METLIFE, INC. Index to Management's Discussion and Analysis of Financial Condition and Results
of Operations
Page
Forward-Looking Statements and Other Financial Information 52
Executive Summary 52
Industry Trends 55
Summary of Critical Accounting Estimates 61
Economic Capital 68
Acquisitions and Dispositions 68
Results of Operations 69
Effects of Inflation 84
Investments 85
Derivatives 101
Off-Balance Sheet Arrangements 103
Insolvency Assessments 104
Policyholder Liabilities 104
Liquidity and Capital Resources 112
Adoption of New Accounting Pronouncements 129
Future Adoption of New Accounting Pronouncements 129
Non-GAAP and Other Financial Disclosures 129
Subsequent Events 133
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Forward-Looking Statements and Other Financial Information For purposes of this discussion, "MetLife ," the "Company," "we," "our" and "us" refer toMetLife, Inc. , aDelaware corporation incorporated in 1999, its subsidiaries and affiliates. 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. See "Note Regarding Forward-Looking Statements" for cautionary language regarding forward-looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes references to our performance measures, adjusted earnings and adjusted earnings available to common shareholders, that are not based on GAAP. See "- Non-GAAP and Other Financial Disclosures" for definitions and a discussion of these and other financial measures, and "- Results of Operations" for reconciliations of historical non-GAAP financial measures to the most directly comparable GAAP measures. For information relating to the Company's financial condition and results of operations as of and for the year endedDecember 31, 2017 , as well as for the year endedDecember 31, 2018 compared with the year endedDecember 31, 2017 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations" inMetLife, Inc.'s Annual Report on Form 10-K for the year endedDecember 31, 2018 . Executive Summary OverviewMetLife is one of the world's leading financial services companies, providing insurance, annuities, employee benefits and asset management.MetLife is organized into five segments:U.S. ;Asia ;Latin America ; EMEA; andMetLife Holdings . In addition, the Company reports certain of its results of operations in Corporate & Other. See "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. Current Year Highlights During 2019, overall sales increased compared to 2018 as improved sales in ourU.S. Group Benefits business, as well as inLatin America and EMEA, more than offset lower sales inJapan . Positive net flows drove an increase in our investment portfolio; however, investment yields declined and interest credited rates were higher. Underwriting experience was unfavorable compared to 2018 and results in both 2019 and 2018 included a charge due to the impact of our annual actuarial assumption review. In addition, our 2019 results benefited from certain tax settlements. A favorable change in net investment gains (losses) primarily reflects 2018 losses on the fair value option ("FVO") Brighthouse Financial, Inc. common stock ("FVO Brighthouse Common Stock") and higher gains on sales of fixed maturity securities. An unfavorable change in net derivative gains (losses) was primarily the result of changes in key equity index levels, partially offset by a decline in interest rates. The following represents segment level results and percentage contributions to total segment level adjusted earnings available to common shareholders for the year endedDecember 31, 2019 : 52
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[[Image Removed: segmentbarcharta01.jpg]]
_______________
(1) Excludes Corporate & Other adjusted loss available to common shareholders of
$401 million .
(2) Consistent with GAAP guidance for segment reporting, adjusted earnings is
our GAAP measure of segment performance. For additional information, see Note 2
of the Notes to the Consolidated Financial Statements.
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Year Ended
Consolidated Results - Highlights
Net income (loss) available to
MetLife, Inc.'s common
shareholders up $739 million:
• Favorable change in net
investment gains (losses) of
$742 million ($586 million , net
of income tax)
• Unfavorable change in net
[[Image Removed: a2019vs2018barcharta02.jpg]] derivative gains (losses) of
$223 million ($176 million , net
of income tax)
• Adjusted earnings available to
common shareholders up $306
million
(1) See "- Results of Operations - Consolidated Results" and "- Non-GAAP and Other Financial Disclosures" for reconciliations and definitions of non-GAAP financial measures.
Consolidated Results - Adjusted
Earnings Highlights
Adjusted earnings available to common shareholders up
The primary drivers of the increase in adjusted earnings were benefits from certain tax settlements and
higher net investment income due to growth in the investment portfolio, partially offset by higher
interest credited expense, unfavorable underwriting and the impact of our annual actuarial assumption
review.
• Our results for 2019 included the following:
• unfavorable impact
from our annual actuarial assumption review of
net of income tax
• a $17 million , net of income tax, charge due to an increase in our incurred but
not reported ("IBNR") long-term care reserves, reflecting enhancements to our
methodology related to potential claims
• expenses associated
with our previously announced unit cost initiative of
million, net of income tax
• a $317 million tax benefit related to the resolution of an uncertainty
regarding the deemed
repatriation transition tax enacted as a part of
Reform
• a $222 million benefit from the
treatment of a
wholly-owned
comprised of a $158 million tax benefit and a
Our results for 2018 included the following:
• a $349 million benefit from the
treatment of a
wholly-owned
comprised of a $168 million tax benefit and a
• favorable reserve
adjustment of
certain variable annuity guarantees assumed from a former joint venture in
Japan • a$37 million , net of
income tax, favorable net insurance adjustment resulting
from reserve and DAC modeling improvements in our individual disability
insurance business
• expenses associated
with our previously announced unit cost initiative of
million, net of income tax
• a $63 million , net of income tax, charge due to an increase in our IBNR life
reserves, reflecting enhancements to our processes related to potential claims
• a $60 million , net of income tax, increase in litigation reserves
• unfavorable impact
from our annual actuarial assumption review of
net of income tax
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For a more in-depth discussion of our consolidated results, see "- Results of Operations - Consolidated Results," "- Results of Operations - Consolidated Results - Adjusted Earnings" and "- Results of Operations - Segment Results and Corporate & Other." Consolidated Company Outlook At theDecember 2019 Investor Day, we introduced our Next Horizon Strategy which is founded on three pillars: (i) "Focus" - generate strong free cash flow by deploying capital and resources to the highest value opportunities, (ii) "Simplify" - simplify our business to deliver operational efficiency and an outstanding customer experience, and (iii) "Differentiate" - drive competitive advantage through our brand, scale, talent, and innovation. The pillars of our Next Horizon Strategy are the basis of our ability to create and deliver optimal shareholder value. We continue to shift our business mix to protection-oriented and fee-based businesses. As a result, we expect our results to be less sensitive to interest rates. Assuming interest rates follow the observable forward yield curves, as of the year endedDecember 31, 2019 , we expect the ratio of free cash flow to adjusted earnings over the two-year period of 2020 and 2021 to be 65% to 75%, assuming a 10-yearU.S. Treasury rate between 1.5% and 4.5%. We believe that free cash flow is a key determinant of common stock dividends and common stock repurchases. We have returned approximately$16.0 billion to shareholders from 2016 through 2019 and we expect to generate approximately$20.0 billion in free cash flow over the next five years, while maintaining a$3.0 billion to$4.0 billion buffer of liquid assets at the holding companies. Despite the prolonged low interest rate environment, we continue to project adjusted return on equity, excluding accumulated other comprehensive income ("AOCI") other than foreign currency translation adjustments ("FCTA"), of 12% to 14% over the near-term. This target reflects the completion of restructuring charges related to our unit cost improvement program in 2019 which we project will result in approximately$900 million of pre-tax expense margin expansion in 2020. We expect to maintain this margin by holding to a 12.3% direct expense ratio in 2020, excluding total notable items related to direct expenses and pension risk transfers, while creating additional capacity to fund over$1.0 billion in incremental technology and innovation investments to accelerate our growth over the next five years. When making these and other projections, we must rely on the accuracy of our assumptions about future economic and business conditions, which can be affected by known and unknown risks and other uncertainties. Additional guidance from theU.S. Treasury ,SEC or the FASB may require us to revise these projections in future periods. Other Key Information Argentina Highly Inflationary The inflation levels inArgentina have been elevated for several years. In the first half of 2018,Argentina's reported inflation rates began to increase dramatically and the Argentine central bank significantly increased interest rates in an effort to combat inflation. Based onArgentina's reported inflation rates and trends, as ofJuly 1, 2018 , we designatedArgentina as a highly inflationary economy for accounting purposes. The application of highly inflationary accounting did not have a material impact on the Company's consolidated financial statements for the years endedDecember 31, 2019 and 2018. Industry Trends We continue to be impacted by the changing global financial and economic environment that has been affecting the industry. 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 and derivatives are sensitive to changing market factors. See "Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic ConditionsMay Harm Our Businesses, Results of Operations or Financial Condition." We have market presence in numerous countries and, therefore, our business operations are exposed to risks posed by local and regional economic conditions. For example,MetLife is the largest provider of benefits to Mexican federal government personnel and public officials, however, the administration of President López Obrador ofMexico is implementing an austerity plan which, among other measures, has eliminated benefits such as major medical insurance and contributions to additional savings benefit insurance for such individuals. See "Business - Regulation - Fiscal Measures" and "Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic ConditionsMay Harm Our Businesses, Results of Operations or Financial Condition - Currency Exchange Rate Risk." 55
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We are closely monitoring political and economic conditions that might contribute to global market volatility and impact our business operations, investment portfolio and derivatives. For example, events following theU.K. referendum onJune 23, 2016 and the uncertainties, including foreign currency exchange risks, associated with its withdrawal from the EU have contributed to global market volatility. These factors could contribute to weakening Gross Domestic Product growth, primarily in theU.K. and, to a lesser degree, in continentalEurope and beyond. The magnitude and longevity of the potential negative economic impacts would depend on the detailed agreements reached by theU.K. and the EU as a result of the negotiations regarding future trade and other arrangements. See "- Investments - Current Environment - Selected Country and Sector Investments." We are also monitoring the imposition of tariffs or other barriers to international trade, changes to international trade agreements, and their potential impacts on our business, results of operations and financial condition. In addition, the possibility of government shutdowns or a failure to raise the debt ceiling, due to a policy impasse or otherwise, could adversely impact our business and liquidity. See "Business - Regulation - Cross-Border Trade" and "Business - Regulation - Fiscal Measures." See also "Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Harm Our Businesses, Results of Operations or Financial Condition" and "Risk Factors - Business Risks - The Global Nature of Our Operations Exposes Us to a Variety of Political, Legal, Operational, Economic and Other Risks." Central banks around the world are using monetary policy to address regional economic conditions. Inthe United States , theFederal Reserve Board which had been tightening monetary policy by raising the federal funds rate and shrinking the balance sheet, now has lowered rates to sustain the economic expansion and has begun to expand its balance sheet once again to reduce liquidity issues in financing markets. TheEuropean Central Bank has resumed quantitative easing for as long as necessary and left its deposit interest rate unchanged at its historic low. InJapan , the Japanese government and the Bank of Japan are maintaining stimulus measures in order to boost inflation expectations and achieve sustainable economic growth inJapan . Such measures include the imposition of a negative rate on commercial bank deposits, continued government bond purchases and tax reform, including the lowering of the Japanese corporate tax rate. Going forward,Japan's structural and demographic challenges may continue to limit its potential growth unless reforms that boost productivity are put into place.Japan's high public sector debt levels are mitigated by low refinancing risks. Further actions by central banks in the future may affect interest rates and risk markets in theU.S. ,Europe ,Japan and other developed and emerging economies, and may ultimately result in market volatility. We cannot predict with certainty the effect of these actions or the impact on our business operations, investment portfolio or derivatives. See "- Investments - Current Environment." Impact of a Sustained Low Interest Rate Environment Market interest rates are a key driver of our results. Sustained periods of lowU.S. interest rates, may cause us to: • Reduce the difference between interest credited to policyholders and interest earned on supporting assets ("gross margin");
• Reinvest investment proceeds in lower yielding assets and experience
higher frequency prepayment or redemption of assets in our portfolio;
• Increase our reserves or trigger loss recognition events related to policy
liabilities, accelerate amortization of DAC and VOBA, and potentially
impair intangible assets;
• Reduce interest expense, change pension and other post-retirement benefit
calculations, and change derivative cash flows and market values;
• Change our product offerings, design features, crediting rates and sales
mix; and
• Experience changing policyholder behavior, including surrender or
withdrawal activity.
For additional discussion on gross margin and interest rate assumptions, as well
as the potential impact of low interest rates, see "Risk Factors - Economic
Environment and Capital Markets Risks - Difficult Economic Conditions May Harm
Our Businesses, Results of Operations or Financial Condition - Interest Rate
Risk;" "Risk Factors - Business Risks - We May Be Required to Accelerate the
Amortization of or Impair DAC, DSI or VOBA;" "Risk Factors - Business Risks - We
May Be Required to Recognize an Impairment of Our Goodwill or Other Long-Lived
Assets or to Establish a Valuation Allowance Against Our Deferred Income Tax
Assets;" "Risk Factors - Business Risks - Guarantees Within Certain Products May
Decrease Our Earnings, Increase the Volatility of Our Results, Result in Higher
Risk Management Costs and Expose Us to Increased Counterparty Risk;" and "-
Results of Operations - Consolidated Results - Year Ended December 31, 2019
Compared with the Year Ended December 31, 2018 - Actuarial Assumption Review and
Certain Other Insurance Adjustments."
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Mitigating Actions To mitigate unfavorable impacts of a lowU.S. interest rate environment, we maintain diversification across products, distribution channels, and geographies while proactively evaluating interest rate and product strategies. In addition, we apply disciplined asset/liability management ("ALM") strategies, including the use of derivatives, and may take management actions such as: • Lowering interest crediting rates or adjusting the dividend scale on products;
• Limiting or closing certain products to new sales to manage exposures; and
• Shifting sales focus to less interest rate sensitive products.
Our ability to take such actions may be limited by competition, regulatory approval requirements, or minimum crediting rate guarantees and may not match the timing or magnitude of interest rate changes. In addition to proactive mitigation strategies, businesses within ourLatin America , EMEA, andAsia (exclusive of ourJapan business) segments help mitigate unfavorable impacts to our consolidated results given their limitedU.S. interest rate sensitivity. As a result of the foregoing, we expect adjusted earnings will continue to increase over the near term despite the sustained lowU.S. interest rate environment. For additional discussion on interest rate risk management and our ability to change interest crediting rates or dividend scales, see "Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic ConditionsMay Harm Our Businesses, Results of Operations or Financial Condition - Interest Rate Risk;" "Management's Discussion and Analysis of Financial Condition and Results of Operations - Policyholder Liabilities;" and "Quantitative and Qualitative Disclosures About Market Risk - Management of Market Risk Exposures." Low Interest Rate Scenario To illustrate our sensitivity to lowerU.S. interest rates, we compared the outcome of a hypothetical low interest rate environment (the "Low Interest Rate Scenario") relative to the economic assumptions used for our insurance contracts (the "Base Scenario") through 2022. The Low Interest Rate Scenario assumes an immediate decline ofU.S. interest rates for all maturities to 1.00% onJanuary 1, 2020 and subsequent 10 basis point increases for maturities one year and longer onJanuary 1, 2021 andJanuary 1, 2022 . Other than changingU.S. interest rates through 2022, all other economic assumptions are equivalent in the Low Interest Rate Scenario and Base Scenario. The following table compares the most relevant short-term and long-term interest rate assumptions for the dates indicated: Years Ended December 31, 2020 2021 2022 Low Low Low Interest Interest Interest Rate Rate Rate Scenario Base Scenario Scenario Base Scenario
Scenario Base Scenario Three-month LIBOR 1.00% 1.61% 1.00% 1.65% 1.00% 1.72% 10-year U.S. Treasury 1.00% 2.04% 1.10% 2.15% 1.20% 2.25% Hypothetical Impact to Net Derivative Gains (Losses) and Adjusted Earnings We estimate a net favorable impact to net derivative gains (losses) from non-VA program derivatives through 2022. We hold significant positions in long-duration receive-fixedU.S. interest rate swaps, which are most sensitive to the 10-year and 30-year swap rates, to hedge reinvestment risk. For purposes of the Low Interest Rate Scenario, we have excluded allVA program derivatives. For information regarding ourVA and non-VA program derivatives, see "- Results of Operations - Consolidated Results." We estimate a net unfavorable impact to consolidated adjusted earnings through 2022. The negative impact of reinvesting cash flows in lower yielding assets is partially offset by lowering interest crediting rates and dividend scales on products, and additional derivative income. 57
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The following table summarizes the hypothetical impact on net derivative gains
(losses) and the adjusted earnings for certain segments, as well as Corporate &
Other for the dates indicated:
Years Ended December 31,
2020 2021 2022
(In millions)
Net Derivative Gains (Losses):
Non-VA Program Derivatives $ 2,620 $ (170 ) $ (125 )
Adjusted Earnings:
U.S. $ - $ (15 ) $ (50 )
Group Benefits - - (15 )Retirement and Income Solutions - (10 ) (25 ) Property & Casualty
- (5 ) (10 )
Asia (Japan only) - (15 ) (40 )
MetLife Holdings - (65 ) (110 )
Corporate & Other (15 ) 35 -
Total Adjusted Earnings Impact
Segments and Corporate & Other The primary drivers of the Low Interest Rate Scenario impacting our segments, as well as Corporate & Other, are summarized below. OurLatin America , EMEA, andAsia (exclusive of ourJapan business) segments are excluded given their limitedU.S. interest rate sensitivity. For additional information regarding account values subject to minimum crediting rate guarantees, the maturity profile of fixed maturity securities available-for-sale ("AFS"), and the yield on invested assets, see "- Investments;" "- Policyholder Liabilities - Policyholder Account Balances;" and Note 8 of the Notes to the Consolidated Financial Statements.U.S. Group Benefits Our group life insurance products are primarily renewable term policies. This provides repricing flexibility to mitigate the negative impact of reinvesting in lower yielding assets. Our retained asset accounts experience gross margin compression due to minimum crediting rate guarantees. Less than half of these accounts are at their minimum crediting rates. Additionally, we experience gross margin compression from our disability policy claim reserves for which crediting rates cannot be reduced. We use interest rate derivatives to mitigate risk for both products. Gross margin compression is limited for our group disability products, which are generally renewable term policies allowing for crediting rate adjustments at renewal based on the retrospective experience rating and current interest rate assumptions. Retirement and Income Solutions This business contains both short and long-duration products consisting of capital market products, pension risk transfers, structured settlements, and other benefit funding products. Based on our investment portfolios and expected cash flows, only a small portion of invested assets are subject to reinvestment risk through 2022. A significant portion of short-duration products are managed on a floating rate basis, which mitigates gross margin compression. The Low Interest Rate Scenario does not assume any additional ALM actions we may take in our capital markets business. 58
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Our long-duration products have very predictable cash flows and we use both interest rate derivatives and asset/liability duration matching to mitigate gross margin compression. These mitigating strategies partially offset the negative impact of reinvesting in lower yielding assets. Property & Casualty Our products primarily consist of six-month and annual term renewable policies and do not have policyholder benefits linked to interest rates. This provides significant re-pricing flexibility to mitigate the negative impact of reinvesting in lower yielding assets.Asia OurJapan business offers traditional life insurance and accident & health products, many of which areU.S. dollar denominated. We experience gross margin compression to the extent our investment portfolios areU.S. interest rate sensitive and we are unable to offset the impact by lowering interest crediting rates. Additionally, we manage interest rate risk on our life products through a combination of product design features and ALM strategies. OurJapan business also offersU.S. dollar denominated annuities which are predominantly single premium products with crediting rates set upon issuance. This allows for tightly managing product ALM, cash flows and net spreads, which mitigates interest rate risk. For purposes of the Low Interest Rate Scenario, we have excluded businesses outside ofJapan given their insignificantU.S. interest rate sensitivity.MetLife Holdings Our interest rate sensitive life products include traditional and universal life products. Since most of our traditional life insurance is participating, we can mitigate gross margin compression by adjusting the applicable dividend scale. For our universal life products, we manage interest rate risk through a combination of product design features and ALM strategies, including the use of interest rate derivatives. Although we are able mitigate gross margin compression by lowering interest crediting rates on certain in-force universal life policies, these actions may be partially offset by increased liabilities for policies with secondary guarantees. Our annuity products experience gross margin compression primarily from deferred annuities with minimum crediting rate guarantees. Most of these contracts are at their minimum crediting rate, and, therefore we use interest rate derivatives to partially mitigate gross margin compression. Our long-term care business experiences gross margin compression as we cannot reduce interest crediting rates for established claim reserves. Long-term care policies are guaranteed renewable, and rates may be adjusted on a class basis with regulatory approval to reflect emerging experience. We review the discount rate assumptions and other assumptions associated with our long-term care claim reserves no less frequently than annually and, with respect to interest rates, set the discount rate based on the prevailing interest rate environment. Our retained asset accounts experience gross margin compression due to minimum crediting rate guarantees. Most of these accounts are at their minimum crediting rates and therefore we use interest rate derivatives to mitigate gross margin compression. Based on our investment portfolios and cash flow estimates, approximately 7% of our invested assets each year are subject to reinvestment risk through 2022. Corporate & Other Corporate & Other contains the surplus investment portfolios used to fund capital and liquidity needs, certain reinsurance agreements, collateral financing arrangements, and our outstanding debt and preferred securities. Under the Low Interest Rate Scenario, the negative impact of reinvesting in lower yielding assets is partially offset by the positive impact of lower interest expense on collateral financing and variable rate debt. For purposes of the Low Interest Rate Scenario, the preferred stock dividend impact is excluded and the impact on pension and postretirement plan expenses is included within Corporate & Other and not allocated across segments. Under the Low Interest Rate Scenario, the pension and other postretirement benefit liabilities increase, however, the impact is offset by corresponding returns on the fixed income plan assets resulting in lower expenses. 59
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Competitive Pressures The life insurance industry remains highly competitive. See "Business - Competition." Product development is focused on differentiation leading to more intense competition with respect to product features and services. Several of the industry's products can be quite homogeneous and subject to intense price competition. Cost reduction efforts are a priority for industry players, with benefits resulting in price adjustments to favor customers and reinvestment capacity. Larger companies have the ability to invest in brand equity, product development, technology optimization, risk management, and innovation, which are among the fundamentals for sustained profitable growth in the life insurance industry. Insurers are focused on their core businesses, specifically in markets where they can achieve scale. Insurers are increasingly seeking alternative sources of revenue; there is a focus on monetization of assets, fee-based services, and opportunities to offer comprehensive solutions, which include providing value-added services along with traditional products. Financial strength and flexibility and technology modernization are prerequisites for sustainable growth in the life insurance industry. Larger market participants tend to have the capacity to invest in analytics, distribution, and information technology and have the capability to engage with the new digital entrants. There is a shift in distribution from proprietary to third party models in mature markets, due to the lower cost structure. Evolving customer expectations are having a significant impact on the competitive environment as insurers strive to offer the superior customer service demanded by an increasingly sophisticated industry client base. We believe that the continued volatility of the financial markets and its impact on the capital position of many competitors will continue to strain the competitive environment. Legislative and other changes affecting the regulatory environment can also affect the competitive environment within the life insurance industry and within the broader financial services industry. See "Business - Regulation." We believe that the aforementioned factors have highlighted financial strength, technology efficiency, and organizational agility as the most significant differentiators and, as a result, we believe the Company is well positioned to compete in this environment. Regulatory Developments Inthe United States , our life insurance companies are regulated primarily at the state level, with some products and services also subject to federal regulation. As life insurers introduce new and often more complex products, regulators refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially impact the statutory reserve and capital requirements of the industry. See "Risk Factors - Regulatory and Legal Risks - Our Businesses Are Highly Regulated, and Changes in Laws, Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Our Business, Results of Operations and Financial Condition." Regulators have also undertaken market and sales practices reviews of several markets or products, including equity-indexed annuities, variable annuities and group products and, in some states, instituted a moratorium on new reserve financing transactions. See "Business - Regulation," "Risk Factors - Economic Environment and Capital Markets Risks - OurStatutory Life Insurance Reserve Financings May Be Subject to Cost Increases, and New Financings May Be Subject to Limited Market Capacity," "Risk Factors - Regulatory and Legal Risks - Our Businesses Are Highly Regulated, and Changes in Laws, Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Our Business, Results of Operations and Financial Condition" and "- Liquidity and Capital Resources - The Company - Capital - Affiliated Captive Reinsurance Transactions." 60
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Summary of Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Consolidated Financial Statements. For a discussion of our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
(i) liabilities for future policy benefits and the accounting for reinsurance;
(ii) capitalization and amortization of DAC and the establishment and
amortization of VOBA;
(iii) estimated fair values of investments in the absence of quoted market values;
(iv) investment impairments;
(v) estimated fair values of freestanding derivatives and the recognition and
estimated fair value of embedded derivatives requiring bifurcation;
(vi) measurement of goodwill and related impairment;
(vii) measurement of employee benefit plan liabilities; (viii) measurement of income taxes and the valuation of deferred tax assets; and
(ix) liabilities for litigation and regulatory matters.
In addition, the application of acquisition accounting requires the use of
estimation techniques in determining the estimated fair values of assets
acquired and liabilities assumed - the most significant of which relate to the
aforementioned critical accounting estimates. In applying these policies and
estimates, management makes subjective and complex judgments that frequently
require assumptions about matters that are inherently uncertain. Many of these
policies, estimates and related judgments are common in the insurance and
financial services industries; others are specific to our business and
operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
Generally, future policy benefits 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 and geographical
area. 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. If experience is less favorable than assumed, additional
liabilities may be established, resulting in a charge to policyholder benefits
and claims.
Future policy benefit liabilities for disabled lives are estimated using the
present value of benefits method and experience assumptions as to claim
terminations, expenses and interest.
Liabilities for unpaid claims are estimated based upon our historical experience
and other actuarial assumptions that consider the effects of current
developments, anticipated trends and risk management programs, reduced for
anticipated salvage and subrogation.
Future policy benefit liabilities for minimum death and income benefit
guarantees relating to certain annuity contracts are based on estimates of the
expected value of benefits in excess of the projected account balance,
recognizing the excess ratably over the accumulation period based on total
expected assessments. Liabilities for ULSG 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 DAC, and are thus subject to the same variability and
risk. The assumptions of investment performance and volatility for variable
products are consistent with historical experience of the appropriate underlying
equity index, such as the S&P 500 Index.
We regularly review our estimates of liabilities for future policy benefits and
compare them with our actual experience. Differences between actual experience
and the assumptions used in pricing these policies and guarantees, as well as in
the establishment of the related liabilities, result in variances in profit and
could result in losses.
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See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our liability for future policy benefits. Reinsurance 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. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to that evaluated in our security impairment process. See "- Investment Impairments." Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review 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. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance programs. Deferred Policy Acquisition Costs and Value of Business Acquired We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, deferrable costs include 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. We utilize various techniques to estimate the portion of an employee's time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis to reflect significant changes in processes or distribution methods. VOBA 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. For certain acquired blocks of business, the estimated fair value of the in-force contract obligations exceeded the book value of assumed in-force insurance policy liabilities, resulting in negative VOBA, which is presented separately from VOBA as an additional insurance liability included in other policy-related balances. The estimated fair value of the acquired obligations is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future profitability of the related business. 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. Our 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. We monitor these events and only change the assumption when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease (increase) in the DAC and VOBA amortization with an offset to our unearned revenue liability which nets to approximately$30 million . We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for the variable universal life contracts and variable deferred annuity contracts is 6.75%. We periodically review 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. Assumptions used in the calculation of estimated gross margins and profits which may have significantly changed are updated annually. 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. Our most significant assumption updates resulting in a change to expected future gross margins and profits and the amortization of DAC and VOBA are due to revisions to expected future investment returns, expenses, in-force or persistency assumptions and policyholder dividends on participating traditional life contracts, variable and universal life contracts and annuity contracts. We expect these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. 62
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AtDecember 31, 2019 and 2018, DAC and VOBA for the Company was$17.8 billion and$18.9 billion , respectively. Amortization of DAC and VOBA associated with the variable and universal life and annuity contracts was significantly impacted by movements in equity markets. The following illustrates the effect on DAC and VOBA of changing each of the respective assumptions, as well as updating estimated gross margins or profits with actual gross margins or profits during the years endedDecember 31, 2019 and 2018. Increases (decreases) in DAC and VOBA balances, as presented below, resulted in a corresponding decrease (increase) in amortization. Years Ended December 31, 2019 2018 (In millions) General account investment return$ (116 ) $
22
Separate account investment return 31 (42 ) Net investment/Net derivative gains (losses) and GMIB (106 ) (215 ) In-force/Persistency 39
26
Policyholder dividends, expense and other (81 ) - Total$ (233 ) $ (209 ) Significant items contributing to the changes to DAC and VOBA amortization in 2019 consisted of the following: • Net increase in amortization of$106 million associated with net
investment/net derivative gains (losses) and GMIB, primarily driven by the
following:
- An increase in amortization of
from freestanding derivatives hedging the variable annuity guarantees,
partially offset by a decrease in amortization of approximately $10
million from net derivative losses resulting from the increases in
variable annuity guarantee obligations.
- A decrease in amortization of approximately
gains from GMIB hedges and the decreases in GMIB obligations.
- Net increase in amortization of approximately $100 million from other
investment activities.
• Net increase in general account investment return mostly due to net
investment income assumption unlocking and an update to the yield curve
for market value adjustment.
Significant items contributing to the changes to DAC and VOBA amortization in
2018 consisted of the following:
• Net increase in amortization of $215 million associated with net
investment/net derivative gains (losses) and GMIB, primarily driven by the
following:
- An increase in amortization of
from freestanding derivatives hedging the variable annuity guarantees,
partially offset by a decrease in amortization of approximately $30
million from net derivative losses resulting from the increases in
variable annuity guarantee obligations.
- An increase in amortization of approximately
with gains from GMIB hedges and the decreases in GMIB obligations.
- Net increase in amortization of approximately
annual actuarial assumption review and other investment activities.
Our DAC and VOBA balance is also impacted by unrealized investment gains (losses) and the amount of amortization which would have been recognized if such gains and losses had been realized. The increase in unrealized investment gains (losses) decreased the DAC and VOBA balance by$1.5 billion in 2019. The decrease in unrealized investment gains (losses) increased the DAC and VOBA balance by$521 million in 2018. See Notes 5 and 8 of the Notes to the Consolidated Financial Statements for information regarding the DAC and VOBA offset to unrealized investment gains (losses). 63
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Estimated Fair Value of Investments
In determining the estimated fair value of our investments, fair values are
based on unadjusted quoted prices for identical investments in active markets
that are readily and regularly obtainable. When such unadjusted quoted prices
are not available, estimated fair values are based on quoted prices in markets
that are not active, quoted prices for similar but not identical investments, 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 investments.
The methodologies, assumptions and inputs utilized are described in Note 10 of
the Notes to the Consolidated Financial Statements.
Financial markets are susceptible to severe events evidenced by rapid
depreciation in asset values accompanied by a reduction in asset liquidity. Our
ability to sell investments, or the price ultimately realized for investments,
depends upon the demand and liquidity in the market and increases the use of
judgment in determining the estimated fair value of certain investments.
Investment Impairments
One of the significant estimates related to fixed maturity securities AFS is our
impairment evaluation. The assessment of whether an other-than-temporary
impairment ("OTTI") occurred is based on our case-by-case evaluation of the
underlying reasons for the decline in estimated fair value on a
security-by-security basis. Our review of each security for OTTI includes an
analysis of gross unrealized losses by three categories of severity and/or age
of gross unrealized loss. An extended and severe unrealized loss position on a
security may not have any impact on the ability of the issuer to service all
scheduled interest and principal payments. Accordingly, such an unrealized loss
position may not impact our evaluation of recoverability of all contractual cash
flows or the ability to recover an amount at least equal to its amortized cost
based on the present value of the expected future cash flows to be collected.
Additionally, we consider a wide range of factors about the security issuer and
use our 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 our evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Factors we consider in the OTTI evaluation process are described in Note 8 of
the Notes to the Consolidated Financial Statements.
The determination of the amount of allowances and impairments on the remaining
invested asset classes is highly subjective and is based upon our periodic
evaluation and assessment 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.
See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for
additional information relating to our determination of the amount of allowances
and impairments.
Derivatives
The determination of the estimated fair value of freestanding derivatives, 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 the 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. See Note 10 of the Notes to the Consolidated Financial
Statements for additional details on significant inputs into the OTC derivative
pricing models and credit risk adjustment.
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We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions, including expectations concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates. The valuation of these embedded derivatives also includes an adjustment for our nonperformance risk and risk margins for non-capital market inputs. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads in the secondary market forMetLife, 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 toMetLife, 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 in certain actuarial assumptions. 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. The table below illustrates the impact that a range of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the embedded derivative valuation on certain variable annuity products measured at estimated fair value. In determining the ranges, we have considered current market conditions, as well as the market level of spreads that can reasonably be anticipated over the near term. The ranges do not reflect extreme market conditions such as those experienced during the 2008-2009 financial crisis, as we do not consider those to be reasonably likely events in the near future. The impact of the range of reasonably likely variances in credit spreads decreased as compared to prior periods. However, these estimated effects do not take into account potential changes in other variables, such as equity price levels and market volatility, which can also contribute significantly to changes in carrying values. Therefore, the table does not necessarily reflect the ultimate impact on the consolidated financial statements under the credit spread variance scenarios presented below. Changes in
Balance Sheet Carrying Value At
December 31, 2019
Policyholder Account Balances DAC and VOBA
(In millions)
100% increase in our credit spread $ 488 $ 46
As reported $ 624 $ 73
50% decrease in our credit spread $ 705 $ 90
The accounting for derivatives is complex and interpretations of accounting
standards continue to evolve in practice. If it is determined that hedge
accounting designations were not appropriately applied, reported net income
could be materially affected. Assessments of the effectiveness of hedging
relationships are also subject to interpretations and estimations and different
interpretations or estimates may have a material effect on the amount reported
in net income.
Variable annuities with guaranteed minimum benefits 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 our nonperformance risk,
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. If interpretations change, there is a risk that features
previously not bifurcated may require bifurcation and reporting at estimated
fair value on the consolidated financial statements and respective changes in
estimated fair value could materially affect net income.
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Additionally, we ceded the risk associated with certain of the variable annuities with guaranteed minimum benefits described in the preceding paragraphs. 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 us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. Because certain of the direct guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur since the change in fair value of the embedded derivative on the ceded risk is being recorded in net income without a corresponding and offsetting change in fair value of the direct guarantee. See Note 9 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.Goodwill Goodwill 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. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, the implied fair value of the reporting unit goodwill is compared to the carrying value of that goodwill to measure the amount of impairment loss, if any. 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 acquisition. The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected adjusted earnings, current book value, the level of economic capital required to support the mix of business, long-term growth rates, comparative market multiples, the account value of in-force business, projections of new and renewed business, as well as margins on such business, interest rate levels, credit spreads, equity market levels, and the discount rate that we believe is appropriate for the respective reporting unit. In the third quarter of 2019, we tested theMetLife Holdings life insurance reporting unit for impairment using the actuarial based embedded value fair valuation approach. The estimated fair value of the reporting unit exceeded the carrying value by approximately 43% and, therefore, the reporting unit was not impaired. If we had assumed that the discount rate was 100 basis points higher than the discount rate used, the estimated fair value of theMetLife Holdings life insurance reporting unit would have been higher than the carrying value by approximately 22%. This reporting unit consists of operations relating to products and businesses we no longer actively market. As ofDecember 31, 2019 , the amount of goodwill allocated to this reporting unit was$887 million . We also performed our annual goodwill impairment tests of all other reporting units during the third quarter of 2019 using a qualitative assessment and/or quantitative assessments under the market multiple and discounted cash flow valuation approaches based on best available data as ofJune 30, 2019 . We concluded that the estimated fair values of all such reporting units were substantially in excess of their carrying values and, therefore, goodwill was not impaired. We apply significant judgment when determining the estimated fair value of our reporting units and when assessing the relationship of market capitalization to the aggregate estimated fair value of our reporting units. 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 our reporting units could result in goodwill impairments in future periods which could materially adversely affect our results of operations or financial position. See Note 12 of the Notes to the Consolidated Financial Statements for additional information on our goodwill. Employee Benefit Plans Certain subsidiaries ofMetLife, Inc. sponsor defined benefit pension plans and other postretirement benefit plans covering eligible employees. See Note 18 of the Notes to the Consolidated Financial Statements for information on amendments to ourU.S. benefit plans. The calculation of the obligations and expenses associated with these plans requires an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases and healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirement, withdrawal rates and mortality. In consultation with external actuarial firms, we determine these assumptions based upon a variety of factors such as historical experience of the plan and its assets, currently available market and industry data, and expected benefit payout streams. 66
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We determine the expected rate of return on plan assets based upon an approach that considers inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation, as well as expenses, expected asset manager performance, asset weights and the effect of rebalancing. Given the amount of plan assets as ofDecember 31, 2018 , the beginning of the measurement year, if we had assumed an expected rate of return for both our pension and other postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic benefit costs would have been a decrease of$100 million and an increase of$100 million , respectively, in 2019. This considers only changes in our assumed long-term rate of return given the level and mix of invested assets at the beginning of the year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return. We determine the discount rates used to value the Company's pension and postretirement obligations, based upon rates commensurate with current yields on high quality corporate bonds. Given our pension and postretirement obligations as ofDecember 31, 2018 , the beginning of the measurement year, if we had assumed a discount rate for both our pension and postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic benefit costs would have been a decrease of$97 million and an increase of$94 million , respectively, in 2019. This considers only changes in our assumed discount rates without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant impact on the Company's consolidated financial statements and liquidity. See Note 18 of the Notes to the Consolidated Financial Statements for additional discussion of assumptions used in measuring liabilities relating to our employee benefit plans. Income Taxes We provide for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. Tax laws are often complex and may be subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions in which we conduct business. In establishing a liability for unrecognized tax benefits, assumptions may be made in determining whether, and to what extent, a tax position may be sustained. Once established, unrecognized tax benefits are adjusted when there is more information available or when events occur requiring a change. Valuation allowances are established against deferred tax assets 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. See Note 1 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of such valuation allowances. We may be required to change our 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, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported on the consolidated financial statements in the year these changes occur. See also Notes 1 and 19 of the Notes to the Consolidated Financial Statements for additional information on our income taxes. 67
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Litigation Contingencies We are a defendant in a large number of litigation matters and are involved in a number of regulatory investigations. 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. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including our asbestos-related liability, are especially difficult to estimate due to the limitation of reliable data and uncertainty regarding numerous variables that can affect liability estimates. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements. It is possible that an adverse outcome in certain of our litigation and regulatory investigations, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon our consolidated net income or cash flows in particular quarterly or annual periods. See Note 21 of the Notes to the Consolidated Financial Statements for additional information regarding our assessment of litigation contingencies.Economic Capital Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in our business. Our economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. Economic capital-based risk estimation is an evolving science and industry best practices have emerged and continue to evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for the calculation of diversification benefits, and the quantification of appropriate shock levels.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. For further information, see "Financial Measures and Segment Accounting Policies" in Note 2 of the Notes to the Consolidated Financial Statements. Acquisitions and Dispositions Acquisition of PetFirst InDecember 2019 , the Company andPetFirst Healthcare, LLC ("PetFirst"), a fast-growing pet health insurance administrator, entered into a definitive agreement under whichMetLife will acquire PetFirst. The transaction closed inJanuary 2020 . Acquisition of Willing InNovember 2019 , the Company completed the acquisition ofBequest, Inc. ("Willing"), a leading digital estate planning service. This transaction brings new digital capabilities to the Company and reinforces its commitment to providing simple and easy-to-use benefits that respond to consumer needs. Pending Disposition ofMetLife Hong Kong For information regarding the Company's definitive agreement to sell,MetLife Hong Kong , see Note 3 of the Notes to the Consolidated Financial Statements. Disposition ofMetLife Afore For information regarding the Company's 2018 disposition ofMetLife Afore, S.A. de C.V. ("MetLife Afore"), its pension fund management business inMexico , see Note 3 of the Notes to the Consolidated Financial Statements. Separation of Brighthouse In 2017,MetLife, Inc. completed the separation of Brighthouse Financial, Inc. and its subsidiaries ("Brighthouse") through a distribution of 96,776,670 shares of Brighthouse Financial, Inc. common stock to theMetLife, Inc. common shareholders (the "Separation"). For information regarding the Separation, the Company's 2018 sale of the FVO Brighthouse Common Stock, and ongoing transactions betweenMetLife and Brighthouse, see Notes 3 and 13 of the Notes to the Consolidated Financial Statements. 68
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Results of Operations Consolidated Results Business Overview. Overall sales for 2019 increased over 2018 levels reflecting higher sales in the majority of our businesses. In ourU.S. segment, sales increased in our Group Benefits business as a result of strong sales in both our core and voluntary products. In our RIS business, sales were slightly lower, as higher funding agreement issuances and structured settlement sales were more than offset by lower sales of pension risk transfers and stable value products. Sales in ourAsia segment decreased as a result of lower sales inJapan , a large group case inAustralia in 2018, and the pending disposition ofMetLife Hong Kong, partially offset by higher sales inKorea . Sales in ourLatin America segment improved as a result of higher sales inMexico ,Brazil andChile . In our EMEA segment, sales improved as a result of increases inTurkey , theU.K. andEgypt . Years Ended December 31, 2019 2018 (In millions) Revenues Premiums$ 42,235 $ 43,840 Universal life and investment-type product policy fees 5,603 5,502 Net investment income 18,868 16,166 Other revenues 1,842 1,880 Net investment gains (losses) 444 (298 ) Net derivative gains (losses) 628 851 Total revenues 69,620 67,941 Expenses Policyholder benefits and claims and policyholder dividends 42,672
43,907
Interest credited to policyholder account balances 6,464
4,013
Capitalization of DAC (3,358 ) (3,254 ) Amortization of DAC and VOBA 2,896
2,975
Amortization of negative VOBA (33 ) (56 ) Interest expense on debt 955 1,122 Other expenses 13,229 12,927 Total expenses 62,825 61,634 Income (loss) before provision for income tax 6,795
6,307
Provision for income tax expense (benefit) 886
1,179
Net income (loss) 5,909
5,128
Less: Net income (loss) attributable to noncontrolling interests
10 5
Net income (loss) attributable to MetLife, Inc. 5,899 5,123
Less: Preferred stock dividends 178
141
Net income (loss) available to
$ 5,721
Year Ended
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Management of Investment Portfolio and Hedging Market Risks with Derivatives. We
manage our investment portfolio using disciplined ALM principles, focusing on
cash flow and duration to support our current and future liabilities. Our intent
is to match the timing and amount of liability cash outflows with invested
assets that have cash inflows of comparable timing and amount, while optimizing
risk-adjusted net investment income and risk-adjusted total return. Our
investment portfolio is heavily weighted toward fixed income investments, with
over 80% of our portfolio invested in fixed maturity securities AFS 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. In addition, our general
account investment portfolio includes, within contractholder-directed equity
securities and fair value option securities ("FVO Securities ") (collectively,
"Unit-linked and FVO Securities "), contractholder-directed equity securities
supporting unit-linked variable annuity type liabilities ("Unit-linked
investments"), which do not qualify as separate account assets. Returns on these
Unit-linked investments, which can vary significantly from period to period,
include changes in estimated fair value subsequent to purchase, inure to
contractholders and are offset in earnings by a corresponding change in
policyholder account balances through interest credited to policyholder account
balances.
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 also use derivatives as an integral part of our management of the investment
portfolio and insurance liabilities to hedge certain risks, including changes in
interest rates, foreign currency exchange rates, credit spreads and equity
market levels. We use freestanding interest rate, equity, credit and currency
derivatives to hedge certain invested assets and insurance liabilities. A
portion 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. We actively evaluate market risk hedging needs and strategies to
ensure our free cash flow and capital objectives are met under a range of market
conditions.
Certain 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 freestanding derivatives to
hedge the market risks inherent in these variable annuity guarantees. We
continuously review and refine our strategy and ongoing refinement of the
strategy may be required to take advantage of NAIC rules related to a statutory
accounting election for derivatives that mitigate interest rate sensitivity
related to variable annuity guarantees. The restructured hedge strategy is
classified as a macro hedge program, included in the non-VA program derivatives
section of the table below, to protect our overall statutory capital from
significant adverse economic conditions. 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.
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Net Derivative Gains (Losses). The variable annuity embedded derivatives and associated freestanding derivative hedges are collectively referred to as "VA program derivatives." All other derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as "non-VA program derivatives." The table below presents the impact on net derivative gains (losses) from non-VA program derivatives andVA program derivatives: Years Ended December 31, 2019 2018 (In millions) Non-VA program derivatives Interest rate$ 1,384 $ 177 Foreign currency exchange rate (67 ) 464 Credit 282 (52 ) Equity (403 ) 115 Non-VA embedded derivatives (162 ) 78 Total non-VA program derivatives 1,034
782
VA program derivatives Market risks in embedded derivatives 851 (51 ) Nonperformance risk adjustment on embedded derivatives (116 )
133
Other risks in embedded derivatives (301 ) (310 ) Total embedded derivatives 434 (228 ) Freestanding derivatives hedging embedded derivatives (840 ) 297 Total VA program derivatives (406 ) 69 Net derivative gains (losses) $ 628$ 851 The favorable change in net derivative gains (losses) on non-VA program derivatives was$252 million ($199 million , net of income tax). This was primarily due to a favorable change in interest rate impact due to long-termU.S. interest rates decreasing in 2019 and increasing in 2018, favorably impacting receive fixed interest rate swaps, options and total rate of return swaps. In addition, credit spreads narrowed in 2019 and widened in 2018, favorably impacting written credit default swaps used in replications. These favorable impacts were partially offset by the weakening of theU.S. dollar relative to certain foreign currencies in 2019 versus 2018, unfavorably impacting foreign currency forwards and swaps that primarily hedge foreign currency-denominated bonds. In addition, key equity markets increasing in 2019 versus decreasing in 2018 unfavorably impacted equity options acquired primarily as part of our macro hedge program. There was also a change in the value of the underlying assets, unfavorably impacting non-VA embedded derivatives related to funds withheld on a certain reinsurance agreement. 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 items being hedged. The unfavorable change in net derivative gains (losses) onVA program derivatives was$475 million ($375 million , net of income tax). This was due to an unfavorable change of$249 million ($197 million , net of income tax) in the nonperformance risk adjustment on embedded derivatives and an unfavorable change of$235 million ($186 million , net of income tax) in freestanding derivatives hedging market risks in embedded derivatives, net of market risks in embedded derivatives, partially offset by a favorable change of$9 million , ($7 million , net of income tax) in other risks in embedded derivatives. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged. The aforementioned$235 million ($186 million , net of income tax) unfavorable change reflects a$1.1 billion ($898 million , net of income tax) unfavorable change in freestanding derivatives hedging market risks in embedded derivatives, partially offset by a$902 million ($713 million , net of income tax) favorable change in market risks in embedded derivatives. 71
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The primary changes in market factors are summarized as follows:
• Long-term
contributing to a favorable change in our freestanding derivatives and an
unfavorable change in our embedded derivatives. For example, the 30-year
U.S. swap rate decreased 75 basis points in 2019 and increased 30 basis points in 2018. • Key equity index levels increased in 2019 and decreased in 2018,
contributing to an unfavorable change in our freestanding derivatives and
a favorable change in our embedded derivatives. For example, the S&P 500
Index increased 29% in 2019 and decreased 6% in 2018.
The aforementioned $9 million ($7 million , net of income tax) favorable change
in other risks in embedded derivatives reflects actuarial assumption updates and
a combination of factors, which include fees deducted from accounts, changes in
the benefit base, premiums, lapses, withdrawals and deaths.
The aforementioned $249 million ($197 million , net of income tax) unfavorable
change in the nonperformance risk adjustment on embedded derivatives resulted
from an unfavorable change of $137 million , before income tax, related to model
changes and changes in capital market inputs, such as long-term interest rates
and key equity index levels, on variable annuity guarantees in addition to an
unfavorable change of $112 million , before income tax, related to changes in our
own credit spread.
When equity index levels decrease in isolation, the 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.
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.
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. For each of these primary
market drivers, the opposite effect occurs when the driver moves in the opposite
direction.
Net Investment Gains (Losses). The favorable change in net investment gains
(losses) of $742 million ($586 million , net of income tax) primarily reflects
2018 losses on FVO Brighthouse Common Stock comprised of a change in fair value
through date of disposal and loss on disposal, as well as mark-to-market losses
on equity securities in 2018, both of which are measured at fair value through
net income. Additionally, there were higher gains on sales of fixed maturity
securities AFS in 2019 versus 2018. These favorable changes were partially
offset by higher foreign currency transaction losses.
Divested Businesses. Income (loss) before provision for income tax related to
the divested businesses, excluding net investment gains (losses) and net
derivative gains (losses), increased $18 million ($6 million , net of income tax)
to a loss of $104 million ($84 million , net of income tax) in 2019 from a loss
of $122 million ($90 million , net of income tax) in 2018. Included in this
increase was an increase in total revenues of $115 million , before income tax,
and an increase in total expenses of $97 million , before income tax. Divested
businesses primarily include activity related to the Separation and the pending
disposition of MetLife Hong Kong.
Taxes. Our 2019 effective tax rate on income (loss) before provision for income
tax was 13%. Our effective tax rate differed from the U.S. statutory rate of 21%
primarily due to tax benefits related to non-taxable investment income, tax
credits, tax benefits related to the resolution of an uncertainty regarding the
deemed repatriation transition tax enacted as a part of U.S. Tax Reform and the
settlement of certain tax audits, partially offset by tax charges from foreign
earnings taxed at different rates than the U.S. statutory rate and the impact
from the definitive agreement to sell MetLife Hong Kong. Our 2018 effective tax
rate on income (loss) before provision for income tax was 19%. Our effective tax
rate differed from the U.S. statutory rate of 21% primarily due to tax benefits
related to non-taxable investment income, tax credits, the settlement of tax
audits and a non-cash transfer of assets from a wholly-owned U.K. investment
subsidiary to its U.S. parent. These tax benefits were partially offset by tax
charges from foreign earnings taxed at different rates than the U.S. statutory
rate, U.S. Tax Reform, a non-deductible loss incurred on the mark-to-market and
disposition of FVO Brighthouse Common Stock and a tax adjustment in Chile .
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Actuarial Assumption Review and Certain Other Insurance Adjustments. Results for 2019 include a$201 million ($162 million , net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a$31 million loss ($27 million , net of income tax) was recognized in net derivative gains (losses). Of the$201 million charge,$49 million ($37 million , net of income tax) was related to DAC and$152 million ($125 million , net of income tax) was associated with reserves. The portion of the$201 million charge that was included in adjusted earnings was$179 million ($143 million , net of income tax). The$31 million loss ($27 million , net of income tax) recognized in net derivative gains (losses) associated with our annual review of actuarial assumptions was included within the other risks in embedded derivatives line in the table above. As a result of our annual review of actuarial assumptions, changes were made to economic, biometric, policyholder behavior, and operational assumptions. The most significant impacts were in theMetLife Holdings segment, driven by the projection of closed block results and economic updates. The breakdown of total 2019 results is summarized as follows: • Economic assumption updates resulted in a net charge of$151 million ($117
million, net of income tax).
• Changes in biometric assumptions resulted in a net charge of
(
• Changes in policyholder behavior assumptions resulted in a favorable
impact of
• Changes in operational assumptions, most notably related to closed block
projections, resulted in a net charge of
income tax).
Results for 2018 include a$358 million ($272 million , net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a$131 million loss ($94 million , net of income tax) was recognized in net derivative gains (losses). Of the$358 million charge,$20 million ($20 million , net of income tax) was related to DAC and$338 million ($252 million , net of income tax) was associated with reserves. The portion of the$358 million charge that is included in adjusted earnings is$53 million ($42 million , net of income tax). Certain other insurance adjustments recorded in 2019 include a$22 million ($17 million , net of income tax) charge due to a 2019 increase in our IBNR long-term care reserves reflecting enhancements to our methodology related to potential claims in ourMetLife Holdings segment. Certain other insurance adjustments recorded in 2018 include a$79 million ($63 million , net of income tax) charge due to an increase in our IBNR life reserves, reflecting enhancements to our processes related to potential claims in ourMetLife Holdings segment, and a favorable net insurance adjustment of$47 million ($37 million , net of income tax) resulting from reserve and DAC modeling improvements in our individual disability insurance business in ourU.S. segment. These adjustments are included in adjusted earnings. Adjusted Earnings. As more fully described in "- Non-GAAP and Other Financial Disclosures," we use adjusted 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 adjusted earnings and other financial measures based on adjusted 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. Adjusted earnings and other financial measures based on adjusted earnings allow analysis of our performance relative to our business plan and facilitate comparisons to industry results. Adjusted earnings should not be viewed as a substitute for net income (loss). Adjusted earnings available to common shareholders and adjusted earnings available to common shareholders on a constant currency basis should not be viewed as substitutes for net income (loss) available toMetLife, Inc.'s common shareholders. Adjusted earnings available to common shareholders increased$306 million , net of income tax, to$5.8 billion , net of income tax, for 2019 from$5.5 billion , net of income tax, for 2018. 73
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Reconciliation of net income (loss) to adjusted earnings available to common shareholders Year EndedDecember 31, 2019 MetLife U.S. Asia Latin America EMEA Holdings Corporate& Other Total (In millions) Net income (loss) available to MetLife, Inc.'s common shareholders$ 3,148 $ 1,755 $ 403
- - - - - 178 178
Add: Net income (loss) attributable
to noncontrolling interests - - 8 3 - (1 ) 10
Net income (loss) $ 3,148 $ 1,755 $ 411 $ 275 $ 780 $ (460 ) $ 5,909
Less: adjustments from net income
(loss) to adjusted earnings
available to common shareholders:
Revenues:
Net investment gains (losses) 44 232 (22 ) (1 ) 294 (103 ) 444
Net derivative gains (losses) 566 467 (11 ) (24 ) (273 ) (97 ) 628
Premiums - 71 - - - - 71
Universal life and
investment-type product policy
fees - 105 - 15 88 - 208
Net investment income (200 ) 229 (9 ) 1,151 (141 ) 8 1,038
Other revenues - 11 - - - 246 257Expenses:
Policyholder benefits and claims
and policyholder dividends (37 ) (83 ) (202 ) 15 (177 ) 4 (480 )
Interest credited to
policyholder account balances 19 (293 ) (53 ) (1,108 ) - - (1,435 )
Capitalization of DAC - 20 - - - - 20
Amortization of DAC and VOBA - (92 ) - 8 (25 ) - (109 )
Amortization of negative VOBA - - - - - - -
Interest expense on debt - - - - - - -
Other expenses - (54 ) 11 (29 ) (87 ) (292 ) (451 )
Goodwill impairment - - - - - - -
Provision for income tax (expense)
benefit (82 ) (263 ) 88 (34 ) 67 (3 ) (227 )
Adjusted earnings $ 2,838 $ 1,405 $ 609
178 178
Adjusted earnings available to
common shareholders $ (401 ) $ 5,767
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Table of Contents Year EndedDecember 31, 2018 MetLife U.S. Asia Latin America EMEA Holdings Corporate& Other Total (In millions) Net income (loss) available to MetLife, Inc.'s common shareholders$ 2,755 $ 1,547 $ 471
- - - - - 141 141
Add: Net income (loss) attributable
to noncontrolling interests - - 6 2 - (3 ) 5
Net income (loss) $ 2,755 $ 1,547 $ 477 $ 296 $ 1,016 $ (963 ) $ 5,128
Less: adjustments from net income
(loss) to adjusted earnings
available to common shareholders:
Revenues:
Net investment gains (losses) (72 ) 142 18 5 (164 ) (227 ) (298 )
Net derivative gains (losses) 268 312 (64 ) 28 263 44 851
Premiums - - - - - - -
Universal life and
investment-type product policy
fees - (6 ) 7 25 94 - 120
Net investment income (274 ) (262 ) (45 ) (488 ) (157 ) 9 (1,217 )
Other revenues - 19 - - - 305 324Expenses:
Policyholder benefits and claims
and policyholder dividends 11 3 (40 ) (31 ) (117 ) - (174 )
Interest credited to
policyholder account balances 4 218 (21 ) 479 - - 680
Capitalization of DAC - - 1 - - - 1
Amortization of DAC and VOBA - 5 - 1 (221 ) - (215 )
Amortization of negative VOBA - 1 - - - - 1
Interest expense on debt - - - - - (63 ) (63 )
Other expenses - (7 ) 4 (7 ) - (388 ) (398 )
Goodwill impairment - - - - - - -
Provision for income tax (expense)
benefit 14 (115 ) 25 7 63 (80 ) (86 )
Adjusted earnings $ 2,804 $ 1,237 $ 592
141 141
Adjusted earnings available to
common shareholders $ (704 ) $ 5,461
Adjusted earnings available to
common shareholders on a constant
currency basis (1) $ 2,804 $ 1,208 $ 565 $ 255 $ 1,255 $ (704 ) $ 5,383
__________________(1) Amounts forU.S. ,MetLife Holdings and Corporate & Other are shown on a reported basis, as constant currency impact is not significant. Consolidated Results - Adjusted Earnings Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Overview. The primary drivers of the increase in adjusted earnings were benefits from certain tax settlements and higher net investment income due to growth in the investment portfolio, partially offset by higher interest credited expense, unfavorable underwriting and the unfavorable impact of our annual actuarial assumption review. Foreign Currency. Changes in foreign currency exchange rates had a$78 million negative impact on adjusted earnings for 2019 compared to 2018. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items. 75
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Business Growth. We benefited from positive net flows from many of our businesses, which increased our invested asset base. Growth in the investment portfolios of ourAsia andU.S. segments resulted in higher net investment income. However, this was partially offset by a corresponding increase in interest credited expenses on certain insurance-related liabilities. Higher fee income in ourAsia ,Latin America and EMEA segments was largely offset by lower fee income in ourMetLife Holdings segment. Business growth also drove an increase in commissions, which was offset by higher DAC capitalization. A decrease in expenses was primarily due to the 2019 abatement of the annual health insurer fee under the PPACA. The combined impact of the items affecting our business growth, partially offset by higher DAC amortization, resulted in a$206 million increase in adjusted earnings. Market Factors. Market factors, including interest rate levels, variability in equity market returns, and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Excluding the impact of changes in foreign currency exchange rates on net investment income in our non-U.S. segments and changes in inflation rates on our inflation-indexed investments, investment yields decreased. Investment yields were negatively affected by lower yields on fixed income securities, lower income from derivatives and lower returns on real estate investments. In addition, lower earnings from our securities lending program resulted primarily from lower margins and balances. These decreases were partially offset by higher prepayment fees and higher returns onFVO Securities , equity-linked notes and hedge funds. The decrease in investment yields was more than offset by an increase in asset-based fee income and lower DAC amortization inMetLife Holdings , both driven by higher equity returns, and a decrease in average interest credited expenses, primarily inAsia . The changes in market factors discussed above resulted in a$44 million increase in adjusted earnings. Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Unfavorable underwriting resulted in a$121 million decrease in adjusted earnings primarily as a result of higher claims and lapses in ourAsia segment, less favorable mortality in ourMetLife Holdings andLatin America segments, and an increase in non-catastrophe claim costs and adverse prior year development in our Property & Casualty business, partially offset by favorable claims experience and favorable mortality, primarily in our Group Benefits business, and lower catastrophe losses. The impact in 2019 and 2018 of our annual actuarial assumption review resulted in a net decrease of$101 million in adjusted earnings, primarily due to less favorable assumption changes in ourMetLife Holdings segment in 2019. Refinements to DAC and certain insurance-related liabilities, which were recorded in 2019 and 2018, resulted in an$8 million increase in adjusted earnings. Interest Expense on Debt. Interest expense on debt decreased by$82 million , primarily due to the exchange of senior notes for FVO Brighthouse Common Stock and the redemption of senior notes for cash in 2018, partially offset by a premium paid in excess of the debt principal and accrued and unpaid interest on senior notes redeemed in 2019. Expenses. Expenses increased compared to 2018, which resulted in a$53 million decrease in adjusted earnings, primarily due to higher costs associated with corporate initiatives and projects, including the continued investment in our unit cost initiative and a prior period reduction of a litigation reserve inArgentina , partially offset by lower legal expenses, interest on uncertain tax positions and employee-related costs, as well as a decline in costs associated with certain other enterprise-wide initiatives. Taxes. Our 2019 effective tax rate on adjusted earnings was 10%. Our effective tax rate differed from theU.S. statutory rate of 21% primarily due to tax benefits from non-taxable investment income and tax credits, the resolution of an uncertainty regarding the deemed repatriation transition tax enacted as a part ofU.S. Tax Reform and the settlement of certain tax audits, partially offset by tax charges from foreign earnings taxed at different rates than theU.S. statutory rate. Our 2018 effective tax rate on adjusted earnings was 16%. Our effective tax rate differed from theU.S. statutory rate of 21% primarily due to tax benefits from non-taxable investment income, tax credits, the settlement of tax audits and a non-cash transfer of assets from a wholly-ownedU.K. investment subsidiary to itsU.S. parent, partially offset by tax charges from foreign earnings taxed at different rates than theU.S. statutory rate and a tax adjustment inChile . 76
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Segment Results and Corporate & OtherU.S. Business Overview. Sales increased compared to 2018, primarily driven by our Group Benefits business, as a result of strong sales in both our core and voluntary products. In our RIS business, sales were slightly lower than 2018, as higher funding agreement issuances and structured settlement sales were more than offset by lower sales of pension risk transfers (driven by a large transaction in the second quarter of 2018) and stable value products. Changes in premiums for the RIS business were almost entirely offset by the related changes in policyholder benefits and claims. In our Property & Casualty business, sales were relatively flat compared to 2018. In addition, the number of exposures decreased from 2018, reflecting management actions to improve the quality of the business. Years Ended December 31, 2019 2018 (In millions) Adjusted revenues Premiums$ 26,801 $ 28,186 Universal life and investment-type product policy fees 1,078 1,053 Net investment income 7,021 6,977 Other revenues 887 821 Total adjusted revenues 35,787 37,037 Adjusted expenses Policyholder benefits and claims and policyholder dividends 26,165
27,765
Interest credited to policyholder account balances 1,984 1,790 Capitalization of DAC (484 ) (449 ) Amortization of DAC and VOBA 475 477 Interest expense on debt 10 12 Other expenses 4,075 3,902 Total adjusted expenses 32,225 33,497 Provision for income tax expense (benefit) 724 736 Adjusted earnings$ 2,838 $ 2,804 Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Business Growth. The impact of positive flows from pension risk transfer transactions in both 2019 and 2018 and funding agreement issuances in 2019 resulted in higher average invested assets, improving net investment income. However, consistent with the growth in average invested assets, interest credited expenses on long-duration liabilities increased. Higher volume-related, premium tax and direct expenses, driven by business growth, were partially offset by lower employee-related expenses. This net increase in expenses, partially offset by the decrease due to the 2019 abatement of the annual health insurer fee under the PPACA, was more than offset by a corresponding increase in premiums, fees and other revenues. The combined impact of the items affecting our business growth increased adjusted earnings by$111 million . Market Factors. Market factors, including interest rate levels, variability in equity market returns and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment yields decreased, primarily due to lower income from derivatives, lower yields on fixed income securities and real estate investments, lower returns on private equity funds and lower earnings from our securities lending program, primarily from lower margins and balances. These decreases were partially offset by higher prepayment fees and higher yields on mortgage loans. In addition, net investment income increased as a result of the impact of an increased crediting rate on interest on economic capital. The impact of interest rate fluctuations resulted in an increase in our average interest credited rates on deposit-type liabilities, partially offset by lower rates on our long-duration liabilities, which drove a net increase in interest credited expenses. The changes in market factors discussed above resulted in a$176 million decrease in adjusted earnings. 77
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Underwriting and Other Insurance Adjustments. Favorable claims experience and the impact of growth in our Group Benefits business resulted in a$95 million increase in adjusted earnings. This was primarily driven by lower claim severity, favorable renewal results and an increase in recoveries in our group disability business. In both our accident & health and individual disability businesses, the impact of growth in the business and favorable claims experience also contributed to the increase in adjusted earnings. These favorable results were partially offset by less favorable dental results, driven by an increase in utilization and the impact of unfavorable prior period development in 2019. Favorable mortality, driven by claims experience in our term life business, primarily due to lower severity in 2019 and the unfavorable impact of the influenza virus in 2018, partially offset by less favorable mortality in our pension risk transfer, structured settlement, income annuities and specialized benefit resources businesses, resulted in a$42 million increase in adjusted earnings. In our Property & Casualty business, adjusted earnings decreased$77 million , the result of higher non-catastrophe claims costs, driven by higher severities in both our auto and homeowner businesses and a net increase in frequencies, with an increase in our auto business being mostly offset in our homeowner business, coupled with higher losses in the commercial business. In addition, adverse prior year development, due to auto non-catastrophe claims costs impacting the estimate of ultimate losses for prior accident years, predominantly for casualty coverages, contributed to this decrease. These unfavorable results were partially offset by lower catastrophe costs. Refinements to certain insurance and other liabilities recorded in both 2019 and 2018 resulted in a$48 million increase to adjusted earnings, which included the impact of favorable insurance adjustments resulting from enhancements to our claim-related processes, and the 2018 favorable net insurance adjustments resulting from reserve and DAC modeling improvements in our individual disability insurance business.Asia Business Overview. Sales decreased compared to 2018, primarily driven by lower sales of foreign currency-denominated annuity products inJapan , a large group case inAustralia in the prior period, and the pending disposition ofMetLife Hong Kong , partially offset by higher sales inKorea due to higher sales of retirement products and a new life product launch. Years Ended December 31, 2019 2018 (In millions) Adjusted revenues Premiums$ 6,632 $ 6,766 Universal life and investment-type product policy fees 1,674 1,630 Net investment income 3,691 3,317 Other revenues 56 51 Total adjusted revenues 12,053 11,764 Adjusted expenses Policyholder benefits and claims and policyholder dividends 5,185
5,326
Interest credited to policyholder account balances 1,710 1,465 Capitalization of DAC (1,913 ) (1,915 ) Amortization of DAC and VOBA 1,288 1,302 Amortization of negative VOBA (25 ) (39 ) Other expenses 3,818 3,840 Total adjusted expenses 10,063 9,979 Provision for income tax expense (benefit) 585 548 Adjusted earnings$ 1,405 $ 1,237 Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Foreign Currency. Changes in foreign currency exchange rates decreased adjusted earnings by$29 million for 2019 compared to 2018, primarily due to the weakening of the Japanese yen and Korean won against theU.S. dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items. 78
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Business Growth.Asia's premiums, fees and other revenues decreased slightly as compared to 2018, mainly driven by the pending disposition ofMetLife Hong Kong and a decrease in premiums from yen-denominated life products inJapan , partially offset by a related decline in policyholder benefits, as well as growth in accident & health and foreign currency-denominated life products inJapan . Positive net flows inJapan andKorea resulted in higher average invested assets, which improved net investment income. The increase in net investment income was partially offset by a corresponding increase in interest credited expenses on certain insurance liabilities. The combined impact of the items affecting our business growth improved adjusted earnings by$122 million . Market Factors. Market factors, including interest rate levels and variability in equity market returns, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment results were favorably impacted by higher derivative income, earnings from our operating joint venture inChina (mainly driven by a regulatory change), returns from hedge funds, private equities and real estate investments, as well as higher yields on mortgage loans. These increases were partially offset by lower yields on fixed income securities supportingU.S. dollar-denominated products sold inJapan , and fixed income securities inBangladesh andKorea . In addition, lower interest credited rates improved adjusted earnings. The changes in market factors discussed above increased adjusted earnings by$102 million . Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Higher claims and lapses primarily inJapan andKorea decreased adjusted earnings by$99 million . The impact in 2019 and 2018 of our annual actuarial assumption review resulted in a net increase of$67 million in adjusted earnings. Refinements to certain insurance and other liabilities, which were recorded in 2019 and 2018, resulted in a slight increase in adjusted earnings. Expenses and Taxes. Expenses increased as compared to 2018, which reduced adjusted earnings by$5 million . Various tax items in both 2019 and 2018 resulted in a$9 million increase in adjusted earnings. Results for 2019 include a charge of$8 million related to a withholding tax provision on dividends from our operating joint venture inChina and a$6 million benefit due to reduced tax charges as a result of recently issued tax regulations related toU.S. Tax Reform and the filing of the Company's 2018 U.S. tax return.Latin America Business Overview. Total sales forLatin America increased compared to 2018, driven by higher group and individual medical sales inMexico , higher universal and variable life sales inMexico andChile , and higher dental and life sales inBrazil , partially offset by lower retirement sales inChile . Years Ended December 31, 2019 2018 (In millions) Adjusted revenues Premiums$ 2,723 $ 2,760 Universal life and investment-type product policy fees 1,094 1,050 Net investment income 1,271 1,239 Other revenues 44 35 Total adjusted revenues 5,132 5,084 Adjusted expenses Policyholder benefits and claims and policyholder dividends 2,623
2,602
Interest credited to policyholder account balances 332 394 Capitalization of DAC (396 ) (377 ) Amortization of DAC and VOBA 291 209 Amortization of negative VOBA - (1 ) Interest expense on debt 3 6 Other expenses 1,443 1,421 Total adjusted expenses 4,296 4,254 Provision for income tax expense (benefit) 227 238 Adjusted earnings$ 609 $ 592 79
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Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Foreign Currency. Changes in foreign currency exchange rates decreased adjusted earnings by$27 million for 2019 compared to 2018, mainly due to the weakening of the Argentine and Chilean pesos against theU.S. dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items. Business Growth.Latin America experienced growth across several lines of business primarily withinChile andMexico . This growth resulted in increased premiums and policy fee income, which was partially offset by related changes in policyholder benefits. Positive net flows, primarily fromChile andArgentina , partially offset byMexico , resulted in an increase in average invested assets and generated higher net investment income. Although business growth drove an increase in commissions, net of DAC capitalization, this was more than offset by decreases in interest credited expense on certain insurance liabilities and other variable expenses. The combined impact of the items affecting business growth, including higher DAC amortization, increased adjusted earnings by$62 million . Market Factors. Market factors, including interest rate levels and variability in equity market returns, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment yields increased, driven by higher yields onFVO Securities , due to the favorable impact of equity markets on our Chilean encaje and fixed income securities inArgentina ,Chile andMexico . These increases in investment yields were partially offset by lower private equity returns inChile andMexico , as well as lower yields on mortgage loans and lower derivative income, both inChile . The changes in market factors discussed above increased adjusted earnings by$61 million . Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Less favorable underwriting resulted in a$23 million decrease to adjusted earnings primarily driven by higher claims experience inMexico . The impact in 2019 and 2018 of our annual actuarial assumption review resulted in a net decrease of$18 million in adjusted earnings. In addition, refinements to certain insurance liabilities and other adjustments in 2019 and 2018, primarily inBrazil , resulted in a$12 million increase to adjusted earnings. Expenses and Taxes. A$60 million increase in expenses was primarily the result of a prior period reduction of a litigation reserve inArgentina , along with various other expense increases. Adjusted earnings increased by$13 million due to reduced tax charges as a result of recently issued tax regulations related toU.S. Tax Reform and the filing of the Company's 2018 U.S. tax return. Other tax-related adjustments in 2019 and 2018, primarily related to foreign exchange volatility inArgentina , resulted in a net decrease in adjusted earnings of$29 million . Results for 2018 also include tax expenses of$24 million driven by a$17 million tax charge related to a tax adjustment inChile and a$5 million tax charge inColombia to establish a deferred tax liability due to a change in tax status. 80
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EMEA
Business Overview. Sales increased compared to 2018 primarily driven by
increases in our credit life business in
Years Ended December 31,
2019 2018
(In millions)
Adjusted revenues
Premiums $ 2,177 $ 2,131
Universal life and investment-type product policy fees 423 431
Net investment income 291 293
Other revenues 54 66
Total adjusted revenues 2,945 2,921
Adjusted expenses
Policyholder benefits and claims and policyholder dividends 1,176 1,127
Interest credited to policyholder account balances 98 100 Capitalization of DAC (505 ) (468 ) Amortization of DAC and VOBA 428 434 Amortization of negative VOBA (8 ) (15 ) Other expenses 1,399 1,378 Total adjusted expenses 2,588 2,556 Provision for income tax expense (benefit) 75 88 Adjusted earnings$ 282 $ 277 Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Foreign Currency. Changes in foreign currency exchange rates decreased adjusted earnings by$22 million for 2019 as compared to 2018, primarily driven by the strengthening of theU.S. dollar against the Turkish lira, the euro, the British pound and the Polish zloty. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items. Business Growth. Growth from our accident & health and credit life businesses inTurkey and across several European markets, partially offset by a decrease in our pensions business inRomania due to regulatory changes, increased adjusted earnings by$10 million . Market Factors. Market factors, including interest rate levels and variability in equity market returns, impacted our results favorably by$4 million primarily due to higher investment yields inTurkey andUkraine . Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Unfavorable underwriting decreased adjusted earnings by$5 million as a result of unfavorable experience in (i) our credit life business inTurkey and (ii) across several businesses in European markets (primarily our employee benefits business in theU.K. ), partially offset by favorable experience in our employee benefits and accident & health businesses in the Gulf region. The impact in 2019 and 2018 of our annual actuarial assumption review resulted in a net increase of$10 million in adjusted earnings. Refinements to certain insurance-related assets and liabilities that were recorded in 2019 and 2018 resulted in an$8 million increase in adjusted earnings. Expenses and Taxes. Adjusted earnings decreased by$6 million , primarily driven by higher expenses inEurope due to transformation costs and regulatory fees, partially offset by lower costs associated with enterprise-wide initiatives. Adjusted earnings increased by$6 million due to reduced tax charges as a result of recently issued tax regulations related toU.S. Tax Reform and the filing of the Company's 2018 U.S. tax return, partially offset by the prior period release of provisions arising from the finalization of historical corporate tax filings and changes in business mix among tax jurisdictions. 81
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MetLife Holdings Business Overview. OurMetLife Holdings segment consists of operations relating to products and businesses, previously included in our former retail business, that we no longer actively market inthe United States . We anticipate an average decline in premiums, fees and other revenues of approximately 5% per year from expected business run-off. A significant portion of our adjusted 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 movements in the market, surrenders, deposits, withdrawals, benefit payments, transfers and policy charges. 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, and we expect the related reserves to grow as this block matures. As ofDecember 31, 2019 , our future policyholder benefit liability for our long-term care business was$12.5 billion . Years Ended December 31, 2019 2018 (In millions) Adjusted revenues Premiums$ 3,748 $ 3,879 Universal life and investment-type product policy fees 1,124 1,218 Net investment income 5,281 5,379 Other revenues 253 250 Total adjusted revenues 10,406 10,726 Adjusted expenses Policyholder benefits and claims and policyholder dividends 6,970
6,833
Interest credited to policyholder account balances 905 944 Capitalization of DAC (28 ) (36 ) Amortization of DAC and VOBA 299 332 Interest expense on debt 8 9 Other expenses 969 1,081 Total adjusted expenses 9,123 9,163 Provision for income tax expense (benefit) 249 308 Adjusted earnings$ 1,034 $ 1,255 Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Business Growth. Negative net flows from our deferred annuities business and a decrease in universal life deposits resulted in lower fee income. Lower net investment income, resulting from a reduced invested asset base, primarily in fixed income securities, also decreased adjusted earnings. The reduced invested asset base was primarily the result of the negative net flows in our deferred annuities and life businesses. The decline was partially offset by invested asset growth from our long-term care business. The combined impact of the items affecting our business growth, partially offset by lower DAC amortization, resulted in a$103 million decrease in adjusted earnings. Market Factors. Market factors, including interest rate levels, variability in equity market returns, and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. In our deferred annuity business, higher equity returns drove an increase in asset-based fee income and lower DAC amortization, increasing adjusted earnings. Investment yields decreased primarily due to lower yields on fixed income securities and lower returns on real estate investments. The decline in investment yields was partially offset by increased prepayment fees and higher returns on hedge funds. The changes in market factors discussed above resulted in a$17 million increase in adjusted earnings. 82
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Underwriting, Actuarial Assumption Review, and Other Insurance Adjustments. Adjusted earnings decreased$47 million , primarily driven by less favorable underwriting in our traditional life business. The impact in 2019 and 2018 of our annual actuarial assumption review resulted in a net decrease of$160 million in adjusted earnings. Changes mainly in mortality, and economic and operational assumptions, including updates to closed block projections, were less favorable in 2019. Refinements to DAC and certain insurance-related liabilities that were recorded in 2019 and 2018 resulted in a$62 million decrease in adjusted earnings. This includes a 2019 charge due to an increase in our IBNR long-term care reserves, reflecting enhancements to our methodology related to potential claims, as well as the following 2018 refinements: (i) a favorable reserve adjustment relating to certain variable annuity guarantees assumed from a former joint venture inJapan ; (ii) favorable reserve adjustments resulting from modeling improvements in our life business; and (iii) a charge due to an increase in our IBNR life reserves, reflecting enhancements to our processes related to potential claims. Expenses. Adjusted earnings increased by$114 million due to declines in employee-related costs and lower operational expenses as a result of enterprise-wide initiatives. Corporate & Other Years Ended December 31, 2019 2018 (In millions) Adjusted revenues Premiums$ 83 $ 118 Universal life and investment-type product policy fees 2 - Net investment income 275 178 Other revenues 291 333 Total adjusted revenues 651 629 Adjusted expenses Policyholder benefits and claims and policyholder dividends 73 80 Capitalization of DAC (12 ) (8 ) Amortization of DAC and VOBA 6 6 Interest expense on debt 934 1,032 Other expenses 1,074 907 Total adjusted expenses 2,075 2,017 Provision for income tax expense (benefit) (1,201 ) (825 ) Adjusted earnings (223 ) (563 ) Less: Preferred stock dividends 178
141
Adjusted earnings available to common shareholders
$ (704 ) 83
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The table below presents adjusted earnings available to common shareholders by
source:
Years Ended December 31,
2019 2018
(In millions)
Business activities $ 70 $ 41
Net investment income 290 263
Interest expense on debt (978 ) (1,076 )
Corporate initiatives and projects (563 ) (405 )
Other (330 ) (368 ) Provision for income tax (expense) benefit and other tax-related items
1,288 982
Preferred stock dividends (178 ) (141 ) Adjusted earnings available to common shareholders$ (401 )
Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Unless otherwise stated, all amounts discussed below are net of income tax. Business Activities. Adjusted earnings from business activities increased$23 million . This was primarily related to improved results from certain of our businesses. Net Investment Income. Variability in equity market results increased returns on bothFVO Securities and equity-linked notes. In addition, lower losses on tax credit partnerships favorably impacted net investment income. These increases were partially offset by decreased income on fixed income securities, mortgage loans and lower returns on private equities and real estate investments, resulting in an increase of$21 million in net investment income. Interest Expense on Debt. Interest expense on debt decreased by$77 million , primarily due to the exchange of senior notes for FVO Brighthouse Common Stock and the redemption of senior notes for cash in 2018, partially offset by a premium paid in excess of the debt principal and accrued and unpaid interest on senior notes redeemed in 2019. Corporate Initiatives and Projects. Adjusted earnings decreased$125 million due to higher expenses associated with corporate initiatives and projects, most notably, costs associated with the continued investment in our unit cost initiative, partially offset by lower costs associated with certain other enterprise-wide initiatives. Provision for Income Tax (Expense) Benefit and Other Tax-Related Items. A favorable change in Corporate & Other's effective tax rate was primarily due to tax benefits related to the resolution of an uncertainty regarding the deemed repatriation transition tax enacted as a part ofU.S. Tax Reform. Additionally, 2019 and 2018 include benefits from the settlement of tax audits related to the tax treatment of a wholly-ownedU.K. investment subsidiary of MLIC. The 2018 provision for income tax (expense) benefit and other tax related items also included a tax benefit from a non-cash transfer of assets from a wholly-ownedU.K. investment subsidiary to itsU.S. parent and a reduction in adjusted earnings related to certain tax impacts on tax credit partnership investments. Other. Adjusted earnings increased$30 million , primarily as a result of lower interest expenses on certain tax positions, lower legal expenses and declines in various other expenses, partially offset by a loss related to the sale of a run-off business that was previously reinsured, as well as increases in certain corporate-related expenses. Preferred Stock Dividends. Preferred stock dividends increased$37 million as a result of the issuance ofMetLife, Inc.'s 5.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series D ("Series D preferred stock") andMetLife, Inc.'s 5.625% Non-Cumulative Preferred Stock, Series E ("Series E preferred stock") in 2018. Effects of Inflation Management believes that inflation has not had a material effect on the Company's consolidated results of operations, except insofar as inflation may affect interest rates. 84
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An increase in inflation could affect our business in several ways. During inflationary periods, the value of fixed income investments falls which could increase realized and unrealized losses. Inflation also increases expenses for labor and other materials, potentially putting pressure on profitability if such costs cannot be passed through in our product prices. Inflation could also lead to increased costs for losses and loss adjustment expenses in certain of our businesses, which could require us to adjust our pricing to reflect our expectations for future inflation. Prolonged and elevated inflation could adversely affect the financial markets and the economy generally, and dispelling it may require governments to pursue a restrictive fiscal and monetary policy, which could constrain overall economic activity, inhibit revenue growth and reduce the number of attractive investment opportunities. Investments Investment Risks Our primary investment objective is to optimize, net of income tax, risk-adjusted net investment income and risk-adjusted total return while ensuring that assets and liabilities are managed on a cash flow and duration basis.The Investments Department , led by the Chief Investment Officer, manages investment risks using a risk control framework comprised of policies, procedures and limits, as discussed further below.The Investment Risk Committee andAsset-Liability Steering Committee review and monitor investment risk limits and tolerances. We are exposed to the following primary sources of investment risks: • credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;
• interest rate risk, relating to the market price and cash flow variability
associated with changes in market interest rates. Changes in market
interest rates will impact the net unrealized gain (loss) position of our
fixed income investment portfolio and the rates of return we receive on
both new funds invested and reinvestment of existing funds;
• liquidity risk, relating to the diminished ability to sell certain
investments, in times of strained market conditions;
• market valuation risk, relating to the variability in the estimated fair
value of investments associated with changes in market factors such as
credit spreads and equity market levels. A widening of credit spreads will
adversely impact the net unrealized gain (loss) position of the fixed
income investment portfolio, will increase losses associated with
credit-based non-qualifying derivatives where we assume credit exposure,
and, if credit spreads widen significantly or for an extended period of
time, will likely result in higher OTTI. Credit spread tightening willreduce net investment income associated with purchases of fixed income
investments and will favorably impact the net unrealized gain (loss)
position of the fixed income investment portfolio;
• currency risk, relating to the variability in currency exchange rates for
foreign denominated investments including as a result of the
withdrawal from the EU. This risk relates to potential decreases in
estimated fair value and net investment income resulting from changes in
currency exchange rates versus the
of foreign currencies versus the U.S. dollar will adversely affect the
estimated fair value of our foreign denominated investments; and
• real estate risk, relating to commercial, agricultural and residential
real estate, and stemming from factors, which include, but are not limited
to, market conditions, including the supply and demand of leasable
commercial space, creditworthiness of borrowers, tenants and our joint
venture partners, capital markets volatility, changes in market interest
rates, commodity prices, farm incomes and
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We manage investment risk through in-house fundamental credit analysis of the underlying obligors, issuers, transaction structures and real estate properties. We also manage credit, market and liquidity risk through industry and issuer diversification and asset allocation. These risk limits, approved annually by the Investment Risk Committee, promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure, as measured by our economic capital framework. For real estate assets, we manage credit and market risk through asset allocation and by diversifying by geography, property and product type. We manage interest rate risk as part of our ALM strategies which are reviewed and approved by theAsset-Liability Steering Committee . These strategies include maintaining an investment portfolio with diversified maturities that has a weighted average duration that reflects the duration of our estimated liability cash flow profile, and utilizing product design, such as the use of market value adjustment features and surrender charges, to manage interest rate risk. We also manage interest rate risk through proactive monitoring and management of certain NGEs of our products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. In addition to hedging with foreign currency derivatives, we manage currency risk by matching much of our foreign currency liabilities in our foreign subsidiaries with their respective foreign currency assets, thereby reducing our risk to foreign currency exchange rate fluctuation. We also use certain derivatives in the management of credit, interest rate, and market valuation risk. We enter into market standard purchased and written credit default swap contracts. Payout under such contracts is triggered by certain credit events experienced by the referenced entities. For credit default swaps covering North American corporate issuers, credit events typically include bankruptcy and failure to pay on borrowed money. For European corporate issuers, credit events typically also include involuntary restructuring. With respect to credit default contracts on sovereign debt, credit events typically include failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after theCredit Derivatives Determinations Committee of the International Swaps andDerivatives Association determines that a credit event has occurred. We use purchased credit default swaps to mitigate credit risk in our investment portfolio. Generally, we purchase credit protection by entering into credit default swaps referencing the issuers of specific assets we own. In certain cases, basis risk exists between these credit default swaps and the specific assets we own. For example, we may purchase credit protection on a macro basis to reduce exposure to specific industries or other portfolio concentrations. In such instances, the referenced entities and obligations under the credit default swaps may not be identical to the individual obligors or securities in our investment portfolio. In addition, our purchased credit default swaps may have shorter tenors than the underlying investments they are hedging, which gives us more flexibility in managing our credit exposures. We believe that our purchased credit default swaps serve as effective economic hedges of our credit exposure. Current Environment As a global insurance company, we continue to be impacted by the changing global financial and economic environment, as well as the monetary policy of central banks around the world. See "- Industry Trends - Financial and Economic Environment." Measures taken by central banks, including with respect to the level of interest rates, may have an impact on the pricing levels of risk-bearing investments and may adversely impact our business operations, investment portfolio and derivatives. The current environment continues to impact our net investment income, net investment gains (losses), net derivative gains (losses), level of unrealized gains (losses) within the various asset classes in our investment portfolio, and our level of investment in lower yielding cash equivalents, short-term investments and government securities. See "Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Harm Our Businesses, Results of Operations or Financial Condition." Selected Country and Sector Investments We have country-specific exposure to volatility as a result of our general account investments which support our insurance operations and related policyholder liabilities, as well as our global portfolio diversification objectives. We also have sector-specific exposure to volatility, in the energy sector, as a result of variable oil prices. 86
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Selected Country: The following table presents a summary of selected country
fixed maturity securities AFS, at estimated fair value. The information below is
presented on a "country of risk basis" (e.g. where the issuer primarily conducts
business). Sovereign includes government and agency.
Selected Country Fixed
Maturity Securities AFS at
Financial Non-Financial
Sovereign Services Services Structured Total (1)
(Dollars in millions)
United Kingdom $ 27 $ 5,295 $ 12,208 $ 133 $ 17,663
China 313 5 347 - 665
Hong Kong SAR 91 30 212 - 333
Argentina 256 3 17 - 276
Turkey 192 1 37 - 230
Total $ 879 $ 5,334 $ 12,821 $ 133 $ 19,167
Investment grade % 49.0 % 99.9 % 96.3 % 69.5 % 94.9 %
__________________(1) The par value and amortized cost of these selected country fixed maturity
securities AFS were
value of the purchased credit default swaps was
respectively, at
Selected Sector: Our exposure to energy sector fixed maturity securities AFS was$10.0 billion , of which 89% were investment grade, with unrealized gains of$849 million atDecember 31, 2019 . We maintain a diversified energy sector fixed maturities securities portfolio across sub-sectors and issuers. This portfolio comprised less than 3% of total investments atDecember 31, 2019 . We manage direct and indirect investment exposure in the selected countries and the energy sector through fundamental credit analysis and we continually monitor and adjust our level of investment exposure. We do not expect that our general account investments in these countries or the energy sector will have a material adverse effect on our results of operations or financial condition. Investment Portfolio Results The reconciliation of net investment income under GAAP to net investment income, as reported on an adjusted earnings basis, is presented below. For the Years Ended December 31, 2019 2018 (In millions) Net investment income - GAAP basis$ 18,868 $ 16,166 Investment hedge adjustments 469 475 Unit-linked contract income (1,475 ) 683 Other (32 ) 59
Net investment income, as reported on an adjusted basis (1)
__________________
(1) See "Financial Measures and Segment Accounting Policies" in Note 2 of the
Notes to the Consolidated Financial Statements for a discussion of the
adjustments made to net investment income under GAAP in calculating net
investment income, as reported on an adjusted basis.
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The following yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results.
For the Years Ended December 31,
2019 2018
Yield% (1) Amount Yield% (1) Amount
(Dollars in millions)
Fixed maturity securities AFS (2) (3) 4.22 % $ 11,743 4.26 % $ 11,678
Mortgage loans (3) 4.82 % 3,782 4.66 % 3,340
Real estate and real estate joint ventures 3.20 % 327 3.59 % 352
Policy loans 5.29 % 512 5.21 % 506
Equity securities 5.25 % 61 4.79 % 64
Other limited partnership interests 11.81 % 840 12.97 % 792
Cash and short-term investments 2.47 % 256 2.41 % 244
Other invested assets 901 887
Investment income 4.56 % 18,422 4.56 % 17,863
Investment fees and expenses (0.14 ) (545 ) (0.12 ) (479 )
Net investment income including divested
businesses (4) 4.42 % 17,877 4.44 % 17,384
Less: net investment income from divested
businesses (4) 47 1
Net investment income, as reported on an
adjusted basis $ 17,830 $ 17,383
__________________(1) We calculate yields using average quarterly asset carrying values. Yields
exclude recognized gains (losses) and include the impact of changes in
foreign currency exchange rates. Asset carrying values exclude unrealized
gains (losses), collateral received in connection with our securities
lending program, annuities funding structured settlement claims,
freestanding derivative assets, collateral received from derivative
counterparties, the effects of consolidating under GAAP certain variable
interest entities that are treated as consolidated securitization entities
("CSEs") and contractholder-directed equity securities. A yield is not
presented for other invested assets, as it is not considered a meaningful
measure of performance for this asset class.
(2) Investment income from fixed maturity securities AFS includes amounts from
(3) Investment income from fixed maturity securities AFS and mortgage loans
includes prepayment fees.
(4) See "Financial Measures and Segment Accounting Policies" in Note 2 of theNotes to the Consolidated Financial Statements for discussion of divested
businesses.
See "- Results of Operations - Consolidated Results - Adjusted Earnings" for an analysis of the period over period changes in investment portfolio results.
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Fixed Maturity Securities AFS and Equity Securities The following table presents fixed maturity securities AFS and equity securities by type (public or private) and information about perpetual and redeemable securities held at: December 31, 2019 December 31, 2018 Estimated Fair % of Estimated Fair % of Value Total Value Total (Dollars in millions) Fixed maturity securities AFS Publicly-traded$ 267,617 81.6 %$ 249,595 83.7 % Privately-placed 60,203 18.4 48,670 16.3
Total fixed maturity securities AFS
298,265 100.0 %
Percentage of cash and invested assets 66.8 % 66.0 % Equity securities Publicly-traded $ 1,156 86.1 % $ 1,282 89 % Privately-held 186 13.9 158 11 Total equity securities $ 1,342 100.0 % $ 1,440 100.0 % Percentage of cash and invested assets 0.3 % 0.3 % Perpetual and redeemable securities Perpetual securities included within fixed maturity securities AFS and equity securities $ 363 $
367
Redeemable preferred stock with a stated maturity included within fixed maturity securities AFS $ 960 $
911
Included within fixed maturity securities AFS are structured securities
including residential mortgage-backed securities ("RMBS"), ABS and commercial
mortgage-backed securities ("CMBS") (collectively, "Structured Products").
Perpetual securities are included within fixed maturity securities AFS and
equity securities. Upon acquisition, we classify perpetual securities that have
attributes of both debt and equity as fixed maturity securities AFS if the
securities have an interest rate step-up feature which, when combined with other
qualitative factors, indicates that the securities have more debt-like
characteristics; while those with more equity-like characteristics are
classified as equity securities. Many of such securities, commonly referred to
as "perpetual hybrid securities," have been issued by non-U.S. financial
institutions that are accorded the highest two capital treatment categories by
their respective regulatory bodies (i.e. core capital, or "Tier 1 capital" and
perpetual deferrable securities, or "Upper Tier 2 capital").
Redeemable preferred stock with a stated maturity is included within fixed
maturity securities AFS. These securities, which are commonly referred to as
"capital securities," primarily have cumulative interest deferral features and
are primarily issued by U.S. financial institutions.
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Valuation of Securities. We are responsible for the determination of the estimated fair value of our investments. We determine the estimated fair value of publicly-traded securities after considering one of three primary sources of information: quoted market prices in active markets, independent pricing services, or independent broker quotations. We determine the estimated fair value of privately-placed securities after considering one of three primary sources of information: market standard internal matrix pricing, market standard internal discounted cash flow techniques, or independent pricing services (after we determine the independent pricing services' use of available observable market data). For publicly-traded securities, the number of quotations obtained varies by instrument and depends on the liquidity of the particular instrument. Generally, we obtain prices from multiple pricing services to cover all asset classes and obtain multiple prices for certain securities, but ultimately utilize the price with the highest placement in the fair value hierarchy. Independent pricing services that value these instruments use market standard valuation methodologies based on data about market transactions and inputs from multiple pricing sources that are market observable or can be derived principally from or corroborated by observable market data. See Note 10 of the Notes to the Consolidated Financial Statements for a discussion of the types of market standard valuation methodologies utilized and key assumptions and observable inputs used in applying these standard valuation methodologies. When a price is not available in the active market or through an independent pricing service, management values the security primarily using market standard internal matrix pricing or discounted cash flow techniques, and non-binding quotations from independent brokers who are knowledgeable about these securities. Independent non-binding broker quotations utilize inputs that may be difficult to corroborate with observable market data. As shown in the following section, less than 1% of our fixed maturity securities AFS were valued using non-binding quotations from independent brokers atDecember 31, 2019 . Senior management, independent of the trading and investing functions, is responsible for the oversight of control systems and valuation policies for securities, mortgage loans and derivatives. On a quarterly basis, new transaction types and markets are reviewed and approved to ensure that observable market prices and market-based parameters are used for valuation, wherever possible, and for determining that valuation adjustments, when applied, are based upon established policies and are applied consistently over time. Senior management oversees the selection of independent third-party pricing providers and the controls and procedures to evaluate third-party pricing. We review our valuation methodologies on an ongoing basis and revise 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. We ensure that prices received from independent brokers, also referred to herein as "consensus pricing," are representative of estimated fair value by considering such pricing relative to our 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. We also apply 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, 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 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. We have reviewed the significance and observability of inputs used in the valuation methodologies to determine the appropriate fair value hierarchy level for each of our securities. Based on the results of this review and investment class analysis, each instrument is categorized as Level 1, 2 or 3 based on the lowest level significant input to its valuation. See Note 10 of the Notes to the Consolidated Financial Statements for information regarding the valuation techniques and inputs by level within the three-level fair value hierarchy by major classes of invested assets. 90
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Fair Value ofFixed Maturity Securities AFS and Equity Securities Fixed maturity securities AFS and equity securities measured at estimated fair value on a recurring basis and their corresponding fair value pricing sources are as follows: December 31, 2019 Fixed Maturity Equity Securities AFS Securities (Dollars in millions) Level 1 Quoted prices in active markets for identical assets$ 21,061 6.4 %$ 794 59.2 % Level 2 Independent pricing sources 287,218 87.7 80 6.0 Internal matrix pricing or discounted cash flow techniques 730 0.2 38 2.8 Significant other observable inputs 287,948 87.9 118 8.8 Level 3 Independent pricing sources 15,737 4.8 281 20.9 Internal matrix pricing or discounted cash flow techniques 2,637 0.8 143 10.7 Independent broker quotations 437 0.1 6 0.4 Significant unobservable inputs 18,811 5.7 430 32.0 Total estimated fair value$ 327,820 100.0 %$ 1,342 100.0 % See Note 10 of the Notes to the Consolidated Financial Statements for the fixed maturity securities AFS and equity securities fair value hierarchy. The majority of the Level 3 fixed maturity securities AFS and equity securities were concentrated in three sectors atDecember 31, 2019 : foreign corporate securities,U.S. corporate securities and RMBS. During the year endedDecember 31, 2019 , Level 3 fixed maturity securities AFS increased by$4.0 billion , or 26%, as compared to the prior year. The increase was driven by purchases in excess of sales and by an increase in estimated fair value recognized in other comprehensive income (loss), partially offset by transfers out of Level 3 in excess of transfers into Level 3. See "-Fixed Maturity Securities AFS and Equity Securities - Valuation of Securities" for further information regarding the composition of fair value pricing sources for securities. See Note 10 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for securities measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs; transfers into and/or out of Level 3; and further information about the valuation approaches and inputs by level by major classes of invested assets that affect the amounts reported above. Fixed Maturity Securities AFS See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for information about fixed maturity securities AFS by sector, contractual maturities and continuous gross unrealized losses. Fixed Maturity Securities AFS Credit Quality - RatingsThe Securities Valuation Office of the NAIC evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called "NAIC designations." If no designation is available from the NAIC, then, as permitted by the NAIC, an internally developed designation is used. The NAIC designations are generally similar to the credit quality ratings of the NRSRO for fixed maturity securities AFS, except for certain non-agency RMBS and CMBS as described below. Rating agency ratings are based on availability of applicable ratings from rating agencies on the NAIC credit rating provider list, including Moody's Investor Service ("Moody's"), S&P, Fitch Ratings ("Fitch"), Dominion Bond Rating Service,A.M. Best Company ("A.M. Best"),Kroll Bond Rating Agency ,Egan Jones Ratings Company andMorningstar Credit Ratings, LLC ("Morningstar"). If no rating is available from a rating agency, then an internally developed rating is used. 91
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The NAIC has adopted revised methodologies for non-agency RMBS, and CMBS. The NAIC's objective with the revised methodologies for non-agency RMBS and CMBS was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for non-agency RMBS and CMBS. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from non-agency RMBS and CMBS. We apply the revised NAIC methodologies to non-agency RMBS and CMBS held byMetLife, Inc.'s insurance subsidiaries that maintain the NAIC statutory basis of accounting. The NAIC's present methodology is to evaluate non-agency RMBS and CMBS held by insurers using the revised NAIC methodologies on an annual basis. IfMetLife, Inc.'s insurance subsidiaries acquire non-agency RMBS and CMBS that have not been previously evaluated by the NAIC, but are expected to be evaluated by the NAIC in the upcoming annual review, an internally developed designation is used until a NAIC designation becomes available. NAIC designations may not correspond to NRSRO ratings. The following table presents total fixed maturity securities AFS by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for non-agency RMBS and CMBS, which are presented using the revised NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at: December 31, 2019 2018 Estimated Estimated NAIC Amortized Unrealized Fair % of Amortized Unrealized Fair % of Designation NRSRO Rating Cost Gain (Loss) Value Total Cost Gain (Loss) Value Total (Dollars in millions) 1 Aaa/Aa/A$ 207,742 $ 22,966 $ 230,708 70.4 %$ 197,604 $ 11,202 $ 208,806 70.0 % 2 Baa 74,568 6,857 81,425 24.8 72,482 659 73,141 24.5 Subtotal investment grade 282,310 29,823 312,133 95.2 270,086 11,861 281,947 94.5 3 Ba 11,210 442 11,652 3.6 11,249 (91 ) 11,158 3.7 4 B 3,297 40 3,337 1.0 4,745 (247 ) 4,498 1.6 5 Caa and lower 832 (139 ) 693 0.2 720 (73 ) 647 0.2 6 In or near default 6 (1 ) 5 - 16 (1 ) 15 - Subtotal below investment grade 15,345 342 15,687 4.8 16,730 (412 ) 16,318 5.5 Total fixed maturity securities AFS$ 297,655 $ 30,165 $ 327,820 100.0 %$ 286,816 $ 11,449 $ 298,265 100.0 % 92
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The following tables present total fixed maturity securities AFS, based on
estimated fair value, by sector classification and by NRSRO rating and the
applicable NAIC designations from the NAIC published comparison of NRSRO ratings
to NAIC designations, except for non-agency RMBS and CMBS, which are presented
using the revised NAIC methodologies:
Fixed Maturity Securities AFS - by Sector & Credit Quality Rating
NAIC Designation: 1 2 3 4 5 6 Total
Caa and In or Near Estimated
NRSRO Rating: Aaa/Aa/A Baa Ba B Lower Default Fair Value
(Dollars in millions)
December 31, 2019
U.S. corporate $ 41,504 $ 37,915 $ 5,760 $ 2,199 $ 374 $ 1 $ 87,753
Foreign government 58,325 5,866 2,383 392 263 - 67,229
Foreign corporate 26,078 34,674 2,810 556 47 - 64,165
U.S. government and
agency 41,577 507 - - - - 42,084
RMBS 27,957 403 102 75 7 3 28,547
ABS 12,727 1,339 448 25 2 1 14,542
Municipals 12,397 624 32 - - - 13,053
CMBS 10,143 97 117 90 - - 10,447
Total fixed maturity
securities AFS $ 230,708 $ 81,425 $ 11,652 $ 3,337 $ 693 $ 5 $ 327,820
Percentage of total 70.4 % 24.8 % 3.6 % 1.0 % 0.2 % - % 100.0 %
December 31, 2018
U.S. corporate $ 34,363 $ 35,081 $ 5,850 $ 3,102 $ 544 $ 8 $ 78,948
Foreign government 54,149 5,140 2,389 604 5 1 62,288
Foreign corporate 22,602 30,849 2,534 669 49 - 56,703
U.S. government and
agency 38,915 407 - - - - 39,322
RMBS 27,370 350 138 94 3 6 27,961
ABS 11,467 772 204 26 3 - 12,472
Municipals 11,056 439 38 - - - 11,533
CMBS 8,884 103 5 3 43 - 9,038
Total fixed maturity
securities AFS $ 208,806 $ 73,141 $ 11,158 $ 4,498 $ 647 $ 15 $ 298,265
Percentage of total 70.0 % 24.5 % 3.7 % 1.6 % 0.2 % - % 100.0 %
U.S. and Foreign Corporate Fixed Maturity Securities AFS
We maintain a diversified portfolio of corporate fixed maturity securities AFS
across industries and issuers. This portfolio does not have any exposure to any
single issuer in excess of 1% of total investments and the top 10 holdings
comprised 2% and 1% of total investments at December 31, 2019 and 2018,
respectively. The tables below present our U.S. and foreign corporate securities
holdings by industry at:
December 31,
2019 2018
Estimated Estimated
Fair % of Fair % of
Value Total Value Total
(Dollars in millions)
Industrial $ 46,018 30.3 % $ 40,556 29.9 %
Finance 34,776 22.9 30,546 22.5
Consumer 31,952 21.0 30,140 22.2
Utility 25,763 17.0 22,206 16.4
Communications 11,471 7.5 10,406 7.7
Other 1,938 1.3 1,797 1.3
Total $ 151,918 100.0 % $ 135,651 100.0 %
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Structured Products We held$53.5 billion and$49.5 billion of Structured Products, at estimated fair value, atDecember 31, 2019 and 2018, respectively, as presented in the RMBS, ABS and CMBS sections below. RMBS Our RMBS portfolio is diversified by security type and risk profile. The following table presents our RMBS portfolio by security type, risk profile and ratings profile at: December 31, 2019 2018 Estimated Net Estimated Net Fair % of Unrealized Fair % of Unrealized Value Total Gains (Losses) Value Total Gains (Losses) (Dollars in millions) By security type: Collateralized mortgage obligations$ 16,315 57.2 % $ 1,185$ 15,302 54.7 % $ 726 Pass-through mortgage-backed securities 12,232 42.8 311 12,659 45.3 (174 ) Total RMBS$ 28,547 100.0 % $ 1,496$ 27,961 100.0 % $ 552 By risk profile: Agency$ 19,563 68.5 % $ 797$ 19,834 70.9 % $ 5 Prime 1,142 4.0 48 1,123 4.0 47 Alt-A 3,323 11.7 347 3,361 12.0 277 Sub-prime 4,519 15.8 304 3,643 13.1 223 Total RMBS$ 28,547 100.0 % $ 1,496$ 27,961 100.0 % $ 552 Ratings profile: Rated Aaa/AAA$ 21,122 74.0 %$ 20,666 73.9 % Designated NAIC 1$ 27,957 97.9 %$ 27,370 97.9 % Collateralized mortgage obligations are structured by dividing the cash flows of mortgage loans into separate pools or tranches of risk that create multiple classes of bonds with varying maturities and priority of payments. Pass-through mortgage-backed securities are secured by a mortgage loan or collection of mortgage loans. The monthly mortgage loan payments from homeowners pass from the originating bank through an intermediary, such as a government agency or investment bank, which collects the payments and, for a fee, remits or passes these payments through to the holders of the pass-through securities. The majority of our RMBS holdings were rated Aaa/AAA by Moody's, S&P or Fitch; and were designated NAIC 1 by the NAIC atDecember 31, 2019 and 2018. Agency RMBS were guaranteed or otherwise supported by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation orGovernment National Mortgage Association . Non-agency RMBS include prime, alternative residential mortgage loans ("Alt-A") and sub-prime RMBS. Prime residential mortgage lending includes the origination of residential mortgage loans to the most creditworthy borrowers with high quality credit profiles. Alt-A is a classification of mortgage loans where the risk profile of the borrower is between prime and sub-prime. Sub-prime mortgage lending is the origination of residential mortgage loans to borrowers with weak credit profiles. Historically, we have managed our exposure to sub-prime RMBS holdings by focusing primarily on senior tranche securities, stress testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2). 94
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ABS
Our ABS portfolio is diversified by collateral type and issuer. The following table presents our ABS portfolio by collateral type and ratings profile at:
December 31,
2019 2018
Estimated Net Estimated Net
Fair % of Unrealized Fair % of Unrealized
Value Total Gains (Losses) Value Total Gains (Losses)
(Dollars in millions)
By collateral type:
Collateralized
obligations (1) $ 7,974 54.8 % $ (54 ) $ 6,724 53.9 % $ (112 )
Student loans 1,350 9.3 (5 ) 1,256 10.1 13
Consumer loans 1,181 8.1 9 580 4.7 4
Foreign residential
loans 1,088 7.5 14 1,066 8.5 11
Automobile loans 813 5.6 7 895 7.2 1
Credit card loans 454 3.1 4 668 5.3 -
Other loans 1,682 11.6 20 1,283 10.3 3
Total $ 14,542 100.0 % $ (5 ) $ 12,472 100.0 % $ (80 )
Ratings profile:
Rated Aaa/AAA $ 7,711 53.0 % $ 7,142 57.3 %
Designated NAIC 1 $ 12,727 87.5 % $ 11,467 91.9 %
(1) Includes primarily collateralized loan obligations.
CMBS
Our CMBS portfolio is comprised primarily of securities collateralized by
multiple commercial mortgage loans and our portfolio is diversified by property
type, borrower, geography and vintage year. The following tables present our
CMBS portfolio by NRSRO rating and vintage year at:
December 31, 2019
Below
Investment
Aaa Aa A Baa Grade Total
Estimated Estimated Estimated Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
(Dollars in millions)2003 - 2012$ 402 $ 424 $ 335 $ 341 $ 121 $ 123 $ 7 $ 7 $ - $ -$ 865 $ 895 2013 707 745 638 666 247 253 30 29 52 41 1,674 1,734 2014 372 389 486 502 114 119 - - - - 972 1,010 2015 419 436 65 67 31 33 - - - - 515 536 2016 285 298 71 73 55 56 - - - - 411 427 2017 668 689 589 608 181 182 - - - - 1,438 1,479 2018 1,713 1,804 704 739 240 249 22 22 - - 2,679 2,814 2019 744 754 143 143 652 655 - - - - 1,539 1,552
Total
1,641
41$ 10,093 $ 10,447 Ratings Distribution 53.0 % 30.0 % 16.0 % 0.6 % 0.4 % 100.0 % 95
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December 31, 2018
Below
Investment
Aaa Aa A Baa Grade Total
Estimated Estimated Estimated Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
(Dollars in millions)2003 - 2012$ 488 $ 508 $ 266 $ 264 $ 229 $ 227 $ 7 $ 6 $ - $ -$ 990 $ 1,005 2013 723 746 644 655 279 277 - - 59 43 1,705 1,721 2014 381 379 488 485 128 127 - - - - 997 991 2015 523 514 81 80 34 34 - - - - 638 628 2016 345 339 84 80 46 46 - - - - 475 465 2017 862 851 666 654 234 228 39 39 - - 1,801 1,772 2018 1,434 1,445 690 695 292 293 23 23 - - 2,439 2,456 Total$ 4,756 $ 4,782 $ 2,919 $ 2,913 $ 1,242 $ 1,232 $ 69 $ 68 $ 59 $ 43 $ 9,045 $ 9,038 Ratings Distribution 52.9 % 32.2 % 13.6 % 0.8 % 0.5 % 100.0 % The tables above reflect NRSRO ratings including Moody's, S&P, Fitch and Morningstar. CMBS designated NAIC 1 were 97.1% and 98.3% of total CMBS atDecember 31, 2019 and 2018, respectively. Evaluation of Fixed Maturity Securities AFS for OTTI and Evaluating Temporarily Impaired Fixed Maturity Securities AFS See Note 8 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities AFS for OTTI and evaluation of temporarily impaired fixed maturity securities AFS. OTTI Losses on Fixed Maturity Securities AFS Recognized in Earnings See Note 8 of the Notes to the Consolidated Financial Statements for information about OTTI losses and gross gains and gross losses on fixed maturity securities AFS sold. Fixed Maturity Securities AFS OTTI Losses Recognized in Earnings Overall OTTI losses recognized in earnings on fixed maturity securities AFS were$129 million for the year endedDecember 31, 2019 , as compared to$40 million for the year endedDecember 31, 2018 . The most significant increase in OTTI losses was in foreign government securities, which comprised$81 million for the year endedDecember 31, 2019 , as compared to$9 million for the year endedDecember 31, 2018 . An increase of$72 million in OTTI losses was concentrated in Argentine foreign government securities and was due to the weakening of the Argentine peso and issuer specific concerns. Future Impairments Future impairments on fixed maturity securities AFS 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, and collateral valuation. If economic fundamentals deteriorate or if there are adverse changes in the above factors, credit losses may be incurred in upcoming periods. See Note 1 of the Notes to the Consolidated Financial Statements for a description of new guidance to be adopted in 2020 regarding the measurement of credit losses on financial instruments.Contractholder-Directed Equity Securities andFair Value Option Securities The estimated fair value of these investments, which are primarily comprised of Unit-linked investments, was$13.1 billion and$12.6 billion , or 2.7% and 2.8% of cash and invested assets, atDecember 31, 2019 and 2018, respectively. See Notes 1 and 10 of the Notes to the Consolidated Financial Statements for a description of this portfolio, its fair value hierarchy and a rollforward of the fair value measurements for these investments measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. Securities Lending, Repurchase Agreements and FHLB of Boston Advance Agreements We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We also participate in short-term repurchase agreement transactions with unaffiliated financial institutions. In addition, a subsidiary of the Company has entered into short-term advance agreements with the FHLB ofBoston . See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Securities Lending and Repurchase Agreements" and Notes 1 and 8 of the Notes to the Consolidated Financial Statements for further information. 96
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Mortgage Loans Our mortgage loans held-for-investment are principally collateralized by commercial, agricultural and residential properties. Mortgage loans held-for-investment are carried at amortized cost and the related valuation allowances are summarized as follows at:
December 31,
2019 2018
% of % of
Recorded % of Valuation Recorded Recorded % of Valuation Recorded
Investment Total Allowance Investment Investment Total Allowance Investment
(Dollars in millions)
Commercial $ 49,624 61.5 % $ 246 0.5 % $ 48,463 63.9 % $ 238 0.5 %
Agricultural 16,695 20.7 52 0.3 % 14,905 19.7 46 0.3 %
Residential 14,316 17.8 55 0.4 % 12,427 16.4 58 0.5 %
Total $ 80,635 100.0 % $ 353 0.4 % $ 75,795 100.0 % $ 342 0.5 %
The carrying value of all mortgage loans, net of valuation allowance, was 16.4%
and 16.8% of cash and invested assets at December 31, 2019 and 2018,
respectively.
We diversify our mortgage loan portfolio by both geographic region and property
type to reduce the risk of concentration. Of our commercial and agricultural
mortgage loan held-for-investment portfolios, 83% are collateralized by
properties located in the United States , with the remaining 17% collateralized
by properties located outside the United States , which includes 5% of properties
located in the U.K. , at December 31, 2019 . The carrying values of our commercial
and agricultural mortgage loans held-for-investment located in California , New
York and Texas were 18%, 11% and 7%, respectively, of total commercial and
agricultural mortgage loans held-for-investment at December 31, 2019 .
Additionally, we manage risk when originating commercial and agricultural
mortgage loans by generally lending up to 75% of the estimated fair value of the
underlying real estate collateral.
We manage our residential mortgage loan held-for-investment portfolio in a
similar manner to reduce risk of concentration, with 93% collateralized by
properties located in the United States , and the remaining 7% collateralized by
properties located outside the United States , at December 31, 2019 . The carrying
values of our residential mortgage loans located in California , Florida , and New
York were 33%, 9%, and 6%, respectively, of total residential mortgage loans at
December 31, 2019 .
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Commercial Mortgage Loans byGeographic Region and Property Type. Commercial mortgage loans are the largest component of the mortgage loan invested asset class. The tables below present the diversification across geographic regions and property types of commercial mortgage loans held-for-investment at: December 31, 2019 2018 % of % of Amount Total Amount Total (Dollars in millions) Region Pacific$ 10,169 20.5 %$ 10,884 22.5 % Non-U.S. 10,093 20.3 9,281 19.1 Middle Atlantic 8,302 16.7 7,911 16.3 South Atlantic 6,487 13.1 6,347 13.1 West South Central 4,255 8.6 3,951 8.1 East North Central 3,066 6.2 2,840 5.9 Mountain 1,602 3.2 1,387 2.9 New England 1,433 2.9 1,481 3.1 West North Central 607 1.2 594 1.2 East South Central 502 1.0 564 1.2 Multi-Region and Other 3,108 6.3 3,223 6.6 Total recorded investment 49,624 100.0 % 48,463 100.0 % Less: valuation allowances 246 238 Carrying value, net of valuation allowances$ 49,378 $ 48,225 Property Type Office$ 22,925 46.2 %$ 23,995 49.5 % Retail 9,052 18.2 9,089 18.7 Apartment 8,212 16.6 7,018 14.5 Industrial 3,985 8.0 3,719 7.7 Hotel 3,471 7.0 3,479 7.2 Other 1,979 4.0 1,163 2.4 Total recorded investment 49,624 100.0 % 48,463 100.0 % Less: valuation allowances 246 238 Carrying value, net of valuation allowances$ 49,378 $ 48,225
__________________
Mortgage Loan Credit Quality - Monitoring Process. We monitor our mortgage loan
investments on an ongoing basis, including a review of loans that are current,
past due, restructured and under foreclosure. See Note 8 of the Notes to the
Consolidated Financial Statements for further information regarding mortgage
loans by credit quality indicator, past due and nonaccrual mortgage loans and
impaired mortgage loans.
We review our commercial mortgage loans on an ongoing basis. These reviews may
include an analysis of the property financial statements and rent roll, lease
rollover analysis, property inspections, market analysis, estimated valuations
of the underlying collateral, loan-to-value ratios, debt service coverage ratios
and tenant creditworthiness. The monitoring process focuses on higher risk
loans, which include those that are classified as restructured, delinquent or in
foreclosure, as well as loans with higher loan-to-value ratios and lower debt
service coverage ratios. The monitoring process for agricultural mortgage loans
is generally similar, with a focus on higher risk loans, such as loans with
higher loan-to-value ratios, including reviews on a geographic and sector basis.
We review our residential mortgage loans on an ongoing basis. See Note 8 of the
Notes to the Consolidated Financial Statements for information on our evaluation
of residential mortgage loans and related valuation allowance methodology.
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Loan-to-value ratios and debt service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio compares a property's net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 55% at bothDecember 31, 2019 and 2018, and our average debt service coverage ratio was 2.4x and 2.5x atDecember 31, 2019 and 2018, respectively. The debt service coverage ratio, as well as the values utilized in calculating the ratio, is 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 our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage loans, our average loan-to-value ratio was 47% and 46% atDecember 31, 2019 and 2018, respectively. The values utilized in calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated. Mortgage Loan Valuation Allowances. Our valuation allowances are established both on a loan specific basis for those loans considered impaired where a property specific or market specific risk has been identified that could likely result in a future loss, as well as for pools of loans with similar risk characteristics where a property specific or market specific risk has not been identified, but for which we expect to incur a loss. Accordingly, a valuation allowance is provided to absorb these estimated probable credit losses. The determination of the amount of valuation allowances is based upon our periodic evaluation and assessment of known and inherent risks associated with our loan portfolios. Such evaluations and assessments are based upon several factors, including our experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations and assessments are revised as conditions change and new information becomes available, which can cause the valuation allowances to increase or decrease over time as such evaluations are revised. Negative credit migration, including an actual or expected increase in the level of problem loans, will result in an increase in the valuation allowance. Positive credit migration, including an actual or expected decrease in the level of problem loans, will result in a decrease in the valuation allowance. See Note 1 of the Notes to the Consolidated Financial Statements for a description of new guidance to be adopted in 2020 regarding the measurement of credit losses on financial instruments. See Note 8 of the Notes to the Consolidated Financial Statements for information about how valuation allowances are established and monitored and activity in and balances of the valuation allowance as of and for the years endedDecember 31, 2019 , 2018 and 2017. Real Estate andReal Estate Joint Ventures Real estate and real estate joint ventures is comprised of wholly-owned real estate and joint ventures with interests in single property income-producing real estate, and to a lesser extent joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the operation of income-producing properties, as well as a runoff portfolio. The carrying values of real estate and real estate joint ventures was$10.7 billion and$9.7 billion , or 2.2% and 2.1% of cash and invested assets, atDecember 31, 2019 and 2018, respectively. Impairments recognized on real estate and real estate joint ventures were$10 million for the year endedDecember 31, 2019 . There were no impairments for the year endedDecember 31, 2018 . We diversify our real estate investments by both geographic region and property type to reduce risk of concentration. Geographical diversification: Of our real estate investments, excluding funds, 61% were located inthe United States , with the remaining 39% located outsidethe United States , atDecember 31, 2019 . The carrying value of our real estate investments, excluding funds, located inJapan ,California andWashington, D.C. were 34%, 11% and 10%, respectively, of total real estate investments, excluding funds, atDecember 31, 2019 . Real estate funds were 24% of our real estate investments atDecember 31, 2019 . The majority of these funds hold underlying real estate investments that are well diversified acrossthe United States . 99
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Property type diversification: Real estate and real estate joint venture investments by property type are categorized by sector as follows at:
December 31,
2019 2018
Carrying % of Carrying % of
Value Total Value Total
(Dollars in millions)
Office $ 3,678 34.2 % $ 3,922 40.4 %
Real estate funds 2,539 23.6 1,921 19.8
Retail 1,260 11.7 1,206 12.4
Apartment 1,211 11.3 872 9.0
Land 669 6.2 676 7.0
Hotel 599 5.6 555 5.7
Industrial 393 3.7 307 3.2
Agriculture 21 0.2 27 0.3
Other 371 3.5 212 2.2
Total real estate and real estate
joint ventures $ 10,741 100.0 % $ 9,698 100.0 %
Other Limited Partnership Interests Other limited partnership interests are comprised of investments in private funds, including private equity funds and hedge funds. AtDecember 31, 2019 and 2018, the carrying value of other limited partnership interests was$7.7 billion and$6.6 billion , which included$575 million and$634 million of hedge funds, respectively. Other limited partnership interests were 1.6% and 1.5% of cash and invested assets atDecember 31, 2019 and 2018, respectively. Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds. Other Invested Assets The following table presents the carrying value of our other invested assets by type at: December 31, 2019 2018 Carrying Value % of Total Carrying Value % of Total (Dollars in millions)
Freestanding derivatives with positive estimated fair values$ 10,084 53.0 %$ 8,969 49.3 % Tax credit and renewable energy partnerships 1,993 10.5 2,457 13.5 Annuities funding structured settlement claims 1,271 6.7 1,279 7.0 Direct financing leases 1,247 6.6 1,192 6.5 Leveraged leases 1,052 5.5 1,108 6.1 Operating joint ventures 838 4.4 796 4.4 FHLB common stock 809 4.3 793 4.4 Funds withheld 470 2.5 416 2.3 Other 1,251 6.6 1,180 6.5 Total$ 19,015 100 %$ 18,190 100 % Percentage of cash and invested assets 3.9 % 4.0 % See Notes 1, 8 and 9 of the Notes to the Consolidated Financial Statements for information regarding freestanding derivatives with positive estimated fair values, tax credit and renewable energy partnerships, direct financing and leveraged leases, annuities funding structured settlement claims, FHLB common stock, operating joint ventures and funds withheld. See Note 8 of the Notes to the Consolidated Financial Statements for information regarding gains (losses) on disposals of, and impairments of, tax credit and renewable energy partnerships, and leveraged lease impairment losses. 100
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See Note 1 of the Notes to the Consolidated Financial Statements for a description of new guidance to be adopted in 2020 regarding the measurement of credit losses on financial instruments, including direct financing and leveraged leases. Derivatives Derivative Risks We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 9 of the Notes to the Consolidated Financial Statements for: • A comprehensive description of the nature of our derivatives, including
the strategies for which derivatives are used in managing various risks.
• Information about the primary underlying risk exposure, gross notional
amount, and estimated fair value of our derivatives by type of hedge
designation, excluding embedded derivatives held at
2018.
• The statement of operations effects of derivatives in net investments in
foreign operations, cash flow, fair value, or nonqualifying hedge
relationships for the years ended
See "Quantitative and Qualitative Disclosures About Market Risk - Management of Market Risk Exposures - Hedging Activities" for more information about our use of derivatives by major hedge program. Fair Value Hierarchy See Note 10 of the Notes to the Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy. The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income. Derivatives categorized as Level 3 atDecember 31, 2019 include: interest rate forwards with maturities which extend beyond the observable portion of the yield curve; interest rate total return swaps with unobservable repurchase rates; foreign currency swaps and forwards with certain unobservable inputs, including the unobservable portion of the yield curve; credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs; and equity index options with unobservable correlation inputs. AtDecember 31, 2019 , less than 1% of the estimated fair value of our derivatives was priced through independent broker quotations. See Note 10 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. The gain (loss) on Level 3 derivatives primarily relates to foreign currency swaps and forwards that are valued using an unobservable portion of the swap yield curves. Other significant inputs, which are observable, include equity index levels, equity volatility and the swap yield curves. We validate the reasonableness of these inputs by valuing the positions using internal models and comparing the results to broker quotations. The gain (loss) on Level 3 derivatives, percentage of gain (loss) attributable to observable and unobservable inputs, and the primary drivers of observable gain (loss) are summarized as follows: Year EndedDecember 31, 2019 Gain (loss) recognized in net income (loss) ($108 ) Approximate percentage of gain (loss) attributable to observable inputs 45% Increases in interest rates on new interest rate total return swaps
and
Primary drivers of observable gain increases in certain equity index levels (loss)
on equity derivatives.
Approximate percentage of gain (loss)
attributable to unobservable inputs 55%
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See "- Summary of Critical Accounting Estimates - Derivatives" for further
information on the estimates and assumptions that affect derivatives.
Credit Risk
See Note 9 of the Notes to the Consolidated Financial Statements for information
about how we manage credit risk related to derivatives and for the estimated
fair value of our net derivative assets and net derivative liabilities after the
application of master netting agreements and collateral.
Our policy is not to offset the fair value amounts recognized for derivatives
executed with the same counterparty under the same master netting agreement.
This policy applies to the recognition of derivatives on the consolidated
balance sheets, and does not affect our legal right of offset.
Credit Derivatives
The following table presents the gross notional amount and estimated fair value
of credit default swaps at:
December 31,
2019 2018
Gross Gross
Notional Estimated Notional Estimated
Credit Default Swaps Amount Fair Value Amount Fair Value
(In millions)
Purchased $ 2,944 $ (98 ) $ 1,903 $ (14 )
Written 11,520 271 11,391 82
Total $ 14,464 $ 173 $ 13,294 $ 68
The following table presents the gross gains, gross losses and net gains
(losses) recognized in net derivative gains (losses) for credit default swaps as
follows:
Years Ended December 31,
2019 2018
Net Net
Gross Gross Gains Gross Gross Gains
Credit Default Swaps Gains Losses (Losses) Gains Losses (Losses)
(In millions)
Purchased (1) $ 2 $ (40 ) $ (38 ) $ 17 $ (11 ) $ 6
Written (1) 257 (9 ) 248 24 (156 ) (132 )
Total $ 259 $ (49 ) $ 210 $ 41 $ (167 ) $ (126 )
__________________(1) Gains (losses) do not include earned income (expense) on credit default
swaps.
The favorable change in net gains (losses) on written credit default swaps of$380 million was due to certain credit spreads on certain credit default swaps used as replications narrowing in the current period as compared to widening in the prior period. The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by state insurance regulators and the NAIC and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasingTreasury bonds (or other high quality assets) and associating them with written credit default swaps on the desired corporate credit name, we can replicate the desired bond exposures and meet our ALM needs. In addition, given the shorter tenor of the credit default swaps (generally five-year tenors) versus a long-dated corporate bond, we have more flexibility in managing our credit exposures. 102
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Embedded Derivatives See Note 10 of the Notes to the Consolidated Financial Statements for information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy and a rollforward of the fair value measurements for embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. See Note 9 of the Notes to the Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives. See "- Summary of Critical Accounting Estimates - Derivatives" for further information on the estimates and assumptions that affect embedded derivatives. Off-Balance Sheet Arrangements Credit and Committed Facilities We maintain an unsecured revolving credit facility, as well as committed facilities, with various financial institutions. See Note 13 of the Notes to the Consolidated Financial Statements for descriptions of such arrangements, the classification of expenses on such credit and committed facilities and the nature of the associated liability for letters of credit issued and drawdowns on these credit and committed facilities. See also "- Liquidity and Capital Resources - The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities." Collateral for Securities Lending, Third-Party Custodian Administered Repurchase Programs and Derivatives We participate in a securities lending program and third-party custodian administered repurchase programs in the normal course of business for the purpose of enhancing the total return on our investment portfolio. See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for further discussion of our securities lending program and repurchase agreement transactions, the classification of revenues and expenses, and the nature of the secured financing arrangements and associated liabilities. Securities lending: Periodically we receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was$0 and$78 million at estimated fair value atDecember 31, 2019 and 2018, respectively. Third-party custodian administered repurchase programs: We loan certain of our fixed maturity securities AFS to unaffiliated financial institutions and, in exchange, non-cash collateral is put on deposit by the unaffiliated financial institutions on our behalf with third-party custodians. The estimated fair value of securities loaned in connection with these transactions was$85 million and$78 million atDecember 31, 2019 and 2018, respectively. Non-cash collateral on deposit with third-party custodians on our behalf was$90 million and$84 million , at estimated fair value, atDecember 31, 2019 and 2018, respectively, which cannot be sold or re-pledged, and which is not reflected on our consolidated balance sheets. Derivatives: We enter into derivatives to manage various risks relating to our ongoing business operations. We receive non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was$1.7 billion and$1.3 billion , at estimated fair value, atDecember 31, 2019 and 2018, respectively. See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Pledged Collateral" and Note 9 of the Notes to the Consolidated Financial Statements for information regarding the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives. Lease Commitments As lessee, we have entered into various lease and sublease agreements for office space and equipment. Our commitments under such lease agreements are included within the contractual obligations table. See "- Liquidity and Capital Resources - The Company - Contractual Obligations" and Note 11 of the Notes to the Consolidated Financial Statements. Guarantees See "Guarantees" in Note 21 of the Notes to the Consolidated Financial Statements. 103
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Other
We enter into the following additional commitments in the normal course of business for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnerships, bank credit facilities, bridge loans and private corporate bond investments. See "Net Investment Income" and "Net Investment Gains (Losses)" in Note 8 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, and gains and losses from such investments. See also "- Investments -Fixed Maturity Securities AFS and Equity Securities " and "- Investments - Mortgage Loans" for information on our investments in fixed maturity securities AFS and mortgage loans. See "- Investments - Real Estate andReal Estate Joint Ventures " and "- Investments - Other Limited Partnership Interests" for information on our partnership investments. Other than the commitments disclosed in Note 21 of the Notes to the Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnerships, bank credit facilities, bridge loans, and private corporate bond investments. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities, bridge loans and private corporate bond investments, see "- Liquidity and Capital Resources - The Company - Contractual Obligations." Insolvency Assessments See Note 21 of the Notes to the Consolidated Financial Statements. Policyholder Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported on the consolidated financial statements in conformity with GAAP. For more details on Policyholder Liabilities, see "- Summary of Critical Accounting Estimates." Due to the nature of the underlying risks and the uncertainty associated with the determination of actuarial liabilities, we cannot precisely determine the amounts that will ultimately be paid with respect to these actuarial liabilities, and the ultimate amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future. We periodically review our estimates of actuarial liabilities for future benefits and compare them with our actual experience. We revise estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on our business, results of operations and financial condition. We have experienced, and will likely in the future experience, catastrophe losses and possibly acts of terrorism, as well as turbulent financial markets that may have an adverse impact on our business, results of operations and financial condition. Due to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes and acts of terrorism, but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils. We also use hedging, reinsurance and other risk management activities to mitigate financial market volatility. See "Business - Regulation - Insurance Regulation - Policy and Contract Reserve Adequacy Analysis" for information regarding required analyses of the adequacy of statutory reserves of our insurance operations. Future Policy Benefits We establish liabilities for amounts payable under insurance policies. See Notes 1 and 4 of the Notes to the Consolidated Financial Statements, "- Industry Trends - Impact of a Sustained Low Interest Rate Environment - Low Interest Rate Scenario" and "- Variable Annuity Guarantees." A discussion of future policy benefits by segment (as well as Corporate & Other) follows. 104
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Amounts payable under insurance policies for this segment are comprised of group insurance and annuities, as well as property and casualty policies. For group insurance, future policyholder benefits are comprised mainly of liabilities for disabled lives under disability waiver of premium policy provisions, liabilities for survivor income benefit insurance, active life policies and premium stabilization and other contingency liabilities held under life insurance contracts. For group annuity contracts, future policyholder benefits are primarily related to payout annuities, including pension risk transfers, structured settlement annuities and institutional income annuities. There is no interest rate crediting flexibility on these liabilities. As a result, a sustained low interest rate environment could negatively impact earnings; however, we mitigate our risks by applying various ALM strategies, including the use of various interest rate derivative positions. The components of future policy benefits related to our property and casualty policies are liabilities for unpaid claims, estimated based upon assumptions such as rates of claim frequencies, levels of severities, inflation, judicial trends, legislative changes or regulatory decisions. Assumptions are based upon our historical experience and analysis of historical development patterns of the relationship of loss adjustment expenses to losses for each line of business, and we consider the effects of current developments, anticipated trends and risk management programs, reduced for anticipated salvage and subrogation.Asia Future policy benefits for this segment are held primarily for traditional life, endowment, annuity and accident & health contracts. They are also held for total return pass-through provisions included in certain universal life and savings products. They include certain liabilities for variable annuity and variable life guarantees of minimum death benefits, and longevity guarantees. Factors impacting these liabilities include sustained periods of lower than expected yields, lower than expected asset reinvestment rates, market volatility, actual lapses resulting in lower than expected income, and actual mortality or morbidity resulting in higher than expected benefit payments. We mitigate our risks by applying various ALM strategies and by the use of reinsurance.Latin America Future policy benefits for this segment are held primarily for immediate annuities inChile ,Mexico andArgentina and traditional life contracts mainly inMexico ,Brazil andColombia . There are also liabilities held for total return pass-through provisions included in certain universal life and savings products inMexico . There is limited interest rate crediting flexibility on the immediate annuity and traditional life liabilities. As a result, sustained periods of lower than expected yields could negatively impact earnings; however, we mitigate our risks by applying various ALM strategies. Other factors impacting these liabilities are actual mortality resulting in higher than expected benefit payments and actual lapses resulting in lower than expected income. EMEA Future policy benefits for this segment include unearned premium reserves for group life and credit insurance contracts. Future policy benefits are also held for traditional life, endowment and annuity contracts with significant mortality risk and accident & health contracts. Factors impacting these liabilities include lower than expected asset reinvestment rates, market volatility, actual lapses resulting in lower than expected income, and actual mortality or morbidity resulting in higher than expected benefit payments. We mitigate our risks by having premiums which are adjustable or cancellable in some cases, applying various ALM strategies and by the use of reinsurance.MetLife Holdings Future policy benefits for the life insurance business are comprised mainly of liabilities for traditional life insurance contracts. In order to manage risk, we have often reinsured a portion of the mortality risk on life insurance policies. We routinely evaluate our reinsurance programs, which may result in increases or decreases to existing coverage. We have entered into various interest rate derivative positions to mitigate the risk that investment of premiums received and reinvestment of maturing assets over the life of the policy will be at rates below those assumed in the original pricing of these contracts. For the annuities business, future policy benefits are comprised mainly of liabilities for life-contingent income annuities and liabilities for the variable annuity guaranteed minimum benefits that are accounted for as insurance. Other future policyholder benefits are comprised mainly of liabilities for disabled lives under disability waiver of premium policy provisions, and active life policies. In addition, for our other products, future policyholder benefits related to the reinsurance of our formerJapan joint venture are comprised of liabilities for the variable annuity guaranteed minimum benefits that are accounted for as insurance. Corporate & Other Future policy benefits primarily include liabilities for other reinsurance business. 105
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Policyholder Account Balances Policyholder account balances are generally equal to the account value, which includes accrued interest credited, but excludes the impact of any applicable charge that may be incurred upon surrender. See "- Industry Trends - Impact of a Sustained Low Interest Rate Environment - Low Interest Rate Scenario" and "- Variable Annuity Guarantees." See also Notes 1 and 4 of the Notes to the Consolidated Financial Statements for additional information. A discussion of policyholder account balances by segment follows.U.S. Policyholder account balances in this segment are comprised of funding agreements, retained asset accounts, universal life policies, the fixed account of variable life insurance policies and specialized life insurance products for benefit programs. Group Benefits Policyholder account balances in this business are held for retained asset accounts, universal life policies, the fixed account of variable life insurance policies and specialized life insurance products for benefit programs. Policyholder account balances are credited interest at a rate we determine, which is influenced by current market rates. A sustained low interest rate environment could adversely impact liabilities and earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We have various interest rate derivative positions to partially mitigate the risks associated with such a scenario. The table below presents the breakdown of account value subject to minimum guaranteed crediting rates for Group Benefits: December 31, 2019 Account Account Value at Guaranteed Minimum Crediting Rate Value Guarantee (In millions) Greater than 0% but less than 2% $ 4,728 $ 4,604
Equal to or greater than 2% but less than 4% $ 1,689 $ 1,652 Equal to or greater than 4%
$ 757 $ 729
Retirement and Income Solutions
Policyholder account balances in this business are held largely for
investment-type products mainly funding agreements and also include
postretirement benefits and corporate owned life insurance to fund non-qualified
benefit programs for executives. Interest crediting rates vary by type of
contract, and can be fixed or variable. Variable interest crediting rates are
generally tied to an external index, most commonly (1-month or 3-month) LIBOR.
We are exposed to interest rate risks, as well as foreign currency exchange rate
risk, when guaranteeing payment of interest and return of principal at the
contractual maturity date. We may invest in floating rate assets or enter into
receive-floating interest rate swaps, also tied to external indices, as well as
interest rate caps, to mitigate the impact of changes in market interest rates.
We also mitigate our risks by applying various ALM strategies and seek to hedge
all foreign currency exchange rate risk through the use of foreign currency
hedges, including cross currency swaps.
The table below presents the breakdown of account value subject to minimum
guaranteed crediting rates for RIS:
December 31, 2019
Account
Account Value at
Guaranteed Minimum Crediting Rate Value Guarantee
(In millions)
Greater than 0% but less than 2% $ 149 $ -
Equal to or greater than 2% but less than 4% $ 1,070 $ 102
Equal to or greater than 4% $ 4,582 $ 4,375
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Policyholder account balances in this segment are held largely for fixed income retirement and savings plans, fixed deferred annuities, interest sensitive whole life products, universal life and, to a lesser degree, liability amounts for Unit-linked investments that do not meet the GAAP definition of separate accounts. Also included are certain liabilities for retirement and savings products sold in certain countries inAsia that generally are sold with minimum credited rate guarantees. Liabilities for guarantees on certain variable annuities inAsia are accounted for as embedded derivatives and recorded at estimated fair value and are also included within policyholder account balances. A sustained low interest rate environment could adversely impact liabilities and earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We mitigate our risks by applying various ALM strategies and with reinsurance. Liabilities for Unit-linked investments are impacted by changes in the fair value of the associated underlying investments, as the return on assets is generally passed directly to the policyholder. The table below presents the breakdown of account value subject to minimum guaranteed crediting rates forAsia : December 31, 2019 Account Account Value at Guaranteed Minimum Crediting Rate Value Guarantee (In millions)
Annuities
Greater than 0% but less than 2% $ 29,398 $ 1,578
Equal to or greater than 2% but less than 4% $ 1,131 $ 372 Equal to or greater than 4%
$ 1 $ 1
Life & Other
Greater than 0% but less than 2% $ 11,431 $ 11,047
Equal to or greater than 2% but less than 4% $ 27,890 $ 9,318 Equal to or greater than 4%
$ 276 $ 276
Latin America
Policyholder account balances in this segment are held largely for
investment-type products and universal life products in Mexico and Chile , and
deferred annuities in Brazil . Some products in Chile and some of the deferred
annuities in Brazil are Unit-linked investments that do not meet the GAAP
definition of separate accounts. Liabilities for Unit-linked investments are
impacted by changes in the fair value of the associated investments, as the
return on assets is generally passed directly to the policyholder. Many of the
other liabilities have minimum credited rate guarantees, which could adversely
impact liabilities and earnings in a sustained low interest rate environment.
EMEA
Policyholder account balances in this segment are held mostly for universal
life, deferred annuities, pension products, and Unit-linked investments that do
not meet the GAAP definition of separate accounts. They are also held for
endowment products without significant mortality risk. A sustained low interest
rate environment could adversely impact liabilities and earnings as a result of
the minimum credited rate guarantees present in many of these policyholder
account balances. We mitigate our risks by applying various ALM strategies.
Liabilities for Unit-linked investments are impacted by changes in the fair
value of the associated investments, as the return on assets is generally passed
directly to the policyholder.
MetLife Holdings
Life policyholder account balances in this segment are held for retained asset
accounts, universal life policies, the fixed account of variable life insurance
policies, and funding agreements. For annuities, policyholder account balances
are held for fixed deferred annuities, the fixed account portion of variable
annuities, non-life contingent income annuities, and embedded derivatives
related to variable annuity guarantees. Interest is credited to the
policyholder's account at interest rates we determine which are influenced by
current market rates, subject to specified minimums. A sustained low interest
rate environment could adversely impact liabilities and earnings as a result of
the minimum credited rate guarantees present in most of these policyholder
account balances. We have various interest rate derivative positions to
partially mitigate the risks associated with such a scenario. Additionally, for
our other products, policyholder account balances are held for variable annuity
guarantees assumed from a former operating joint venture in Japan that are
accounted for as embedded derivatives.
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The table below presents the breakdown of account value subject to minimum
guaranteed crediting rates for the
December 31, 2019
Account
Account Value at
Guaranteed Minimum Crediting Rate Value Guarantee
(In millions)
Greater than 0% but less than 2% $ 1,308 $ 1,174
Equal to or greater than 2% but less than 4% $ 17,896 $ 15,280 Equal to or greater than 4%
$ 7,859 $ 5,337
Variable Annuity Guarantees
We issue, directly and through assumed business, 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. In some cases, the benefit base may be increased by additional
deposits, bonus amounts, accruals or optional market value resets. See Notes 1
and 4 of the Notes to the Consolidated Financial Statements for additional
information.
Certain guarantees, including portions thereof, have insurance liabilities
established that are included in future policy benefits. Guarantees accounted
for in this manner include GMDBs, the life-contingent portion of GMWBs, elective
GMIB annuitizations, and the life contingent portion of GMIBs that require
annuitization when the account balance goes to zero. These liabilities are
accrued over the life of the contract in proportion to actual and future
expected policy assessments based on the level of guaranteed minimum benefits
generated using multiple scenarios of separate account returns. The scenarios
are based on best estimate assumptions consistent with those used to amortize
DAC. When current estimates of future benefits exceed those previously projected
or when current estimates of future assessments are lower than those previously
projected, liabilities will increase, resulting in a current period charge to
net income. The opposite result occurs when the current estimates of future
benefits are lower than those previously projected or when current estimates of
future assessments exceed those previously projected. At the end of each
reporting period, we update the actual amount of business remaining in-force,
which impacts expected future assessments and the projection of estimated future
benefits resulting in a current period charge or increase to earnings.
Certain guarantees, including portions thereof, accounted for as embedded
derivatives, are recorded at estimated fair value and included in policyholder
account balances. Guarantees accounted for as embedded derivatives include
GMABs, the non-life contingent portion of GMWBs and certain non-life contingent
portions of GMIBs. The estimated fair values of guarantees accounted for as
embedded derivatives are determined based on the present value of projected
future benefits minus the present value of projected future fees. The
projections of future benefits and future fees require capital market and
actuarial assumptions including expectations concerning policyholder behavior. A
risk neutral valuation methodology is used to project the cash flows from the
guarantees under multiple capital market scenarios to determine an economic
liability. The reported estimated fair value is then determined by taking the
present value of these risk-free generated cash flows using a discount rate that
incorporates a spread over the risk-free rate to reflect our nonperformance risk
and adding a risk margin. For more information on the determination of estimated
fair value, see Note 10 of the Notes to the Consolidated Financial Statements.
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The table below presents the carrying value for guarantees at:
Future Policy Policyholder
Benefits Account Balances
December 31, December 31,
2019 2018 2019 2018
(In millions)
Asia
GMDB $ 3 $ 3 $ - $ -
GMAB - - 34 34
GMWB 34 81 143 143
EMEA
GMDB 3 7 - -
GMAB - - 25 24
GMWB 15 70 (62 ) (82 )
MetLife Holdings
GMDB 335 289 - -
GMIB 756 743 110 106
GMAB - - (1 ) 5
GMWB 125 129 375 563
Total $ 1,271 $ 1,322 $ 624 $ 793
The carrying amounts for guarantees included in policyholder account balances
above include nonperformance risk adjustments of $147 million and $263 million
at December 31, 2019 and 2018, respectively. These nonperformance risk
adjustments represent the impact of including a credit spread when discounting
the underlying risk neutral cash flows to determine the estimated fair values.
The nonperformance risk adjustment does not have an economic impact on us as it
cannot be monetized given the nature of these policyholder liabilities. The
change in valuation arising from the nonperformance risk adjustment is not
hedged.
The carrying values of these guarantees can change significantly during periods
of sizable and sustained shifts in equity market performance, equity volatility,
interest rates or foreign currency exchange rates. Carrying values are also
impacted by our assumptions around mortality, separate account returns and
policyholder behavior, including lapse rates.
As discussed below, we use a combination of product design, hedging strategies,
reinsurance, and other risk management actions to mitigate the risks related to
these benefits. Within each type of guarantee, there is a range of product
offerings reflecting the changing nature of these products over time. Changes in
product features and terms are in part driven by customer demand but, more
importantly, reflect our risk management practices of continuously evaluating
the guaranteed benefits and their associated asset-liability matching. We
continue to diversify the concentration of income benefits in our portfolio by
focusing on withdrawal benefits, variable annuities without living benefits and
index-linked annuities.
The sections below provide further detail by total account value for certain of
our most popular guarantees. Total account values include amounts not reported
on the consolidated balance sheets from assumed business, Unit-linked
investments that do not qualify for presentation as separate account assets, and
amounts included in our general account. The total account values and the net
amounts at risk include direct and assumed business, but exclude offsets from
hedging or ceded reinsurance, if any.
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GMDBs
We offer a range of GMDBs to our contractholders. The table below presents GMDBs, by benefit type, at December 31, 2019:
Total Account Value (1)
MetLife
Asia & EMEA Holdings
(In millions)
Return of premium or five to seven year step-up $ 8,119 $ 47,459
Annual step-up - 3,159
Roll-up and step-up combination - 5,756 Total $ 8,119 $ 56,374 __________________
(1) Total account value excludes $649 million for contracts with no GMDBs. The
Company's annuity contracts with guarantees may offer more than one type of
guarantee in each contract. Therefore, the amounts listed for GMDBs and for
living benefit guarantees are not mutually exclusive.
Based on total account value, less than 19% of our GMDBs included enhanced death
benefits such as the annual step-up or roll-up and step-up combination products
at December 31, 2019. We expect the above GMDB risk profile to be relatively
consistent for the foreseeable future.
Living Benefit Guarantees
The table below presents our living benefit guarantees based on total account
values at December 31, 2019:
Total Account Value (1)
Asia & EMEA MetLife Holdings
(In millions)
GMIB $ - $ 21,472
GMWB - non-life contingent (2) 1,168 2,521
GMWB - life-contingent 3,737 9,385
GMAB 2,009 232
Total $ 6,914 $ 33,610
__________________(1) Total account value excludes $24.2 billion for contracts with no living
benefit guarantees. The Company's annuity contracts with guarantees may
offer more than one type of guarantee in each contract. Therefore, the
amounts listed for GMDBs and for living benefit guarantee amounts are not
mutually exclusive.
(2) The Asia and EMEA segments include the non-life contingent portion of theGMWB total account value of $1.2 billion with a guarantee at annuitization.
In terms of total account value, GMIBs are our most significant living benefit
guarantee. Our primary risk management strategy for our GMIB products is our
derivatives hedging program as discussed below. Additionally, we have engaged in
certain reinsurance agreements covering some of our GMIB business. As part of
our overall risk management approach for living benefit guarantees, we
continually monitor the reinsurance markets for the right opportunity to
purchase additional coverage for our GMIB business. We stopped selling GMIBs in
February 2016.
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The table below presents our GMIB associated total account values, by their guaranteed payout basis, at December 31, 2019:
Total
Account Value
(In millions)
7-year setback, 2.5% interest rate $ 5,940
7-year setback, 1.5% interest rate
964
10-year setback, 1.5% interest rate
4,301
10-year mortality projection, 10-year setback, 1.0% interest rate 8,666 10-year mortality projection, 10-year setback, 0.5% interest rate 1,601
$ 21,472
The annuitization interest rates on GMIBs have been decreased from 2.5% to 0.5%
over time, partially in response to the low interest rate environment,
accompanied by an increase in the setback period from seven years to 10 years
and the introduction of a 10-year mortality projection.
Additionally, 42% of the $21.5 billion of GMIB total account value has been
invested in managed volatility funds as of December 31, 2019. These funds seek
to manage volatility by adjusting the fund holdings within certain guidelines
based on capital market movements. Such activity reduces the overall risk of the
underlying funds while maintaining their growth opportunities. These risk
mitigation techniques reduce or eliminate the need for us to manage the funds'
volatility through hedging or reinsurance.
Our GMIB products typically have a waiting period of 10 years to be eligible for
annuitization. As of December 31, 2019, only 22% of our contracts with GMIBs
were eligible for annuitization. The remaining contracts are not eligible for
annuitization for an average of four years.
Once eligible for annuitization, contractholders would be expected to annuitize
only if their contracts were in-the-money. We calculate in-the-moneyness with
respect to GMIBs consistent with net amount at risk as discussed in Note 4 of
the Notes to the Consolidated Financial Statements, by comparing the
contractholders' income benefits based on total account values and current
annuity rates versus the guaranteed income benefits. The net amount at risk was
$584 million at December 31, 2019, of which $524 million was related to GMIBs.
For those contracts with GMIB, the table below presents details of contracts
that are in-the-money and out-of-the-money at December 31, 2019:
Total
In-the-Moneyness Account Value % of Total
(In millions)
In-the-money 30% or greater $ 512 2 %
20% to less than 30% 338 2 %
10% to less than 20% 590 3 %
0% to less than 10% 1,232 6 %
2,672
Out-of-the-money -10% to 0% 2,090 10 %
-20% to less than -10% 3,775 18 %
Greater than -20% 12,935 60 %
18,800
Total GMIBs $ 21,472
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Derivatives Hedging Variable Annuity Guarantees
Our risk mitigating hedging strategy uses various OTC and exchange traded
derivatives. The table below presents the gross notional amount, estimated fair
value and primary underlying risk exposure of the derivatives hedging our
variable annuity guarantees:
December 31,
2019 2018
Primary Underlying Gross Notional Estimated Fair Value Gross Notional Estimated Fair Value
Risk Exposure Instrument Type Amount Assets Liabilities Amount Assets Liabilities
(In millions)
Interest rate Interest rate swaps $ 8,639 $ 73 $ 16 $ 8,209 $ 89 $ 3
Interest rate futures 1,678 3 3 1,559 1 3
Interest rate options 838 209 - 838 163 -
Foreign currency
exchange rate Foreign currency forwards 1,644 16 24 1,815 44 9
Currency options 1 - - - - -
Equity market Equity futures 4,127 5 8 2,730 11 77
Equity index options 8,775 473 667 9,933 408 546
Equity variance swaps 1,115 23 19 2,269 40 87
Equity total return swaps 761 - 70 929 91 -
Total $ 27,578 $ 802 $ 807 $ 28,282 $ 847 $ 725
The change in estimated fair values of our derivatives is recorded in
policyholder benefits and claims if such derivatives are hedging guarantees
included in future policy benefits, and in net derivative gains (losses) if such
derivatives are hedging guarantees included in policyholder account balances.
Our hedging strategy involves the significant use of static longer-term
derivative instruments to avoid the need to execute transactions during periods
of market disruption or higher volatility. We continually monitor the capital
markets for opportunities to adjust our liability coverage, as appropriate.
Futures are also used to dynamically adjust the daily coverage levels as markets
and liability exposures fluctuate.
We remain liable for the guaranteed benefits in the event that reinsurers or
derivative counterparties are unable or unwilling to pay. Certain of our
reinsurance agreements and all derivative positions are collateralized and
derivatives positions are subject to master netting agreements, both of which
significantly reduce the exposure to counterparty risk. In addition, we are
subject to the risk that hedging and other risk management actions prove
ineffective or that unanticipated policyholder behavior or mortality, combined
with adverse market events, produces economic losses beyond the scope of the
risk management techniques employed.
Liquidity and Capital Resources
Overview
Our business and results of operations are materially affected by conditions in
the global capital markets and the economy generally. Stressed conditions,
volatility and disruptions in global capital markets, particular markets, or
financial asset classes can have an adverse effect on us, in part because we
have a large investment portfolio and our insurance liabilities and derivatives
are sensitive to changing market factors. Changing conditions in the global
capital markets and the economy may affect our financing costs and market
interest for our debt or equity securities. For further information regarding
market factors that could affect our ability to meet liquidity and capital
needs, see "- Industry Trends" and "- Investments - Current Environment."
Liquidity Management
Based upon the strength of our franchise, diversification of our businesses,
strong financial fundamentals and the substantial funding sources available to
us as described herein, we continue to believe we have access to ample liquidity
to meet business requirements under current market conditions and reasonably
possible stress scenarios. We continuously monitor and adjust our liquidity and
capital plans for MetLife, Inc. and its subsidiaries in light of market
conditions, as well as changing needs and opportunities.
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Short-term Liquidity
We maintain a substantial short-term liquidity position, which was $9.8 billion
and $11.1 billion at December 31, 2019 and 2018, respectively. Short-term
liquidity includes cash and cash equivalents and short-term investments,
excluding assets that are pledged or otherwise committed, including amounts
received in connection with securities lending, repurchase agreements,
derivatives, and secured borrowings, as well as amounts held in the closed
block.
Liquid Assets
An integral part of our liquidity management includes managing our level of
liquid assets, which was $221.4 billion and $202.7 billion at December 31, 2019
and 2018, respectively. Liquid assets include cash and cash equivalents,
short-term investments and publicly-traded securities, excluding assets that are
pledged or otherwise committed. Assets pledged or otherwise committed include
amounts received in connection with securities lending, repurchase agreements,
derivatives, regulatory deposits, the collateral financing arrangement, funding
agreements and secured borrowings, as well as amounts held in the closed block.
Capital Management
We have established several senior management committees as part of our capital
management process. These committees, including the Capital Management Committee
and the Enterprise Risk Committee ("ERC"), regularly review actual and projected
capital levels (under a variety of scenarios including stress scenarios) and our
annual capital plan in accordance with our capital policy. The Capital
Management Committee is comprised of members of senior management, including
MetLife, Inc.'s Chief Financial Officer ("CFO"), Treasurer, and Chief Risk
Officer ("CRO"). The ERC is also comprised of members of senior management,
including MetLife, Inc.'s CFO, CRO and Chief Investment Officer.
Our Board of Directors and senior management are directly involved in the
development and maintenance of our capital policy. The capital policy sets
forth, among other things, minimum and target capital levels and the governance
of the capital management process. All capital actions, including proposed
changes to the annual capital plan, capital targets or capital policy, are
reviewed by the Finance and Risk Committee of the Board of Directors prior to
obtaining full Board of Directors approval. The Board of Directors approves the
capital policy and the annual capital plan and authorizes capital actions, as
required.
See "Risk Factors - Capital Risks - Legal and Regulatory Restrictions May
Prevent Us from Paying Dividends and Repurchasing Our Stock" for information
regarding restrictions on payment of dividends and stock repurchases. See also
Note 16 of the Notes to the Consolidated Financial Statements for information
regarding MetLife, Inc.'s common stock repurchase authorizations.
The Company
Liquidity
Liquidity refers to the ability to generate adequate amounts of cash to meet our
needs. We determine our liquidity needs based on a rolling 12-month forecast by
portfolio of invested assets which we monitor daily. We adjust the asset mix and
asset maturities based on this rolling 12-month forecast. To support this
forecast, we conduct cash flow and stress testing, which include various
scenarios of the potential risk of early contractholder and policyholder
withdrawal. We include provisions limiting withdrawal rights on many of our
products, including general account pension products sold to employee benefit
plan sponsors. Certain of these provisions prevent the customer from making
withdrawals prior to the maturity date of the product. In the event of
significant cash requirements beyond anticipated liquidity needs, we have
various alternatives available depending on market conditions and the amount and
timing of the liquidity need. These available alternatives include cash flows
from operations, sales of liquid assets, global funding sources including
commercial paper and various credit and committed facilities.
Under certain stressful market and economic conditions, our access to liquidity
may deteriorate, or the cost to access liquidity may increase. A downgrade in
our credit or financial strength ratings could also negatively affect our
liquidity. See "- Rating Agencies." If we require significant amounts of cash on
short notice in excess of anticipated cash requirements or if we are required to
post or return cash collateral in connection with derivatives or our securities
lending program, we may have difficulty selling investments in a timely manner,
be forced to sell them for less than we otherwise would have been able to
realize, or both. In addition, in the event of such forced sale, for securities
in an unrealized loss position, realized losses would be incurred on securities
sold and impairments would be incurred, if there is a need to sell securities
prior to recovery, which may negatively impact our financial condition. See
"Risk Factors - Investment Risks - We May Have Difficulty Selling Certain
Holdings in Our Investment Portfolio or in Our Securities Lending Program in a
Timely Manner and Realizing Full Value."
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All general account assets within a particular legal entity - other than those which may have been pledged to a specific purpose - are generally available to fund obligations of the general account of that legal entity. Capital We manage our capital position to maintain our financial strength and credit ratings. See "- Rating Agencies" for information regarding such ratings. Our capital position is supported by our ability to generate strong cash flows within our operating companies and borrow funds at competitive rates, as well as by our demonstrated ability to raise additional capital to meet operating and growth needs despite adverse market and economic conditions. Statutory Capital and Dividends OurU.S. insurance subsidiaries have statutory surplus well above levels to meet current regulatory requirements. RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to most of ourU.S. insurance subsidiaries. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital of each of these subsidiaries subject to these requirements was in excess of each of those RBC levels. As aDelaware corporation, American Life is subject toDelaware law; however, because it does not conduct insurance business inDelaware or any otherU.S. state, it is exempt from RBC requirements underDelaware law. American Life's operations are also regulated by applicable authorities of the jurisdictions in which it operates and is subject to capital and solvency requirements in those jurisdictions. The amount of dividends that our insurance subsidiaries can pay toMetLife, Inc. or to other parent entities is constrained by the amount of surplus we hold to maintain our ratings and provides an additional margin for risk protection and investment in our businesses. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions toMetLife, Inc. and other parent entities by their respective insurance subsidiaries is governed by insurance laws and regulations. See "Business - Regulation - Insurance Regulation," "-MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries" and Note 16 of the Notes to the Consolidated Financial Statements. Affiliated Captive Reinsurance Transactions MLIC cedes specific policy classes, including term and universal life insurance, participating whole life insurance, LTD insurance, group life insurance and other business to various wholly-owned captive reinsurers. The reinsurance activities among these affiliated companies are eliminated within our consolidated results of operations. The statutory reserves of such affiliated captive reinsurers are supported by a combination of funds withheld assets, investment assets and letters of credit issued by unaffiliated financial institutions.MetLife, Inc. has entered into various support agreements in connection with the activities of these captive reinsurers. See Note 5 of the Notes to theMetLife, Inc. (Parent Company Only) Condensed Financial Information included in Schedule II of the Financial Statement Schedules for further details on certain of these support arrangements. MLIC has entered into reinsurance agreements with affiliated captive reinsurers for risk and capital management purposes, as well as to manage statutory reserve requirements related to universal life and term life insurance policies and other business. 114
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The NYDFS continues to have a moratorium on new reserve financing transactions involving captive insurers. We are not aware of any states other thanNew York andCalifornia implementing such a moratorium. While such a moratorium would not impact our existing reinsurance agreements with captive reinsurers, a moratorium placed on the use of captives for new reserve financing transactions could impact our ability to write certain products and/or impact our RBC ratios and ability to deploy excess capital in the future. This could result in our need to increase prices, modify product features or limit the availability of those products to our customers. While this affects insurers across the industry, it could adversely impact our competitive position and our results of operations in the future. We continue to evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results. See Note 6 of the Notes to the Consolidated Financial Statements for further information on our reinsurance activities. Rating Agencies Rating agencies assign insurer financial strength ratings toMetLife, Inc.'s U.S. life insurance subsidiaries and credit ratings toMetLife, Inc. and certain of its subsidiaries. Financial strength ratings represent the opinion of rating agencies regarding the ability of an insurance company to pay obligations under insurance policies and contracts in accordance with their terms and are not evaluations directed toward the protection of investors inMetLife, Inc.'s securities. Insurer financial strength ratings are not statements of fact nor are they recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of any other rating. Rating agencies use an "outlook statement" of "positive," "stable," ''negative'' or "developing" to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a "stable" outlook to indicate that the rating is not expected to change; however, a "stable" rating does not preclude a rating agency from changing a rating at any time, without notice. Certain rating agencies assign rating modifiers such as "CreditWatch" or "under review" to indicate their opinion regarding the potential direction of a rating. These ratings modifiers are generally assigned in connection with certain events such as potential mergers, acquisitions, dispositions or material changes in a company's results, in order for the rating agency to perform its analysis to fully determine the rating implications of the event. Our insurer financial strength ratings at the date of this filing are indicated in the following table. Outlook is stable unless otherwise indicated. Additional information about financial strength ratings can be found on the websites of the respective rating agencies. A.M. Best Fitch Moody's S&P "AAA "Aaa (extremely "A++ "AAA (highest strong)" to Ratings Structure (superior)" (exceptionally quality)" to "SD to "S strong)" to "C "C (lowest (Selective (suspended)" (distressed)" rated)" Default)" or "D (Default)" American Life Insurance NR NR A1 AA- Company 5th of 21 4th of 22 Metropolitan Life Insurance A+ AA- Aa3 AA- Company 2nd of 16 4th of 19 4th of 21 4th of 22MetLife Insurance K.K . NR NR NR AA- (MetLife Japan) 4th of 22 Metropolitan Tower Life A+ AA- Aa3 AA- Insurance Company 2nd of 16 4th of 19 4th of 21 4th of 22 __________________ NR = Not rated Credit ratings indicate the rating agency's opinion regarding a debt issuer's ability to meet the terms of debt obligations in a timely manner. They are important factors in our overall funding profile and ability to access certain types of liquidity. The level and composition of regulatory capital at the subsidiary level and our equity capital are among the many factors considered in determining our insurer financial strength ratings and credit ratings. Each agency has its own capital adequacy evaluation methodology, and assessments are generally based on a combination of factors. In addition to heightening the level of scrutiny that they apply to insurance companies, rating agencies have increased and may continue to increase the frequency and scope of their credit reviews, may request additional information from the companies that they rate and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. 115
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A downgrade in the credit ratings or insurer financial strength ratings ofMetLife, Inc. or its subsidiaries would likely impact us in the following ways, including: • impact our ability to generate cash flows from the sale of funding
agreements and other capital market products offered by our RIS business;
• impact the cost and availability of financing for
subsidiaries; and
• result in additional collateral requirements or other required payments
under certain agreements, which are eligible to be satisfied in cash or by
posting investments held by the subsidiaries subject to the agreements.
See "- Liquidity and Capital Uses - Pledged Collateral."
See also "Risk Factors - Economic Environment and Capital Markets Risks - A
Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings
Could Result in a Loss of Business and Harm Our Financial Condition or Results
of Operations."
Summary of the Company's Primary Sources and Uses of Liquidity and Capital
Our primary sources and uses of liquidity and capital are summarized as follows:
Years Ended December 31,
2019 2018
(In millions)
Sources:
Operating activities, net $ 13,786 $ 11,738
Net change in policyholder account balances 6,524 4,266
Net change in payables for collateral under securities loaned and other transactions
2,019 -
Cash received for other transactions with tenors greater than three months
125 200
Long-term debt issued 1,382
24
Financing element on certain derivative instruments and other derivative related transactions, net
- 144
Preferred stock issued, net of issuance costs -
1,274
Effect of change in foreign currency exchange rates on cash and cash equivalents 9 - Total sources 23,845 17,646 Uses: Investing activities, net 17,586 5,634
Net change in payables for collateral under securities loaned and other transactions
- 821
Cash paid for other transactions with tenors greater than three months
200 -
Long-term debt repaid 906 1,871
Collateral financing arrangement repaid 67
61
Financing element on certain derivative instruments and other derivative related transactions, net
126 -
Treasury stock acquired in connection with share
repurchases 2,285 3,992
Dividends on preferred stock 178 141
Dividends on common stock 1,643 1,678
Other, net 77 145Effect of change in foreign currency exchange rates on cash and cash equivalents
- 183
Total uses 23,068
14,526
Net increase (decrease) in cash and cash equivalents $ 777
$ 3,120
Cash Flows from Operations
The principal cash inflows from our insurance activities come from insurance
premiums, net investment income, annuity considerations and deposit funds. The
principal cash outflows are the result of various life insurance, property and
casualty, annuity and pension products, operating expenses and income tax, as
well as interest expense. A primary liquidity concern with respect to these cash
flows is the risk of early contractholder and policyholder withdrawal.
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Cash Flows from Investments The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments and settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. Additional cash outflows relate to purchases of businesses. We typically have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. Cash Flows from Financing The principal cash inflows from our financing activities come from issuances of debt and other securities, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt and the collateral financing arrangement, payments of dividends on and repurchases ofMetLife, Inc.'s securities, withdrawals associated with policyholder account balances and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early contractholder and policyholder withdrawal. Liquidity and Capital Sources In addition to the general description of liquidity and capital sources in "- Summary of the Company's Primary Sources and Uses of Liquidity and Capital," the Company's primary sources of liquidity and capital are set forth below. Global Funding Sources Liquidity is provided by a variety of global funding sources, including funding agreements, credit and committed facilities and commercial paper. Capital is provided by a variety of global funding sources, including short-term and long-term debt, the collateral financing arrangement, junior subordinated debt securities, preferred securities, equity securities and equity-linked securities.MetLife, Inc. maintains a shelf registration statement with theSEC that permits the issuance of public debt, equity and hybrid securities. As a "Well-Known Seasoned Issuer" underSEC rules,MetLife, Inc.'s shelf registration statement provides for automatic effectiveness upon filing and has no stated issuance capacity. The diversity of our global funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary global funding sources include: Preferred Stock See Notes 16 and 23 of the Notes to the Consolidated Financial Statements for information on preferred stock issuances. Common Stock See Note 16 of the Notes to the Consolidated Financial Statements. Commercial Paper, Reported in Short-term DebtMetLife, Inc. andMetLife Funding each have a commercial paper program that is supported by our unsecured revolving credit facility (see "- Credit and Committed Facilities").MetLife Funding raises cash from its commercial paper program and uses the proceeds to extend loans throughMetLife Credit Corp., another subsidiary of MLIC, to affiliates in order to enhance the financial flexibility and liquidity of these companies. Federal Home Loan Bank Funding Agreements, Reported in Policyholder Account Balances Certain of ourU.S. insurance subsidiaries are members of a regional FHLB. For the years ended December 31, 2019 and 2018, we issued $33.0 billion and $27.3 billion, respectively, and repaid $32.8 billion and $27.5 billion, respectively, of funding agreements with certain regional FHLBs. At December 31, 2019 and 2018, total obligations outstanding under these funding agreements were $15.3 billion and $15.1 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements. 117
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Federal Home Loan Bank Advance Agreements, Reported in Payables for Collateral Under Securities Loaned and Other Transactions For the years ended December 31, 2019 and 2018, we borrowed $3.0 billion and $3.1 billion, respectively, and repaid $3.0 billion and $2.6 billion, respectively, under advance agreements with the FHLB ofBoston . At both December 31, 2019 and 2018, total obligations outstanding under these advance agreements were $800 million. See Note 8 of the Notes to the Consolidated Financial Statements. Special Purpose Entity Funding Agreements, Reported in Policyholder Account Balances We issue fixed and floating rate funding agreements which are denominated in eitherU.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. For the years ended December 31, 2019 and 2018, we issued $37.3 billion and $41.8 billion, respectively, and repaid $36.4 billion and $43.7 billion, respectively, under such funding agreements. At December 31, 2019 and 2018, total obligations outstanding under these funding agreements were $34.6 billion and $32.3 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements. Federal Agricultural Mortgage Corporation Funding Agreements, Reported in Policyholder Account Balances We have issued funding agreements to a subsidiary of Farmer Mac, as well as 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 all such funding agreements are secured by a pledge of certain eligible agricultural mortgage loans. For the years ended December 31, 2019 and 2018, we issued $700 million and $900 million, respectively, and repaid $700 million and $900 million, respectively, under such funding agreements. At both December 31, 2019 and 2018, total obligations outstanding under these funding agreements were $2.6 billion. See Note 4 of the Notes to the Consolidated Financial Statements. Debt Issuances In May 2019,MetLife, Inc. issued ¥151.7 billion ($1.4 billion at issuance) of senior notes for general corporate purposes and the repayment of indebtedness, which included the redemption of certain senior notes. See "- Liquidity and Capital Uses - Debt Repurchases, Redemptions and Exchanges" and Note 13 of the Notes to the Consolidated Financial Statements. Credit and Committed Facilities See Note 13 of the Notes to the Consolidated Financial Statements for information on credit and committed facilities. We have no reason to believe that our lending counterparties will be unable to fulfill their respective contractual obligations under these facilities. As commitments under our credit and committed facilities may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements. Outstanding Debt Under Global Funding Sources The following table summarizes our outstanding debt excluding long-term debt relating to CSEs at: December 31, 2019 2018 (In millions) Short-term debt (1) $ 235 $ 268 Long-term debt (2) $ 13,461 $ 12,824
Collateral financing arrangement $ 993 $ 1,060 Junior subordinated debt securities $ 3,150 $ 3,147
__________________
(1) Includes $136 million and $168 million of debt that is non-recourse to
MetLife, Inc. and MLIC, subject to customary exceptions, at December 31,
2019 and 2018, respectively. Certain subsidiaries have pledged assets to
secure this debt.
(2) Includes $403 million and $422 million of debt that is non-recourse to
MetLife, Inc. and MLIC, subject to customary exceptions, at December 31,2019 and 2018, respectively. Certain investment subsidiaries have pledged
assets to secure this debt.
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Debt and Facility Covenants Certain of our debt instruments and committed facilities, as well as our unsecured revolving credit facility, contain various administrative, reporting, legal and financial covenants. We believe we were in compliance with all applicable financial covenants at December 31, 2019. Dispositions For information regarding the pending disposition ofMetLife Hong Kong, see Note 3 of the Notes to the Consolidated Financial Statements. Liquidity and Capital Uses In addition to the general description of liquidity and capital uses in "- Summary of the Company's Primary Sources and Uses of Liquidity and Capital" and "- Contractual Obligations," the Company's primary uses of liquidity and capital are set forth below. Common Stock Repurchases See Note 16 of the Notes to the Consolidated Financial Statements for information relating to authorizations by the Board of Directors to repurchaseMetLife, Inc. common stock, amounts of common stock repurchased pursuant to such authorizations for the years ended December 31, 2019 and 2018, and the amount remaining under such authorizations at December 31, 2019. See Note 23 of the Notes to the Consolidated Financial Statements for information regarding shares of common stock repurchased subsequent to December 31, 2019. Common stock repurchases are subject to the discretion of our Board of Directors and will depend upon our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price ofMetLife, Inc.'s common stock compared to management's assessment of the stock's underlying value, applicable regulatory approvals, and other legal and accounting factors. Restrictions on the payment of dividends that may arise under so-called "Dividend Stopper" provisions would also restrictMetLife, Inc.'s ability to repurchase common stock. See "- Dividends" for information about these restrictions. See also "Risk Factors - Capital Risks - Legal and Regulatory Restrictions May Prevent Us from Paying Dividends and Repurchasing Our Stock." Dividends For the years ended December 31, 2019 and 2018,MetLife, Inc. paid dividends on its preferred stock of $178 million and $141 million, respectively. For the years ended December 31, 2019 and 2018,MetLife, Inc. paid dividends on its common stock of $1.6 billion and $1.7 billion, respectively. See Note 16 of the Notes to the Consolidated Financial Statements for information regarding the calculation and timing of these dividend payments. Dividends are paid quarterly on the Series A preferred stock. Dividends are paid semi-annually onMetLife, Inc.'s 5.25% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C, until June 15, 2020 and, thereafter, will be paid quarterly. Dividends are paid semi-annually on the Series D preferred stock, in September and March until March 15, 2028 and, thereafter, will be paid quarterly. Dividends are paid quarterly on the Series E preferred stock. The declaration and payment of common stock dividends are subject to the discretion of our Board of Directors, and will depend onMetLife, Inc.'s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends byMetLife, Inc.'s insurance subsidiaries and other factors deemed relevant by the Board. See Note 23 of the Notes to the Consolidated Financial Statements for information regarding common and preferred stock dividends declared subsequent to December 31, 2019. "Dividend Stopper" Provisions inMetLife 's Preferred Stock and Junior Subordinated DebenturesMetLife, Inc.'s preferred stock and junior subordinated debentures contain "dividend stopper" provisions under whichMetLife, Inc. may not pay dividends on instruments junior to those instruments if payments have not been made on those instruments. Moreover,MetLife, Inc.'s Series A preferred stock and its junior subordinated debentures contain provisions that would limit the payment of dividends or interest on those instruments ifMetLife, Inc. fails to meet certain tests ("Trigger Events"), to an amount not greater than the net proceeds from sales of common stock and other specified instruments during a period preceding the dividend declaration date or the interest payment date, as applicable. If such proceeds were under the circumstances insufficient to make such payments on those instruments, the dividend stopper provisions affecting common stock (and preferred stock, as applicable) would come into effect. 119
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A "Trigger Event" would occur if: • the RBC ratio ofMetLife 's largestU.S. insurance subsidiaries in the aggregate (as defined in the applicable instrument) were to be less than 175% of the company action level based on the subsidiaries' prior year annual financial statements filed (generally around March 1) with state insurance commissioners; or
• at the end of a quarter ("Final Quarter End Test Date"), consolidated GAAP
net income for the four-quarter period ending two quarters before such
quarter-end (the "Preliminary Quarter End Test Date") is zero or a
negative amount and the consolidated GAAP stockholders' equity, minus AOCI
(the "adjusted stockholders' equity amount"), as of the Final Quarter End
Test Date and the Preliminary Quarter End Test Date, declined by 10% or
more from (A) its level 10 quarters before the Final Quarter End Test Date
(the "Benchmark Quarter End Test Date"), for Benchmark Quarter End Test
Dates after August 4, 2017 (the date of the Separation), or (B)
$49,282,000,000, the consolidated GAAP stockholders' equity, minus AOCI as
of June 30, 2017 as reported on a pro forma basis reflecting the
Separation in
Benchmark Quarter End Test Dates prior to August 4, 2017.
Once a Trigger Event occurs for a Final Quarter End Test Date, the suspension of payments of dividends and interest (in the absence of sufficient net proceeds from the issuance of certain securities during specified periods) would continue until there is no Trigger Event at a subsequent Final Quarter End Test Date, and, if the test in the second paragraph above caused the Trigger Event, the adjusted stockholders' equity amount is no longer 10% or more below its level at the Benchmark Quarter End Test Date that is associated with the Trigger Event. In the case of successive Trigger Events, the suspension would continue untilMetLife satisfies these conditions for each of the Trigger Events. The junior subordinated debentures further provide thatMetLife, Inc. may, at its option and provided that certain conditions are met, elect to defer payment of interest. See Note 15 of the Notes to the Consolidated Financial Statements. Any such elective deferral would trigger the dividend stopper provisions. Further,MetLife, Inc. is a party to certain replacement capital covenants which limit its ability to eliminate these restrictions through the repayment, redemption or purchase of the junior subordinated debentures by requiringMetLife, Inc. , with some limitations, to receive cash proceeds during a specified period from the sale of specified replacement securities prior to any repayment, redemption or purchase. See Note 15 of the Notes to the Consolidated Financial Statements for a description of such covenants. Debt Repayments See Notes 13 and 14 of the Notes to the Consolidated Financial Statements for further information on long-term and short-term debt and the collateral financing arrangement, respectively, including: • For the years ended December 31, 2019 and 2018, following regulatory
approval,
subsidiary of
$61 million, respectively, in aggregate principal amount of its surplus
notes, which were reported in collateral financing arrangement on the
consolidated balance sheets;
• In August 2018, MetLife, Inc. repaid at maturity the remaining $533
million of its 6.817% senior notes.
Debt Repurchases, Redemptions and Exchanges
We may from time to time seek to retire or purchase our outstanding debt through
cash purchases, redemptions and/or exchanges for other securities, in open
market purchases, privately negotiated transactions or otherwise. Any such
repurchases, redemptions, or exchanges will be dependent upon several factors,
including our liquidity requirements, contractual restrictions, general market
conditions, and applicable regulatory, legal and accounting factors. Whether or
not to repurchase or redeem any debt and the size and timing of any such
repurchases or redemptions will be determined at our discretion.
In June 2019, MetLife, Inc. redeemed for cash and canceled its £400 million
aggregate principal amount 5.250% senior notes due June 2020 and the remaining
$368 million aggregate principal amount of its 4.750% senior notes due February
2021.
See Note 13 of the Notes to the Consolidated Financial Statements for further
information on long-term and short-term debt including the FVO Brighthouse
Common Stock exchange.
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Support AgreementsMetLife, Inc. and several of its subsidiaries (each, an "Obligor") are parties to various capital support commitments and guarantees with subsidiaries. Under these arrangements, each Obligor has agreed to cause the applicable entity to meet specified capital and surplus levels or has guaranteed certain contractual obligations. We anticipate that in the event these arrangements place demands upon us, there will be sufficient liquidity and capital to enable us to meet such demands. See Note 5 of the Notes to theMetLife, Inc. (Parent Company Only) Condensed Financial Information included in Schedule II of the Financial Statement Schedules. Insurance Liabilities Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, property and casualty, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse behavior differs somewhat by segment. In theMetLife Holdings segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. For both the years ended December 31, 2019 and 2018, general account surrenders and withdrawals from annuity products were $1.8 billion. In the RIS business within theU.S. segment, which includes pension risk transfers, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals. With regard to the RIS business products that provide customers with limited rights to accelerate payments, at December 31, 2019, there were funding agreements totaling $123 million that could be put back to the Company. Pledged Collateral We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At December 31, 2019 and 2018, we had received pledged cash collateral from counterparties of $6.3 billion and $5.0 billion, respectively. At December 31, 2019 and 2018, we had pledged cash collateral to counterparties of $275 million and $283 million, respectively. See Note 9 of the Notes to the Consolidated Financial Statements for additional information about collateral pledged to us, collateral we pledge and derivatives subject to credit contingent provisions. We pledge collateral and have had collateral pledged to us, and may be required from time to time to pledge additional collateral or be entitled to have additional collateral pledged to us, in connection with the collateral financing arrangement related to the reinsurance of closed block liabilities. See Note 14 of the Notes to the Consolidated Financial Statements. We pledge collateral from time to time in connection with funding agreements and advance agreements. See Note 4 of the Notes to the Consolidated Financial Statements. Securities Lending and Repurchase Agreements We participate in a securities lending program and in short-term repurchase agreements whereby securities are loaned to unaffiliated financial institutions. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Through these arrangements, we were liable for cash collateral under our control of $19.7 billion and $19.1 billion at December 31, 2019 and 2018, respectively, including a portion that may require the immediate return of cash collateral we hold. See Note 8 of the Notes to the Consolidated Financial Statements. Litigation We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated net income or cash flows in particular quarterly or annual periods. See Note 21 of the Notes to the Consolidated Financial Statements. Acquisitions Cash outflows for acquisitions and investments in strategic partnerships for the years ended December 31, 2019 and 2018 were $32 million and $0, respectively. 121
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Contractual Obligations
The following table summarizes our major contractual obligations at December 31,
2019:
More than More than
One Year One Year to Three Years More than
Total or Less Three Years to Five Years Five Years
(In millions)
Insurance liabilities $ 340,290 $ 21,848 $ 13,752 $ 13,424 $ 291,266
Policyholder account
balances 237,319 29,887 28,556 18,406 160,470
Payables for collateral
under securities loaned and
other transactions 26,745 26,745 - - -
Debt 31,600 1,201 2,416 4,791 23,192
Investment commitments 12,181 11,861 275 43 2
Operating leases 1,902 285 495 406 716
Other 19,353 18,966 - - 387
Total $ 669,390 $ 110,793 $ 45,494 $ 37,070 $ 476,033
Insurance Liabilities
Insurance liabilities include future policy benefits, other policy-related
balances, policyholder dividends payable and the policyholder dividend
obligation, which are all reported on the consolidated balance sheet and are
more fully described in Notes 1 and 4 of the Notes to the Consolidated Financial
Statements. The amounts presented reflect future estimated cash payments and
(i) are based on mortality, morbidity, lapse and other assumptions comparable
with our experience and expectations of future payment patterns; and
(ii) consider future premium receipts on current policies in-force. All
estimated cash payments presented are undiscounted as to interest, net of
estimated future premiums on in-force policies and gross of any reinsurance
recoverable. Payment of amounts related to policyholder dividends left on
deposit are projected based on assumptions of policyholder withdrawal activity.
Because the exact timing and amount of the ultimate policyholder dividend
obligation is subject to significant uncertainty and the amount of the
policyholder dividend obligation is based upon a long-term projection of the
performance of the closed block, we have reflected the obligation at the amount
of the liability, if any, presented on the consolidated balance sheet in the
more than five years category. Additionally, the more than five years category
includes estimated payments due for periods extending for more than 100 years.
The sum of the estimated cash flows of $340.3 billion exceeds the liability
amounts of $214.8 billion included on the consolidated balance sheet principally
due to (i) the time value of money, which accounts for a substantial portion of
the difference; (ii) differences in assumptions, most significantly mortality,
between the date the liabilities were initially established and the current
date; and (iii) liabilities related to accounting conventions, or which are not
contractually due, which are excluded.
Actual cash payments may differ significantly from the liabilities as presented
on the consolidated balance sheet and the estimated cash payments as presented
due to differences between actual experience and the assumptions used in the
establishment of these liabilities and the estimation of these cash payments.
For the majority of our insurance operations, estimated contractual obligations
for future policy benefits and policyholder account balances, as presented, are
derived from the annual asset adequacy analysis used to develop actuarial
opinions of statutory reserve adequacy for state regulatory purposes. These cash
flows are materially representative of the cash flows under GAAP. See "-
Policyholder Account Balances."
Policyholder Account Balances
See Notes 1 and 4 of the Notes to the Consolidated Financial Statements for a
description of the components of policyholder account balances. See "- Insurance
Liabilities" regarding the source and uncertainties associated with the
estimation of the contractual obligations related to future policy benefits and
policyholder account balances.
Amounts presented represent the estimated cash payments undiscounted as to
interest and including assumptions related to the receipt of future premiums and
deposits; withdrawals, including unscheduled or partial withdrawals; policy
lapses; surrender charges; annuitization; mortality; future interest credited;
policy loans and other contingent events as appropriate for the respective
product type. Such estimated cash payments are also presented net of estimated
future premiums on policies currently in-force and gross of any reinsurance
recoverable. For obligations denominated in foreign currencies, cash payments
have been estimated using current spot foreign currency rates.
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The sum of the estimated cash flows of $237.3 billion exceeds the liability amount of $192.6 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded. Payables for Collateral Under Securities Loaned and Other Transactions We have accepted cash collateral in connection with securities lending, repurchase agreements, FHLB ofBoston short-term advance agreements and derivatives. As these transactions expire within the next year and the timing of the return of the derivatives collateral is uncertain, the return of the collateral has been included in the one year or less category in the table above. We also held non-cash collateral, which is not reflected as a liability on the consolidated balance sheet, of $1.7 billion at December 31, 2019. Debt Amounts presented for debt include short-term debt, long-term debt, the collateral financing arrangement and junior subordinated debt securities, the total of which differs from the total of the corresponding amounts presented on the consolidated balance sheet as the amounts presented herein (i) do not include premiums or discounts upon issuance or purchase accounting fair value adjustments; (ii) include future interest on such obligations for the period from January 1, 2020 through maturity; and (iii) do not include long-term debt relating to CSEs at December 31, 2019 as such debt does not represent our contractual obligation. Future interest on variable rate debt was computed using prevailing rates at December 31, 2019 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was computed using the stated rate on the obligations for the period from January 1, 2020 through maturity, except with respect to junior subordinated debt which was computed using the stated rates through the scheduled redemption dates as it is our expectation that such obligations will be redeemed as scheduled. Inclusion of interest payments on junior subordinated debt securities through the final maturity dates would increase the contractual obligation by $7.7 billion. Pursuant to the collateral financing arrangement,MetLife, Inc. may be required to deliver cash or pledge collateral to the unaffiliated financial institution. See Note 14 of the Notes to the Consolidated Financial Statements. Investment Commitments To enhance the return on our investment portfolio, we commit to lend funds under mortgage loans, bank credit facilities, bridge loans and private corporate bond investments and we commit to fund partnership investments. In the table above, the timing of the funding of mortgage loans and private corporate bond investments is based on the expiration dates of the corresponding commitments. As it relates to commitments to fund partnerships and bank credit facilities, we anticipate that these amounts could be invested any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations are generally presented in the one year or less category. Commitments to fund bridge loans are short-term obligations and, as a result, are presented in the one year or less category. See Note 21 of the Notes to the Consolidated Financial Statements and "- Off-Balance Sheet Arrangements." Operating Leases As a lessee, we have various operating leases, primarily for office space. Contractual provisions exist that could increase or accelerate those lease obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to our financial position or results of operations. See Note 11 of the Notes to the Consolidated Financial Statements. Other Other obligations presented are principally comprised of amounts due under reinsurance agreements, payables related to securities purchased but not yet settled, securities sold short, accrued interest on debt obligations, estimated fair value of derivative obligations, deferred compensation arrangements, guaranty liabilities, and accruals and accounts payable due under contractual obligations, which are all reported in other liabilities on the consolidated balance sheet. If the timing of any of these other obligations is sufficiently uncertain, the amounts are included within the one year or less category. Items reported in other liabilities on the consolidated balance sheet that were excluded from the table represent accounting conventions or are not liabilities due under contractual obligations. Unrecognized tax benefits and related accrued interest totaling $295 million were excluded as the timing of payment could not be reliably determined at December 31, 2019. Separate account liabilities are excluded as they are fully funded by cash flows from the corresponding separate account assets and are set equal to the estimated fair value of separate account assets. 123
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We also enter into agreements to purchase goods and services in the normal course of business; however, such amounts are excluded as these purchase obligations were not material to our consolidated results of operations or financial position at December 31, 2019. Additionally, we have agreements in place for services we conduct, generally at cost, between subsidiaries relating to insurance, reinsurance, loans and capitalization. Intercompany transactions have been eliminated in consolidation. Intercompany transactions among insurance subsidiaries and affiliates have been approved by the appropriate insurance regulators as required.MetLife, Inc. Liquidity and Capital Management Liquidity and capital are managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and are provided by a variety of sources, including a portfolio of liquid assets, a diversified mix of short- and long-term funding sources from the wholesale financial markets and the ability to borrow through credit and committed facilities. Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and debt transactions and exposure to contingent draws onMetLife, Inc.'s liquidity.MetLife, Inc. is an active participant in the global financial markets through which it obtains a significant amount of funding. These markets, which serve as cost-effective sources of funds, are critical components ofMetLife, Inc.'s liquidity and capital management. Decisions to access these markets are based upon relative costs, prospective views of balance sheet growth and a targeted liquidity profile and capital structure. A disruption in the financial markets could limitMetLife, Inc.'s access to liquidity.MetLife, Inc.'s ability to maintain regular access to competitively priced wholesale funds is fostered by its current credit ratings from the major credit rating agencies. We view our capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and our liquidity monitoring procedures as critical to retaining such credit ratings. See "- The Company - Rating Agencies." Liquidity For a summary ofMetLife, Inc.'s liquidity, see "- The Company - Liquidity." Capital For a summary ofMetLife, Inc.'s capital, see "- The Company - Capital." See also "- The Company - Liquidity and Capital Uses - Common Stock Repurchases" for information regardingMetLife, Inc.'s common stock repurchases. Liquid Assets At December 31, 2019 and 2018,MetLife, Inc. and otherMetLife holding companies had $4.2 billion and $3.0 billion, respectively, in liquid assets. Of these amounts, $3.0 billion and $2.4 billion were held byMetLife, Inc. and $1.2 billion and $607 million were held by otherMetLife holding companies at December 31, 2019 and 2018, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include amounts received in connection with derivatives and a collateral financing arrangement. Liquid assets held in non-U.S. holding companies are generated in part through dividends from non-U.S. insurance operations. Such dividends are subject to local insurance regulatory requirements, as discussed in "- Liquidity and Capital Sources - Dividends from Subsidiaries." The cumulative earnings of certain active non-U.S. operations have historically been reinvested indefinitely in such non-U.S. operations. Following a post-Separation review of our capital needs, the Company repatriated $400 million of pre-2017 earnings in the second quarter of 2018. As a result ofU.S. Tax Reform, we expect to repatriate future foreign earnings back to theU.S. with minimal or no additionalU.S. tax. See Note 19 of the Notes to the Consolidated Financial Statements and "- Risk Factors - Regulatory and Legal Risks - Changes in Tax Laws or Interpretations of Such Laws Could Reduce Our Earnings and Materially Impact Our Operations by Increasing Our Corporate Taxes and Making Some of Our Products Less Attractive to Consumers." See "- Executive Summary - Consolidated Company Outlook," for the targeted level of liquid assets at the holding companies. 124
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MetLife, Inc. and OtherMetLife Holding Companies Sources and Uses of Liquid Assets and Sources and Uses of Liquid Assets included in Free Cash FlowMetLife, Inc.'s sources and uses of liquid assets, as well as sources and uses of liquid assets included in free cash flow are summarized as follows. Year Ended December 31, 2019 Year Ended December 31, 2018 Sources and Uses of Liquid Sources and Assets Uses of Liquid Sources and Included in Assets Included Uses of Free Cash Sources and Uses in Free Cash Liquid Assets Flow of Liquid Assets Flow (In millions)MetLife, Inc. (Parent Company Only) Sources: Dividends and returns of capital from subsidiaries (1) $ 4,800 $ 4,800 $ 7,454 $ 7,454 Long-term debt issued (2) 1,373 494 - - Repayments on and (issuances of) loans to subsidiaries and related interest, net (3) - - - - Preferred stock issued - - 1,274 - Other, net (4) 320 196 - - Total sources 6,493 5,490 8,728 7,454 Uses: Capital contributions to subsidiaries (5) 75 75 767 767 Long-term debt repaid - unaffiliated 877 - 1,759 - Interest paid on debt and financing arrangements - unaffiliated 817 817 964 964 Dividends on common stock 1,643 - 1,678 -Treasury stock acquired in connection with share repurchases 2,285 - 3,992 - Dividends on preferred stock 178 178 141 141 Issuances of and (repayments on) loans to subsidiaries and related interest, net (3) 44 44 63 63 Other, net (4) - - 1,029 1,083 Total uses 5,919 1,114 10,393 3,018 Net increase (decrease) in liquid assets,MetLife, Inc. (Parent Company Only) 574 (1,665 ) Liquid assets, beginning of year 2,430
4,095
Liquid assets, end of year $ 3,004 $ 2,430 Free Cash Flow,MetLife, Inc. (Parent Company Only) 4,376 4,436 Net cash provided by operating activities,MetLife, Inc. (Parent Company Only) $ 4,177
$ 5,494
OtherMetLife Holding Companies Sources: Dividends and returns of capital from subsidiaries $ 2,199 $ 2,199 $ 2,836 $ 2,836 Capital contributions fromMetLife, Inc. - - - - Total sources 2,199 2,199 2,836 2,836
Uses:
Capital contributions to subsidiaries 67 67 57 57 Repayments on and (issuance of) loans to subsidiaries and affiliates and related interest, net 16 16 6 6 Dividends and returns of capital toMetLife, Inc. 1,100 1,100 3,200 3,200 Other, net 444 444 603 603 Total uses 1,627 1,627 3,866 3,866 Net increase (decrease) in liquid assets, Other MetLife Holding Companies 572 (1,030 ) Liquid assets, beginning of year 613
1,643
Liquid assets, end of year $ 1,185 $ 613 Free Cash Flow, OtherMetLife Holding Companies 572 (1,030 ) Net increase (decrease) in liquid assets, All Holding Companies $ 1,146 $ (2,695 ) Free Cash Flow, All Holding Companies (6) (7) $ 4,948 $ 3,406 __________________ 125
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(1) Dividends and returns of capital to
$4.3 billion from operating subsidiaries and $1.1 billion and $3.2 billion
from other
and 2018, respectively.
(2) Included in free cash flow is the portion of long-term debt issued that
represents incremental debt to be at or below target leverage ratios.
(3) See
included in Schedule II of the Financial Statement Schedules for information
regarding the source of liquid assets from receipts on loans to subsidiaries
(excluding interest) and the use of liquid assets related to the issuances
of loans to subsidiaries (excluding interest).
(4) Other, net includes $155 million and ($877) million of net receipts
(payments) by
agreement and tax payments to tax agencies for the years ended December 31,
2019 and 2018, respectively.
(5) Amounts to fund business acquisitions were $0 (included in capital
contributions to subsidiaries) at both years ended December 31, 2019 and
2018.
(6) In 2018, $268 million of Separation-related items (comprised of certain
Separation-related inflows primarily related to reinsurance benefit from
Brighthouse) were included in free cash flow, which increased our holding
companies' liquid assets, as well as our free cash flow ratio. Excluding
these Separation-related items, adjusted free cash flow would be $3.1
billion for the year ended December 31, 2018.
(7) See "- Non-GAAP and Other Financial Disclosures" for the reconciliation of
net cash provided by operating activities of
of all holding companies.
Sources and Uses of Liquid Assets ofMetLife, Inc. The primary sources ofMetLife, Inc.'s liquid assets are dividends and returns of capital from subsidiaries, issuances of long-term debt, issuances of common and preferred stock, and net receipts from subsidiaries under a tax sharing agreement.MetLife, Inc.'s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. See "- Liquidity and Capital Sources - Dividends from Subsidiaries." The primary uses ofMetLife, Inc.'s liquid assets are principal and interest payments on long-term debt, dividends on and repurchases of common and preferred stock, capital contributions to subsidiaries, funding of business acquisitions, income taxes and operating expenses.MetLife, Inc. is party to various capital support commitments and guarantees with certain of its subsidiaries. See "- Liquidity and Capital Uses - Support Agreements." In addition,MetLife, Inc. issues loans to subsidiaries or subsidiaries issue loans toMetLife, Inc. Accordingly, changes inMetLife, Inc. liquid assets include issuances of loans to subsidiaries, proceeds of loans from subsidiaries and the related repayment of principal and payment of interest on such loans. See "- Liquidity and Capital Sources - Affiliated Long-term Debt" and "- Liquidity and Capital Uses - Affiliated Capital and Debt Transactions." Sources and Uses of Liquid Assets of OtherMetLife Holding Companies The primary sources of liquid assets of otherMetLife holding companies are dividends, returns of capital and remittances from their subsidiaries and branches, principally non-U.S. insurance companies; capital contributions received; receipts of principal and interest on loans to subsidiaries and affiliates and borrowings from subsidiaries and affiliates.MetLife, Inc.'s non-U.S. operations are subject to regulatory restrictions on the payment of dividends imposed by local regulators. See "- Liquidity and Capital Sources - Dividends from Subsidiaries." The primary uses of liquid assets of otherMetLife holding companies are capital contributions paid to their subsidiaries and branches, principally non-U.S. insurance companies; loans to subsidiaries and affiliates; principal and interest paid on loans from subsidiaries and affiliates; dividends and returns of capital toMetLife, Inc. and the following items, which are reported within other, net: business acquisitions; and operating expenses. There were no uses of liquid assets of otherMetLife holding companies to fund business acquisitions during the years ended December 31, 2019 or 2018. Liquidity and Capital Sources In addition to the description of liquidity and capital sources in "- The Company - Summary of the Company's Primary Sources and Uses of Liquidity and Capital" and "- The Company - Liquidity and Capital Sources,"MetLife, Inc.'s primary sources of liquidity and capital are set forth below. 126
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Dividends from SubsidiariesMetLife, Inc. relies, in part, on dividends from its subsidiaries to meet its cash requirements.MetLife, Inc.'s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. See Note 16 of the Notes to the Consolidated Financial Statements. The dividend limitation forU.S. insurance subsidiaries is generally based on the surplus to policyholders at the end of the immediately preceding calendar year and statutory net gain from operations for the immediately preceding calendar year. Statutory accounting practices, as prescribed by insurance regulators of various states in which we conduct business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of DAC, certain deferred income tax, required investment liabilities, statutory reserve calculation assumptions, goodwill and surplus notes. The table below sets forth the dividends permitted to be paid byMetLife, Inc.'s primaryU.S. insurance subsidiaries without insurance regulatory approval and the actual dividends paid: 2020 2019 2018 Permitted Without Permitted Without Permitted Without Company Approval (1) Paid (2) Approval (1) Paid (2) Approval (1) (In millions) Metropolitan Life Insurance Company $ 3,272 $ 3,065 $ 3,065 $ 3,736 (3) $ 3,075 American Life Insurance Company $ 51 $ 1,100 $ - $ 3,200 $ -
Metropolitan Property and Casualty Insurance Company $ 114 $ 430 $ 171 $ 233 $ 125Metropolitan Tower Life Insurance Company (4) $ 149 $ - $ 154 $ 191 (4) $ 73 General American Life Insurance Company (4) N/A $ - N/A $ - $ 118 __________________
(1) Reflects dividend amounts that may be paid during the relevant year without
prior regulatory approval ("ordinary dividends"). However, because dividend
tests may be based on dividends previously paid over rolling 12-month
periods, if paid before a specified date during such year, some or all of
such dividends may require regulatory approval.
(2) Reflects all amounts paid, including those where regulatory approval was
obtained as required ("extraordinary dividends").
(3) Represents ordinary dividends of $3.0 billion and an extraordinary dividend
of $705 million. The extraordinary dividend was paid in cash with proceeds
from the sale to an affiliate of certain property, equipment, leasehold
improvements and computer software that were non-admitted by MLIC for
statutory accounting purposes. The affiliate received a capital contribution
in cash from
(4) In April 2018, MTL merged with GALIC ("MTL Merger"). The surviving entity of
the merger was MTL, which re-domesticated from
immediately prior to the merger. The total dividends paid of $191 million is
equal to the sum of the individual 2018 ordinary dividends that MTL and
GALIC would each have been permitted to pay computed on a stand-alone basis
if the MTL Merger had not occurred.
In addition to the amounts presented in the table above, for the years ended December 31, 2019 and 2018,MetLife, Inc. also received cash payments of $195 million and $7 million, respectively, representing dividends from certain other subsidiaries. Additionally, for the years ended December 31, 2019 and 2018,MetLife, Inc. received cash returns of capital of $10 million and $87 million. The dividend capacity of our non-U.S. operations is subject to similar restrictions established by the local regulators. The non-U.S. regulatory regimes also commonly limit dividend payments to the parent company to a portion of the subsidiary's prior year statutory income, as determined by the local accounting principles. The regulators of our non-U.S. operations, including the FSA, may also limit or not permit profit repatriations or other transfers of funds to theU.S. if such transfers are deemed to be detrimental to the solvency or financial strength of the non-U.S. operations, or for other reasons. Most of our non-U.S. subsidiaries are second tier subsidiaries which are owned by various non-U.S. holding companies. The capital and rating considerations applicable to our first tier subsidiaries may also impact the dividend flow intoMetLife, Inc. We proactively manage target and excess capital levels and dividend flows and forecast local capital positions as part of the financial planning cycle. The dividend capacity of certainU.S. and non-U.S. subsidiaries is also subject to business targets in excess of the minimum capital necessary to maintain the desired rating or level of financial strength in the relevant market. See "Risk Factors - Capital Risks - As a Holding Company,MetLife, Inc. Depends on the Ability of Its Subsidiaries to Pay Dividends, a Major Component of Holding Company Free Cash Flow" and Note 16 of the Notes to the Consolidated Financial Statements. 127
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Affiliated Long-term Debt See "Senior Notes - Affiliated" in Note 4 of the Notes to theMetLife, Inc. (Parent Company Only) Condensed Financial Information included in Schedule II of the Financial Statement Schedules for information on affiliated long-term debt. Collateral Financing Arrangement and Junior Subordinated Debt Securities For information onMetLife, Inc.'s collateral financing arrangement and junior subordinated debt securities, see Notes 14 and 15 of the Notes to the Consolidated Financial Statements, respectively. Credit and Committed Facilities See "- The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities," as well as Note 13 of the Notes to the Consolidated Financial Statements, for further information regarding the Company's unsecured revolving credit facility and certain committed facilities. Long-term Debt Outstanding The following table summarizes the outstanding long-term debt ofMetLife, Inc. at: December 31, 2019 2018 (In millions)
Long-term debt - unaffiliated $ 12,379 $ 11,844 Long-term debt - affiliated (1) $ 1,976 $ 1,957 Junior subordinated debt securities $ 2,458 $ 2,456
__________________
(1) In July 2019, a ¥53.3 billion 1.448% senior note issued to MLIC matured and
was refinanced with a ¥37.3 billion 1.602% senior note due July 2023 and a
¥16.0 billion 1.637% senior note due July 2026 issued to MLIC. In October
2019, a ¥26.5 billion 1.721% senior note issued to MLIC matured and was
refinanced with a ¥26.5 billion 1.81% senior note due October 2029 issued to
MLIC.
Debt and Facility Covenants
Certain of MetLife, Inc.'s debt instruments and committed facilities, as well as
its unsecured revolving credit facility, contain various administrative,
reporting, legal and financial covenants. MetLife, Inc. believes it was in
compliance with all applicable financial covenants at December 31, 2019.
Liquidity and Capital Uses
The primary uses of liquidity of MetLife, Inc. include debt service, cash
dividends on common and preferred stock, capital contributions to subsidiaries,
common stock, preferred stock and debt repurchases, payment of general operating
expenses and acquisitions. Based on our analysis and comparison of our current
and future cash inflows from the dividends we receive from subsidiaries that are
permitted to be paid without prior insurance regulatory approval, our investment
portfolio and other cash flows and anticipated access to the capital markets, we
believe there will be sufficient liquidity and capital to enable MetLife, Inc.
to make payments on debt, pay cash dividends on its common and preferred stock,
contribute capital to its subsidiaries, repurchase its common stock and certain
of its other securities, pay all general operating expenses and meet its cash
needs under current market conditions and reasonably possible stress scenarios.
In addition to the description of liquidity and capital uses in "- The Company -
Liquidity and Capital Uses" and "- The Company - Contractual Obligations,"
MetLife, Inc.'s primary uses of liquidity and capital are set forth below.
Affiliated Capital and Debt Transactions
For the years ended December 31, 2019 and 2018, MetLife, Inc. invested a net
amount of $89 million and $778 million, respectively, in various subsidiaries.
MetLife, Inc. lends funds, as necessary, through credit agreements or otherwise
to its subsidiaries and affiliates, some of which are regulated, to meet their
capital requirements or to provide liquidity. MetLife, Inc. had loans to
subsidiaries outstanding of $100 million at both December 31, 2019 and 2018.
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Debt Repayments For information onMetLife, Inc.'s debt repayments, see "- The Company - Liquidity and Capital Uses - Debt Repayments."MetLife, Inc. intends to repay or refinance, in whole or in part, all the debt that is due in 2020. Maturities of Senior Notes The following table summarizesMetLife, Inc.'s outstanding senior notes by year of maturity, excluding any premium or discount and unamortized issuance costs, at December 31, 2019: Year of Maturity Principal Interest Rate (In millions) Unaffiliated: 2022 $ 500 3.05% 2023 $ 1,000 4.37% 2024 $ 1,000 3.60% 2024 $ 464 5.38% 2025 - 2046 $ 9,496 Ranging from 0.50% - 6.50% Affiliated: 2020 $ 244 0.82% 2021 $ 495 2.97% 2021 $ 503 3.14% 2023 $ 343 1.60% 2026-2029 $ 391 Ranging from 1.64% - 1.81% Support AgreementsMetLife, Inc. is party to various capital support commitments and guarantees with certain of its subsidiaries. See Note 5 of the Notes to theMetLife, Inc. (Parent Company Only) Condensed Financial Information included in Schedule II of the Financial Statement Schedules. Adoption of New Accounting Pronouncements See Note 1 of the Notes to the Consolidated Financial Statements. Future Adoption of New Accounting Pronouncements See Note 1 of the Notes to the Consolidated Financial Statements. Non-GAAP and Other Financial Disclosures In this report, the Company presents certain measures of its performance on a consolidated and segment basis 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. Segment-specific financial measures are calculated using only the portion of consolidated results attributable to that specific segment. 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) adjusted earnings (i) net income (loss) (ii) adjusted earnings available to (ii) net income (loss) available to common shareholders MetLife, Inc.'s common shareholders (iii) (iii)MetLife, Inc. (parent company only) free cash flow of all holding net cash provided companies by (used in) operating
activities
(iv) net investment income, as reported (iv) net investment income
on an adjusted basis
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Any of these financial measures shown on a constant currency basis reflect the
impact of changes in foreign currency exchange rates and are calculated using
the average foreign currency exchange rates for the most recent period and
applied to the comparable prior period ("constant currency basis").
Reconciliations of these non-GAAP financial measures to the most directly
comparable historical GAAP financial measures are included in the results of
operations, see "- Results of Operations." Reconciliations of these non-GAAP
measures to the most directly comparable GAAP measures are not accessible on a
forward-looking basis because we believe it is not possible without unreasonable
effort 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 non-GAAP and other financial measures discussed in this
report may differ from those used by other companies.
Adjusted earnings and related measures:
• adjusted earnings;
• adjusted earnings available to common shareholders; and
• adjusted earnings available to common shareholders on a constant currency
basis.
These measures are used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings and components of, or other financial measures based on, adjusted earnings are also our GAAP measures of segment performance. Adjusted earnings and other financial measures based on adjusted earnings are also the measures by which senior management's and many other employees' performance is evaluated for the purposes of determining their compensation under applicable compensation plans. Adjusted earnings and other financial measures based on adjusted earnings allow analysis of our performance relative to our business plan and facilitate comparisons to industry results. Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax. Adjusted loss is defined as negative adjusted earnings. Adjusted earnings available to common shareholders is defined as adjusted earnings less preferred stock dividends. For information relating to adjusted revenues and adjusted expenses, see "Financial Measures and Segment Accounting Policies" in Note 2 of the Notes to the Consolidated Financial Statements. Return on equity, allocated equity and related measures: •MetLife, Inc.'s common stockholders' equity, excluding AOCI other than
FCTA, is defined as
the net unrealized investment gains (losses) and defined benefit plans
adjustment components of AOCI, net of income tax.
• Adjusted return on
as adjusted earnings available to common shareholders divided by
Inc.'s average common stockholders' equity.
• Adjusted return on
AOCI other than FCTA is defined as adjusted earnings available to common
shareholders divided by MetLife, Inc.'s average common stockholders'
equity, excluding AOCI other than FCTA.
• Allocated equity is the portion of
equity that management allocates to each of its segments and sub-segments
based on local capital requirements and economic capital. See "- Economic
Capital." Allocated equity excludes the impact of AOCI other than FCTA.
The above measures represent a level of equity consistent with the view that, in the ordinary course of business, we do not plan to sell most investments for the sole purpose of realizing gains or losses. Also, refer to the utilization of adjusted earnings and components of, or other financial measures based on, adjusted earnings mentioned above. Expense ratio and direct expense ratio: • Expense ratio: other expenses, net of capitalization of DAC, divided by
premiums, fees and other revenues.
• Direct expense ratio: direct expenses, on an adjusted basis, divided by
adjusted premiums, fees and other revenues. Direct expenses are comprised
of employee-related costs, third party staffing costs, and general and
administrative expenses.
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• Direct expense ratio, excluding total notable items related to direct
expenses and pension risk transfers: direct expenses, on an adjusted
basis, excluding total notable items related to direct expenses, divided
by adjusted premiums, fees and other revenues, excluding pension risk
transfers.
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. Further, sales statistics for our
• Near-term represents one to three years.
• Asymmetrical and non-economic accounting refers to: (i) the portion of net
derivative gains (losses) on embedded derivatives attributable to the
inclusion of our credit spreads in the liability valuations, (ii) hedging
activity that generates net derivative gains (losses) and creates
fluctuations in net income because hedge accounting cannot be achieved and
the item being hedged does not a have an offsetting gain or loss
recognized in earnings, (iii) inflation-indexed benefit adjustments
associated with contracts backed by inflation-indexed investments and
amounts associated with periodic crediting rate adjustments based on the
total return of a contractually referenced pool of assets and other pass
through adjustments, and (iv) impact of changes in foreign currency
exchange rates on the re-measurement of foreign denominated unhedged
funding agreements and financing transactions to the U.S. dollar and the
re-measurement of certain liabilities from non-functional currencies to
functional currencies. We believe that excluding the impact ofasymmetrical and non-economic accounting from total GAAP results enhances
investor understanding of our performance by disclosing how these
accounting practices affect reported GAAP results.
• Notable items represent a positive (negative) impact to adjusted earnings
available to common shareholders. Notable items reflect the unexpected
impact of events that affect
that MetLife could not anticipate when it devised its Business Plan.
Notable items also include certain items regardless of the extent
anticipated in the Business Plan, to help investors have a better
understanding of MetLife 's results and to evaluate and forecast those
results.
• The Company uses a measure of free cash flow to facilitate an
understanding of its ability to generate cash for reinvestment into itsbusinesses or use in non-mandatory capital actions. The Company defines
free cash flow as the sum of cash available at
from dividends from operating subsidiaries, expenses and other net flows
of the holding companies (including capital contributions to
subsidiaries), and net contributions from debt to be at or below target
leverage ratios. This measure of free cash flow is prior to capital
actions, such as common stock dividends and repurchases, debt reduction
and mergers and acquisitions. Free cash flow should not be viewed as a
substitute for net cash provided by (used in) operating activities
calculated in accordance with GAAP. The free cash flow ratio is typically
expressed as a percentage of annual adjusted earnings available to common
shareholders. A reconciliation of net cash provided by operating
activities of
holding companies for the years ended December 31, 2019 and 2018 is
provided below.
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Reconciliation of Net Cash Provided by Operating Activities ofMetLife, Inc. to Free Cash Flow of All Holding Companies Years Ended December 31, 2019 2018 (In millions)
$ 4,177 $ 5,494
Adjustments from net cash provided by operating activities
to free cash flow:
Add: Incremental debt to be at or below target leverage
ratios 494 -
Add: Capital contributions to subsidiaries (75 ) (767 )
Add: Returns of capital from subsidiaries 10 87
Add: Investment portfolio and derivatives changes and other, net
(230 ) (378 )
MetLife, Inc. (parent company only) free cash flow 4,376 4,436
OtherMetLife, Inc. holding companies: Add: Dividends and returns of capital from subsidiaries 2,199
2,836
Add: Capital contributions to subsidiaries (67 ) (57 ) Add: Repayments on and (issuances of) loans to subsidiaries, net (16 ) (6 ) Add: Other expenses (720 ) (771 ) Add: Dividends and returns of capital toMetLife, Inc. (1,100 )
(3,200 ) Add: Investment portfolio and derivative changes and other, net
276 168
Total other
(1,030 )
Free cash flow of all holding companies (1) $ 4,948 $ 3,406
$ 4,177 $ 5,494
Consolidated net income (loss) available to MetLife,
Inc.'s common
shareholders (1) $ 5,721 $ 4,982
Ratio of net cash provided by operating activities (parent
company only) to
consolidated net income (loss) available to MetLife,
Inc.'s common
shareholders (1) (2) 73 % 110 %
Ratio of free cash flow to adjusted earnings available to
common shareholders:
Free cash flow of all holding companies (3) $ 4,948 $ 3,406 Consolidated adjusted earnings available to common shareholders (3)
$ 5,767 $ 5,461
Ratio of free cash flow of all holding companies to
consolidated adjusted
earnings available to common shareholders (3) 86 % 62 %
__________________
(1) Consolidated net income (loss) available to
shareholders for the year ended 2018 includes Separation-related costs of
$80 million, net of income tax. Excluding this amount from the denominator
of the ratio, this ratio, as adjusted, would be 109%. See "- Liquidity and
Capital Resources - MetLife, Inc. - Liquid Assets - MetLife, Inc. and
Other MetLife Holding Companies Sources and Uses of Liquid Assets and
Sources and Uses of Liquid Assets included in Free Cash Flow."
(2) Including the free cash flow of other
$572 million and ($1.0) billion for the years ended December 31, 2019 and
2018, respectively, in the numerator of the ratio, this ratio, as
adjusted, would be 83% and 90%, respectively. Including the free cash flow
of other
excluding the Separation-related costs from the denominator of the ratio,
this ratio, as adjusted, would be 88% for the year ended December 31,
2018.
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(3) i) Consolidated adjusted earnings available to common shareholders for the
year ended December 31, 2019, was positively impacted by notable items,
primarily related to tax related adjustments, of $539 million, net of
income tax, partially offset by expense initiative costs of $332 million,
net of income tax. Excluding such notable items impacting consolidated
adjusted earnings available to common shareholders from the denominator of
the ratio, the adjusted free cash flow ratio for the year ended December
31, 2019, would be 87%.
ii) For the year ended December 31, 2018, $268 million of Separation-related items (comprised of certain Separation-related inflows primarily related to reinsurance benefit from Brighthouse) were included in free cash flow, which increased our holding companies' liquid assets, as well as our free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $3.1 billion for the year ended December 31, 2018. Consolidated adjusted earnings available to common shareholders for 2018 was negatively impacted by notable items, primarily related to expense initiative costs of $284 million, net of income tax, partially offset by tax adjustments of $247 million, net of income tax. Excluding the Separation-related items, which increased free cash flow, from the numerator of the ratio and excluding such notable items negatively impacting consolidated adjusted earnings available to common shareholders from the denominator of the ratio, the adjusted free cash flow ratio for the year ended December 31, 2018, would be 56%. Subsequent Events See Note 23 of the Notes to the Consolidated Financial Statements.
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