with the possible exception of certain trends in the Auto & Home and disability businesses.
Certain expenses may increase due to initiatives such as Operational Excellence. Other charges are also possible as the combination of the downward pressure on net income coupled with the expectations of the financial markets, may necessitate a review of goodwill impairment, specifically within the Individual Business. The unusual
financial market conditions will also likely cause an increase in the Company's pension-related expense and may cause an increase in DAC amortization.
In response to the challenges presented by the unusual economic environment, management continues to focus on disciplined underwriting, pricing, hedging strategies, as well as focused expense management.
Institutional Business Outlook
Management expects continued growth in premium, fees, and other revenues across the majority of the Institutional businesses. Revenues in many of the businesses can fluctuate based, in part, on the covered payroll of customers or changes in the amount of coverage they have purchased for current or former employees. As a result, in periods of high unemployment, revenue may be impacted. Revenue may also be negatively impacted as a result of customers' reduction of coverage stemming from benefit plan changes, the elimination of retiree coverage or customer-related bankruptcies. Revenues in the retirement & savings business may experience some pressure as the demand for certain of these products can decline during periods of volatile credit and investment markets.
With the expectation of the turbulent financial markets continuing in 2009, management expects to see lower earnings resulting from depressed levels of net investment income, specifically as previously discussed in the consolidated outlook, which will put downward pressure on earnings from interest margins in the spread-related businesses. If there is an extended period of sustained, low long-term market interest rates, it is possible that strengthening certain long-term liabilities could be necessary. Management does not expect to see significant changes in the underlying trends that drive underwriting results, with the possible exception of the disability business. Management thinks the level of disability claims is correlated to the unemployment rate and therefore underwriting results in this business may be impacted if the recession continues to deepen and there is a continued rise in the unemployment rate.
In 2009, management will continue to focus on disciplined underwriting, pricing and aggressively managing expenses, while making deliberate investments in certain areas that Management expects will create long-term growth opportunities. The unusual financial market conditions previously mentioned, will also likely cause an increase in the Company's pension-related expense.
Individual Business Outlook
Management expects 2009 premium, fees and other revenues to be down slightly compared to 2008 results. Individual Business experienced a significant decline in asset-based fees in annuity and variable life products in the second half of 2008 due to equity market declines. This depressed level of fee revenue is expected to continue in 2009. However, Individual Business experienced a significant increase in fourth quarter 2008 fixed annuity sales, which management believes was partially the result of consumers recognizing the strength of MetLife's guarantees. While management believes fixed annuity sales will continue to be strong, future sales of all products could be impacted as the financial services industry adjusts to the economic environment and as anticipated industry consolidation occurs.
Management believes the investment and capital markets may continue to be turbulent in 2009, which would continue to exert downward pressure on net . . .
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