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MET > SEC Filings for MET > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for METLIFE INC

Form 10-K for METLIFE INC


27-Feb-2014

Annual Report


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 Page Forward-Looking Statements and Other Financial Information 71 Executive Summary 71 Industry Trends 75 Summary of Critical Accounting Estimates 83 Economic Capital 91 Acquisitions and Dispositions 91 Results of Operations 92 Effects of Inflation 118 Investments 119 Derivatives 135 Off-Balance Sheet Arrangements 138 Insolvency Assessments 139 Policyholder Liabilities 139 Liquidity and Capital Resources 147 Adoption of New Accounting Pronouncements 169 Future Adoption of New Accounting Pronouncements 169 Non-GAAP and Other Financial Disclosures 169 Subsequent Events 170


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Forward-Looking Statements and Other Financial Information For purposes of this discussion, "MetLife," the "Company," "we," "our" and "us" refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with "Note Regarding Forward-Looking Statements," "Risk Factors," "Selected Financial Data," "Quantitative and Qualitative Disclosures About Market Risk" 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, or are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong. Actual results could differ materially from those expressed or implied in the forward-looking statements. See "Note Regarding Forward-Looking Statements." This Management's Discussion and Analysis of Financial Condition and Results of Operations includes references to our performance measures, operating earnings and operating earnings available to common shareholders, that are not based on accounting principles generally accepted in the United States of America ("GAAP"). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP guidance for segment reporting, operating earnings is our measure of segment performance. Operating earnings is also a measure by which senior management's and many other employees' performance is evaluated for the purposes of determining their compensation under applicable compensation plans. See "- Non-GAAP and Other Financial Disclosures" for definitions of such measures. Executive Summary
MetLife is a leading global provider of insurance, annuities and employee benefit programs throughout the United States, Japan, Latin America, Asia, Europe and the Middle East. Through its subsidiaries and affiliates, MetLife offers life insurance, annuities, property & casualty insurance, and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. MetLife is organized into six segments, reflecting three broad geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, the "Americas"); Asia; and Europe, the Middle East and Africa ("EMEA"). In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Home Loans LLC ("MLHL"), the surviving, non-bank entity of the merger of MetLife Bank, National Association ("MetLife Bank") with and into MLHL. See Note 3 of the Notes to the Consolidated Financial Statements for information regarding MetLife Bank's exit from substantially all of its businesses (the "MetLife Bank Divestiture") and other business activities. See "Business" for further information on the Company's segments and Corporate & Other.
On October 1, 2013, MetLife, Inc. completed its previously announced acquisition of Administradora de Fondos de Pensiones Provida S.A. ("ProVida"), the largest private pension fund administrator in Chile based on assets under management and number of pension fund contributors. The acquisition of ProVida supports the Company's growth strategy in emerging markets and further strengthens the Company's overall position in Chile. See Note 3 of the Notes to the Consolidated Financial Statements for further information on the acquisition of ProVida.


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In the second quarter of 2013, MetLife, Inc. announced its plans to merge three U.S.-based life insurance companies and an offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the "Mergers"). The companies to be merged are MetLife Insurance Company of Connecticut ("MICC"), MetLife Investors USA Insurance Company ("MLI-USA") and MetLife Investors Insurance Company ("MLIIC"), each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. ("Exeter"), a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MICC, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013, resulting in a redistribution of assets held in trust and the cancellation of outstanding letters of credit which were no longer required. See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Sources
- Credit and Committed Facilities." Effective January 1, 2014, following receipt of New York State Department of Financial Services ("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 an affiliate all existing New York insurance policies and annuity contracts that include a separate account feature; on December 31, 2013, MICC deposited investments with an estimated fair market value of $6.3 billion into a custodial account, which became restricted on January 1, 2014, to secure MICC's remaining New York policyholder liabilities not covered by such reinsurance. The Mergers are expected to occur in the fourth quarter of 2014, subject to regulatory approvals. The Mergers (i) may mitigate to some degree the impact of any restrictions on the use of captive reinsurers that could be adopted by the Department of Financial Services or other state insurance regulators by reducing our exposure to and use of captive reinsurers; (ii) will alleviate the need to use holding company cash to fund derivative collateral requirements; (iii) will increase transparency relative to our capital allocation and variable annuity risk management; and (iv) may impact the aggregate amount of dividends permitted to be paid without insurance regulatory approval. See "Business - U.S. Regulation - Holding Company Regulation - Insurance Regulatory Examinations," "- Liquidity and Capital Resources - MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries" and Note 8 of the Notes to the Consolidated Financial Statements for further information on the impact of these Mergers and see "- Liquidity and Capital Resources - The Company - Capital - Affiliated Captive Reinsurance Transactions" for information on our use of captive reinsurers. See also "Risk Factors - Acquisition-Related Risks- We Could Face Difficulties, Unforeseen Liabilities, Asset Impairments or Rating Actions Arising from Business Acquisitions or Integrating and Managing Growth of Such Businesses, Dispositions of Businesses, or Legal Entity Reorganizations" for information regarding the potential impact on our operations if the Mergers or related regulatory approvals are prevented or delayed. 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. For example, starting in the first quarter of 2013, the Latin America segment includes U.S. sponsored direct business, comprised of group and individual products sold through sponsoring organizations and affinity groups. Products included are life, dental, group short- and long-term disability, accidental death & dismemberment ("AD&D") coverages, property & casualty and other accident and health coverages, as well as non-insurance products such as identity protection. See Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company's segments and Corporate & Other.


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On November 1, 2010, MetLife, Inc. completed the acquisition of American Life Insurance Company ("American Life") from AM Holdings LLC (formerly known as ALICO Holdings LLC), a subsidiary of American International Group, Inc. ("AIG"), and Delaware American Life Insurance Company ("DelAm") from AIG (American Life, together with DelAm, collectively, "ALICO") (the "ALICO Acquisition"). The assets, liabilities and operating results relating to the ALICO Acquisition are included in the Latin America, Asia and EMEA segments. See Note 3 of the Notes to the Consolidated Financial Statements.
Certain international subsidiaries have a fiscal year-end of November 30. Accordingly, the Company's consolidated financial statements reflect the assets and liabilities of such subsidiaries as of November 30, 2013 and 2012 and the operating results of such subsidiaries for the years ended November 30, 2013, 2012 and 2011.
We continue to experience an increase in sales in several of our businesses; however, global economic conditions continue to negatively impact the demand for certain of our products. Also, as a result of our continued focus on pricing discipline and risk management in this challenging economic environment, we adjusted certain product features of our variable annuity products which resulted in a decrease in sales of such products. An increase in average value of our separate accounts from both favorable equity market performance and positive net flows produced higher asset-based fee revenue. The sustained low interest rate environment reduced investment yields, but also reduced crediting rates. In addition, changes in long-term interest rates and foreign currency exchange rates resulted in an increase in derivative losses. Finally, the prior period included a goodwill impairment charge.

                                                         Years Ended December 31,
                                                    2013            2012           2011
                                                               (In millions)
Income (loss) from continuing operations, net
of income tax                                   $     3,391     $    1,314     $    6,391
Less: Net investment gains (losses)                     161           (352 )         (867 )
Less: Net derivative gains (losses)                  (3,239 )       (1,919 )        4,824
Less: Goodwill impairment                                 -         (1,868 )            -
Less: Other adjustments to continuing
operations (1)                                       (1,638 )       (2,550 )       (1,451 )
Less: Provision for income tax (expense)
benefit                                               1,698          2,195           (914 )
Operating earnings                                    6,409          5,808          4,799
Less: Preferred stock dividends                         122            122            122
Operating earnings available to common
shareholders                                    $     6,287     $    5,686     $    4,677


______________


(1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments.

Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012 During the year ended December 31, 2013, income (loss) from continuing operations, net of income tax, increased $2.1 billion over 2012. The change was predominantly due to a non-cash charge in 2012 of $1.9 billion ($1.6 billion, net of income tax) for goodwill impairment associated with our U.S. Retail annuities business. In addition, operating earnings available to common shareholders increased by $601 million and net investment gains (losses) increased by $513 million ($333 million, net of income tax) primarily due to an increase in net gains on sales of fixed maturity securities in 2013 coupled with a decrease in impairments of fixed maturity securities. These increases were partially offset by an unfavorable change in net derivatives gains (losses) of $1.3 billion ($858 million, net of income tax) driven by changes in interest rates and foreign currency exchange rates. Also included in income (loss) from continuing operations, net of income tax, were the results of the discontinued operations and other businesses that have been or will be sold or exited by MetLife, Inc. ("Divested Businesses"), which improved $459 million ($294 million, net of income tax) over 2012.


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The increase in operating earnings available to common shareholders was primarily driven by higher asset-based fee revenues due to growth in our average separate account assets and an increase in net investment income due to growth in our investment portfolio. The sustained low interest rate environment negatively impacted investment yields; however, it also resulted in lower crediting rates. These favorable results were partially offset by an increase in expenses. During the fourth quarter of 2013, we increased our litigation reserve related to asbestos by $101 million. During 2013, we also increased our other litigation reserves by $46 million. The fourth quarter 2013 acquisition of ProVida in Chile increased operating earnings available to common shareholders by $48 million, net of income tax. In addition, results for 2012 included a $52 million, net of income tax, charge representing a multi-state examination payment related to unclaimed property and our use of the U.S. Social Security Administration's Death Master File to identify potential life insurance claims, as well as the acceleration of benefit payments to policyholders under the settlements of such claims.
Year Ended December 31, 2012 Compared with the Year Ended December 31, 2011 During the year ended December 31, 2012, income (loss) from continuing operations, net of income tax, decreased $5.1 billion from the year ended December 31, 2011. The change was predominantly due to a $6.7 billion ($4.4 billion, net of income tax), unfavorable change in net derivative gains (losses) primarily driven by changes in interest rates, the weakening of the U.S. dollar and Japanese yen, equity market movements, decreased volatility and the impact of a nonperformance risk adjustment. In addition, 2012 includes a $1.9 billion ($1.6 billion, net of income tax) non-cash charge for goodwill impairment associated with our U.S. Retail annuities business. Also, 2012 includes a $1.2 billion ($752 million, net of income tax) charge associated with the global review of assumptions related to deferred policy acquisition costs ("DAC"), reserves and certain intangibles, of which $526 million ($342 million, net of income tax) was reflected in net derivative gains (losses). Also included in income (loss) from continuing operations, net of income tax, were the unfavorable results of the Divested Businesses, which decreased $724 million ($476 million, net of income tax) from 2011. These declines were partially offset by a $1.0 billion, net of income tax, increase in operating earnings available to common shareholders.
The increase in operating earnings available to common shareholders was primarily driven by improved investment results and higher asset-based fee revenue as strong sales levels drove portfolio growth. In addition, the low interest rate environment resulted in lower average interest credited rates. Despite the impact of Superstorm Sandy, catastrophe losses were lower in 2012 as compared to the significant weather-related claims in 2011. In addition, 2011 included a $117 million, net of income tax, charge in connection with the Company's use of the U.S. Social Security Administration's Death Master File. Also, 2011 included $40 million, net of income tax, of expenses incurred related to a liquidation plan filed by the Department of Financial Services for Executive Life Insurance Company of New York ("ELNY"). Results for 2012 include a $52 million, net of income tax, charge representing a multi-state examination payment related to unclaimed property and MetLife's use of the U.S. Social Security Administration's Death Master File to identify potential life insurance claims, as well as the expected acceleration of benefit payments to policyholders under the settlements. Also, 2012 includes a $50 million, net of income tax, impairment charge on an intangible asset related to a previously acquired dental business.
Consolidated Company Outlook
As part of an enterprise-wide strategic initiative, by 2016, we expect to increase our operating return on common equity, excluding accumulated other comprehensive income ("AOCI"), to the 12% to 14% range, driven by higher operating earnings. This target assumes that regulatory capital rules appropriately reflect the life insurance business model and that we have clarity on the rules in a reasonable time frame, allowing for meaningful share repurchases prior to 2016. If we are unable to engage in such repurchases, we expect the range of our operating return on common equity, excluding AOCI, to be 11% to 13%. Also, as part of this initiative, we will leverage our scale to improve the value we provide to customers and shareholders in order to achieve $1 billion in efficiencies, $600 million of which is expected to be related to net pre-tax expense savings, and $400 million of which we expect to be primarily reinvested in our technology, platforms and functionality to improve our current operations and develop new capabilities. We also continue to shift our product mix toward protection products and away from more capital-intensive products, in order to generate more predictable operating earnings and cash flows, and improve our risk profile and free cash flow.


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We expect to achieve the 2016 target range on our operating return on common equity by primarily focusing on the following:
Growth in premiums, fees and other revenues driven by:

- Accelerated growth in Group, Voluntary & Worksite Benefits;

- Increased fee revenue reflecting the benefit of higher equity markets on our separate account balances; and

- Increases in our businesses outside of the U.S., notably accident & health, from continuing organic growth throughout our various geographic regions and leveraging of our multichannel distribution network.

Expanding our presence in emerging markets, including potential merger and acquisition activity. We expect that by 2016, 20% or more of our operating earnings will come from emerging markets, with the acquisition of ProVida contributing to this increase.

Focus on disciplined underwriting. We see no significant changes to the underlying trends that drive underwriting results; however, unanticipated catastrophes, similar to Superstorm Sandy, could result in a high volume of claims.

Focus on expense management in the light of the low interest rate environment, and continued focus on expense control throughout the Company.

Continued disciplined approach to investing and asset/liability management ("ALM"), through our enterprise risk and ALM governance process.

Impact of Superstorm Sandy
On October 29, 2012, Superstorm Sandy made landfall in the northeastern United States causing extensive property damage. MetLife's property & casualty business' gross losses from Superstorm Sandy were approximately $150 million, before income tax. As of December 31, 2012, we recognized total net losses related to the catastrophe of $90 million, net of income tax and reinsurance recoverables and including reinstatement premiums, which impacted the Retail and Group, Voluntary & Worksite Benefits segments. The Retail and Group, Voluntary & Worksite Benefits segments recorded net losses related to the catastrophe of $49 million and $41 million, each net of income tax reinsurance recoverables and reinstatement premiums, respectively.
We did not incur any losses related to Superstorm Sandy in 2013, however, we may incur additional storm-related losses in future periods as claims are received from insureds and claims to reinsurers are processed. Reinsurance recoveries are dependent on the continued creditworthiness of the reinsurers, which may be affected by their other reinsured losses in connection with Superstorm Sandy and otherwise.
Industry Trends
We continue to be impacted by the unstable global financial and economic environment that has been affecting the industry.


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Financial and Economic Environment
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation and inflation, all affect the business and economic environment and, ultimately, the amount and profitability of our business. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals in the financial markets can also affect our business through their effects on general levels of economic activity, employment and customer behavior. While our diversified business mix and geographically diverse business operations partially mitigate these risks, correlation across regions, countries and global market factors may reduce the benefits of diversification. Financial markets have also been affected by concerns over U.S. fiscal and monetary policy, although recent signs of Congressional compromise, reflected in the passage of a two-year budget agreement in December 2013 and the approval on February 12, 2014 of a bill to raise the debt ceiling until March 2015, appear to have alleviated some of these concerns. However, unless long-term steps are taken to raise the debt ceiling and reduce the federal deficit, rating agencies have warned of the possibility of future downgrades of U.S. Treasury securities. These issues could, on their own, or combined with the possible slowing of the global economy generally, send the U.S. into a new recession, have severe repercussions to the U.S. and global credit and financial markets, further exacerbate concerns over sovereign debt of other countries and disrupt economic activity in the U.S. and elsewhere. Concerns about the economic conditions, capital markets and the solvency of certain European Union ("EU") member states, including Portugal, Ireland, Italy, Greece and Spain ("Europe's perimeter region") and Cyprus, and of financial institutions that have significant direct or indirect exposure to debt issued by these countries, have been a cause of elevated levels of market volatility. However, after several tumultuous years, economic conditions in Europe's perimeter region seem to be stabilizing or improving, as evidenced by the stabilization of downward credit ratings momentum, particularly in Spain, Portugal and Ireland. This, combined with greater European Central Bank ("ECB") support and improving macroeconomic conditions at the country level, has reduced the risk of default on the sovereign debt of Europe's perimeter region and Cyprus and the risk of possible withdrawal of one or more countries from the Euro zone. See "- Investments - Current Environment" for information regarding credit ratings downgrades, support programs for Europe's perimeter region and Cyprus and our exposure to obligations of European governments and private obligors.

The financial markets have also been affected by concerns that other EU member states could experience similar financial troubles, that some countries could default on their obligations, have to restructure their outstanding debt, or be unable or unwilling to comply with the terms of any aid provided to them, or that financial institutions with significant holdings of sovereign or private debt issued by borrowers in Europe's perimeter region or Cyprus could experience financial stress, any of which could have significant adverse effects on the European and global economies and on financial markets, generally. In September 2012, the ECB announced a new bond buying program, Outright Monetary Transactions ("OMT"), intended to stabilize the European financial crisis. This program involves the potential purchase by the ECB of unlimited quantities of sovereign bonds with maturities of one to three years. These large scale purchases of sovereign bonds are intended to provide a buyer of last resort in the event of market stress, raising the price of the bonds, and lowering their interest rates, making it less expensive for certain countries to borrow money. In the absence of the OMT, concerns over sovereign debt sustainability could arise, and private demand for sovereign debt could decrease, putting further upward pressure on sovereign yields. Countries must agree to strict levels of economic reform and oversight as a condition to participate in this program. The . . .

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