-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GfQIdtbs+lthX2j7tauDuiuJ7Y5Pu3PiW0Rn5A05ny3UR/BwwXq21M306ITp8IE9 fz5B2t4PTKu6CgPjUiY2eg== 0000950123-00-002929.txt : 20000331 0000950123-00-002929.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950123-00-002929 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METLIFE INC CENTRAL INDEX KEY: 0001099219 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 134075851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-91517 FILM NUMBER: 584011 BUSINESS ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000 REGISTRATION NO. 333-91517 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ METLIFE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6719 13-4075851 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ONE MADISON AVENUE NEW YORK, NEW YORK 10010-3690 (212) 578-2211 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) GARY A. BELLER, ESQ. SENIOR EXECUTIVE VICE-PRESIDENT AND GENERAL COUNSEL METLIFE, INC. ONE MADISON AVENUE NEW YORK, NY 10010-3690 (212) 578-2211 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ WITH COPIES TO: WOLCOTT B. DUNHAM, JR., ESQ. PHYLLIS G. KORFF, ESQ. JAMES C. SCOVILLE, ESQ. SUSAN J. SUTHERLAND, ESQ. DEBEVOISE & PLIMPTON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 875 THIRD AVENUE FOUR TIMES SQUARE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10036 (212) 909-6000 (212) 735-3000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Registration Statement contains two forms of Prospectus: (i) one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and (ii) the other to be used in a concurrent offering outside the United States and Canada (the "International Prospectus"). The two prospectuses are identical in all material respects except for the front cover pages. The form of U.S. Prospectus is included herein and is followed by the alternate cover page to be used in the International Prospectus. The alternate cover page for the International Prospectus included herein is labeled "Alternate Page for International Prospectus." Final forms of each Prospectus will be filed with the Securities and Exchange Commission under Rule 424(b). 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [MetLife SNOOPY LOGO] SUBJECT TO COMPLETION. DATED MARCH 29, 2000. 179,000,000 SHARES [METLIFE LOGO] COMMON STOCK ------------------------ This is an initial public offering of shares of common stock of MetLife, Inc. The offering is being made in connection with the reorganization of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process known as a demutualization. 152,150,000 shares of common stock are initially being offered in the United States and Canada by the U.S. underwriters and 26,850,000 shares are initially being concurrently offered outside the United States and Canada by the international underwriters. The offering price and underwriting discount for both offerings are identical. In addition to these shares, in connection with the demutualization we will issue 493,476,118 shares of our common stock to a trust for the benefit of eligible policyholders of Metropolitan Life Insurance Company. In addition, we expect to issue concurrently with this offering up to 73,000,000 shares of our common stock to Banco Santander Central Hispano, S.A. and Credit Suisse Group or their respective affiliates in private placements at a price per share equal to the initial public offering price. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price per share will be between $13.00 and $15.00. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "MET", subject to official notice of issuance. Concurrently with this offering, we and a trust we own are offering 20,000,000 % equity security units for an aggregate offering of $1 billion, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full, by means of a separate prospectus. Each unit consists of (a) a contract to purchase shares of our common stock and (b) a % capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 19.
PER SHARE TOTAL --------- ----- Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to MetLife, Inc. ................ $ $
To the extent that the underwriters sell more than 179,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 26,850,000 shares from us at the initial public offering price less the underwriting discount. Delivery of the shares of common stock will be made on or about , 2000. None of the Securities and Exchange Commission, any state securities commission, the New York Superintendent of Insurance or any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Joint Bookrunners CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC DONALDSON, LUFKIN AND JENRETTE LEHMAN BROTHERS MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY CONNING & COMPANY FOX-PITT, KELTON J.P. MORGAN & CO. SANTANDER INVESTMENT UTENDAHL CAPITAL PARTNERS, L.P. WARBURG DILLON READ LLC Prospectus dated , 2000. 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 19 Use of Proceeds............................................. 33 Dividend Policy............................................. 34 Capitalization.............................................. 35 Selected Financial Information.............................. 36 Pro Forma Consolidated Financial Information................ 43 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 51 The Demutualization......................................... 88 Business.................................................... 101 Management.................................................. 178 Ownership of Common Stock................................... 194 Common Stock Eligible for Future Sale....................... 196 Description of the Equity Security Units.................... 198 Description of Capital Stock................................ 201 Underwriting................................................ 208 Validity of Common Stock.................................... 213 Experts..................................................... 213 Additional Information...................................... 213 Glossary.................................................... G-1 Index to Financial Statements............................... F-1 Opinion of Consulting Actuary............................... A-1
------------------------- Some statements contained in this prospectus, including those containing the words "believes", "expects", "intends", "estimates", "assumes" and "anticipates", are forward looking. Actual results may differ materially from those suggested by the forward looking statements for various reasons, including those discussed under "Risk Factors". You should rely only on the information contained or referred to in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate as of the date of this document. DEALER PROSPECTUS DELIVERY OBLIGATION Until , 2000 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. 2 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. As a result, it does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the notes to those statements. Unless otherwise stated or the context otherwise requires, references in this prospectus to "we", "our", "us" or "MetLife" refer to MetLife, Inc., together with Metropolitan Life Insurance Company, and their respective direct and indirect subsidiaries. All financial information contained in this prospectus, unless otherwise indicated, has been derived from the consolidated financial statements of Metropolitan Life Insurance Company and its subsidiaries and is presented in conformity with generally accepted accounting principles ("GAAP"). The Glossary beginning on page G-1 of this prospectus includes definitions of certain insurance terms. Each term defined in the Glossary is printed in boldface the first time it appears in this prospectus. Information regarding the number of shares of MetLife, Inc. common stock to be outstanding after the initial public offering, the planned private placements and the concurrent offering of equity security units does not include shares of common stock issuable upon the settlement of the purchase contracts that are a part of the units. We are a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. We currently provide individual insurance, ANNUITIES and investment products to approximately nine million households, or one of every eleven households in the U.S. We also provide group insurance and retirement and savings products and services to approximately 64,000 corporations and other institutions, including 86 of the FORTUNE 100 largest companies. Our institutional clients have approximately 33 million employees and members. We are a leader in each of our major U.S. businesses. We are: - the largest life insurer, with approximately $1.7 trillion of life insurance IN FORCE at December 31, 1999; - the largest individual life insurer, with $11.5 billion in individual life insurance and annuity PREMIUMS and deposits in 1999; - the largest group life insurer, with $5.3 billion of premiums in 1999; - a leading group non-medical health insurer, including the second largest group disability insurer, the second largest commercial dental insurer and the largest group long-term care insurer; - a leading issuer of individual variable life insurance and variable annuities; and - a leading asset manager, with $373.6 billion of total assets under management at December 31, 1999. We believe that our unparalleled franchises and brand names uniquely position us to be the preeminent provider of insurance and financial services in the U.S. businesses in which we compete. We are one of the largest and best capitalized insurance and financial services companies in the U.S. Our revenues for 1999 were $25.4 billion and our net income was $617 million. We had total consolidated assets of $225.2 billion and equity of $13.7 billion at December 31, 1999. We are organized into five major business segments: Individual Business, Institutional Business, Asset Management, Auto & Home and International. INDIVIDUAL BUSINESS. Individual Business offers a wide variety of protection and asset accumulation products for individuals, including life insurance and annuities. Individual Business also distributes products provided by our other business segments, including mutual funds and auto and homeowners insurance. Reflecting overall trends in the insurance 3 6 industry, sales of our traditional life insurance products have declined in recent years, while FIRST-YEAR PREMIUMS AND DEPOSITS from variable life insurance products have grown at a compound annual rate of 33.1% for the five years ended 1999 and represented 67.4% of our total life insurance sales for Individual Business in 1999. Our principal distribution channels are the MetLife career agency and the New England Financial general agency distribution systems and, after our recent acquisition of GenAmerica Corporation, GenAmerica's independent general agency system. We also have dedicated sales forces that market to non-profit organizations and banks and their customers. In total, we had approximately 11,000 active sales representatives in 1999. In addition to these distribution channels, we are increasing the distribution of our products through independent insurance agents and registered representatives. We believe our ability to effectively manage these multiple distribution channels represents a significant competitive advantage. Individual Business had $11.1 billion of revenues, or 43.5% of our total revenues, and $565 million of operating income in 1999. INSTITUTIONAL BUSINESS. Institutional Business offers a broad range of group insurance and retirement and savings products and services. Our group insurance products and services include group life insurance and non-medical health insurance such as short- and long-term disability, long-term care and dental insurance, as well as other related products and services. Our group insurance premiums, fees and other income, which totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0% for the three years ended 1999. Our retirement and savings products and services include administrative services sold to sponsors of 401(k) and other defined contribution plans, guaranteed interest products and separate account products. We distribute our Institutional Business products through a sales force of approximately 300 MetLife employees that is organized by both customer size and product. In total, we have approximately 64,000 institutional customers, including 86 of the FORTUNE 100 largest companies. Institutional Business had $10.4 billion of revenues, or 40.8% of our total revenues, and $585 million of operating income in 1999. ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street Research & Management Company, and our controlling interest in Nvest Companies, L.P. and its affiliates, Asset Management provides a broad variety of asset management products and services primarily to third-party institutions and individuals. Our Asset Management segment managed $189.8 billion of our total assets under management at December 31, 1999, including $54.9 billion of assets in mutual funds and in SEPARATE ACCOUNTS supporting individual variable life and annuity products. For the five years ended 1999, this segment's assets under management grew at a compound annual rate of 14.2%. We distribute our asset management products through several distribution channels, including State Street Research's and Nvest's dedicated sales forces, and also through our Individual Business and Institutional Business distribution channels. Asset Management had $0.9 billion of revenues, or 3.5% of our total revenues, and $51 million of operating income in 1999. AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance and other personal property and casualty insurance products. We sell these products directly to employees through employer-sponsored programs, as well as through a variety of retail distribution channels. These channels include the MetLife career agency system, approximately 6,000 independent agents and brokers, which includes those of The St. Paul Companies acquired in 1999, and approximately 385 Auto & Home specialists. We are the leading provider of personal auto and homeowners insurance through employer-sponsored programs in the U.S. Net premiums earned from products sold through employer-sponsored programs have grown at a 14.3% compound annual rate for the five years ended 1999. On September 30, 1999, our Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion, substantially increasing the size of this segment's business, making us the eleventh largest personal property and casualty insurer in the U.S. 4 7 based on 1998 net premiums written. See "Business -- Auto & Home". Auto & Home had $1.9 billion of revenues, or 7.4% of our total revenues, and $54 million of operating income in 1999. INTERNATIONAL. We have international insurance operations in ten countries, with a focus on the Asia/Pacific region, Latin America and selected European countries. Our International segment offers life insurance, accident and health insurance, annuities and retirement and savings products and services to both individuals and groups, and auto and homeowners coverage to individuals. Assets of our International segment, as adjusted for the recent divestitures of a substantial portion of our U.K. and Canadian operations, have grown at a compound annual rate of 21.4% for the five years ended 1999. International had $0.8 billion of revenues, or 3.1% of our total revenues, and $18 million of operating income in 1999. On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in cash. GenAmerica is a leading provider of life insurance, life reinsurance and other financial services to affluent individuals, businesses, insurers and financial institutions. GenAmerica's products and services include individual life insurance and annuities, life reinsurance, institutional asset management, group life and health insurance and administration, pension benefits administration and software products and technology services for the life insurance industry. GenAmerica distributes its products through approximately 625 agents in its independent general agency system and approximately 1,575 active independent insurance agents and brokers. GenAmerica is a holding company which owns General American Life Insurance Company. GenAmerica's subsidiaries also include Reinsurance Group of America, Inc., one of the largest life reinsurers in the United States, and Conning Corporation, a manager of investments for General American Life and other insurance company and pension clients. Upon completion of the acquisition of GenAmerica, we owned approximately 58% and 61% of the outstanding common stock of Reinsurance Group of America (also known as RGA) and Conning, respectively. Both RGA and Conning are publicly-traded. On March 9, 2000, we announced that we had agreed to acquire all of the outstanding shares of Conning common stock not already owned by us for $12.50 per share in cash, or approximately $65 million. The Conning acquisition is subject to customary terms and conditions, including regulatory approvals. Subsequent to January 6, 2000, the date on which we acquired GenAmerica, GenAmerica's businesses will be incorporated into our business segments as applicable, except for RGA, which will be separately designated as our Reinsurance segment. STRATEGY As we become a public company, we are committed to providing superior stockholder value through the following growth strategies: - - INCREASING OUR REVENUES AND ASSETS UNDER MANAGEMENT BY: Building on widely recognized brand names. We believe that the MetLife name is one of the most well-known brand names in the U.S. and one of our most valuable assets. We have also been successful in utilizing additional brand names, such as New England Financial, Security First Group and State Street Research, for specific market segments. We believe our recent acquisition of GenAmerica and RGA further strengthens our brand portfolio. Capitalizing on large customer base. We intend to enhance our relationships with our existing individual customers by offering a broad array of products, improving the training of our agents and developing direct marketing programs in partnership with our agency sales force and increasing sales to our institutional customers by expanding the offering of voluntary, or employee-paid, products. Expanding multiple distribution channels. We believe that our development and successful management of multiple distribution channels represent a significant competitive 5 8 advantage. We intend to both grow our core distribution channels and to continue to build complementary distribution channels for sales of our products. Continuing to introduce innovative and competitive products. We intend to be at the forefront of the insurance and financial services industries in offering innovative and competitive products to our customers. Recent initiatives include new or revised products covering a substantial portion of our individual product offerings and new voluntary institutional products. Increasing focus on asset accumulation products. We intend to expand our assets under management in both our insurance operations and our Asset Management segment by increasing our focus on sales of asset accumulation products, such as variable life and annuity products, mutual funds and 401(k) products. Focusing international operations on growing markets. We have established insurance operations in selected international markets that are experiencing significant growth in demand for insurance products and where we believe we can gain significant market share. - - GROWING OUR EARNINGS AND OPERATING RETURN ON EQUITY BY: Reducing operating expenses. We are committed to improving profitability by reducing operating expenses through employee reductions, increased integration of operations and enhanced use of technology. Strengthening performance-oriented culture. We have implemented a number of initiatives to significantly enhance the performance of our employees, including establishing a new compensation program, selectively hiring experienced new employees, expanding our training efforts and implementing a new performance measurement and review program. Continuing to optimize returns from investment portfolio. The return on our invested assets has contributed significantly to our earnings growth. We believe that the expertise of our investment department will enable us to continue to optimize the operating returns on our invested assets in the future. Enhancing capital efficiency of our operations. We seek to maximize our operating return on equity by enhancing the capital efficiency of our operations. We have recently implemented a new internal capital allocation system and, consistent with a more disciplined approach to capital allocation, have divested operations that did not meet targeted rates of return or growth. THE DEMUTUALIZATION We are conducting the offerings in connection with the reorganization of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process commonly known as a demutualization. On the date the plan of reorganization becomes effective, which will be the date of the closing of the initial public offering, the private placements and the offering of the units described below, Metropolitan Life Insurance Company will become a wholly-owned subsidiary of MetLife, Inc. In the demutualization, in exchange for their membership interests, policyholders who are eligible to receive consideration under the plan of reorganization will be entitled to receive consideration in the form of shares of our common stock or, in some cases, cash or an adjustment to their policy values, referred to as "policy credits". The shares of our common stock allocated to policyholders who do not receive cash or policy credits under the plan will be held through the MetLife Policyholder Trust on behalf of these policyholders. We are establishing the trust to help us efficiently manage the administration of accounts and the costs associated with the approximately nine million eligible policyholders that we estimate will become beneficiaries of the trust. Subject to certain limitations, trust beneficiaries will be permitted, after specified periods, to instruct the trustee to withdraw their allocated shares of our common stock from the trust for sale or to purchase additional shares 6 9 commission-free through a purchase and sale program established and administered by a program agent. Trust beneficiaries allocated more than 25,000 shares of our common stock may be limited in their ability to sell shares under the purchase and sale program for the first 300 days after the plan effective date. Beginning on the first anniversary of the closing of the initial public offering, trust beneficiaries may also withdraw all, but not less than all, their allocated shares of our common stock held in the trust in order to hold or sell such shares of our common stock on their own. We will account for the demutualization using the historical carrying values of our assets and liabilities. The board of directors of Metropolitan Life Insurance Company adopted the plan of reorganization on September 28, 1999, and subsequently adopted amendments to the plan. As required by law, the plan was approved by more than two-thirds of the eligible policyholders who voted in voting completed on February 7, 2000. Under the New York Insurance Law, in order for the demutualization to become effective, it must also be approved by the New York Superintendent of Insurance after a public hearing. The New York Superintendent held a public hearing on the plan on January 24, 2000. At the public hearing, some policyholders and others raised objections to certain aspects of the plan. Six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent of Insurance. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. The plaintiffs in three of the New York County cases have moved to consolidate their cases into a single proceeding. Metropolitan Life Insurance Company has entered into a stipulation with those plaintiffs in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of Insurance's approval may adversely affect the terms of the demutualization and the market price of our common stock". PRIVATE PLACEMENTS Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle that they or their respective affiliates will purchase from us in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units described below. We will determine at the time of the pricing of the initial public offering whether 7 10 to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public under this prospectus. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. We expect each of these purchasers to enter into an agreement with us that provides that any shares purchased by it will be restricted from sale or transfer for a period of one year after the initial public offering, except for sales to affiliates or pursuant to a tender or exchange offer recommended by our board of directors. In addition, we expect each purchaser to agree that it will not, without our consent, increase its ownership of voting securities beyond 4.9% of the outstanding shares (or 5.0% with the New York Superintendent of Insurance's approval), seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. Although these investors will receive common stock which has not been registered under the Securities Act, they will also receive registration rights with respect to such stock, which rights are not exercisable until one year after the closing of the initial public offering. Pursuant to these registration rights, the purchasers will be able to have their shares of common stock registered for resale under the Securities Act, beginning after the first anniversary of the closing, on not more than one occasion for each purchaser each year, or not more than five occasions for each purchaser in total (known as a "demand" registration right). In addition, we expect to agree to use our reasonable efforts to register the shares for resale on a registration statement on Form S-3 as soon as practicable after the first anniversary of the closing. If the shares are registered on a Form S-3, each purchaser will be allowed to make not more than two offerings each year, subject to a minimum of $50,000,000 per offering, although underwritten offerings will be subject to the limitations on the number of demand registrations described above. The purchasers will also be able to participate, subject to specified limitations, in registrations effected by us for our own account or others. The private placements are subject to the negotiation of definitive documentation. OFFERING OF EQUITY SECURITY UNITS Concurrently with this offering, we and a trust we own are offering 20,000,000 equity security units for an aggregate offering of $1,000 million, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full, by means of a separate prospectus. Each unit initially consists of (a) a contract to purchase shares of our common stock and (b) a % capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. The purchase contract underlying a unit obligates holders to purchase, and us to sell, for $50, on , 2003, a number of newly issued shares of our common stock equal to a settlement rate based on the average trading price of the common stock at that time. The capital securities represent undivided beneficial ownership interests in the assets of the trust, consisting solely of debentures issued by us to the trust. The debentures will have an interest rate and principal amount that are the same as the distribution rate and stated liquidation amount of the capital securities. The capital securities will initially be held as components of the units and be pledged to secure the holders' obligations under the related purchase contracts. The holders will initially receive from each unit distributions on the capital securities at the rate of % of $50 per year, paid quarterly, subject to the deferral provisions described under "Description of the Equity Security Units", below. During any period in which payments are deferred, in general we cannot declare or pay any dividend or distribution on our capital stock or take specified other actions. The distribution rate will be reset, and the capital securities remarketed, as described under "Description of the Equity Security Units". 8 11 MetLife, Inc. will, on a senior and unsecured basis, irrevocably guarantee payments on the capital securities to the extent of available trust funds. The financial statements of MetLife Capital Trust I will be consolidated in our consolidated financial statements, with the capital securities shown on our consolidated balance sheets under the caption "Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent". The notes to our consolidated financial statements will disclose that the sole asset of the trust will be the debentures issued by MetLife, Inc. to the trust. Distributions on the capital securities will be reported as a charge to minority interest in our consolidated statements of income, whether paid or accrued. Before the issuance of shares of our common stock upon settlement of the purchase contracts, the units will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating earnings per share for any period is deemed to be increased by the excess, if any, of the number of our shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by us in the market, at the average market price during that period, using the proceeds receivable upon settlement. Consequently, there will be no dilutive effect on our earnings per share, except during periods when the average market price of our common stock is above $ per share. The closings of the initial public offering, the private placements and the offering of the equity security units are each conditioned on the concurrent closings of the others. ------------------------- Our principal executive offices are located at One Madison Avenue, New York, New York 10010-3690. Our telephone number is (212) 578-2211. 9 12 THE OFFERING Common stock offered.......... 179,000,000 shares, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. Shares to be outstanding after the offering.................. 745,476,118 shares, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. New York Stock Exchange symbol...................... MET Use of proceeds............... We estimate that we will receive net proceeds from the initial public offering of $2,381 million, or $2,738 million if the underwriters' options to purchase additional shares as described under "Underwriting" are exercised in full, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. As required by the plan of reorganization, we will use the net proceeds from the initial public offering, together with an estimated $1,022 million of proceeds from the planned private placements and an estimated $960 million of net proceeds, or $1,104 million if the underwriters' options to purchase additional units are exercised in full, from the offering of equity security units, as follows: - an estimated $397 million to reimburse Metropolitan Life Insurance Company for the crediting of policy credits to certain policyholders in the demutualization; - an estimated $2,494 million to reimburse Metropolitan Life Insurance Company for the payment of cash to certain policyholders in the demutualization; - an estimated $315 million to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998; - an estimated $361 million to reimburse Metropolitan Life Insurance Company for the payment of the fees and expenses incurred in connection with the demutualization; and - up to $340 million (unless the New York Superintendent of Insurance approves a larger amount) to be retained by MetLife, Inc. and used for working capital, payment of dividends and other general corporate purposes, including payments on the debentures issued by MetLife, Inc. to MetLife Capital Trust I in connection with the offering 10 13 of the units, and to pay the fees and expenses of the trustee and custodian of the MetLife Policyholder Trust. We will contribute any remaining proceeds to Metropolitan Life Insurance Company for its general corporate purposes and to repay up to $450 million of short-term debt that Metropolitan Life Insurance Company incurred in connection with the acquisition of GenAmerica Corporation. In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described above, Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible capital note due 2005 having the principal terms described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different from the amounts estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to limits set forth in the plan. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and on our capital needs at the time of issuance. Dividend policy............... Our board of directors intends to declare an annual dividend on our common stock of $0.20 per share. For more information on dividends and potential limitations on our ability to pay dividends, see "Dividend Policy". Risk factors.................. For a discussion of certain risks you should consider before investing in our securities, see "Risk Factors". 11 14 SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial information for MetLife. We have derived the consolidated financial information for the years ended December 31, 1999, 1998 and 1997 and at December 31, 1999 and 1998 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated financial information for the years ended December 31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 from our audited consolidated financial statements not included elsewhere in this prospectus. We have prepared the following consolidated statements of income and consolidated balance sheet data, other than the statutory data, in conformity with generally accepted accounting principles. We have derived the statutory data from Metropolitan Life Insurance Company's ANNUAL STATEMENTS filed with insurance regulatory authorities and we have prepared the statutory data in accordance with STATUTORY ACCOUNTING PRACTICES. You should read the following information in conjunction with the information and consolidated financial statements appearing elsewhere in this prospectus.
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) STATEMENTS OF INCOME DATA Revenues: Premiums(1)................................................. $12,088 $11,503 $11,278 $11,345 $11,178 Universal life and investment-type product policy fees...... 1,438 1,360 1,418 1,243 1,177 Net investment income(1)(2)(3).............................. 9,816 10,228 9,491 8,978 8,837 Other revenues(1)........................................... 2,154 1,994 1,491 1,246 834 Net realized investment gains (losses)(4)................... (70) 2,021 787 231 (157) ------- ------- ------- ------- ------- 25,426 27,106 24,465 23,043 21,869 Total expenses(1)(3)(5)..................................... 23,991 25,019 22,794 21,637 21,125 ------- ------- ------- ------- ------- Income before provision for income taxes, discontinued operations and extraordinary item......................... 1,435 2,087 1,671 1,406 744 Provision for income taxes(6)............................... 593 740 468 482 407 ------- ------- ------- ------- ------- Income before discontinued operations and extraordinary item...................................................... 842 1,347 1,203 924 337 (Loss) gain from discontinued operations(7)................. -- -- -- (71) 362 ------- ------- ------- ------- ------- Income before extraordinary item............................ 842 1,347 1,203 853 699 Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively........................... 225 4 -- -- -- ------- ------- ------- ------- ------- Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ======= ======= ======= ======= =======
12 15
AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) BALANCE SHEET DATA General account assets(3)................................. $160,291 $157,278 $154,444 $145,877 $144,277 Separate account assets................................... 64,941 58,068 48,338 43,399 38,861 -------- -------- -------- -------- -------- Total assets.............................................. $225,232 $215,346 $202,782 $189,276 $183,138 Policyholder liabilities(8)............................... $124,955 $124,203 $127,358 $122,895 $122,220 Long-term debt............................................ $ 2,514 $ 2,903 $ 2,884 $ 1,946 $ 2,345 Retained earnings......................................... $ 14,100 $ 13,483 $ 12,140 $ 10,937 $ 10,084 Accumulated other comprehensive income (loss)............. (410) 1,384 1,867 1,046 1,670 -------- -------- -------- -------- -------- Total equity.............................................. $ 13,690 $ 14,867 $ 14,007 $ 11,983 $ 11,754 OTHER DATA Operating income(4)(9).................................... $ 990 $ 23 $ 617 $ 818 $ 504 Adjusted operating income(4)(10).......................... $ 1,307 $ 1,226 $ 807 $ 921 $ 613 Operating return on equity(11)............................ 7.2% 0.2% 5.3% 7.8% 5.2% Adjusted operating return on equity(12)................... 9.5% 9.6% 7.0% 8.8% 6.3% Return on equity(13)...................................... 4.5% 10.5% 10.4% 8.1% 7.2% Operating cash flows...................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823 Total assets under management(14)......................... $373,646 $360,703 $338,731 $297,570 $288,000 STATUTORY DATA(15) Premiums and deposits..................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651 Net income (loss)......................................... $ 790 $ 875 $ 589 $ 460 $ (672) Policyholder surplus...................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785 Asset valuation reserve................................... $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038
- --------------- (1) Includes the following combined financial statement data of MetLife Capital Holdings, Inc., which we sold in 1998, and our Canadian operations and U.K. insurance operations, substantially all of which we sold in 1998 and 1997, respectively:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (DOLLARS IN MILLIONS) Revenues: Premiums.................................................. $204 $ 463 $ 456 $ 439 Net investment income..................................... 495 914 877 637 Other revenues............................................ 33 225 164 192 ---- ------ ------ ------ $732 $1,602 $1,497 $1,268 ==== ====== ====== ====== Expenses: Policyholder benefits and claims.......................... $240 $ 495 $ 459 $ 492 Other expenses............................................ 418 861 606 831 ---- ------ ------ ------ $658 $1,356 $1,065 $1,323 ==== ====== ====== ======
As a result of these sales, we recorded net realized investment gains of $520 million and $139 million for the years ended December 31, 1998 and 1997, respectively. In July 1998, Metropolitan Life Insurance Company sold a substantial portion of its Canadian operations to Clarica Life Insurance Company. As part of that sale, we transferred a large block of policies in effect with Metropolitan Life Insurance Company in Canada to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of Metropolitan Life Insurance Company and, therefore, are not entitled to compensation under the plan of reorganization. However, as a result of a commitment made in connection 13 16 with obtaining Canadian regulatory approval of that sale, if Metropolitan Life Insurance Company demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of these transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The aggregate amount of the payment is dependent upon the initial public offering price of common stock to be issued at the effective date of the plan. Assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, and based on actuarial calculations we have made regarding these payments, we estimate that the aggregate payments will be $315 million. (2) During 1997, we changed to the retrospective interest method of accounting for investment income on structured notes in accordance with Emerging Issues Task Force Consensus 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. As a result, net investment income increased by $175 million. The cumulative effect of this accounting change on prior years' income was immaterial. (3) In 1998, we adopted the provisions of Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to our securities lending program. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 million at December 31, 1998 and increasing revenues and expenses by $266 million for the year ended December 31, 1998. (4) Realized investment gains and losses are presented net of related policyholder amounts. The amounts netted against realized investment gains and losses are the following:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ----- ------ ------ ------ ----- (DOLLARS IN MILLIONS) Gross realized investment gains (losses).................... $(137) $2,629 $1,018 $ 458 $ 73 ----- ------ ------ ------ ----- Less amounts allocable to: Future policy benefit loss recognition.................... -- (272) (126) (203) (152) Deferred policy acquisition costs......................... 46 (240) (70) (4) (78) Participating pension contracts........................... 21 (96) (35) (20) -- ----- ------ ------ ------ ----- Total..................................................... 67 (608) (231) (227) (230) ----- ------ ------ ------ ----- Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157) ===== ====== ====== ====== =====
Realized investment gains (losses) have been reduced by (1) deferred policy acquisition amortization to the extent that such amortization results from realized investment gains and losses, (2) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains, and (3) additions to participating contractholder accounts when amounts equal to such investment gains and losses are credited to the contractholders' accounts. This presentation may not be comparable to presentations made by other insurers. This presentation affected operating income and adjusted operating income. See note 9 below. (5) Total expenses exclude $(67) million, $608 million, $231 million, $227 million and $230 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, of deferred policy acquisition costs, future policy benefit loss recognition and credits to participating pension contracts that have been charged against realized investment gains and losses as these amounts are directly related to the realized investment gains and losses. This presentation may not be comparable to presentations made by other insurers. (6) Includes $125 million, $18 million, $(40) million, $38 million and $67 million for surplus tax paid (received) by Metropolitan Life Insurance Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. As a stock life insurance company, 14 17 we will no longer be subject to the surplus tax after the effective date of the demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (7) The gain (loss) from discontinued operations was primarily attributable to the disposition of our group medical insurance business. (8) Policyholder liabilities include future policy benefits, policyholder account balances, other policyholder funds and policyholder dividends. (9) The following provides a reconciliation of net income to operating income:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------- ------- ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ------ ------- ------- ----- ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73) Income tax on gross realized investment gains and losses.................................................. (92) 883 312 173 26 ------ ------- ------- ----- ----- Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47) ------ ------- ------- ----- ----- Amounts allocated to investment gains and losses (see note 4)...................................................... (67) 608 231 227 230 Income tax on amounts allocated to investment gains and losses.................................................. 45 (204) (71) (86) (83) ------ ------- ------- ----- ----- Amounts allocated to investment gains and losses, net of income tax (benefit) expense.......................... (22) 404 160 141 147 ------ ------- ------- ----- ----- Loss (gain) from discontinued operations.................. -- -- -- 71 (362) ------ ------- ------- ----- ----- Surplus tax............................................... 125 18 (40) 38 67 ------ ------- ------- ----- ----- Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively.................. 225 4 -- -- -- ------ ------- ------- ----- ----- Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504 ====== ======= ======= ===== =====
We believe the supplemental operating information presented above allows for a more complete analysis of results of operations. We have excluded realized investment gains and losses due to their volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. You should not consider operating income as a substitute for any GAAP measure of performance. Our method of calculating operating income may be different from the method used by other companies and therefore comparability may be limited. (10) The following provides a reconciliation of operating income to adjusted operating income:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------- ------- ----- ----- (DOLLARS IN MILLIONS) Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504 Adjustment for charges for sales practices claims and for personal injuries caused by exposure to asbestos-containing products, net of income tax........... 317 1,203 190 103 109 ------ ------- ------- ----- ----- Adjusted operating income................................... $1,307 $ 1,226 $ 807 $ 921 $ 613 ====== ======= ======= ===== =====
The charge for the year ended December 31, 1999 was principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The amount reported for the year ended December 31, 1998 includes charges for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. See Note 9 of Notes to Consolidated Financial Statements. We believe that 15 18 supplemental adjusted operating income data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. These expenses are not related to our ongoing operations. Adjusted operating income should not be considered as a substitute for any GAAP measure of performance. (11) Operating return on equity is defined as operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe the operating return on equity information presented supplementally allows for a more complete analysis of results of operations. Accumulated other comprehensive income (loss) has been excluded due to its volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating return on equity should not be considered as a substitute for any GAAP measure of performance or liquidity. Our method of calculation of operating return on equity may be different from the calculation used by other companies and, therefore, comparability may be limited. Operating return on equity is only presented for annual periods. (12) Adjusted operating return on equity is defined as adjusted operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe that supplemental adjusted operating return on equity data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. Adjusted operating return on equity should not be considered as a substitute for any GAAP measure of performance. Adjusted operating return on equity is only presented for annual periods. (13) Return on equity is defined as net income divided by average total equity, excluding accumulated other comprehensive income (loss). (14) Includes MetLife's general account and separate account assets and assets managed on behalf of third parties. (15) Metropolitan Life Insurance Company statutory data only. 16 19 SUMMARY PRO FORMA FINANCIAL INFORMATION The following summary pro forma financial information is derived from the pro forma financial information and the notes thereto included elsewhere in this prospectus. This information gives effect to the demutualization, the establishment of the closed block, the planned concurrent private placements of 73,000,000 shares at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, the concurrent offering of 20,000,000 equity security units at $50.00 per unit and the sale of 179,000,000 shares of common stock in the initial public offering at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, as if they each had occurred at December 31, 1999 for purposes of the consolidated balance sheet information and at January 1, 1999 for purposes of the consolidated statement of income information for the year ended December 31, 1999. This information has been prepared based on the terms of the plan of reorganization and the assumptions described in "Pro Forma Consolidated Financial Information". This information assumes, among other things, (a) a total of 699,974,077 shares of common stock is allocated to eligible policyholders under the plan of reorganization and (b) the underwriters' options to purchase additional shares of common stock and units in the offerings are not exercised. We have based the pro forma information on available information and on assumptions management believes are reasonable and that reflect the effects of these transactions. We have provided this information for informational purposes only. The number of shares and units actually sold in the offerings and the private placements and their respective prices may vary from the amounts assumed. The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different from the amounts estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to the limit in the plan that the proceeds of the units offering may not exceed one-third of the combined proceeds of that offering, the offering of MetLife, Inc.'s common stock pursuant to this prospectus and the private placements. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and our capital needs at the time of issuance. This information does not necessarily indicate our consolidated financial position or results of operations had the demutualization, the establishment of the closed block, the offering of equity security units, the initial public offering and the private placements been consummated on the dates assumed. It also does not project or forecast our consolidated financial position or results of operations for any future date or period. The data set forth below give effect to gross proceeds of $2,506 million from the issuance of common stock in the initial public offering less an assumed underwriting discount and estimated initial public offering expenses aggregating $125 million, or net proceeds from the initial public offering of $2,381 million, assuming an initial public offering price of $14.00 per share. The data also gives effect to proceeds of $1,022 million from the private placements assuming a purchase of 73,000,000 shares at an initial public offering price of $14.00 per share and gross proceeds of $1,000 million from the issuance of the units, less an assumed underwriting discount and offering expenses aggregating $40 million, or net proceeds from the offering of $960 million. Under the plan of reorganization, policyholders eligible to receive consideration in the demutualization will receive interests in the MetLife Policyholder Trust, cash or policy credits. The trust will hold the shares of common stock allocated under the plan to those eligible policyholders receiving trust interests. The information in the table below assumes that an estimated $397 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for policy credits made in lieu of 28,331,484 allocated shares, an estimated $2,494 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for cash payments made in lieu of 178,166,475 allocated shares and an estimated $315 million will 17 20 be used to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998. We will account for the payments to the transferred Canadian policyholders in other expenses in the same period as the effective date of the plan. The consideration an eligible policyholder receives under the plan of reorganization will be based on the number of shares of common stock allocated to the eligible policyholder pursuant to the terms of the plan. For those policyholders receiving policy credits or for those non-electing eligible policyholders who must receive cash in the demutualization, we will translate the share allocations into dollar amounts based on the initial public offering price per share. The pro forma information reflects $397 million of policy credits and $164 million of cash payments that will be distributed to non-electing eligible policyholders that must receive cash in the demutualization, assuming an initial public offering price of $14.00 per share. The pro forma information also reflects elections to receive cash made by eligible policyholders holding approximately 23.8% of the total number of shares allocated to eligible policyholders, representing estimated cash payments of $2,330 million, assuming an initial public offering price of $14.00 per share. See "The Demutualization -- Payment of Consideration to Eligible Policyholders". The pro forma consolidated statement of income also reflects the elimination of the surplus tax on earnings and the inclusion of the minority interest related to the units and is presented before the extraordinary item for demutualization expense. The pro forma consolidated statement of income does not give effect to any pro forma earnings resulting from the use of the net proceeds from the offerings and the private placements or the charge related to the payments to be made to certain transferred Canadian policyholders described above. Share Data: Shares allocated to eligible policyholders................ 699,974,077 Less shares allocated to eligible policyholders who receive cash or policy credits......................... 206,497,959 ----------- Shares issued to the MetLife Policyholder Trust........... 493,476,118 Shares issued in the initial public offering.............. 179,000,000 Shares issued in the private placements................... 73,000,000 ----------- Total shares of common stock outstanding.......... 745,476,118 =========== Percentage Ownership: MetLife Policyholder Trust................................ 66.2% Purchasers in the initial public offering................. 24.0% Purchasers in the private placements...................... 9.8%
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) For the year ended December 31, 1999 Pro forma income before extraordinary item............ $ 912 Pro forma income before extraordinary item per share -- basic and diluted......................... $ 1.22 Pro forma equity...................................... $13,768 Pro forma book value per share -- basic............... $ 18.47 Pro forma tangible book value per share -- basic(1)... $ 17.65
- --------------- (1) Excludes goodwill. 18 21 RISK FACTORS CHANGES IN INTEREST RATES MAY SIGNIFICANTLY AFFECT OUR PROFITABILITY In periods of increasing interest rates, policy loans and surrenders and withdrawals may tend to increase as policyholders seek investments with higher perceived returns. This process may result in cash outflows requiring that we sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. Conversely, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive investments, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increased PERSISTENCY during a period when our new investments carry lower returns. In addition, borrowers may prepay or redeem mortgages and bonds in our investment portfolio as they seek to borrow at lower market rates, and we might have to reinvest those funds in lower interest-bearing investments. Accordingly, during periods of declining interest rates, a decrease in the spread between interest and dividend rates to policyholders and returns on our investment portfolio may adversely affect our profitability. Additionally, customers for whom we provide asset management services may terminate their relationship with us or reduce the amount of their assets under management with us in response to changes in interest rates. DECLINE IN SECURITIES MARKETS MAY ADVERSELY AFFECT OUR ASSET MANAGEMENT BUSINESS AND SALES OF OUR INVESTMENT PRODUCTS Fluctuations in the securities markets may affect our asset management business, as well as sales of our mutual funds, variable life insurance and variable annuity products. Favorable performance by the U.S. securities markets over the last five years has attracted a substantial increase in the investments in these markets and has benefited our asset management business and increased our assets under management. A decline in the securities markets, failure of the securities markets to sustain their recent levels of growth, or short-term volatility in the securities markets could result in investors withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect our asset management business and sales of our investment products. In addition, because the revenues of our asset management business are, to a large extent, based on the value of assets under management, a decline in the value of these assets would adversely affect our revenues. COMPETITIVE FACTORS MAY ADVERSELY AFFECT OUR MARKET SHARE We believe that competition in our business segments is based on service, product features, price, commission structure, financial strength, claims paying ability ratings and name recognition. We compete with a large number of other insurers, as well as non-insurance financial services companies, such as banks, broker-dealers and asset managers, for individual customers, employer and other group customers and agents and other distributors of insurance and investment products. Some of these companies offer a broader array of products, have more competitive pricing or, with respect to other insurers, have higher claims paying ability ratings. Some may also have greater financial resources with which to compete. National banks, with their pre-existing customer bases for financial services products, may increasingly compete with insurers, as a result of court cases that permit national banks to sell annuity products of life insurers in some circumstances and recently-enacted legislation removing restrictions on bank affiliations with insurers. This legislation, the Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933, as amended, had limited the ability of banks to engage in securities-related businesses, and the Bank Holding Company Act of 1956, as amended, had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, among other things, bank holding companies may acquire insurers, and insurance holding companies may acquire banks. The ability of banks to affiliate with insurers may materially adversely affect all of our product lines by substantially 19 22 increasing the number, size and financial strength of potential competitors. Additionally, proposed health care reforms could cause medical health insurance providers to enter some of the non-medical health insurance markets in which we do business, thereby increasing competition. Many of our insurance products, particularly those offered by our Institutional Business segment, are UNDERWRITTEN yearly, and, accordingly, group purchasers may be able to obtain more favorable terms from competitors rather than renewing coverage with us. The effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future. The investment management and securities brokerage businesses have relatively few barriers to entry and continually attract new entrants. Many of these competitors offer a broader array of investment products and services and are better known as sellers of annuities and other investment products. WE MAY BE UNABLE TO ATTRACT AND RETAIN SALES REPRESENTATIVES FOR OUR PRODUCTS We must attract and retain productive sales representatives to sell our insurance, annuities and investment products. Strong competition exists among insurers for sales representatives with demonstrated ability. We compete with other insurers for sales representatives primarily on the basis of our financial position, support services and compensation and product features. From 1994 to 1998, the number of agents in the MetLife career agency system declined, from 9,521 to 6,853. We believe that this decline was principally the result of the adverse impact of sales practices litigation brought against us beginning in the early 1990s, the establishment of more stringent company-wide criteria for recruiting and retaining agents and a consolidation of sales offices and changes in compensation practices for our sales force during this period. We have undertaken several initiatives to grow our career agency force in the future. At December 31, 1999, the number of agents in the MetLife career agency system was 6,866. We cannot provide assurance that these initiatives will succeed in attracting and retaining new agents. Sales of individual insurance, annuities and investment products and our business, results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining agents. DIFFERENCES BETWEEN ACTUAL CLAIMS EXPERIENCE AND UNDERWRITING AND RESERVING ASSUMPTIONS MAY REQUIRE US TO INCREASE LIABILITIES Our earnings significantly depend upon the extent to which our actual claims experience is consistent with the assumptions used in setting the prices for our products and establishing the liabilities for our obligations for future policy benefits and claims. To the extent that actual claims experience is less favorable than our underlying assumptions used in establishing such liabilities, we could be required to increase our liabilities. Such an increase could have a material adverse effect on our business, results of operations and financial condition. Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts which we will ultimately pay to settle these liabilities. Such amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. We evaluate our liabilities periodically, based on changes in the assumptions used to establish the liabilities, as well as our actual policy benefits and claims experience. 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 policy benefits prove inadequate, we must increase our liabilities, which may have a material adverse effect on our business, results of operations and financial condition. 20 23 CATASTROPHES MAY ADVERSELY IMPACT LIABILITIES FOR PROPERTY AND CASUALTY POLICYHOLDER CLAIMS AND REINSURANCE AVAILABILITY Our Auto & Home segment has experienced, and will likely in the future experience, CATASTROPHE losses that may have an adverse impact on the business, results of operations and financial condition of this segment. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hail, tornados, explosions, severe winter weather (including snow, freezing water, ice storms and blizzards) and fires. Due to their nature, we cannot predict the incidence and severity of catastrophes. Historically, substantially all of our catastrophe-related claims have related to homeowners coverages. However, catastrophes may also affect other Auto & Home coverages. For us, areas of major hurricane exposure include coastal sections of the northeastern U.S. (including Long Island and the Connecticut, Rhode Island and Massachusetts shorelines) and Florida. We also have some earthquake exposure, primarily along the New Madrid fault line in the central U.S. Losses incurred by us from catastrophes, net of REINSURANCE but before taxes, were $29.3 million, $56.7 million, $18.0 million, $69.0 million and $38.1 million in 1999, 1998, 1997, 1996 and 1995, respectively. Consistent with industry practices, we establish liabilities for claims arising from a catastrophe only after assessing the exposure and damages arising from the event. We cannot be certain that the liabilities we have established will be adequate to cover actual claims. Furthermore, we cannot assure that the reinsurance we purchased will be adequate to protect us against material catastrophe losses or that such reinsurance will continue to be available to us in the future at commercially reasonable rates. States have from time to time passed legislation that has the effect of limiting the ability of insurers to manage risk, such as legislation restricting an insurer's ability to withdraw from catastrophe-prone areas. While we attempt to limit our exposure to acceptable levels, subject to restrictions imposed by insurance regulatory authorities, a catastrophic event or multiple catastrophic events might have a material adverse effect on our business, results of operations and financial condition. A DOWNGRADE IN OUR RATINGS MAY INCREASE POLICY SURRENDERS AND WITHDRAWALS, ADVERSELY AFFECT RELATIONSHIPS WITH DISTRIBUTORS AND NEGATIVELY IMPACT NEW SALES Claims paying ability and financial strength ratings are a factor in establishing the competitive position of insurers. A rating downgrade (or the potential for such a downgrade) of Metropolitan Life Insurance Company or any of its insurance subsidiaries could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of CASH VALUES from their policies, adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of Metropolitan Life Insurance Company's and its subsidiaries' products and services, negatively impact new sales, adversely affect its ability to compete and thereby have a material adverse effect on our business, results of operations and financial condition. The current claims paying ability and financial strength ratings of Metropolitan Life Insurance Company are listed in the table below:
RATING AGENCY RATING RATING STRUCTURE Standard & Poor's Ratings Services AA Second highest of nine ratings ("Very Strong") categories and mid-range within the category based on modifiers (e.g., AA+, AA and AA- are "Very Strong") Moody's Investors Service, Inc. Aa2 Second highest of nine ratings ("Excellent") categories and mid-range within the category based on modifiers (e.g., Aa1, Aa2 and Aa3 are "Excellent")
21 24
RATING AGENCY RATING RATING STRUCTURE A.M. Best Company, Inc. A+ Highest of nine ratings categories and ("Superior") second highest within the category based on modifiers (e.g., A++ and A+ are "Superior" while A and A- are "Excellent") Duff & Phelps Credit Rating Co. AA+ Second highest of eight ratings ("Very High") categories and highest within the category based on modifiers (e.g., AA+, AA and AA- are "Very High")
The foregoing ratings reflect each rating agency's opinion of Metropolitan Life Insurance Company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed toward the protection of holders of our common stock or the units. CHANGES IN STATE AND FEDERAL REGULATION MAY AFFECT OUR PROFITABILITY Our insurance business is subject to comprehensive state regulation and supervision throughout the U.S. The primary purpose of such regulation is to protect policyholders, not stockholders. The laws of the various states establish insurance departments with broad powers with respect to such things as licensing companies to transact business, licensing agents, admitting statutory assets, mandating certain insurance benefits, regulating premium rates, approving policy forms, regulating unfair trade and claims practices, establishing statutory reserve requirements and solvency standards, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, restricting certain transactions between affiliates and regulating the types, amounts and statutory valuation of investments. State insurance regulators and the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS ("NAIC") continually reexamine existing laws and regulations, and may impose changes in the future that materially adversely affect our business, results of operations and financial condition. The U.S. federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in certain areas can significantly and adversely affect the insurance industry generally and MetLife in particular. These areas include employee benefit plan regulation, financial services regulation and federal taxation and securities laws. Additionally, interpretation of existing laws may change and the passage from time to time of new legislation may adversely affect our claims exposure on our policies. Metropolitan Life Insurance Company, some of its subsidiaries and certain policies and contracts offered by them are subject to various levels of regulation under the federal securities laws administered by the Securities and Exchange Commission. These laws and regulations are primarily intended to protect investors in the securities markets, and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. We may also be subject to similar laws and regulations in the states and foreign countries in which we provide investment advisory services, offer products or conduct other securities-related activities. We cannot predict the impact of future state or federal laws or regulations on our business. Future laws and regulations, or the interpretation thereof, may materially adversely affect our business, results of operations and financial condition. 22 25 DEMUTUALIZATION RISKS OUR BOARD OF DIRECTORS WILL CONTROL THE OUTCOME OF STOCKHOLDER VOTES ON MANY MATTERS DUE TO THE VOTING PROVISIONS OF THE METLIFE POLICYHOLDER TRUST Under the plan of reorganization, we will establish the MetLife Policyholder Trust to hold the shares of MetLife, Inc. common stock allocated to eligible policyholders not receiving cash or policy credits under the plan. An estimated 493,476,118 shares of our common stock, or 66.2% of the total number of shares expected to be outstanding based upon an estimated initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, will be issued to the trust on the effective date of the plan, to be held on behalf of approximately nine million eligible policyholders. Because of the number of shares held by the trust and the voting provisions of the trust, the trust may affect the outcome of matters brought to a stockholder vote. Except on votes regarding certain fundamental corporate actions described below, the trustee will vote all of the shares of common stock held in the trust in accordance with the recommendations given by our board of directors to our stockholders or, if the board gives no such recommendation, as directed by the board. As a result of the voting provisions of the trust, the board of directors will effectively be able to control votes on all matters submitted to a vote of stockholders, excluding those fundamental corporate actions, so long as the trust holds a substantial number of shares of common stock. If the vote relates to fundamental corporate actions specified in the trust, the trustee will solicit instructions from the trust beneficiaries and vote all shares held in the trust in proportion to the instructions it receives. These actions include: - an election or removal of directors in which a stockholder has properly nominated one or more candidates in opposition to a nominee or nominees of our board of directors or a vote on a stockholder's proposal to oppose a board nominee for director, remove a director for cause or fill a vacancy caused by the removal of a director by stockholders, subject to certain conditions; - a merger or consolidation, a sale, lease or exchange of all or substantially all of the assets, or a recapitalization or dissolution, of MetLife, Inc., in each case requiring a vote of our stockholders under applicable Delaware law; - any transaction that would result in an exchange or conversion of shares of common stock held by the trust for cash, securities or other property; - issuances of our common stock during the first year after the effective date of the plan at a price materially less than the then prevailing market price of our common stock, if a vote of our stockholders is required to approve the issuance under Delaware law, other than issuances in an underwritten public offering or pursuant to an employee benefit plan; - for the first year after the effective date of the plan, any matter that requires a supermajority vote of our outstanding stock entitled to vote thereon under Delaware law or our certificate of incorporation or by-laws, and any amendment to our certificate of incorporation or by-laws that is submitted for approval to our stockholders; and - any proposal requiring our board of directors to amend or redeem the rights under our stockholder rights plan, other than a proposal with respect to which we have received advice of nationally-recognized legal counsel to the effect that the proposal is not a proper subject for stockholder action under Delaware law. If a vote concerns any of these fundamental corporate actions, the trustee will vote all of the shares of common stock held by the trust in proportion to the instructions it receives, which will give disproportionate weight to the instructions actually given by trust beneficiaries. 23 26 WE MAY NEED TO FUND DEFICIENCIES IN OUR CLOSED BLOCK; ASSETS ALLOCATED TO THE CLOSED BLOCK BENEFIT ONLY THE HOLDERS OF CLOSED BLOCK POLICIES The plan of reorganization requires that Metropolitan Life Insurance Company establish and operate an accounting mechanism, known as a closed block, to ensure that the reasonable dividend expectations of policyholders who own certain individual insurance policies of Metropolitan Life Insurance Company are met. We will allocate assets to the closed block in an amount that will produce cash flows which, together with anticipated revenue from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of the policyholder DIVIDEND SCALES in effect for 1999, if the experience underlying such scales continues, and for appropriate adjustments in such scales if the experience changes. We cannot assure that the closed block assets, the cash flows generated by the closed block assets and the anticipated revenue from the policies included in the closed block will be sufficient to provide for the benefits guaranteed under these policies. If they are not sufficient, we must fund the shortfall. Even if they are sufficient, we may choose, for competitive reasons, to support policyholder dividend payments with our general account funds. See "The Demutualization" for a description of the closed block. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenue from the policies in the closed block will benefit only the holders of those policies. In addition, to the extent that these amounts are greater than the amounts estimated at the time we fund the closed block, dividends payable in respect of the policies included in the closed block may be greater than they would be in the absence of a closed block. Any excess earnings will be available for distribution over time to closed block policyholders but will not be available to our stockholders. A CHALLENGE TO THE PLAN OF REORGANIZATION OR TO THE NEW YORK SUPERINTENDENT OF INSURANCE'S APPROVAL MAY ADVERSELY AFFECT THE TERMS OF THE DEMUTUALIZATION AND THE MARKET PRICE OF OUR COMMON STOCK AND THE EQUITY SECURITY UNITS After a public hearing, which was held on January 24, 2000, the New York Superintendent of Insurance will determine whether the plan of reorganization meets the standards of applicable New York law, including, among other things, whether the plan is fair and equitable to the policyholders of Metropolitan Life Insurance Company. We do not expect that the New York Superintendent's order approving the plan will address the fairness of the plan to purchasers of common stock in the initial public offering or purchasers of equity security units in the offering of units. Section 7312 of the New York Insurance Law provides that any lawsuit challenging the validity of or arising out of acts taken or proposed to be taken under the demutualization statute in connection with the demutualization must be commenced within one year after a copy of the plan of reorganization, with the New York Superintendent's approval endorsed thereon, is filed in the office of the New York Superintendent or six months from the effective date of the plan of reorganization, whichever is later, or if the plan is withdrawn, within six months of such withdrawal. Although Section 326 of the New York Insurance Law provides that orders of the New York Superintendent are subject to judicial review in a proceeding under Article 78 of New York's Civil Practice Law and Rules, the law is not clear whether a lawsuit challenging an order of the New York Superintendent under Section 7312 would have to be commenced within four months after the order became final and binding, as is generally the case for an Article 78 proceeding, or within the time period specified in Section 7312, if later. A successful challenge to the order of the New York Superintendent of Insurance could result in injunctive relief, monetary damages, a modification of the plan of reorganization or the New York Superintendent's approval of the plan being set aside. In order to challenge 24 27 successfully the New York Superintendent's approval of the plan, a challenging party would have to sustain the burden of showing that approval was arbitrary and capricious, an abuse of discretion, made in violation of lawful procedures or affected by an error of law. In addition, Section 7312 provides that an insurer may require a challenging party to give security for the insurer's reasonable expenses, including attorneys' fees, which may be incurred or for which the insurer may become liable, to which security the insurer will have recourse in such amount as the court shall determine upon the termination of the action. The New York Superintendent held a public hearing on the plan on January 24, 2000. At the public hearing, some policyholders and others raised objections to certain aspects of the plan. These objections alleged, among other things, that the plan was not fair and equitable to policyholders of Metropolitan Life Insurance Company. Six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent of Insurance. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. The plaintiffs in three of the New York County cases have moved to consolidate their cases into a single proceeding. Metropolitan Life Insurance Company has entered into a stipulation with those plaintiffs in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. We are not aware of any other lawsuits challenging the plan or the approval thereof. However, there can be no assurance that we are aware of all lawsuits that have been commenced or that additional lawsuits will not be commenced in the future. An injunction or other court order delaying consummation of the plan would likely result in substantial uncertainty relating to the terms and effectiveness of the plan, and a substantial period of time might be required to finally resolve these matters. A successful challenge to the plan or its approval would be materially adverse to purchasers of common stock in the initial public offering and equity security units in the offering of units and would have a material adverse effect on our business, results of operations and financial condition. LITIGATION AND REGULATORY INVESTIGATIONS MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION We face significant risks of litigation and regulatory investigations and actions in connection with our activities as an insurer, employer, investment advisor, investor and taxpayer. These types of lawsuits and regulatory actions may be difficult to assess or quantify, may seek recovery 25 28 of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have a material adverse effect on our business, results of operations and financial condition. Metropolitan Life Insurance Company and its affiliates are currently defendants in approximately 500 lawsuits raising allegations of improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." On December 28, 1999, after a fairness hearing, the United States District Court for the Western District of Pennsylvania approved a class action settlement resolving a multidistrict litigation proceeding involving alleged sales practices claims. The settlement class includes most of the owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. This class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. In addition to dismissing the consolidated class actions, the District Court's order also bars sales practices claims by class members for sales by the defendant insurers during the class period, effectively resolving all pending class actions against these insurers. The defendants are in the process of having these claims dismissed. Under the terms of the order, only those class members who excluded themselves from the settlement may continue an existing, or start a new, sales practices lawsuit against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company for sales that occurred during the class period. Approximately 20,000 class members elected to exclude themselves from the settlement. Over 400 of the approximately 500 lawsuits noted above are brought by individuals who elected to exclude themselves from the settlement. We expect that the total cost to us of the settlement will be approximately $957 million. This amount is equal to the amount of the increase in liabilities for the death benefits and policy adjustments and the present value of expected cash payments to be provided to included class members, as well as attorneys' fees and expenses and estimated other administrative costs, but does not include the cost of litigation with policyholders who are excluded from the settlement. We believe that the cost to us of the settlement will be substantially covered by available reinsurance and the provisions made in our consolidated financial statements, and thus will not have a material adverse effect on our business, results of operations or financial position. We have not yet made a claim under those reinsurance agreements and, although there is a risk that the carriers will refuse coverage for all or part of the claim, we believe this is very unlikely to occur. We believe we have made adequate provision in our consolidated financial statements for all probable losses for sales practices claims, including litigation costs involving policyholders who are excluded from the settlement. The class action settlement does not resolve nine purported or certified class actions currently pending against New England Mutual Life Insurance Company with which we merged in 1996, three putative sales practices class actions lawsuits which have been brought against General American Life Insurance Company, two putative class actions involving sales practices claims filed against Metropolitan Life Insurance Company in Canada, or a certified class action with conditionally certified subclasses against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company, Metropolitan Tower Life Insurance Company and various individual defendants alleging improper sales abroad. 26 29 Metropolitan Life Insurance Company is also a defendant in numerous lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. Additional litigation relating to these matters may be commenced in the future. While it is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or to provide reasonable ranges of potential losses, it is the opinion of our management that their outcomes, after consideration of available insurance and reinsurance and the provisions made in our consolidated financial statements, are not likely to have a material adverse effect on our consolidated financial condition. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our operating results or cash flows in particular quarterly or annual periods. See "Business -- Legal Proceedings" and Note 9 of Notes to Consolidated Financial Statements for a discussion of the material legal matters in which we are currently involved. INVESTMENT PORTFOLIO RISKS DEFAULTS ON OUR FIXED MATURITY PORTFOLIO MAY ADVERSELY AFFECT OUR PROFITABILITY We are subject to the risk that the issuers of the fixed maturity securities we own may default on principal and interest payments due thereon, particularly if a major economic downturn occurs. At December 31, 1999, fixed maturities that we classify as either "Problem" or "Potential Problem" totaled 0.5% of our fixed maturity investments. In recent years we have increased the percentage of our investments in non-investment grade fixed maturity securities. At December 31, 1999, such securities constituted 9.0% of our total fixed maturities. Our fixed maturity securities of $97.0 billion represented 69.9% of our total cash and invested assets at December 31, 1999. An increase in defaults on these securities could have a material adverse effect on our business, results of operations and financial condition. DEFAULTS ON OUR MORTGAGE LOANS MAY ADVERSELY AFFECT OUR PROFITABILITY Our mortgage loans face default risk. At December 31, 1999, our mortgage loans of $19.7 billion represented 14.2% of our total cash and invested assets. At December 31, 1999, loans that were either delinquent or in process of foreclosure totaled 0.2% of our mortgage loan investments, compared with the industry average of 0.3%, as reported by the American Council of Life Insurance at December 31, 1999. The performance of our mortgage loan investments, however, may fluctuate in the future. In addition, substantially all of our mortgage loans have balloon payment maturities. An increase in the default rate of our mortgage loans could have a material adverse effect on our business, results of operations and financial condition. SOME OF OUR INVESTMENTS ARE RELATIVELY ILLIQUID Our investments in private placement fixed maturities, mortgage loans, equity real estate, including real estate joint ventures and other limited partnership interests are relatively illiquid. If we require significant amounts of cash on short notice in excess of our normal cash requirements, we may have difficulty selling these investments at attractive prices, in a timely manner, or both. DERIVATIVES MAY NOT BE HONORED BY COUNTERPARTIES We use derivative instruments to hedge market risk. Our derivative strategy employs a variety of instruments including financial futures, foreign exchange forwards, foreign currency swaps, interest rate swaps, interest rate caps and options. A failure by a counterparty to honor the terms of its derivatives contracts with us could have a material adverse effect on our business, results of operations and financial condition. 27 30 DIVIDENDS AND PAYMENTS ON OUR INDEBTEDNESS MAY BE AFFECTED BY LIMITATIONS IMPOSED ON METROPOLITAN LIFE INSURANCE COMPANY AND OUR OTHER SUBSIDIARIES After the effective date of the plan, MetLife, Inc. will be an insurance holding company. The assets of MetLife, Inc. will consist primarily of all of the outstanding shares of common stock of Metropolitan Life Insurance Company. Our ongoing ability to pay dividends to our stockholders and meet our obligations, including paying operating expenses, making payments on the debentures issued to MetLife Capital Trust I and any other debt service, primarily depends upon the receipt of dividends from Metropolitan Life Insurance Company and the interest received from Metropolitan Life Insurance Company under its $1 billion mandatorily convertible capital note due 2005 issued to MetLife, Inc. Any inability of Metropolitan Life Insurance Company to pay dividends or interest on the capital note to us in the future in an amount sufficient for us to pay dividends to our stockholders and meet our other obligations could have a material adverse effect on our business, results of operations and financial condition. The payment of dividends by Metropolitan Life Insurance Company is regulated under state insurance law. Under the New York Insurance Law, Metropolitan Life Insurance Company may pay a stockholder dividend to MetLife, Inc. only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Insurance, and the New York Superintendent does not disapprove the dividend. Under the New York Insurance Law, the New York Superintendent has broad discretion in determining whether the financial condition of a stock life insurer would support the payment of dividends to stockholders. The New York Insurance Department has established informal guidelines for the New York Superintendent's determinations that focus on, among other things, an insurer's overall financial condition and profitability under statutory accounting practices. We cannot assure that Metropolitan Life Insurance Company will have statutory earnings to support the payment of dividends to MetLife, Inc. in an amount sufficient to fund our cash requirements and pay cash dividends or that the New York Superintendent will not disapprove any dividends that Metropolitan Life Insurance Company may seek to pay. Our other insurance subsidiaries are also subject to restrictions on the payment of dividends. In addition, from time to time, the NAIC and various state insurance regulators have considered, and may in the future consider and adopt, proposals to further restrict the making of dividend payments by an insurer without regulatory approval. Such proposals, if enacted, could further restrict the ability of Metropolitan Life Insurance Company and its subsidiaries to pay dividends. In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described above, Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible capital note due 2005 having the same interest and interest payment terms (including reset and deferral provisions) as set forth in the debentures of MetLife, Inc. issued to the MetLife Capital Trust I. The principal amount of the capital note is mandatorily convertible into common stock of Metropolitan Life Insurance Company upon maturity or acceleration of the capital note and without any further action by MetLife, Inc. or Metropolitan Life Insurance Company. As required by the New York Insurance Law, the terms of the capital note must be approved by the New York Superintendent of Insurance as not adverse to the interests of Metropolitan Life Insurance Company's policyholders. In addition, the capital note will provide that Metropolitan Life Insurance Company may not make any payment of the interest on or the principal of the capital note so long as specified payment restrictions exist and have not been waived by the New York Superintendent. Payment restrictions would exist if the level of Metropolitan Life Insurance Company's statutory total adjusted capital falls below certain thresholds relative to the level of its statutory risk-based capital or the amount of its outstanding capital notes, surplus notes or similar obligations. As of the date hereof, Metropolitan Life Insurance Company's statutory total adjusted capital significantly exceeds these limitations. If the New York Superintendent does not approve the issuance of the capital note, or the payment of 28 31 interest is prevented by application of the payment restrictions described above, the interest on the capital note will not be available as a source of liquidity for MetLife, Inc. FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY ADVERSELY IMPACT SYSTEMS OPERATIONS We have modified or replaced portions of our information technology and non-information technology systems to address Year 2000 compliance issues. As of the date of this prospectus, we are not aware of any material Year 2000-related problems experienced by these systems. We have not been informed by any other companies, governmental agencies or entities on which we rely that any such persons experienced any material Year 2000-related problems. However, we cannot guarantee that we or the other companies, governmental agencies or other entities on which we rely will not experience any Year 2000-related problems in the future. If such problems do occur, we cannot assure you that they will not have any material adverse effect on our business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness". CHANGES IN FEDERAL INCOME TAXATION COULD ADVERSELY IMPACT SALES OF OUR INSURANCE, ANNUITIES AND INVESTMENT PRODUCTS Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products. Taxes, if any, are payable on the accumulated tax-deferred earnings when earnings are actually paid. Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. The 1994 U.S. Supreme Court ruling in NationsBank of North Carolina v. Variable Annuity Life Insurance Company that annuities are not insurance for purposes of the National Bank Act may cause Congress to consider legislation that would eliminate tax deferral at least for certain annuities. Enactment of other possible legislation, including a simplified "flat tax" income structure with an exemption from taxation for investment income, could also adversely affect purchases of life insurance. We cannot foresee whether Congress will enact legislation or, whether such legislation, if enacted, will contain provisions with possible adverse effects on our life insurance and annuity products. In 1998, the federal income tax rate on capital gains was reduced. Consequently, some of our annuities and investment products that feature tax deferral of earnings appear relatively less attractive in comparison with alternative accumulation products that feature long-term capital gains treatment, particularly if the tax rates on ordinary income that are ultimately applied to such tax-deferred earnings substantially exceed the reduced rate on long-term capital gains. SALES OF SHARES MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK The MetLife Policyholder Trust will hold 493,476,118 shares of MetLife, Inc. common stock on behalf of approximately nine million eligible policyholders, and their permitted assigns, who we estimate will become beneficiaries of the trust. The trust agreement provides that a beneficiary may sell the beneficiary's allocated shares of our common stock through the purchase and sale program that we have established. Sales may be made at any time after the later of (1) termination of any stabilization arrangements and trading restrictions in connection with the initial public offering or (2) the closing of all underwriters' over-allotment options that have been exercised and the expiration of all unexercised options in connection with the initial public offering. Generally, sales will be processed on the first or second trading day after sale instructions are received. However, for the first 300 days after the plan effective date, if sales on the open market on behalf of trust beneficiaries holding more than 25,000 trust interests exceed the lesser of (i) 1/20th of 1% of the number of shares of common stock outstanding and (ii) 25% of the average daily trading volume for the 20 trading days (or such shorter period, if fewer than 20 trading days have elapsed since the plan effective date) preceding the trade, sales of such excess shares for those beneficiaries may be deferred to the next trading day (which will 29 32 then be subject to the same volume limitations on that day) or sold by a nationally-recognized brokerage firm that will sell the shares as agent at market clearing prices or as principal in a block trade. We expect that these sales may begin within approximately 30 days after the plan effective date. In addition, subject to certain limitations, a trust beneficiary may withdraw his or her allocated shares beginning one year after the effective date of the plan. Counsel has advised us that those beneficiaries who are not "affiliates" of MetLife, Inc. within the meaning of Rule 144 under the Securities Act may resell their shares in the purchase and sale program or otherwise without registration under the Securities Act and without compliance with the time, volume, manner of sale and other limitations set forth in Rule 144. Substantially all of the shares allocated in the demutualization will be allocated to non-affiliates of MetLife, Inc. Accordingly, most trust beneficiaries may freely transfer such shares, without limitations, through the purchase and sale program. In addition to the shares issued in the demutualization, the shares of our common stock issued in the initial public offering and the shares issued upon settlement of the equity security units will be freely transferable without restriction in the public market, except to the extent that those shares are acquired by affiliates of MetLife, Inc. and are therefore subject to restrictions under Rule 144. Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle that they or their respective affiliates will purchase from us in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units described below. We will determine at the time of the pricing of the initial public offering whether to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public under this prospectus. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. We expect each of these purchasers to enter into an agreement with us that provides that any shares purchased by it will be restricted from sale or transfer for a period of one year after the initial public offering, except for sales to affiliates or pursuant to a tender or exchange offer recommended by our board of directors. In addition, we expect each purchaser to agree that it will not, without our consent, increase its ownership of voting securities above 4.9% of the outstanding shares (or 5.0% with the New York Superintendent's approval), seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. Although these investors will receive common stock which has not been registered under the Securities Act, they will also receive registration rights with respect to such stock, which rights are not exercisable until one year after the closing of the initial public offering. Pursuant to these registration rights, the purchasers will be able to have their shares of common stock registered for resale under the Securities Act, beginning after the first anniversary of the closing, on not more than one occasion for each purchaser each year, or not more than five occasions for each purchaser in total (known as a "demand" registration right). In addition, we expect to agree to use our reasonable efforts to register the shares for resale on a registration statement on Form S-3 as soon as practicable after the first anniversary of the closing. If the shares are registered on a Form S-3, each purchaser will be allowed to make not more than two offerings each year, subject to a minimum of $50,000,000 per offering, although underwritten offerings will be subject to the limitations on the number of demand registrations described above. The purchasers will also be able to participate, subject to specified limitations, in registrations effected by us for our own account or others. The private placements are subject to the negotiation of definitive documentation. Sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. 30 33 THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF THE MARKET PRICE OF OUR STOCK AFTER THE OFFERING The initial public offering price of our common stock will be determined by negotiations among MetLife, Inc., Metropolitan Life Insurance Company and the representatives of the underwriters. In addition, the final terms of the initial public offering, including the initial public offering price, will be subject to the approval of the New York Superintendent of Insurance. The initial public offering price of our common stock will be based on numerous factors and may not be indicative of the market price for our common stock after the initial public offering. Factors such as variations in actual or anticipated operating results, changes in or failure to meet earnings estimates of securities analysts, market conditions in the financial services and insurance industries, regulatory actions and general economic and stock market conditions, among others, may have a significant effect on the market price of our common stock. Accordingly, the market price of our common stock may decline below the initial public offering price. STATE LAWS AND OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DELAY, DETER OR PREVENT TAKEOVERS AND BUSINESS COMBINATIONS THAT STOCKHOLDERS MIGHT CONSIDER IN THEIR BEST INTERESTS State laws and our certificate of incorporation and by-laws may delay, deter or prevent a takeover attempt that stockholders might consider in their best interests. For instance, they may prevent stockholders from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future. The insurance laws and regulations of New York, the jurisdiction in which our principal insurance subsidiary, Metropolitan Life Insurance Company, is organized, may delay or impede a business combination involving us. Under the New York Insurance Law, for a period of five years following the effective date of the demutualization, no person may acquire beneficial ownership of 5% or more of the outstanding shares of our common stock without the prior approval of the New York Superintendent of Insurance. In addition, the New York Insurance Law prohibits any person from acquiring control of us and thus indirect control of Metropolitan Life Insurance Company, without the prior approval of the New York Superintendent. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock, unless the New York Superintendent, upon application, determines otherwise. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired such control, if the New York Superintendent determines that such persons, directly or indirectly, exercise a controlling influence over our management or our policies. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which may delay, deter or prevent an acquisition that stockholders might consider in their best interests. In addition, Section 203 of the Delaware General Corporation Law may affect the ability of an "interested stockholder" to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an "interested stockholder". An "interested stockholder" is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. The stockholder rights plan adopted by our board of directors may also have antitakeover effects. The stockholder rights plan is designed to protect our stockholders in the event of unsolicited offers to acquire MetLife, Inc. and other coercive takeover tactics which, in the opinion of our board of directors, could impair its ability to represent stockholder interests. The provisions of the stockholder rights plan may render an unsolicited takeover more difficult or less 31 34 likely to occur or might prevent such a takeover, even though such takeover may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price and may be favored by a majority of our stockholders. RISKS RELATING TO THE ACQUISITION OF GENAMERICA WE MAY BE EXPOSED TO ADDITIONAL LITIGATION General American Life is a defendant in three putative class action lawsuits involving sales practices claims. These lawsuits would not be covered either by our recent class action settlement pertaining to sales practices claims or by our excess of loss reinsurance agreements covering some of our sales practices claims. We are not indemnified under the stock purchase agreement relating to our acquisition of GenAmerica for any losses relating to such claims against GenAmerica. While it is not feasible to predict or determine the ultimate outcome of these matters, we believe that their outcomes will not have a material adverse effect on our business or financial condition, although it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our operating results or cash flows in any particular period. We or General American Life may also become subject to claims brought by policyholders of General American Life or shareholders of its publicly held subsidiaries in connection with events leading up to the execution of the stock purchase agreement, as well as the acquisition itself. Some transactions leading up to the acquisition and the acquisition itself might be susceptible to challenge if any of the entities involved is placed in liquidation or bankruptcy. No claims arising out of these events have yet been made. However, we cannot assure that claims will not be made in the future. We are indemnified under the terms of the stock purchase agreement for some of those matters. We have a first priority perfected security interest in the purchase price proceeds under the stock purchase agreement to cover losses that we incur for which General American Mutual Holding Company has indemnified us under the stock purchase agreement. Such indemnified losses include breaches of representations and warranties, legal proceedings brought within three years after the date of closing, alleged breaches of General American Life's funding agreements and GUARANTEED INTEREST CONTRACTS ("GICS") and the acceleration of payments under certain compensation arrangements and benefit plans. However, we cannot assure that the purchase price proceeds which may be available for indemnified losses will adequately protect us from liabilities if any claims are brought. WE MAY BE UNABLE TO RESTORE THE ONGOING BUSINESS OF GENAMERICA IN A TIMELY MANNER After General American Life was placed under the supervision of the Missouri Department of Insurance, sales of new insurance policies and annuity contracts by GenAmerica declined significantly and surrender levels for existing policyholders and annuity owners increased. Although we intend to quickly integrate GenAmerica into our existing operations following the acquisition, we cannot guarantee that we will be able to do so or that sales by GenAmerica of new insurance policies and annuity contracts and surrender rates for existing policies and contracts will return to pre-supervision levels. GenAmerica incurred a net loss in 1999, principally due to losses from the sale of invested assets to meet funding agreement and other policy obligations and the write-down of other assets to their current market value. There can be no assurance that future profitability of GenAmerica will not be adversely affected. 32 35 USE OF PROCEEDS Our net proceeds from the initial public offering are estimated to be $2,381 million, or $2,738 million if the underwriters' options to purchase additional shares of common stock as described under "Underwriting" are exercised in full, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, and after deducting an assumed underwriting discount and estimated offering expenses payable by us. Our proceeds from the planned private placements are estimated to be $1,022 million, assuming the purchase of 73,000,000 shares at an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. Our net proceeds from the offering of equity security units (net of the purchase price of the common securities by MetLife, Inc.) are estimated to be $960 million, or $1,104 million if the underwriters' options to purchase additional units are exercised in full, after deducting an assumed underwriting discount and estimated offering expenses payable by us. As required by the plan of reorganization, we will use the net proceeds from the offerings as follows: - an estimated $397 million to reimburse Metropolitan Life Insurance Company for the crediting of policy credits to certain policyholders in the demutualization; - an estimated $2,494 million to reimburse Metropolitan Life Insurance Company for the payment of cash to certain policyholders in the demutualization; - an estimated $315 million to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998; - an estimated $361 million to reimburse Metropolitan Life Insurance Company for the payment of the fees and expenses incurred in connection with the demutualization; and - MetLife, Inc. will retain up to $340 million (unless the New York Superintendent of Insurance approves a larger amount) for working capital, payment of dividends and other general corporate purposes, including payments on the debentures issued by MetLife, Inc. to MetLife Capital Trust I in connection with the offering of the units, and to pay the fees and expenses of the trustee and custodian of the MetLife Policyholder Trust. We will contribute any remaining proceeds to Metropolitan Life Insurance Company for its general corporate purposes and to repay up to $450 million of short-term debt that Metropolitan Life Insurance Company incurred in connection with the acquisition of GenAmerica Corporation. In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described above, Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible capital note due 2005 having the principal terms described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different than the amount estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to the limit in the plan that the proceeds of the units offering may not exceed one-third of the combined proceeds of that offering and the offering of MetLife, Inc.'s common stock pursuant to this prospectus and the private placements. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and our capital needs at the time of issuance. We will not receive any proceeds from the issuance of our common stock to the MetLife Policyholder Trust in exchange for policyholders' membership interests. 33 36 DIVIDEND POLICY Our board of directors intends to declare an annual dividend on our common stock of $0.20 per share. The declaration and payment of dividends is subject to the discretion of our board of directors, and will depend on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by Metropolitan Life Insurance Company and our other insurance subsidiaries and other factors deemed relevant by the board. There is no requirement or assurance that we will declare and pay any dividends. In addition, the indenture governing the terms of our debentures issued to MetLife Capital Trust I in connection with the offering of units prohibits the payment of dividends on our common stock during a deferral of interest payments on the debentures or an event of default under the indenture or the related guarantee. For a discussion of our cash sources and needs, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." Following the effective date of the plan, we will be an insurance holding company. Our assets will consist primarily of all of the outstanding shares of common stock of Metropolitan Life Insurance Company. Our ongoing ability to pay dividends to our stockholders and to meet our obligations, including paying our operating expenses, making payments on the debentures issued to MetLife Capital Trust I and any other debt service, depends primarily upon the receipt of dividends from Metropolitan Life Insurance Company and the interest received from Metropolitan Life Insurance Company under its $1 billion mandatorily convertible capital note due 2005 issued to MetLife, Inc. The payment of dividends by Metropolitan Life Insurance Company is regulated under the New York Insurance Law. See "Risk Factors -- Dividends and payments on our indebtedness may be affected by limitations imposed on Metropolitan Life Insurance Company" and "Business -- Regulation -- Insurance regulation -- Holding company regulation". 34 37 CAPITALIZATION The information in the following table is derived from and should be read in conjunction with the Consolidated Financial Statements and the related Notes and with the Pro Forma Consolidated Financial Information and Notes thereto included elsewhere in this prospectus. The table presents our consolidated capitalization at December 31, 1999 and after giving effect to (1) the demutualization as if it had occurred at December 31, 1999, (2) the initial public offering of 179,000,000 shares of our common stock, (3) the planned private placements of 73,000,000 shares of common stock, (4) the offering of 20,000,000 equity security units in the offering to be conducted concurrently with the initial public offering and (5) the application of the proceeds from the initial public offering of our common stock, the private placements and the offering of equity security units as described in "Use of Proceeds". The data set forth below assumes that the underwriters' options to purchase additional shares of common stock and units in the offerings are not exercised. See "The Demutualization -- Payment of Consideration to Eligible Policyholders".
AT DECEMBER 31, 1999 ------------------------------------------------------------------ THE INITIAL THE THE PUBLIC PRIVATE THE UNIT PRO HISTORICAL DEMUTUALIZATION OFFERING PLACEMENTS OFFERING FORMA ---------- --------------- ----------- ---------- -------- ------- (DOLLARS IN MILLIONS) DEBT: Short-term debt.......................... $ 4,208 $ -- $ -- $ -- $ -- $ 4,208 ------- -------- ------ ------ ---- ------- Long-term debt Surplus notes and other................ 1,666 -- -- -- -- 1,666 Investment-related debt................ 369 -- -- -- -- 369 Non-insurance subsidiary debt.......... 479 -- -- -- -- 479 ------- -------- ------ ------ ---- ------- Total long-term debt............ 2,514 -- -- -- -- 2,514 ------- -------- ------ ------ ---- ------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF PARENT............ -- -- -- -- 947 947 ------- -------- ------ ------ ---- ------- EQUITY: Preferred stock, par value $.01 per share; 200,000,000 shares authorized; none issued............................ -- -- -- -- -- -- Series A Junior Participating Preferred Stock; 10,000,000 shares authorized, none issued............................ -- -- -- -- -- -- Common stock, par value $.01 per share; 3,000,000,000 shares authorized; pro forma 493,476,118 shares for the demutualization, 179,000,000 shares for the initial public offering and 73,000,000 shares for the private placements; total pro forma 745,476,118 shares issued and outstanding.......... -- 5 2 1 -- 8 Additional paid-in capital............... -- 10,757 2,379 1,021 13 14,170 Retained earnings........................ 14,100 (14,100) -- -- -- -- Accumulated other comprehensive loss..... (410) -- -- -- -- (410) ------- -------- ------ ------ ---- ------- Total equity.................... 13,690 (3,338) 2,381 1,022 13 13,768 ------- -------- ------ ------ ---- ------- TOTAL CAPITALIZATION............ $16,204 $ (3,338) $2,381 $1,022 $960 $17,229 ======= ======== ====== ====== ==== =======
35 38 SELECTED FINANCIAL INFORMATION The following table sets forth selected consolidated financial information for MetLife. The consolidated financial information for the years ended December 31, 1999, 1998 and 1997 and at December 31, 1999 and 1998 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated financial information for the years ended December 31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 has been derived from our audited consolidated financial statements not included elsewhere in this prospectus. The following consolidated statements of income and consolidated balance sheet data, other than the statutory data, have been prepared in conformity with generally accepted accounting principles. The statutory data have been derived from Metropolitan Life Insurance Company's Annual Statements filed with insurance regulatory authorities and have been prepared in accordance with statutory accounting practices. The following information should be read in conjunction with and is qualified in its entirety by the information and consolidated financial statements appearing elsewhere in this prospectus.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ------- ---- ---- ---- ---- (DOLLARS IN MILLIONS) STATEMENTS OF INCOME DATA Revenues: Premiums(1)............................................... $12,088 $ 11,503 $ 11,278 $ 11,345 $ 11,178 Universal life and investment-type product policy fees.... 1,438 1,360 1,418 1,243 1,177 Net investment income(1)(2)(3)............................ 9,816 10,228 9,491 8,978 8,837 Other revenues(1)......................................... 2,154 1,994 1,491 1,246 834 Net realized investment gains (losses)(4)................. (70) 2,021 787 231 (157) ------- -------- -------- -------- -------- 25,426 27,106 24,465 23,043 21,869 ------- -------- -------- -------- -------- Expenses: Policyholder benefits and claims(1)(5).................... 13,105 12,638 12,403 12,432 12,043 Interest credited to policyholder account balances........ 2,441 2,711 2,878 2,868 3,143 Policyholder dividends.................................... 1,690 1,651 1,742 1,728 1,786 Other expenses(1)(3)(6)................................... 6,755 8,019 5,771 4,609 4,153 ------- -------- -------- -------- -------- 23,991 25,019 22,794 21,637 21,125 ------- -------- -------- -------- -------- Income before provision for income taxes, discontinued operations and extraordinary item......................... 1,435 2,087 1,671 1,406 744 Provision for income taxes(7)............................... 593 740 468 482 407 ------- -------- -------- -------- -------- Income before discontinued operations and extraordinary item...................................................... 842 1,347 1,203 924 337 (Loss) gain from discontinued operations(8)................. -- -- -- (71) 362 ------- -------- -------- -------- -------- Income before extraordinary item............................ 842 1,347 1,203 853 699 Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively........................... 225 4 -- -- -- ------- -------- -------- -------- -------- Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ======= ======== ======== ======== ========
36 39
AT DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) BALANCE SHEET DATA General account assets(3)............................... $160,291 $157,278 $154,444 $145,877 $144,277 Separate account assets................................. 64,941 58,068 48,338 43,399 38,861 -------- -------- -------- -------- -------- Total assets............................................ $225,232 $215,346 $202,782 $189,276 $183,138 ======== ======== ======== ======== ======== Liabilities: Life and health policyholder liabilities(9)........... $122,637 $122,726 $125,849 $121,333 $120,782 Property and casualty policyholder liabilities(9)..... 2,318 1,477 1,509 1,562 1,438 Short-term debt....................................... 4,208 3,585 4,587 3,311 3,235 Long-term debt........................................ 2,514 2,903 2,884 1,946 2,345 Separate account liabilities.......................... 64,941 58,068 48,338 43,399 38,861 Other liabilities(3).................................. 14,924 11,720 5,608 5,742 4,723 -------- -------- -------- -------- -------- Total liabilities....................................... 211,542 200,479 188,775 177,293 171,384 -------- -------- -------- -------- -------- Retained earnings....................................... 14,100 13,483 12,140 10,937 10,084 Accumulated other comprehensive income (loss)........... (410) 1,384 1,867 1,046 1,670 -------- -------- -------- -------- -------- Total equity............................................ 13,690 14,867 14,007 11,983 11,754 -------- -------- -------- -------- -------- Total liabilities and equity............................ $225,232 $215,346 $202,782 $189,276 $183,138 ======== ======== ======== ======== ========
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) OTHER DATA Operating income(4)(10)................................. $ 990 $ 23 $ 617 $ 818 $ 504 Adjusted operating income(4)(11)........................ $ 1,307 $ 1,226 $ 807 $ 921 $ 613 Operating return on equity(12).......................... 7.2% 0.2% 5.3% 7.8% 5.2% Adjusted operating return on equity(13)................. 9.5% 9.6% 7.0% 8.8% 6.3% Return on equity(14).................................... 4.5% 10.5% 10.4% 8.1% 7.2% Operating cash flows.................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823 Total assets under management(15)....................... $373,646 $360,703 $338,731 $297,570 $288,000 STATUTORY DATA(16) Premiums and deposits................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651 Net income (loss)....................................... $ 790 $ 875 $ 589 $ 460 $ (672) Policyholder surplus.................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785 Asset valuation reserve................................. $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) OPERATING DATA(21) INDIVIDUAL BUSINESS Total revenues.......................................... $ 11,067 $ 11,753 $ 10,630 Operating income(10).................................... $ 565 $ 631 $ 325 Net income.............................................. $ 555 $ 1,069 $ 599 Total assets............................................ $109,401 $103,614 $ 95,323 Policyholder liabilities(9)............................. $ 72,956 $ 71,571 $ 70,686 Separate account liabilities............................ $ 28,828 $ 23,013 $ 17,345 INSTITUTIONAL BUSINESS Total revenues.......................................... $ 10,380 $ 10,651 $ 9,271 Operating income(10).................................... $ 585 $ 482 $ 310 Net income.............................................. $ 567 $ 846 $ 339 Total assets............................................ $ 88,127 $ 88,741 $ 83,473 Policyholder liabilities(9)............................. $ 47,781 $ 49,406 $ 49,547 Separate account liabilities............................ $ 35,236 $ 35,029 $ 30,473 AUTO & HOME Total revenues.......................................... $ 1,876 $ 1,642 $ 1,459 Operating income(10).................................... $ 54 $ 81 $ 69 Net income.............................................. $ 56 $ 161 $ 74 Total assets............................................ $ 4,443 $ 2,763 $ 2,542 Combined ratio.......................................... 103.7% 100.8% 99.9%
37 40
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) ASSET MANAGEMENT Total revenues.......................................... $ 883 $ 892 $ 760 Operating income(10).................................... $ 51 $ 46 $ 45 Net income.............................................. $ 51 $ 49 $ 45 Assets under management(17)............................. $189,800 $191,000 $175,100 INTERNATIONAL OPERATIONS Total revenues(18)...................................... $ 790 $ 1,179 $ 1,745 Operating income (loss)................................. $ 18 $ (35) $ 6 Net income.............................................. $ 21 $ 56 $ 126 Total assets............................................ $ 4,381 $ 3,432 $ 7,412 Separate account liabilities............................ $ 877 $ 26 $ 520 CORPORATE(19) Total revenues(20)...................................... $ 623 $ 1,472 $ 1,045 Total expenses.......................................... $ 1,031 $ 2,591 $ 966 Net income (loss)....................................... $ (583) $ (695) $ 163
- --------------- (1) Includes the following combined financial statement data of MetLife Capital Holdings, Inc., which was sold in 1998, and our Canadian operations and U.K. insurance operations, substantially all of which were sold in 1998 and 1997, respectively:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (DOLLARS IN MILLIONS) Revenues: Premiums.................................................... $204 $ 463 $ 456 $ 439 Net Investment Income....................................... 495 914 877 637 Other revenues.............................................. 33 225 164 192 ---- ------ ------ ------ $732 $1,602 $1,497 $1,268 ==== ====== ====== ====== Expenses: Policyholder benefits and claims............................ $240 $ 495 $ 459 $ 492 Other expenses.............................................. 418 861 606 831 ---- ------ ------ ------ $658 $1,356 $1,065 $1,323 ==== ====== ====== ======
As a result of these sales, we recorded net realized investment gains of $520 million and $139 million for the years ended December 31, 1998 and 1997, respectively. In July 1998, Metropolitan Life Insurance Company sold a substantial portion of its Canadian operations to Clarica Life Insurance Company. As part of that sale, a large block of policies in effect with Metropolitan Life Insurance Company in Canada were transferred to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of Metropolitan Life Insurance Company and, therefore, are not entitled to compensation under the plan of reorganization. However, as a result of a commitment made in connection with obtaining Canadian regulatory approval of that sale, if Metropolitan Life Insurance Company demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of these transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The aggregate amount of the payment is dependent upon the initial public offering price of common stock to be issued at the effective date of the plan. Assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, and based on actuarial calculations we have made regarding these payments, we estimate that the aggregate payments will be $315 million. 38 41 (2) During 1997, we changed to the retrospective interest method of accounting for investment income on structured notes in accordance with Emerging Issues Task Force Consensus 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. As a result, net investment income increased by $175 million. The cumulative effect of this accounting change on prior years' income was immaterial. (3) In 1998, we adopted the provisions of Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to our securities lending program. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 million at December 31, 1998, and increasing revenues and expenses by $266 million for the year ended December 31, 1998. (4) Realized investment gains and losses are presented net of related policyholder amounts. The amounts netted against realized investment gains and losses are the following:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Gross realized investment gains (losses).................... $(137) $2,629 $1,018 $ 458 $ 73 ----- ------ ------ ----- ----- Less amounts allocable to: Future policy benefit loss recognition.................... -- (272) (126) (203) (152) Deferred policy acquisition costs......................... 46 (240) (70) (4) (78) Participating pension contracts........................... 21 (96) (35) (20) -- ----- ------ ------ ----- ----- Total..................................................... 67 (608) (231) (227) (230) ----- ------ ------ ----- ----- Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157) ===== ====== ====== ===== =====
Realized investment gains (losses) have been reduced by (1) deferred policy acquisition amortization to the extent that such amortization results from realized investment gains and losses, (2) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains, and (3) additions to participating contractholder accounts when amounts equal to such investment gains and losses are credited to the contractholders' accounts. This presentation may not be comparable to presentations made by other insurers. This presentation affected operating income and adjusted operating income. See note 10 below. (5) Policyholder benefits and claims exclude $(21) million, $368 million, $161 million, $223 million and $152 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, of future policy benefit loss recognition and credits to participating pension contracts that have been charged against net realized investment gains and losses as such amounts are directly related to such gains and losses. This presentation may not be comparable to presentations made by other insurers. (6) Other expenses exclude $(46) million, $240 million, $70 million, $4 million and $78 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, of amortization of deferred policy acquisition costs that have been charged against net realized investment gains and losses as such amounts are directly related to such gains and losses. This presentation may not be comparable to presentations made by other insurers. (7) Includes $125 million, $18 million, $(40) million, $38 million and $67 million for surplus tax paid (received) by Metropolitan Life Insurance Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. As a stock life insurance company, we will no longer be subject to the surplus tax after the effective date of the demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (8) The gain (loss) from discontinued operations was primarily attributable to the disposition of our group medical insurance business. (9) Policyholder liabilities include future policy benefits, policyholder account balances, other policyholder funds and policyholder dividends. 39 42 (10) The following provides a reconciliation of net income to operating income on a consolidated basis:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ---- ------- ------- ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $617 $ 1,343 $ 1,203 $ 853 $ 699 ---- ------- ------- ----- ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73) Income tax on gross realized investment gains and losses.................................................. (92) 883 312 173 26 ---- ------- ------- ----- ----- Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47) ---- ------- ------- ----- ----- Amounts allocated to investment gains and losses (see note 4)...................................................... (67) 608 231 227 230 Income tax on amounts allocated to investment gains and losses.................................................. 45 (204) (71) (86) (83) ---- ------- ------- ----- ----- Amount allocated to investment gains and losses, net of income tax............................................ (22) 404 160 141 147 ---- ------- ------- ----- ----- Loss (gain) from discontinued operations.................. -- -- -- 71 (362) ---- ------- ------- ----- ----- Surplus tax............................................... 125 18 (40) 38 67 ---- ------- ------- ----- ----- Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively.................. 225 4 -- -- -- ---- ------- ------- ----- ----- Operating income............................................ $990 $ 23 $ 617 $ 818 $ 504 ==== ======= ======= ===== =====
The following provides a reconciliation of net income to operating income for our Individual Business segment:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Net income.................................................. $555 $1,069 $ 599 ---- ------ ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 60 (914) (433) Income tax on gross realized investment gains and losses.................................................. (14) 306 100 ---- ------ ----- Realized investment (gains) losses, net of income tax... 46 (608) (333) ---- ------ ----- Amounts allocated to investment gains and losses (see note 4)........................................................ (46) 255 77 Income tax on amounts allocated to investment gains and losses.................................................... 10 (85) (18) ---- ------ ----- Amount allocated to investment gains and losses, net of income tax.............................................. (36) 170 59 ---- ------ ----- Operating income............................................ $565 $ 631 $ 325 ==== ====== =====
The following provides a reconciliation of net income to operating income for our Institutional Business segment:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Net income.................................................. $567 $ 846 $ 339 ---- ----- ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 53 (943) (181) Income tax on gross realized investment gains and losses.................................................. (22) 324 64 ---- ----- ----- Realized investment (gains) losses, net of income tax... 31 (619) (117) ---- ----- ----- Amounts allocated to investment gains and losses (see note 4)...................................................... (22) 386 136 Income tax on amounts allocated to investment gains and losses.................................................. 9 (131) (48) ---- ----- ----- Amount allocated to investment gains and losses, net of income tax............................................ (13) 255 88 ---- ----- ----- Operating income............................................ $585 $ 482 $ 310 ==== ===== =====
40 43 The following provides a reconciliation of net income to operating income for our Auto & Home segment:
FOR THE YEARS ENDED DECEMBER 31, --------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Net income.................................................. $56 $ 161 $74 --- ----- --- Adjustments to reconcile net income to operating income: Gross realized investment gains........................... (2) (122) (9) Income tax on gross realized investment gains............. -- 42 4 --- ----- --- Realized investment gains, net of income tax............ (2) (80) (5) --- ----- --- Operating income............................................ $54 $ 81 $69 === ===== ===
The following provides a reconciliation of net income to operating income (loss) for our International segment:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Net income.................................................. $21 $ 56 $ 126 --- ----- ----- Adjustments to reconcile net income to operating income (loss): Gross realized investments gains.......................... (1) (117) (160) Income tax on gross realized investment gains............. (2) 26 24 --- ----- ----- Realized investment gains, net of income tax............ (3) (91) (136) --- ----- ----- Amounts allocated to investment gains (see note 4)........ -- -- 18 Income tax on amounts allocated to investment gains....... -- -- (2) --- ----- ----- Amount allocated to investment gains, net of income tax................................................... -- -- 16 --- ----- ----- Operating income (loss)..................................... $18 $ (35) $ 6 === ===== =====
We believe the supplemental operating information presented above allows for a more complete analysis of results of operations. Realized investment gains and losses have been excluded due to their volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating income should not be considered as a substitute for any GAAP measure of performance. Our method of calculating operating income may be different from the method used by other companies and therefore comparability may be limited. (11) The following provides a reconciliation of operating income to adjusted operating income:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ---- ---- ---- (DOLLARS IN MILLIONS) Operating income............................................ $ 990 $ 23 $617 $818 $504 Adjustment for charges for sales practices claims and for personal injury claims caused by exposure to asbestos or asbestos-containing products, net of income tax........... 317 1,203 190 103 109 ------ ------ ---- ---- ---- Adjusted operating income................................... $1,307 $1,226 $807 $921 $613 ====== ====== ==== ==== ====
The charge for the year ended December 31, 1999 was principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The amount reported for the year ended December 31, 1998 includes charges for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. See Note 9 of Notes to Consolidated Financial Statements. We believe that supplemental adjusted operating income data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales 41 44 practices and asbestos-related claims. These expenses are not related to our ongoing operations. Adjusted operating income should not be considered as a substitute for any GAAP measure of performance. (12) Operating return on equity is defined as operating income divided by average total equity excluding accumulated other comprehensive income (loss). We believe the operating return on equity information presented supplementally allows for a more complete analysis of results of operations. Accumulated other comprehensive income (loss) has been excluded due to its volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating return on equity should not be considered as a substitute for any GAAP measure of performance. Our method of calculation of operating return on equity may be different from the calculation used by other companies and, therefore, comparability may be limited. Operating return on equity is only presented for annual periods. (13) Adjusted operating return on equity is defined as adjusted operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe that supplemental adjusted operating return on equity data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. Adjusted operating return on equity should not be considered as a substitute for any GAAP measure of performance. Adjusted operating return on equity is only presented for annual periods. (14) Return on equity is defined as net income divided by average total equity, excluding accumulated other comprehensive income (loss). (15) Includes MetLife's general account and separate account assets and assets managed on behalf of third parties. (16) Metropolitan Life Insurance Company statutory data only. (17) Includes $0.2 billion, $4.2 billion and $5.6 billion of MetLife's general account assets managed by our Asset Management segment at December 31, 1999, 1998 and 1997, respectively, as well as assets managed on behalf of third parties. (18) Includes our Canadian operations and U.K. insurance operations, substantially all of which were sold in 1998 and 1997, respectively. Total revenues for these entities were $469 million, $1,060 million, $1,001 million and $998 million for the years ended December 31, 1998, 1997, 1996 and 1995, respectively. (19) We maintain a Corporate segment through which we report items that are not directly allocable to any of our business segments, including unallocated capital, revenues and expenses. (20) Includes MetLife Capital Holdings, Inc., which was sold in 1998. Total revenues for this entity were $263 million, $542 million, $496 million and $270 million for the years ended December 31, 1998, 1997, 1996 and 1995, respectively. (21) Segment data does not include consolidation and elimination entries related to intersegment amounts. See Note 15 of Notes to Consolidated Financial Statements. 42 45 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The pro forma consolidated financial information presented below gives effect to: - the demutualization, including the issuance of an estimated 493,476,118 shares of our common stock to the MetLife Policyholder Trust in connection therewith; - the establishment of the closed block; - the sale of 179,000,000 shares of our common stock in the initial public offering at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus; - the planned concurrent private placements of 73,000,000 shares of common stock in the aggregate at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus; and - the concurrent offering of 20,000,000 equity security units at $50.00 per unit; as if they each had occurred at December 31, 1999, for the purposes of the pro forma consolidated balance sheet, and at January 1, 1999 for the purposes of the pro forma consolidated statement of income for the year ended December 31, 1999. The pro forma financial information excludes the effects of various acquisitions, including the acquisition of GenAmerica Corporation, and dispositions because they are not significant. This pro forma information is presented to depict only the effects of the demutualization, the establishment of the closed block, the offering of the units, the private placements and the initial public offering. Metropolitan Life Insurance Company incurred $900 million of short-term debt in connection with the acquisition of GenAmerica Corporation. We intend to repay up to $450 million of this short-term debt with proceeds from the offerings and the private placements in excess of those amounts required under the plan of reorganization. The pro forma information reflects gross and estimated net proceeds from the initial public offering of $2,506 million and $2,381 million, respectively, assuming an initial public offering price per share of $14.00 and the use of proceeds set forth elsewhere in this prospectus. The data also gives effect to proceeds of $1,022 million from the private placements and gross proceeds of $1,000 million from the issuance of the units, less an assumed underwriting discount and offering expenses aggregating $40 million, or net proceeds from the offering of $960 million. We expect to use an estimated $397 million of the aggregate net proceeds of these offerings and the private placements to reimburse Metropolitan Life Insurance Company for policy credits made to certain policyholders in lieu of 28,331,484 allocated shares of our common stock, an estimated $2,494 million of the aggregate net proceeds to reimburse Metropolitan Life Insurance Company for cash payments made to certain policyholders in lieu of 178,166,475 allocated shares of our common stock and an estimated $315 million to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998. We will account for the payments to the transferred Canadian policyholders in other expenses in the same period as the effective date of the plan. The consideration an eligible policyholder receives under the plan of reorganization will be based on the number of shares of our common stock allocated to the eligible policyholder pursuant to the terms of the plan. For those policyholders receiving policy credits or for those non-electing eligible policyholders who must receive cash in the demutualization, we will translate the share allocations into dollar amounts based on the initial public offering price per share. The cash payments made in lieu of allocated shares consist of $164 million of cash payments that will be distributed to non-electing eligible policyholders that must receive cash in the demutualization and $2,330 million in cash payments to eligible policyholders holding approximately 23.8% of the total number of shares of our common stock allocated to eligible policyholders who elected to receive cash, assuming an initial public offering price of $14.00 per share. See "The Demutualization -- Payment of Consideration to Eligible Policyholders". The pro forma consolidated statement of income also reflects the elimination of the surplus tax on 43 46 earnings and the inclusion of the minority interest related to the units and is presented before the extraordinary item for demutualization expense. The pro forma consolidated statement of income does not give effect to any pro forma earnings resulting from the use of the net proceeds from the offerings or the charge related to the payments to be made to certain transferred Canadian policyholders described above. We will account for the demutualization using the historical carrying values of our assets and liabilities. We have based the pro forma information on available information and on assumptions management believes are reasonable and that reflect the effects of these transactions. We have provided this information for informational purposes only. The number of shares and units actually sold in the offerings and the private placements and their respective prices may vary from the amounts assumed. The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of the equity security units are different than the amount estimated, we will be required to change the sizes of the other transactions, subject to the limit in the plan that the proceeds of the units offering may not exceed one-third of the combined proceeds of that offering, the private placements and the offering of MetLife, Inc.'s common stock pursuant to this prospectus. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and our capital needs at the time of issuance. This information does not necessarily indicate our consolidated financial position or results of operations had the demutualization, the establishment of the closed block, the offering of units, the initial public offering and the private placements been consummated on the dates assumed. It also does not project or forecast our consolidated financial position or results of operations for any future date or period. You should read the pro forma information in conjunction with our historical consolidated financial statements included elsewhere in this prospectus and with the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations", "The Demutualization" and "Business". 44 47 METLIFE, INC. PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999
AS ADJUSTED ESTABLISHMENT FOR THE CLOSED THE OF THE THE BLOCK AND THE UNIT HISTORICAL CLOSED BLOCK(1) DEMUTUALIZATION DEMUTUALIZATION OFFERING PRO FORMA ---------- --------------- --------------- --------------- -------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) REVENUES Premiums......................... $12,088 $(3,924) $ -- $ 8,164 $ -- $ 8,164 Universal life and investment-type product policy fees........................... 1,438 -- -- 1,438 -- 1,438 Net investment income............ 9,816 (2,177) -- 7,639 -- 7,639 Other revenues................... 2,154 -- -- 2,154 -- 2,154 Net realized investment losses (net of amounts allocable to other accounts of $67)......... (70) 6 -- (64) -- (64) Contribution from the closed block.......................... -- (87) -- (87) -- (87) ------- ------- ----- ------- ---- ----------- 25,426 (6,182) -- 19,244 -- 19,244 ------- ------- ----- ------- ---- ----------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net realized investment losses of $21)...... 13,105 (4,002) -- 9,103 -- 9,103 Interest credited to policyholder account balances............... 2,441 -- -- 2,441 -- 2,441 Policyholder dividends........... 1,690 (1,456) -- 234 -- 234 Other expenses (excludes amounts directly related to net realized investment losses of $46)........................... 6,755 (724) -- 6,031 87(7) 6,118 ------- ------- ----- ------- ---- ----------- 23,991 (6,182) -- 17,809 87 17,896 ------- ------- ----- ------- ---- ----------- Income (loss) before provision (benefit) for income taxes and extraordinary item............... 1,435 -- -- 1,435 (87) 1,348 Provision (benefit) for income taxes............................ 593 -- (125)(9) 468 (32)(7) 436 ------- ------- ----- ------- ---- ----------- Income before extraordinary item... $ 842 $ -- $ 125 $ 967 $(55) $ 912 ======= ======= ===== ======= ==== =========== Per share data: Income before extraordinary item per share -- basic and diluted........................ $ 1.22 =========== Number of shares used in calculation of per share data-- basic and diluted.............. 745,476,118(2)(3) ===========
The accompanying Notes are an integral part of this Pro Forma Consolidated Statement of Income. 45 48 METLIFE, INC. PRO FORMA CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999
AS ADJUSTED FOR ESTABLISHMENT THE CLOSED OF THE CLOSED THE BLOCK AND THE HISTORICAL BLOCK(1) DEMUTUALIZATION DEMUTUALIZATION ---------- ------------- --------------- --------------- (DOLLARS IN MILLIONS) ASSETS Investments: Fixed maturities available- for-sale, at fair value... $ 96,981 $(21,729) $ -- $ 75,252 Equity securities, at fair value..................... 2,006 -- -- 2,006 Mortgage loans on real estate.................... 19,739 (4,785) -- 14,954 Real estate and real estate joint ventures............ 5,649 -- -- 5,649 Policy loans................ 5,598 (3,747) -- 1,851 Other limited partnership interests................. 1,331 -- -- 1,331 Short-term investments...... 3,055 (8) -- 3,047 Other invested assets....... 1,501 (404) -- 1,097 -------- -------- -------- -------- 135,860 (30,673) -- 105,187 Cash and cash equivalents..... 2,789 (251) (2,809)(2) (271) Accrued investment income..... 1,725 (223) -- 1,502 Premiums and other receivables................. 6,681 (129) -- 6,552 Deferred policy acquisition costs....................... 8,492 (4,076) -- 4,416 Deferred income taxes......... 603 36 -- 639 Other......................... 4,141 -- -- 4,141 Closed block assets........... -- 35,316 -- 35,316 Separate account assets....... 64,941 -- -- 64,941 -------- -------- -------- -------- $225,232 $ -- $ (2,809) $222,423 ======== ======== ======== ======== LIABILITIES AND EQUITY LIABILITIES: Future policy benefits........ $ 73,582 $(38,576) $ 397(2) $ 35,403 Policyholder account balances.................... 45,901 (4) -- 45,897 Other policyholder funds...... 4,498 (308) -- 4,190 Policyholder dividends payable..................... 974 (712) -- 262 Short-term debt............... 4,208 -- -- 4,208 Long-term debt................ 2,514 -- -- 2,514 Current income taxes payable..................... 548 (14) (46)(4) 488 Other......................... 14,376 (13) 178(4) 14,541 Closed block liabilities...... -- 39,627 -- 39,627 Separate account liabilities................. 64,941 -- -- 64,941 -------- -------- -------- -------- 211,542 -- 529 212,071 -------- -------- -------- -------- Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent... -- -- -- -- -------- -------- -------- -------- EQUITY: Preferred stock............... -- -- -- -- Common stock.................. -- -- 5(2)(8) 5 Additional paid-in capital.... -- -- 10,757(2)(8) 10,757 Retained earnings............. 14,100 -- (14,100)(8) -- Accumulated other comprehen- sive loss................... (410) -- -- (410) -------- -------- -------- -------- 13,690 -- (3,338) 10,352 -------- -------- -------- -------- $225,232 $ -- $ (2,809) $222,423 ======== ======== ======== ======== THE INITIAL THE THE PUBLIC PRIVATE UNIT OFFERING PLACEMENTS OFFERING PRO FORMA -------- ---------- -------- --------- (DOLLARS IN MILLIONS) ASSETS Investments: Fixed maturities available- for-sale, at fair value... $ -- $ -- $ -- $ 75,252 Equity securities, at fair value..................... -- -- -- 2,006 Mortgage loans on real estate.................... -- -- -- 14,954 Real estate and real estate joint ventures............ -- -- -- 5,649 Policy loans................ -- -- -- 1,851 Other limited partnership interests................. -- -- -- 1,331 Short-term investments...... -- -- -- 3,047 Other invested assets....... -- -- -- 1,097 ------ ------ ---- -------- -- -- -- 105,187 Cash and cash equivalents..... 2,381(5) 1,022(6) 960(7) 4,092 Accrued investment income..... -- -- -- 1,502 Premiums and other receivables................. -- -- -- 6,552 Deferred policy acquisition costs....................... -- -- -- 4,416 Deferred income taxes......... -- -- -- 639 Other......................... -- -- -- 4,141 Closed block assets........... -- -- -- 35,316 Separate account assets....... -- -- -- 64,941 ------ ------ ---- -------- $2,381 $1,022 $960 $226,786 ====== ====== ==== ======== LIABILITIES AND EQUITY LIABILITIES: Future policy benefits........ $ -- $ -- $ -- $ 35,403 Policyholder account balances.................... -- -- -- 45,897 Other policyholder funds...... -- -- -- 4,190 Policyholder dividends payable..................... -- -- -- 262 Short-term debt............... -- -- -- 4,208 Long-term debt................ -- -- -- 2,514 Current income taxes payable..................... -- -- -- 488 Other......................... -- -- -- 14,541 Closed block liabilities...... -- -- -- 39,627 Separate account liabilities................. -- -- -- 64,941 ------ ------ ---- -------- -- -- -- 212,071 ------ ------ ---- -------- Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent... -- -- 947(7) 947 ------ ------ ---- -------- EQUITY: Preferred stock............... -- -- -- -- Common stock.................. 2(5) 1(6) -- 8 Additional paid-in capital.... 2,379(5) 1,021(6) 13(7) 14,170 Retained earnings............. -- -- -- -- Accumulated other comprehen- sive loss................... -- -- -- (410) ------ ------ ---- -------- 2,381 1,022 13 13,768 ------ ------ ---- -------- $2,381 $1,022 $960 $226,786 ====== ====== ==== ========
The accompanying Notes are an integral part of this Pro Forma Consolidated Balance Sheet. 46 49 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (1) The pro forma consolidated balance sheet and pro forma consolidated statement of income reflect the assets which have been set aside to establish the closed block, and the related liabilities, revenues and expenses, in each case based on provisions in the plan of reorganization. Closed block assets and liabilities on the pro forma consolidated balance sheet are reflected at their historical carrying values. See "The Demutualization -- Establishment and Operation of the Closed Block". We have established bookkeeping records to specifically segregate the assets, liabilities, revenues and expenses in the pro forma closed block, as if the closed block had been formed on January 1, 1999. These amounts include any new individual participating policies issued during 1999 and the revenues and expenses associated with individual participating policies eligible to be included in the closed block. The closed block will actually be formed on the effective date of the plan and, accordingly, the actual assets and liabilities ultimately assigned to the closed block and their carrying values will not be final until that date. In management's opinion, the assets and liabilities of the closed block as of the effective date of the plan are not expected to differ materially from the assets and liabilities reflected in the pro forma consolidated balance sheet. The pro forma consolidated statement of income reflects actual revenues and expenses related to the segregated assets and liabilities of the closed block and certain estimates that management believes are reasonable. We have determined the closed block amounts in the pro forma consolidated statement of income using the underlying policyholder administrative records supporting this business. Actual revenues and expenses related to the segregated closed block liabilities and closed block assets were used to derive the pro forma consolidated statement of income for the year ended December 31, 1999. Net investment income and realized investment gains and losses for the year ended December 31, 1999 reflect the actual income from assets set aside for assignment to the closed block. In management's opinion, the revenues and expenses of the individual participating policies to be included in the closed block as of the effective date of the plan are not expected to differ materially from the pro forma consolidated statement of income. The closed block amounts in the pro forma consolidated statement of income for the year ended December 31, 1999 reflect new individual participating policies issued during such period, which will ultimately be included in the closed block if such policies remain in force as of the effective date of the plan. Closed block amounts were determined as follows: (1) premiums and benefits related to the policies to be included within the closed block were used; (2) net investment income for the year ended December 31, 1999 reflects the actual income from assets set aside for assignment to the closed block; (3) policyholder dividends were based on dividend scales of policies to be included within the closed block; (4) maintenance expenses were based on per policy charges provided in the plan of reorganization; and (5) realized investment gains and losses of the closed block for the year ended December 31, 1999 reflect the actual gains and losses from the assets set aside for assignment to the closed block. Deferred policy acquisition costs on business included in the closed block has been reported as an asset of the closed block in the pro forma consolidated balance sheet. Amortization of closed block deferred policy acquisition costs, other than amounts arising from realized investment gains and losses on assets not allocated to the closed block, has been included in other expenses in the closed block. The pre-tax contribution from the closed block will include only those revenues, benefit payments, dividends, premium taxes, administrative expenses and investment expenses considered in funding the closed block. See "The Demutualization -- Establishment and Operation of the Closed Block". We will report the pre-tax contribution from the closed block as a single line item of total revenues. We will reflect income tax expense applicable to the closed block, which the closed block will pay, as a component of income tax expense. The excess of 47 50 closed block liabilities over closed block assets at the effective date of the demutualization will represent the estimated maximum future contribution from the closed block expected to result from operations attributed to the closed block after income taxes. The contribution from the closed block will be recognized in income over the period the policies and contracts in the closed block remain in force. Management believes that over time the actual cumulative contributions from the closed block will approximately equal the expected cumulative contributions, due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative contribution from the closed block is greater than the expected cumulative contribution from the closed block, only such expected contribution will be recognized in income with the excess recorded as a policyholder dividend obligation, because the excess of the actual cumulative contribution from the closed block over such expected cumulative contribution will be paid to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block. If over such period, the actual cumulative contribution from the closed block is less than the expected cumulative contribution from the closed block, only such actual contribution will be recognized in income. However, we may change dividends in the future, which would be intended to increase future actual contributions until the actual cumulative contributions equal the expected cumulative contributions. Pursuant to the plan of reorganization, Metropolitan Life Insurance Company has set aside assets for assignment to the closed block in an amount that produces cash flows which, together with anticipated revenue from the individual life insurance policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. The excess of closed block liabilities over closed block assets at the effective date of the demutualization equals the estimated maximum future after tax contribution from the closed block. As noted above, we will recognize in income the contribution from the closed block over the period the policies and contracts in the closed block remain in force. As a result of the establishment of the closed block, certain line items in our consolidated financial statements subsequent to the establishment of the closed block will reflect material reductions in reported amounts, compared with periods prior to the establishment of the closed block. These changes will have no effect on net income. We will reflect the results of the closed block business as a single line item in our consolidated statement of income entitled, "Contribution from the closed block". Prior to the establishment of the closed block, the results from the underlying business were reported in various line items in our consolidated statement of income, including premiums, net investment income, policyholder benefits and claims and other expenses. In addition, all assets and liabilities allocated to the closed block will be reported in our consolidated balance sheet separately under the captions, "Closed block assets" and "Closed block liabilities," respectively. (2) The number of shares of our common stock used in the calculation of pro forma income before extraordinary item per share -- basic and diluted is as follows: Shares allocated to eligible policyholders.................. 699,974,077 Less shares allocated to eligible policyholders who receive cash or policy credits.................................... 206,497,959 ----------- Shares issued to the MetLife Policyholder Trust............. 493,476,118 Shares issued in the initial public offering................ 179,000,000 Shares issued in the private placements..................... 73,000,000 ----------- Total shares of common stock outstanding.................... 745,476,118 ===========
48 51 We expect to contribute $4,023 million of the aggregate net proceeds from the offerings and the private placements to Metropolitan Life Insurance Company, of which: - an estimated $397 million will be used to reimburse Metropolitan Life Insurance Company for the crediting of policy credits to certain policyholders in the demutualization in lieu of 28,331,484 allocated shares of our common stock; - an estimated $2,494 million will be used to reimburse Metropolitan Life Insurance Company for cash payments to certain policyholders in the demutualization in lieu of 178,166,475 allocated shares of our common stock; - an estimated $315 million will be used to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998. See "The Demutualization -- Transferred Canadian Policies"; - an estimated $361 million to reimburse Metropolitan Life Insurance Company for the payment of fees and expenses incurred in connection with the demutualization; and - an estimated $456 million will be used for general corporate purposes and to repay up to $450 million of short-term debt incurred in connection with our acquisition of GenAmerica. We have reflected the amounts expected to be used to fund those policy credits referred to above as an increase in future policy benefits and a reduction of retained earnings in the pro forma consolidated balance sheet. We have reflected the amounts we expect to use to make the cash payments referred to above as a reduction in retained earnings in the pro forma consolidated balance sheet. In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described above, Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible capital note due 2005 having the principal terms described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." (3) Each unit in the unit offering consists of (a) a contract to purchase shares of our common stock and (b) a % capital security of MetLife Capital Trust I. Before the issuance of shares of our common stock upon settlement of the purchase contracts, the units will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating earnings per share for any period is deemed to be increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by us in the market, at the average market price during that period, using the proceeds receivable upon settlement. Consequently, there will be no dilutive effect on our earnings per share except during periods when the average market price of our common stock is above $ per share. (4) The pro forma consolidated balance sheet reflects estimated additional nonrecurring expenses of $132 million (net of income taxes of $46 million) related to the demutualization assumed to be incurred at the date of the pro forma consolidated balance sheet. The pro forma consolidated statement of income does not reflect such nonrecurring expenses since they will be reported as an extraordinary item. (5) Represents gross proceeds of $2,506 million from the issuance of 179,000,000 shares of our common stock at an assumed initial public offering price of $14.00 per share, less an assumed underwriting discount and estimated offering expenses aggregating $125 million, in the initial public offering. 49 52 (6) Represents proceeds of $1,022 million from the issuance of 73,000,000 shares of our common stock at an assumed initial public offering price of $14.00 in the planned private placements. (7) Represents gross proceeds of $1,000 million from the issuance of the equity security units, less an assumed underwriting discount and estimated offering expenses aggregating $40 million. The financial statements of the trust will be consolidated in our consolidated financial statements, with the capital securities shown on our consolidated balance sheet under the caption "Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent". The proceeds from the units will be allocated to the underlying purchase contracts and capital securities based on their relative fair values at the offering date. For purposes of the pro forma consolidated balance sheet, the fair value of the underlying purchase contracts and capital securities was assumed to be $13 million and $947 million, respectively. The forward contracts will be reported in additional paid-in capital and subsequent changes in fair value will not be recognized. The notes to our consolidated financial statements will disclose that the sole assets of the trust will be the debentures. Distributions on the capital securities will be reported as a charge to minority interest in our consolidated statements of income, whether paid or accrued. The charge to other expenses in the pro forma consolidated statement of income reflects distributions on the capital securities at an assumed rate of 7.60% ($76 million) and the accretion of the discount ($11 million) on the carrying value of the Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent. The income tax benefit related to such charges is $32 million. (8) Represents the reclassification of the retained earnings of Metropolitan Life Insurance Company to reflect the demutualization as follows:
(DOLLARS IN MILLIONS) --------------------- Historical retained earnings............................. $14,100 Less proceeds of offerings used to fund policy credits and cash payments to certain eligible policyholders.... 2,891 Less cash payments made by Metropolitan Life Insurance Company's Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company. We will account for the payments to the transferred Canadian policyholders in other expenses in the same period as the effective date of the plan of reorganization.......................... 315 Less additional demutualization expenses (net of income taxes of $46 million).................................. 132 ------- Retained earnings related to eligible policyholders receiving common stock................................. $10,762 =======
(9) Represents the elimination of the surplus tax. As a stock life insurance company, we will no longer be subject to the surplus tax after the effective date of the plan. 50 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the consolidated financial condition and results of operations of MetLife should be read in conjunction with "Selected Financial Information", the consolidated financial statements and notes thereto and "Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. BACKGROUND We are a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. We offer insurance, annuity and investment products to individuals and group insurance and retirement and savings products and services to corporations and other institutions. We derive our revenues principally from: - premiums from individual and group insurance, including those annuities that have a death benefit component; - fees from universal and variable life insurance products, annuity, investment products and administrative services contracts; - premiums from property and casualty insurance; - asset management fees; and - net investment income and realized investment gains or losses on general account assets. Our operating expenses consist of insurance benefits, increases in liabilities, interest credited on general account liabilities, marketing and administrative costs relating to products we sell, including commissions to our sales representatives, net of deferrals, and general business expenses. Our profitability depends largely on the adequacy of our product pricing, underwriting and methodology for the establishment of liabilities for future policyholder benefits, our ability to earn appropriate spreads between earned investment rates on general account assets and dividend and interest credited rates to customers, the amount of assets under management and our ability to manage our expenses. We are organized into five major business segments: Individual Business, Institutional Business, Asset Management, Auto & Home and International. Subsequent to January 6, 2000, the date on which we acquired GenAmerica, GenAmerica's businesses will be incorporated into our business segments as applicable, except for RGA, which will be separately designated as our Reinsurance segment. We also maintain a Corporate segment through which we report items that are not directly allocable to any of our business segments, including unallocated capital, income and expenses. We manage and allocate our general account assets among our business segments through distinct portfolios for each product group. Capital is allocated among each of our business segments based on a percentage of the "risk-based capital" levels of the assets allocated to the segments. RISK-BASED CAPITAL ("RBC") is a regulatory measure designed to aid in the evaluation of the statutory capital and surplus of life and health insurers. We also allocate net investment income to each business segment based upon the assets allocated to the segment. Sales of our insurance, annuity and investment products have been affected by overall trends in the insurance industry generally, as Americans have begun to rely less on traditional life insurance, defined benefit retirement plans, social security and other government programs, and the "baby-boom" generation has begun to enter its prime savings years. Reflecting these trends, as well as the impact of a strong equities market in recent years, sales of our traditional insurance products have declined in recent years, while sales of variable life and annuities, mutual funds and other savings products have increased. During the five years ended 1999, the separate account liabilities related to our individual variable annuity products grew at a 38.2% 51 54 compound annual rate, and totaled $20.7 billion and $15.8 billion at December 31, 1999 and 1998, respectively. During the five years ended 1999, first-year premiums and deposits from variable life insurance products grew at a compound annual rate of 33.1% and were $389 million and $371 million for the years ended December 31, 1999 and 1998, respectively. In addition, as the U.S. employment market has become more competitive, employers are seeking to enhance their ability to hire and retain employees by providing attractive benefit plans. Current trends in the work environment also reflect increasing concern of employees about the future of government-funded retirement and "safety-net" programs, an increasingly mobile workforce and the desire of employers to share the market risk from the investment of pension assets with employees. We believe these trends are facilitating the introduction of new benefits such as long-term care and auto and homeowners insurance, and are leading more employers to adopt defined contribution pension arrangements and 401(k) plans. A related trend has been the increased offering of voluntary products, which provide valued benefits to employees at little or no cost to the employer. These benefits, while paid for by employees, appeal to them because they are generally priced at group rates and are usually paid for by payroll deduction, making them convenient to purchase and maintain. We enter into reinsurance agreements to spread the risk and minimize the effect of losses. The amount of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. In recent periods, in response to the reduced cost of reinsurance coverage, we have increased the amount of MORTALITY risk coverage purchased from third party reinsurers. Since 1996, we have continually entered into reinsurance agreements that CEDED substantially all of the mortality risk on term insurance policies issued during 1996 and subsequent years, and on whole life and survivorship whole life insurance policies issued in 1997 and subsequent years. In 1998, we reinsured substantially all of the mortality risk on universal life policies we issued since 1983. We are continuing to reinsure substantially all of the mortality risk on our universal life policies as well as insurance face amounts which are above our retention limits. Generally, as a result of these transactions, we now reinsure up to 90% of the mortality risk for all new individual insurance policies that we write. We also maintain and manage a significant amount of mortality risk, including through our ownership of RGA, which retains mortality risk from many insurers, including MetLife. Furthermore, many of our individual life products, as well as some of our group insurance and annuity products, include elements of mortality risk. Our reinsurance agreements generally provide for payments to the reinsurers for the risks transferred to them, reduced by reimbursements to us of our policy issuance costs. The amounts presented in our consolidated statements of income for revenues and policyholder benefits are net of amounts ceded to the reinsurers. We report amounts reimbursed related to administrative costs for maintaining policies covered under reinsurance agreements in other revenues. Over the past three years, we have repositioned our investment portfolio in order to provide a higher operating rate of return on our invested assets. In connection with this strategy, we have reduced our investments in treasury securities, corporate equities and equity real estate and increased our investments in fixed maturities with a higher current operating yield. We have selectively acquired and disposed of businesses during the past several years as part of our business strategies and to enhance our overall returns. We expanded the distribution channels of Individual Business in the bank and broker-dealer distribution channels through the acquisitions of Security First Group in 1997 and of Nathan & Lewis in 1998. We became a leading provider of administrative services in the 401(k) market through the acquisitions of Benefit Services Corporation and the defined contribution record-keeping and participant services business formerly owned by Bankers Trust Corporation. We sold our commercial finance subsidiary in 1998 because it was not part of our core business strategy and disposed of a 52 55 substantial portion of our insurance operations in the U.K. and Canada to exit mature markets with little opportunity for growth. We expect to continue to make selective acquisitions and dispositions that augment our business strategies. On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in cash. In connection with our acquisition of the stock of GenAmerica, we incurred $900 million of short-term debt, consisting primarily of commercial paper. We intend to repay up to $450 million of that debt with proceeds from the offerings and the private placements in excess of those amounts required under the plan. In addition, we incurred approximately $3.2 billion of short-term debt, consisting primarily of commercial paper, in connection with our exchange offer to holders of General American Life funding agreements. On September 29, 1999, MetLife Funding, Inc. and Metropolitan Life Insurance Company obtained an additional committed credit facility for $5 billion, which serves as back-up for this commercial paper. For a description of the acquisition and related transactions, see "Business -- Acquisition of GenAmerica". On September 30, 1999, our Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion and approximately 3,000 independent agencies and brokers. We funded this acquisition, plus an additional investment in the business, with available cash and the issuance of commercial paper. This acquisition substantially increased the size of this segment's business, making us the eleventh largest personal property and casualty insurer in the U.S. based on 1998 net premiums written. In recent years, we have implemented programs to reduce operating expenses and enhance the efficiency of our operations. For the year ended December 31, 1999, we reduced the number of non-sales positions by 1,856, or 7%. These reductions are in addition to the elimination of 2,267, or 11%, of the non-sales positions in 1998. In 1999, we began an internal reorganization to integrate the operations of New England Financial, which since its merger with MetLife had been operated as a separate division, with the individual insurance operations of MetLife. The objective of this internal reorganization is to identify opportunities to eliminate redundant processes and costs, while maintaining the brand identities of our distribution channels and products. THE DEMUTUALIZATION Pursuant to the New York Insurance Law, the board of directors of Metropolitan Life Insurance Company adopted the plan of reorganization on September 28, 1999, and subsequently adopted amendments to the plan. On the date the plan becomes effective, Metropolitan Life Insurance Company will convert from a mutual life insurance company to a stock life insurance company and become a wholly-owned subsidiary of MetLife, Inc. This process is commonly known as a demutualization. We estimate that costs relating to the demutualization, excluding costs relating to the offerings and the private placements, will total $361 million, net of income taxes of $83 million. We have recorded demutualization costs of $229 million, net of income taxes of $37 million, through December 31, 1999. Demutualization expenses consist of our cost of printing and mailing materials to policyholders and our aggregate cost of engaging independent accounting, actuarial, compensation, financial, investment banking and legal advisors and other consultants to advise us in the demutualization process and related matters, as well as other administrative costs. The New York Superintendent of Insurance has also engaged experts to provide actuarial, investment banking, legal and auditing advice. Pursuant to the New York Insurance Law, we must pay the fees and expenses of such consultants, which fees and expenses are included in the above amounts. We have also agreed to indemnify certain of our consultants and consultants to the New York Superintendent against liabilities arising out of their engagements in connection with the demutualization. In addition, if Metropolitan Life Insurance Company demutualizes, we will incur costs related to payments to certain holders of Canadian policies included in the Canadian business sold by 53 56 Metropolitan Life Insurance Company to Clarica Life Insurance Company in 1998. See "The Demutualization -- Transferred Canadian Policies". These costs will be charged to other expenses in the same period as the effective date of the plan. The payments will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The amount to be paid to the holders of Canadian policies is dependent upon the initial public offering price of our common stock. Assuming an initial public offering price of $14.00 per share, and based on calculations we have made regarding these payments, we estimate the aggregate payments will be $315 million. The plan of reorganization requires us to complete an initial public offering of our common stock on the effective date of the plan. The plan also permits us to complete one or more private placements and other specified capital raising transactions on the effective date of the plan. Concurrently with this offering, we expect to sell not less than 14,900,000 shares nor more than 73,000,000 shares in the aggregate to Banco Santander Central Hispano, S.A. and Credit Suisse Group or their respective affiliates in private placements. In addition, we and a trust we own are offering 20,000,000 equity security units for an aggregate offering of $1,000 million, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full. Each unit consists of (a) a contract to purchase shares of our common stock and (b) a capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. For a description of the units see "Description of the Equity Security Units". Under the plan of reorganization, the total proceeds raised in the offering of units cannot exceed one-third of the combined proceeds raised in that offering, the initial public offering of our common stock and the private placements. The amount of proceeds from the offerings and the private placements and final terms of the units will depend on market conditions and our capital needs at the time of issuance. We cannot proceed with any offering relating to the units and the private placements without the approval of the New York Superintendent. The final terms of the initial public offering, the offering of units and the private placements must be approved by the New York Superintendent. We will be required to use the net proceeds from the initial public offering, as well as the net proceeds from the offering of units and the private placements, in the manner set forth under the caption "Use of Proceeds" above. The plan of reorganization requires that Metropolitan Life Insurance Company establish and operate a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life Insurance Company. We will allocate assets to the closed block in an amount that produces cash flows which, together with anticipated revenue from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenue from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience relating to the closed block are, in the aggregate, more or less favorable than assumed in establishing the closed block, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to our stockholders. The closed block will continue in effect as long as any policy in the closed block remains in force. Its expected life is over 100 years. We do not expect the closed block will affect our net income or our liquidity after its establishment. We will use the same accounting principles to account for the PARTICIPATING 54 57 POLICIES included in the closed block as we used prior to the date of demutualization. However, we will establish a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends in the amounts described below, unless these earnings are offset by future unfavorable experience of the closed block. The excess of closed block liabilities over closed block assets at the effective date of the demutualization represents the estimated maximum future contributions from the closed block expected to result from operations attributed to the closed block after income taxes. We will recognize the contributions from the closed block in income over the period the policies and contracts in the closed block remain in force. Management believes that over time the actual cumulative contributions from the closed block will approximately equal the expected cumulative contributions, due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative contribution from the closed block is greater than the expected cumulative contribution from the closed block, we will recognize only the expected cumulative contribution in income with the excess recorded as a policyholder dividend obligation, because we will pay the excess of the actual cumulative contribution from the closed block over the expected cumulative contribution to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block. If over such period, the actual cumulative contribution from the closed block is less than the expected cumulative contribution from the closed block, we will recognize only the actual contribution in income. However, we may change dividends in the future, which would be intended to increase future actual contributions until the actual cumulative contributions equal the expected cumulative contributions. As required by law, the plan was approved by more than two-thirds of eligible policyholders who voted in voting completed on February 7, 2000. The plan of reorganization will not become effective unless, after conducting a public hearing on the plan, the New York Superintendent of Insurance approves it based on a finding, among other things, that the plan is fair and equitable to policyholders. The New York Superintendent held a public hearing on the plan on January 24, 2000. 55 58 RESULTS OF OPERATIONS The following table presents summary consolidated financial information for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................... $12,088 $11,503 $11,278 Universal life and investment-type product policy fees...... 1,438 1,360 1,418 Net investment income....................................... 9,816 10,228 9,491 Other revenues.............................................. 2,154 1,994 1,491 Net realized investment gains (losses) (net of amounts allocable to other accounts of $(67), $608 and $231, respectively)............................................. (70) 2,021 787 ------- ------- ------- 25,426 27,106 24,465 ------- ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net realized investment gains and losses of $(21), $368 and $161, respectively)....................... 13,105 12,638 12,403 Interest credited to policyholder account balances.......... 2,441 2,711 2,878 Policyholder dividends...................................... 1,690 1,651 1,742 Other expenses (excludes amounts directly related to net realized investment gains and losses of $(46), $240 and $70, respectively)........................................ 6,755(1) 8,019(1) 5,771 ------- ------- ------- 23,991 25,019 22,794 ------- ------- ------- Income before provision for income taxes and extraordinary item...................................................... 1,435 2,087 1,671 Provision for income taxes.................................. 593 740 468 ------- ------- ------- Income before extraordinary item............................ 842 1,347 1,203 Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively........................... 225 4 -- ------- ------- ------- Net income.................................................. $ 617 $ 1,343 $ 1,203 ======= ======= =======
- --------------- (1) Other expenses in 1999 includes a pre-tax charge of $499 million principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. During 1998, we obtained certain excess of loss reinsurance and excess insurance policies and agreements providing coverage for risks associated primarily with sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. In 1998, we recorded a pre-tax charge of $1,895 million, included in other expenses, for related insurance and reinsurance premiums and for potential liabilities related to certain of these claims. See "Business -- Legal Proceedings". YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 Premiums increased by 5% to $12,088 million in 1999 from $11,503 million in 1998. This increase was attributable to strong growth in Institutional Business of $366 million, or 7%, and Auto & Home of $348 million, or 25%. These increases were partially offset by decreases in International of $95 million, or 15%, and in Individual Business of $34 million, or 1%. Institutional Business' growth was primarily driven by an increase in non-medical health premiums due to increased sales and improved policyholder retention in our dental and disability businesses. Auto & Home's premium increase was primarily due to the acquisition of the standard personal lines property and casualty insurance operations of The St. Paul Companies, representing $262 56 59 million of the premiums, as well as growth in both standard and non-standard auto insurance businesses. International's premium decrease was primarily due to the disposition of a substantial portion of our Canadian operations in July 1998. The Individual Business decrease was primarily attributable to the decline in sales of traditional life insurance policies, which reflected a continued shift in customers' investment preferences from those policies to variable life products as well as decreased sales of supplementary contracts with life contingencies. Universal life and investment-type product policy fees increased by 6% to $1,438 million in 1999 from $1,360 million in 1998. This increase was attributable to increases of $71 million, or 9%, in Individual Business and $27 million, or 6%, in Institutional. These increases were partially offset by a decrease in International of $20 million, or 29%. The Individual Business policy fee increase was primarily due to the continued growth in deposits for investment products as well as stock market appreciation. The $27 million increase in Institutional Business' policy fees was primarily due to continued growth in sales of products used in executive and corporate-owned benefit plans. The majority of International's policy fee decrease resulted from the sale of a substantial portion of our Canadian operations. Net investment income decreased by 4% to $9,816 million in 1999 from $10,228 million in 1998. This decrease was primarily due to reductions in (i) investment income related to mortgage loans on real estate of $93 million, or 6%, (ii) investment income on other invested assets of $340 million, or 40%, (iii) equity securities income of $38 million, or 49%, (iv) policy loan income of $47 million, or 12% and (v) real estate and real estate joint ventures income, after investment expenses and depreciation, of $106 million, or 15%. These reductions in net investment income were partially offset by higher income from fixed maturities of $203 million, or 3%. The reduction in investment income from mortgage loans on real estate to $1,479 million in 1999 from $1,572 million in 1998 was due to a reduction in principal balances in MetLife Capital Holdings, Inc. and a substantial portion of our Canadian operations, which were sold in 1998, the proceeds from which were reinvested in fixed maturities. Likewise, the increase in fixed maturity investment income to $6,766 million in 1999 from $6,563 million in 1998 was primarily attributable to increased average principal balances due, in part, to the reinvestment of proceeds from the sale of MetLife Capital Holdings, as well as from sales of equity securities, the dispositions of which were part of our 1998 year-end asset repositioning program. The reduction in investment income from other invested assets to $501 million in 1999 from $841 million in 1998 was due to a reduction in leveraged lease balances as a result of the sale of MetLife Capital Holdings and lower fees received from bond prepayments, calls and tenders. The reduction in real estate and real estate joint ventures income was primarily attributable to the timing of sales of investments held by our real estate joint ventures. Other revenues, which are primarily comprised of expense reimbursements from reinsurers and fees related to investment management and administrative services and securities lending activities, increased by 8% to $2,154 million in 1999 from $1,994 million in 1998. This increase was primarily attributable to growth of $84 million, or 18%, in Individual Business and $54 million, or 9%, in Institutional Business. The Individual Business increase is primarily due to a full year of activity from our acquisition of Nathan & Lewis, which was acquired in April 1998. The increase in Institutional Business is due to increases in our non-medical health and retirement and savings businesses, partially offset by a decrease in our group life business. Our non-medical health business increased $61 million primarily due to growth in our dental administrative service business. The increase in our retirement and savings business of $44 million reflected higher administrative fees derived from separate accounts and our defined contribution record-keeping services. The decrease in the group life business of $51 million was primarily due to lower income in 1999 related to funds used to seed separate accounts. Our realized investment gains and losses are net of related policyholder amounts. The amounts netted against realized investment gains and losses are (i) amortization of deferred policy acquisition costs attributable to the increase or decrease in product gross margins or 57 60 profits resulting from realized investment gains and losses, (ii) additional policyholder liabilities, which are required when investment gains are realized and we reinvest the proceeds in lower yielding assets ("loss recognition"), and (iii) liabilities for those participating contracts in which the policyholders' accounts are increased or decreased by the related investment gains or losses. Net realized investment gains (losses) decreased by 103% to $(70) million in 1999 from $2,021 million in 1998. This decrease reflected total gross realized investment losses of $(137) million, a decrease of 105%, from total gross realized investment gains of $2,629 million in 1998, before the offsets for the amortization of deferred policy acquisition costs of $46 million and $(240) million, loss recognition of $0 million and $(272) million and credits to participating contracts of $21 million and $(96) million related to assets sold in 1999 and 1998, respectively. A significant portion of our net realized investment gains in 1998 was attributable to a sales program initiated in the fourth quarter of 1998, which we conducted as part of our strategy to reposition our investment portfolio in order to provide a higher operating rate of return on our invested assets. In connection with this repositioning, we reduced our investments in treasury securities and corporate equities and increased our investments in fixed maturities with a higher current yield. Net realized investment losses in 1999 reflect the continuation of our strategy to reposition our investment portfolio in order to provide a higher operating rate of return on our invested assets. We believe the policy of netting related policyholder amounts against realized investment gains and losses provides important information in evaluating our operating performance. Realized investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. We believe our presentation enables readers of our consolidated statements of income to easily exclude realized investment gains and losses and the related effects on the consolidated statements of income when evaluating our operating performance. Our presentation of realized investment gains and losses net of related policyholder amounts may be different from the presentation used by other insurance companies and, therefore, amounts in our consolidated statements of income may not be comparable with amounts reported by other insurers. Policyholder benefits and claims increased by 4% to $13,105 million in 1999 from $12,638 million in 1998. This increase reflected total gross policyholder benefits and claims of $13,084 million, an increase of $78 million from $13,006 million in 1998, before the offsets for loss recognition of $272 million in 1998 period (there were no offsets for loss recognition in 1999) and (reductions) in or additions to participating contractholder accounts of $(21) million and $96 million directly related to net realized investment gains and losses for the years ended December 31, 1999 and 1998, respectively. This increase was primarily attributable to increases of $296 million, or 5%, in Institutional Business and $272 million, or 26%, in Auto & Home, partially offset by a decrease of $134 million, or 22%, in International. The Institutional Business increase was primarily due to overall premium growth within our group dental and disability businesses. The increase in Auto & Home was primarily due to the St. Paul acquisition of $195 million, a 6% increase in the number of policies in force and $23 million of unfavorable claims development due to lower than expected savings resulting from the implementation of a new technology platform. The decrease in International was attributable to the sale of a substantial portion of our Canadian operations. Interest credited to policyholder account balances decreased by 10% to $2,441 million in 1999 from $2,711 million in 1998. This decrease was attributable to reductions of $169 million, or 14%, in Institutional Business, $64 million, or 4%, in Individual Business and $37 million, or 42%, in International. Group Insurance in Institutional Business decreased $63 million, or 14%, primarily due to cancellations in the leveraged corporate-owned life insurance business attributable to a change in the federal income tax treatment for those products. In addition, retirement and savings products declined by $106 million, or 14%, which reflected a shift in policyholders' 58 61 investment preferences from guaranteed interest products to separate account alternatives. The decrease in Individual Business was due to a 1998 annuity reinsurance transaction, as well as a shift in policyholders' preferences to separate account alternatives. The International decrease was due to the sale of a substantial portion of our Canadian operations. Policyholder dividends increased by 2% to $1,690 million in 1999 from $1,651 million in 1998. This increase was attributable to increases of $64 million, or 4%, in Individual Business and $17 million, or 12%, in Institutional Business, which were somewhat offset by a $42 million, or 66%, decrease in International. The increase in Individual Business was primarily due to growth in cash values of policies associated with our large block of traditional life insurance business combined with a dividend scale increase on certain mature policies in 1999. Policyholder dividends within Institutional Business vary from period to period based on participating group insurance contract experience. The International decrease was due to the sale of a substantial portion of our Canadian operations. Other expenses decreased by 16% to $6,755 million in 1999 from $8,019 million in 1998. This decrease reflected total gross other expenses of $6,709 million, a decrease of 19%, from $8,259 million in 1998, before the offset for amortization of deferred policy acquisition costs directly attributable to net realized investment gains and losses of $(46) million and $240 million for the years ended December 31, 1999 and 1998, respectively. Excluding the effect of the pay down of debt with proceeds from the sale of MetLife Capital Holdings, Inc. in 1998, other expenses decreased by $1,372 million. This decrease was attributable to a $1,570 million, or 60%, decrease in Corporate. The decrease in Corporate was primarily due to a $1,895 million charge in 1998 for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products, compared with a $499 million charge in 1999. The 1999 charge was principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sale practices, accruals for sales practices claims not covered by the settlement and other legal costs. The 1998 charge of $1,895 million was comprised of $925 million and $970 million for sales practices claims and asbestos-related claims, respectively. We recorded the accrual for sales practices claims based on preliminary settlement discussions and the settlement history of other insurers. Prior to the fourth quarter of 1998, we established a liability for asbestos-related claims based on settlement costs for claims that we had settled, estimates of settlement costs for claims pending against us and an estimate of settlement costs for unasserted claims. The amount for unasserted claims was based on management's estimate of unasserted claims that would be probable of assertion. A liability is not established for claims which we believe are only reasonably possible of assertion. Based on this process, our accrual for asbestos-related claims at December 31, 1997 was $386 million. Our potential liabilities for asbestos-related claims are not easily quantified, due to the nature of the allegations against us, which are not related to the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products, adding to the uncertainty in the number of claims brought against us. During 1998, we decided to pursue the purchase of insurance to limit our exposure to asbestos-related claims. In connection with our negotiations with the casualty insurers to obtain this insurance, we obtained information that caused us to reassess our accruals for asbestos-related claims. This information included: - Information from the insurers regarding the asbestos-related claims experience of other insureds, which indicated that the number of claims that were probable of assertion against us in the future was significantly greater than we had assumed in our accruals. The number of claims brought against us is generally a reflection of the number of asbestos-related claims brought against asbestos defendants generally and the percentage of those claims in which we are included as a defendant. The information provided to us relating to other insureds indicated that we had been included as defendants for a 59 62 significant percentage of total asbestos-related claims and that we may be included in a larger percentage of claims in the future, because of greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers and because of the bankruptcy and reorganization or the exhaustion of insurance coverage of other asbestos defendants; and that, although volatile, there was an upward trend in the number of total claims brought against asbestos defendants. - Information derived from actuarial calculations we made in the fourth quarter of 1998 in connection with these negotiations, which helped us to frame, define and quantify this liability. These calculations were made using, among other things, current information regarding our claims and settlement experience (which reflected our decision to resolve an increased number of these claims by settlement), recent and historic claims and settlement experience of selected other companies and information obtained from the insurers. Based on this information, we concluded that certain claims that previously were considered as only reasonably possible of assertion were now probable of assertion, increasing the number of assumed claims to approximately three times the number assumed in prior periods. As a result of this reassessment, we increased our liability for asbestos-related claims to $1,278 million at December 31, 1998. During 1998, we paid $1,407 million of premiums for excess of loss reinsurance and insurance policies and agreements, consisting of $529 million for the excess of loss reinsurance agreements for sales practices claims and excess mortality losses and $878 million for the excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses of up to $1,500 million, while the excess of loss reinsurance policies provide for recovery of sales practices losses of up to $550 million and for certain mortality losses with a maximum aggregate limit of $650 million. We may recover amounts under the policies annually, with respect to claims paid during the prior calendar year. The policies contain self-insured retentions and, with respect to asbestos-related claims, annual and per-claim sublimits, for which we believe adequate provision has been made in our consolidated financial statements. For additional information regarding the nature of these claims, see "Business -- Legal Proceedings" and Note 9 of Notes to Consolidated Financial Statements. In addition to the decrease in Corporate in 1999, other expenses reflected a $104 million, or 30%, decrease in International, and increases of $128 million, or 33%, in Auto & Home and $142 million, or 6%, in Individual Business. The International decrease was primarily due to the sale of a substantial portion of our Canadian operations. The increase in Auto & Home was primarily due to the St. Paul acquisition. The increase in Individual Business was attributable to the net capitalization of deferred acquisition costs, as discussed below. Excluding the net capitalization of deferred acquisition costs, other expenses in Individual Business decreased by $81 million, or 3%. This decrease is primarily attributable to cost reduction initiatives implemented in 1998. Deferred acquisition costs are principally amortized in proportion to gross margins or gross profits, including realized investment gains or losses. The amortization is allocated to realized investment gains (losses) to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred acquisition costs increased by 13% to $1,160 million in 1999 from $1,025 million in 1998, while amortization of such costs decreased slightly to $816 million in 1999 from $827 million in 1998. Amortization of deferred acquisition costs of $862 million and $587 million was allocated to other expenses in 1999 and 1998, respectively, while the remainder of the amortization in each year was allocated to realized investment gains (losses). The increase in amortization of deferred acquisition costs allocated to other expenses was primarily 60 63 attributable to our Individual Business segment, which increased to $613 million in 1999 from $364 million in 1998. This increase resulted from our reinsurance of mortality risk at a cost that is expected to be less than our previously estimated mortality losses in 1998, as well as refinements in our calculation of estimated gross margins. Income tax expense in 1999 was $593 million, or 41%, of income before provision for income taxes and extraordinary item compared with $740 million, or 35%, in 1998. The 1999 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of surplus tax. We are subject to surplus tax imposed on mutual life insurance companies under Section 809 of the Internal Revenue Code. The surplus tax results from the disallowance of a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. The surplus tax is estimated each year and adjusted the following year based on actual industry experience. As a stock company, we will no longer be subject to the surplus tax after the effective date of the demutualization. Demutualization expenses, net of income taxes, were $225 million in 1999. These costs related to our ongoing demutualization efforts. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 Premiums increased by 2% to $11,503 million in 1998 from $11,278 million in 1997. This increase was attributable to strong growth in Institutional Business of $470 million, or 10%, and in Auto & Home of $49 million, or 4%. These increases were partially offset by a decrease in International of $290 million, or 32%. Institutional Business' premium growth was driven primarily by increases in group life premiums. In addition, Institutional Business' group non-medical health benefited from market share growth in dental products and services and long-term care. Auto & Home's premium increase was primarily due to growth in non-standard auto insurance policies. International's premium decrease was primarily due to the dispositions of substantial portions of our U.K. operations in October 1997 and of our Canadian operations in July 1998. Universal life and investment-type product policy fees decreased by 4% to $1,360 million in 1998 from $1,418 million in 1997. This decrease was attributable to reductions of $69 million, or 50%, in International and $38 million, or 4%, in Individual Business. Substantially all of International's policy fee decrease resulted from the divestitures of substantial portions of our U.K. and Canadian operations. The Individual Business policy fee decrease was primarily due to reinsurance treaties entered into during 1998, related to $86 billion of universal life insurance in-force, which were offset in part by continued growth of $75 million in annuities and investment products. These decreases were also offset by a $49 million increase in Institutional Business policy fees, due to an increase in sales of products used in executive and corporate-owned benefit plans during 1998. Net investment income increased by 8% to $10,228 million in 1998 from $9,491 million in 1997, primarily due to higher other investment income of $473 million, or 129%, higher fixed maturities income of $118 million, or 2%, improved real estate income after investment expenses and depreciation of $101 million and reduced investment expenses of $198 million. These increases in net investment income were partially offset by reduced investment income in mortgage loans on real estate of $112 million, or 7%, and other limited partnership interests of $106 million, or 35%. The increase in other investment income to $841 million in 1998 from $368 million in 1997 was principally due to a $289 million increase in revenue attributable to our securities lending program resulting from the implementation of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities during 1998. This increase was offset by a commensurate increase in other expenses. The remainder of this increase was primarily due to higher fees we received as a result of bond prepayments, calls and tenders, which reflected, in part, declining interest rates in 1998. The increase in fixed maturity investment income to $6,563 million in 1998 from $6,445 million in 1997 was primarily attributable 61 64 to increased principal balances due, in part, to the reinvestment of proceeds from the sale of MetLife Capital Holdings, Inc. Likewise, the reduction in investment income from mortgage loans on real estate to $1,572 million in 1998 from $1,684 million in 1997 was due to a reduction in principal balances in MetLife Capital Holdings, Inc. and a substantial portion of our Canadian operations, which were sold in 1998, the proceeds from which were reinvested in fixed maturities. The real estate investment income improvement represents the result of real estate expenses reducing more than real estate income in 1998, the final leg of our sales program. Since the inception of our sales program in 1995, the average yield on our holdings of real estate has increased to 10.4% in 1998. Investment income from other limited partnership interests decreased to $196 million in 1998 from $302 million in 1997. Income from other limited partnership interests fluctuate from period to period due to the unpredictable nature of realized gains from these partnerships. Other revenues increased by 34% to $1,994 million in 1998 from $1,491 million in 1997. This increase was primarily attributable to growth of $218 million, or 61%, in Institutional Business, $136 million, or 40%, in Individual Business and $135 million, or 20%, in Asset Management. The Institutional Business increase was due to higher administrative fees of $70 million derived from separate accounts, $56 million from our defined contribution plan record-keeping services and $32 million from funds held on deposit related to a reinsurance agreement entered into during 1997. Individual Business' increase was due to the acquisition of Nathan & Lewis ($62 million of the increase), additional commission and fee income associated with reinsurance treaties ($39 million of the increase) and growth in expense reimbursements from reinsurers for administrative costs incurred related to policies covered under reinsurance agreements ($13 million of the increase). The increase in Asset Management was attributable to higher management and advisory fees related to growth in assets managed. Net realized investment gains increased by 157% to $2,021 million in 1998 from $787 million in 1997. This increase reflected total gross realized investment gains of $2,629 million, an increase of 158%, from $1,018 million in 1997, before the offsets for the additional amortization of deferred acquisition costs of $240 million and $70 million, loss recognition for the policy liabilities of $272 million and $126 million and additional credits to participating contracts of $96 million and $35 million related to the assets sold in 1998 and 1997, respectively. The increase in gross realized investment gains was primarily attributable to a sales program initiated in the fourth quarter of 1998, which we conducted as part of our strategy of repositioning our investment portfolio in order to provide a higher operating rate of return on our invested assets. In connection with this repositioning, we reduced our investments in treasury securities and corporate equities and increased our investments in fixed maturities with a higher current yield. We sold approximately $2.2 billion of corporate equities and reinvested these proceeds into other fixed maturity securities, which provide a higher current return. Realized investment gains from fixed maturity and equity securities were $1,567 million in 1998, a 358% increase from $342 million in 1997. Net realized investment gains also increased by $392 million from the sales of MetLife Capital Holdings, Inc. and a substantial portion of our Canadian operations during 1998. Policyholder benefits and claims increased by 2% to $12,638 million in 1998 from $12,403 million in 1997. This increase reflected total gross policyholder benefits and claims of $13,006 million, an increase of 4%, from $12,564 million in 1997, before the offsets for loss recognition of $272 million and $126 million and additions to participating contractholder accounts of $96 million and $35 million directly related to net realized investment gains in 1998 and 1997, respectively. This increase was attributable to increases of $482 million, or 8%, in Institutional Business partially offset by a decrease of $256 million in International attributable to the U.K. and Canadian divestitures. The Institutional Business increase was commensurate with the increase in Institutional Business premiums of $470 million, and was also attributable to less favorable experience on participating group insurance contracts, which were offset by reduced dividends to those policyholders of $163 million. 62 65 Interest credited to policyholder account balances decreased by 6% to $2,711 million in 1998 from $2,878 million in 1997. This decrease was primarily attributable to declines of $120 million, or 9%, in Institutional Business and $48 million, or 35%, in International. Retirement and savings products in Institutional Business declined by $186 million, or 20%, due to a shift in customers' investment preferences from guaranteed interest products to separate account alternatives and the continuation of the low interest rate environment. The International decline was due to the divestitures of substantial portions of our U.K. and Canadian operations. Policyholder dividends decreased by 5% to $1,651 million in 1998 from $1,742 million in 1997. This decrease was attributable to reductions of $163 million, or 53%, in Institutional Business and $33 million, or 34%, in International. The Institutional Business decrease was due to less favorable claims experience on participating group insurance contracts. The International decrease was due to the U.K. and Canadian divestitures. These decreases were partially offset by a $105 million, or 8%, increase in Individual Business, primarily due to dividend increases from growth in cash values in policies associated with our large block of traditional life insurance business, offset by reductions in policyholder dividend scales. Other expenses increased by 39% to $8,019 million in 1998 from $5,771 million in 1997. This increase reflected total gross other expenses of $8,259 million, an increase of 41%, from $5,841 million in 1997, before the offset for accelerated amortization of deferred policy acquisition costs directly attributable to net realized investment gains of $240 million and $70 million in 1998 and 1997, respectively. This increase was primarily attributable to a charge of $1,895 million in 1998 for sales practices claims and claims for personal injuries caused by exposure to asbestos, or asbestos-containing products, compared with $300 million in 1997. These amounts have been charged to the Corporate segment. In addition, the increase in other expenses in 1998 included $266 million resulting from a change in accounting for our securities lending program. This increase related to our securities lending program, which is reflected in the results of operations for each business segment, is commensurate with a related increase in investment income. Expenses in Institutional Business increased by $435 million, or 37%, due to higher administrative expenses, the majority of which are reimbursed and are reflected in other revenues, related to growth in our administrative service contracts business as well as a full year's expenses attributable to our December 1997 acquisition of the defined contribution and participant services business from Bankers Trust Corporation. Individual Business expenses increased by $183 million, or 8%, from 1997, primarily as a result of the acquisition of Nathan & Lewis and the inclusion of a full year's activity from the October 1997 acquisition of Security First Group. Capitalization of deferred acquisition costs increased slightly to $1,025 million in 1998 from $1,000 million in 1997 while amortization of such costs decreased by 2% to $827 million in 1998 from $841 million in 1997. Amortization of deferred acquisition costs of $587 million and $771 million was allocated to other expenses in 1998 and 1997, respectively, while the remainder of the amortization in each year was allocated to realized investment gains and losses. The decrease in amortization of deferred acquisition costs allocated to other expenses was primarily attributable to our individual business segment which decreased to $364 million in 1998 from $546 million in 1997. Approximately $87 million of this decrease was attributable to higher than expected future investment spreads on our traditional business and approximately $96 million of this decrease was attributable to higher estimated gross margins which resulted from the reinsurance of mortality risk at a cost that is expected to be less than our previously estimated mortality losses. Income tax expense in 1998 was $740 million, or 35%, of income before provision for income taxes, discontinued operations and extraordinary item, compared with $468 million, or 28%, of income before provision for income taxes, discontinued operations and extraordinary item in 1997. The difference between the 1998 and 1997 effective tax rates was primarily due to the impact of surplus tax and, in 1997, taxes on sales of subsidiaries. 63 66 Demutualization expenses, net of income taxes, were $4 million in 1998. These costs related to our ongoing demutualization efforts. INDIVIDUAL BUSINESS The following table presents summary consolidated financial information for Individual Business for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Premiums............................................... $ 4,289 $ 4,323 $ 4,327 Universal life and investment-type product policy fees................................................. 888 817 855 Net investment income.................................. 5,346 5,480 4,754 Other revenues......................................... 558 474 338 Net realized investment gains (losses)................. (14) 659 356 ------- ------- ------- 11,067 11,753 10,630 ------- ------- ------- EXPENSES Policyholder benefits and claims....................... 4,625 4,606 4,597 Interest credited to policyholder account balances..... 1,359 1,423 1,422 Policyholder dividends................................. 1,509 1,445 1,340 Other expenses......................................... 2,719 2,577 2,394 ------- ------- ------- 10,212 10,051 9,753 ------- ------- ------- Income before provision for income taxes............... 855 1,702 877 Provision for income taxes............................. 300 633 278 ------- ------- ------- Net income............................................. $ 555 $ 1,069 $ 599 ======= ======= =======
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 -- INDIVIDUAL BUSINESS Premiums decreased by $34 million, or 1%, to $4,289 million in 1999 from $4,323 million in 1998. Premiums from insurance products decreased by $16 million to $4,215 million in 1999 from $4,231 million in 1998. This decrease was primarily due to a decline in sales of traditional life insurance policies, which reflected a continued shift in policyholders' preferences from those policies to variable life products. Premiums from annuity and investment products decreased by $18 million, or 20%, to $74 million in 1999 from $92 million in 1998, primarily due to lower sales of supplementary contracts with life contingencies. The relatively high level of supplemental contract premiums in 1998 reflected the initial offering of a payout annuity feature in that year. Universal life and investment-type product policy fees increased by $71 million, or 9%, to $888 million in 1999 from $817 million in 1998. Policy fees from insurance products increased by $3 million, or 1%, to $571 million in 1999 from $568 million in 1998. This increase is attributable to a $77 million increase in separate account contract fees arising from increased sales of variable life products. This increase was almost entirely offset by reinsurance treaties entered into during 1998 related to $86 billion of universal life insurance in-force, which constituted the majority of our mortality risk on universal life business written subsequent to January 1, 1983. Policy fees from annuity and investment products increased by $68 million, or 27%, to $317 million in 1999 from $249 million in 1998, primarily due to the continued growth in deposits for investment products and stock market appreciation. 64 67 Other revenues increased by $84 million, or 18%, to $558 million in 1999 from $474 million in 1998. Other revenues for insurance products increased by $85 million, or 19%, to $521 million in 1999 from $436 million in 1998. This increase was primarily attributable to the inclusion of a full year's activity of Nathan & Lewis, as well as increased commission and fee income associated with increased sales of non-proprietary products. Other revenues for annuity and investment products were essentially flat at $37 million in 1999 compared with $38 million in 1998. Policyholder benefits and claims increased by $19 million to $4,625 million in 1999 from $4,606 million in 1998. Policyholder benefits and claims for insurance products increased by $85 million, or 2%, to $4,450 million in 1999 from $4,365 million in 1998. This increase was primarily due to growth in our existing block of traditional life policyholder liabilities. Policyholder benefits and claims for annuity and investment products decreased by $66 million, or 27%, to $175 million in 1999 from $241 million in 1998 consistent with the decreased premiums discussed above. Interest credited to policyholder account balances decreased by $64 million, or 4%, to $1,359 million in 1999 from $1,423 million in 1998. Interest on insurance products decreased by $18 million, or 4%, to $419 million in 1999 from $437 million in 1998. This decrease was primarily due to reduced crediting rates on our universal life products. Interest on annuity and investment products decreased by $46 million, or 5%, to $940 million in 1999 from $986 million in 1998. This decrease was due to a 1998 reinsurance transaction, a shift in policyholders' preferences to separate account alternatives and reduced crediting rates. Policyholder dividends increased by $64 million, or 4%, to $1,509 million in 1999 from $1,445 million in 1998. This increase was due to dividend increases from growth in cash values of policies associated with our large block of traditional individual life insurance business, combined with a dividend scale increase in 1999. Other expenses increased by $142 million, or 6%, to $2,719 million in 1999 from $2,577 million in 1998. Excluding the net capitalization of deferred acquisition costs, other expenses decreased by $81 million, or 3%, to $2,888 million in 1999 from $2,969 million in 1998. Other expenses related to insurance products decreased by $160 million, or 7%, to $2,239 million in 1999 from $2,399 million in 1998. This decrease was attributable to expense management initiatives instituted in 1999 and an adjustment to the allocation of expenses in 1999 between our insurance and annuity products to better match expenses to the mix of our business. These decreases were partially offset by a $44 million increase due to the inclusion of a full year's activity of Nathan & Lewis. Other expenses related to annuity and investment products increased $79 million, or 14%, to $649 million in 1999 from $570 million in 1998, primarily due to the adjustment of expenses noted above. Deferred acquisition costs are principally amortized in proportion to gross margins or gross profits, including realized investment gains or losses. The amortization is allocated to realized investment gains (losses) to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred acquisition costs increased to $782 million in 1999 from $756 million in 1998 while total amortization of such costs decreased to $567 million in 1999 from $604 million in 1998. Amortization of deferred acquisition costs of $613 million and $364 million was allocated to other expenses in 1999 and 1998, respectively, while the remainder of the amortization in each year was allocated to realized investment gains (losses). Amortization of deferred acquisition costs allocated to other expenses related to insurance products increased to $515 million in 1999 from $267 million in 1998 attributable to the reinsurance transaction discussed above and refinements in our calculation of estimated gross margins. Amortization of annuity products deferred acquisition costs allocated to other expenses remained essentially unchanged at $98 million in 1999 compared with $97 million in 1998. 65 68 YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 -- INDIVIDUAL BUSINESS Premiums decreased slightly to $4,323 million in 1998 compared with $4,327 million in 1997. Premiums from insurance products decreased 1% to $4,231 million in 1998 compared with $4,266 million in 1997. Higher premiums from insurance riders, which permit the purchase of additional coverage, on our block of traditional individual life insurance business was offset by declines in premiums of traditional life insurance policies of $27 million, reflecting a continued shift in customers' preferences from those policies to variable life products. Premiums from annuities and investment products increased by $31 million, or 51%, to $92 million in 1998 from $61 million in 1997, primarily due to an increase in the number of conversions from annuities to payout annuities with life contingencies related to our traditional business. Universal life and investment-type product policy fees decreased by 4% in 1998 to $817 million from $855 million in 1997. Policy fees from insurance products decreased by $113 million, or 17%, to $568 million in 1998 from $681 million in 1997, primarily due to reinsurance treaties entered into during 1998 relating to $86 billion of universal life insurance in-force, constituting most of our universal life business written subsequent to January 1, 1983. Excluding the impact of the reinsurance treaties, policy fees from insurance products increased by $47 million, or 7%, primarily due to an increase in insurance coverages provided in 1998 compared with 1997. Policy fees from annuities and investment products increased by $75 million, or 43%, to $249 million in 1998 from $174 million in 1997, due primarily to the growth in deposits for tax-advantaged investment products as well as stock market appreciation. Other revenues increased by 40% to $474 million in 1998 from $338 million in 1997. Other revenues for insurance products increased by $127 million, or 41%, to $436 million in 1998 from $309 million in 1997. This increase was primarily due to the acquisition of Nathan & Lewis, additional commission and fee income associated with reinsurance treaties, and an increase in the expense allowance under a reinsurance treaty involving term products resulting from an increase in policies in-force covered by those treaties. Other revenues for annuities and investment products increased by $9 million, or 31%, to $38 million in 1998 from $29 million in 1997, primarily due to the acquisition of Security First Group in October 1997. Policyholder benefits and claims increased slightly to $4,606 million in 1998 compared with $4,597 million in 1997. Policyholder benefits and claims for insurance products decreased by $80 million, or 2%, to $4,365 million in 1998 from $4,445 million in 1997. This decrease was primarily due to an increase in claims ceded of $131 million under the universal life reinsurance treaties discussed above offset by the acquisition of Nathan & Lewis. Policyholder benefits and claims for annuity and investment products increased by $89 million, or 59%, to $241 million in 1998 from $152 million in 1997, primarily due to the increase in premiums described above. Interest credited to policyholder account balances increased slightly to $1,423 million in 1998 compared with $1,422 million in 1997. Interest on insurance products increased by $8 million, or 2%, to $437 million in 1998 from $429 million in 1997, primarily due to an increase in policyholder account balances. Interest on annuities and investment products decreased slightly to $986 million in 1998 compared with $993 million in 1997, primarily due to a reduction in crediting rates attributable to the declining general interest rate environment. This decrease was offset by the inclusion of a full year's activity of $94 million related to Security First Group, which was acquired in October 1997. Policyholder dividends increased by 8% to $1,445 million in 1998 from $1,340 million in 1997, primarily due to dividend increases from growth in cash values in policies associated with our large block of traditional individual life insurance business, offset by reductions in dividend scales. 66 69 Other expenses increased by 8% to $2,577 million in 1998 from $2,394 million in 1997. Excluding the net capitalization of deferred acquisition costs, other expenses increased by 13% to $2,969 million in 1998 from $2,624 million in 1997. Other expenses related to insurance products increased by $158 million, or 7%, to $2,399 million in 1998 from $2,241 million in 1997, primarily due to the acquisition of Nathan & Lewis and higher non-field and sales office expenses. Other expenses related to annuity and investment products increased by $187 million, or 49%, to $570 million in 1998 from $383 million in 1997, $94 million of which was due to the inclusion of a full year's activity from Security First Group. The remaining variance was due to higher general and administrative expenses commensurate with the growth in our businesses. Capitalization of deferred acquisition costs decreased to $756 million in 1998 from $776 million in 1997 and amortization of such costs was essentially unchanged at $604 million in 1998 from $607 million in 1997. Amortization of deferred acquisition costs of $364 million and $546 million was allocated to other expenses in 1998 and 1997, respectively, while the remainder of the amortization in each year was allocated to realized investment gains and losses. Amortization of deferred acquisition costs allocated to other expenses related to insurance products decreased to $267 million in 1998 from $455 million in 1997. Approximately $87 million of this decrease was attributable to higher than expected future investment spreads on our traditional business and approximately $96 million of this decrease was attributable to higher estimated gross margins resulting from the reinsurance of mortality risk at a cost that is expected to be less than our previously estimated mortality losses. Amortization of deferred acquisition costs allocated to other expenses related to annuity products increased in 1998 to $97 million from $91 million in 1997, reflecting growth in the business. INSTITUTIONAL BUSINESS The following table presents summary consolidated financial information for Institutional Business for the periods as indicated:
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Premiums................................................. $ 5,525 $ 5,159 $4,689 Universal life and investment-type product policy fees... 502 475 426 Net investment income.................................... 3,755 3,885 3,754 Other revenues........................................... 629 575 357 Net realized investment gains (losses)................... (31) 557 45 ------- ------- ------ 10,380 10,651 9,271 ------- ------- ------ EXPENSES Policyholder benefits and claims......................... 6,712 6,416 5,934 Interest credited to policyholder account balances....... 1,030 1,199 1,319 Policyholder dividends................................... 159 142 305 Other expenses........................................... 1,589 1,613 1,178 ------- ------- ------ 9,490 9,370 8,736 ------- ------- ------ Income before provision for income taxes................. 890 1,281 535 Provision for income taxes............................... 323 435 196 ------- ------- ------ Net income............................................... $ 567 $ 846 $ 339 ======= ======= ======
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 -- INSTITUTIONAL BUSINESS Premiums increased by 7% to $5,525 million in 1999 from $5,159 million in 1998. Group insurance premiums increased by $478 million, or 10%, to $5,095 million in 1999 from 67 70 $4,617 million in 1998. This increase was mainly attributable to strong sales and improved policyholder retention in non-medical health, primarily our dental and disability businesses. Retirement and savings premiums decreased by $112 million, or 21%, to $430 million in 1999 from $542 million in 1998, primarily due to premiums received from several large existing customers in 1998. Universal life and investment-type product policy fees increased by 6%, to $502 million in 1999 from $475 million in 1998. This increase reflected the continued growth in the sale of products used in executive and corporate-owned benefit plans due to the continued favorable tax status associated with these products. Other revenues increased by 9% to $629 million in 1999 from $575 million in 1998. Group life decreased by $51 million, or 77%, to $15 million in 1999 from $66 million in 1998. This decrease was primarily due to lower income in 1999 related to funds used to seed separate accounts. Non-medical health increased by $61 million, or 27%, to $287 million in 1999 from $226 million in 1998. This increase was primarily due to growth in our dental administrative service business. Retirement and savings increased by $44 million, or 16%, to $327 million in 1999 from $283 million in 1998. This increase reflected higher administrative fees derived from separate accounts and our defined contribution record-keeping services. In addition, the 1999 results reflected interest on funds held on deposit related to a reinsurance transaction entered into during December 1998. Policyholder benefits and claims increased by 5% to $6,712 million in 1999 from $6,416 million in 1998. Group insurance increased by $362 million, or 8%, to $4,857 million in 1999 from $4,495 million in 1998. This increase was primarily due to overall growth and is comparable to the growth in premiums discussed above. Retirement and savings decreased by $66 million, or 3%, to $1,855 million in 1999 from $1,921 million in 1998. The decrease was commensurate with the premium variance discussed above, partially offset by an increase in liabilities associated with the continued accumulation of interest on liabilities related to our large block of non-participating annuity business. Interest credited to policyholder account balances decreased by 14% to $1,030 million in 1999 from $1,199 million in 1998. Group insurance decreased by $63 million, or 14%, to $398 million in 1999 from $461 million in 1998. This decrease was primarily due to cancellations in our leveraged corporate-owned life insurance business attributable to a change in the federal income tax treatment for these products. Retirement and savings decreased by $106 million, or 14%, to $632 million in 1999 from $738 million in 1998 due to a shift in customers' investment preferences from guaranteed interest products to separate account alternatives and the continuation of the low interest rate environment. Policyholder dividends increased by 12% to $159 million in 1999 from $142 million in 1998. Non-medical health increased by $26 million to $27 million in 1999. Group life and retirement and savings decreased $9 million, or 6%, to $132 million in 1999 from $141 million in 1998. Policyholder dividends vary from period to period based on participating group insurance contract experience. Other expenses decreased by 1% to $1,589 million in 1999 from $1,613 million in 1998. Other expenses related to group life decreased by $14 million, or 4%, to $382 million in 1999 from $396 million in 1998. Other expenses related to non-medical health decreased by $18 million, or 3%, to $673 million in 1999 from $691 million in 1998. These decreases were primarily attributable to reductions in non-sales positions and operational efficiencies. Other expenses related to retirement and savings products increased by $8 million, or 2%, to $534 million in 1999 from $526 million in 1998. This increase was due to higher interest expense of $47 million primarily due to commercial paper issued in connection with amounts placed on deposit related to a 1998 reinsurance transaction and a $15 million increase in volume-related expenses, including premium taxes, separate account investment management expenses and commissions. These 68 71 increases were partially offset by a $54 million decrease due to reductions in non-sales positions and other administrative expenses. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 -- INSTITUTIONAL BUSINESS Premiums increased by 10% in 1998 to $5,159 million from $4,689 million in 1997. Group insurance premiums increased by $385 million, or 9%, in 1998 to $4,617 million from $4,232 million in 1997. Group life premiums increased by $153 million, or 5%, to $3,274 million in 1998 from $3,121 million in 1997. Group non-medical health premiums increased by $232 million, or 21%, to $1,343 million in 1998 from $1,111 million in 1997, due primarily to market share growth in our dental and long-term care businesses resulting from our expanding network of dentists and our appointment as of January 1, 1998 by the American Association of Retired Persons ("AARP") to offer long-term care products to its members and the effect of a full year's results related to a disability block of business acquired in late 1997. Retirement and savings premiums increased by $85 million, or 19%, to $542 million in 1998 from $457 million in 1997, due primarily to premiums received from one large existing customer. Universal life and investment-type product policy fees increased by 12% in 1998 to $475 million from $426 million in 1997. This increase reflected the growth in the sale of products used in executive and corporate-owned benefit plans during 1998. Other revenues increased by 61% in 1998 to $575 million from $357 million in 1997. Other revenues from group insurance increased by $75 million, or 35%, to $292 million in 1998 from $217 million in 1997. This increase was primarily attributable to increased administrative fee income from significant growth in insurance contracts having separate account features, the largest being the in-force AARP block of long-term care business. Other revenues from retirement and savings products increased by $143 million, or 102%, to $283 million in 1998 from $140 million in 1997. This gain reflected increased administrative fees derived from separate accounts of $21 million and $56 million related to our defined contribution record-keeping services. The December 1997 acquisition of the defined contribution record-keeping and participant services business from Bankers Trust Corporation accounted for the majority of the growth in our administrative service fee income during 1998. In addition, the 1998 results reflected an increase of $32 million related to the full-year interest on funds held on deposit related to a reinsurance transaction entered into during December 1997. Policyholder benefits and claims increased by 8% to $6,416 million in 1998 from $5,934 million in 1997. Group insurance increased by $469 million, or 12%, to $4,495 million in 1998 from $4,026 million in 1997. This increase reflected an overall growth in the business and less favorable experience on participating group insurance contracts, and an increase of $20 million related to a full year's results from a disability block of business acquired in late 1997, which is partially offset by reduced dividends of $161 million. Retirement and savings increased slightly to $1,921 million in 1998 compared with $1,908 million in 1997 primarily due to the ongoing accumulation of interest related to our large block of non-participating annuity business. Interest credited to policyholder account balances decreased by 9% to $1,199 million in 1998 from $1,319 million in 1997. Interest on group insurance products increased by $66 million, or 17%, to $461 million in 1998 from $395 million in 1997, primarily due to growth in deposits for tax-advantaged investment products. Interest on retirement and savings products decreased by $186 million, or 20%, to $738 million in 1998 from $924 million in 1997 due to a shift in customers' investment preferences from guaranteed interest products to separate account alternatives. Policyholder dividends decreased by 53% to $142 million in 1998 from $305 million in 1997. These dividends vary from period to period based on the claims experience of participating group insurance contracts. 69 72 Other expenses increased by 37% to $1,613 million in 1998 from $1,178 million in 1997. Other expenses related to group insurance increased by $204 million, or 23%, to $1,087 million in 1998 from $883 million in 1997. The primary causes of this increase were higher premium taxes and sales commissions related to premium growth; costs incurred in connection with various strategic initiatives, which were intended to expand our penetration of the small and medium case institutional markets; and costs incurred in connection with initiatives that focused on improving our service delivery capabilities through investments in technology. Group insurance also experienced an increase in administrative expenses, the majority of which are reimbursed, as a result of the AARP business. Other expenses related to retirement and savings products increased by $231 million, or 78%, to $526 million in 1998 from $295 million in 1997. This increase was due to $45 million of ongoing expenses attributable to the acquisition of the defined contribution record-keeping and participant services business of Bankers Trust Corporation and a change in the presentation of expenses relating to our securities lending program in 1998 of $65 million. In addition, the increase of cash flows into separate accounts resulted in higher investment management and other administrative expenses. ASSET MANAGEMENT The following table presents summary consolidated financial information for Asset Management for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Net investment income....................................... $ 80 $ 75 $ 78 Other revenues.............................................. 803 817 682 ---- ---- ---- 883 892 760 OTHER EXPENSES.............................................. 741 740 629 ---- ---- ---- Income before provision for income taxes and minority interest.................................................. 142 152 131 Provision for income taxes.................................. 37 44 36 Minority interest........................................... 54 59 50 ---- ---- ---- Net income.................................................. $ 51 $ 49 $ 45 ==== ==== ====
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 -- ASSET MANAGEMENT Other revenues, which are primarily comprised of management and advisory fees, decreased by $14 million, or 2%, to $803 million in 1999 from $817 million in 1998, reflecting an overall decrease in assets under management of $1 billion, or 1%, to $190 billion in 1999 from $191 billion in 1998. This decrease in assets was primarily attributable to a reduction in assets under management in value-style products. Management and advisory fees are typically calculated based on a percentage of assets under management, and are not necessarily proportionate to average assets managed due to changes in account mix. Other expenses were essentially unchanged in 1999 from 1998. Total compensation and benefits of $424 million consisted of approximately 53% base compensation and 47% variable compensation. Base compensation increased by $10 million, or 5%, to $225 million in 1999 from $215 million in 1998, primarily due to annual salary increases and higher staffing levels. Variable compensation decreased by $15 million, or 7%, to $199 million in 1999 from $214 million in 1998. Variable incentive payments are based upon profitability, investment portfolio performance, new business sales and growth in revenues and profits. The variable compensation plans reward the 70 73 employees for growth in their businesses, but also require them to share in the impact of any declines. In addition, general and administrative expenses increased $6 million, or 2%, to $317 million in 1999 from $311 million in 1998, primarily due to increased discretionary spending. Minority interest, reflecting the value of third-party ownership interests in Nvest, decreased by $5 million, or 9%, to $54 million in 1999 from $59 million in 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 -- ASSET MANAGEMENT Other revenues, which are primarily comprised of management and advisory fees, increased by 20% to $817 million in 1998 from $682 million in 1997. Management and advisory fees are typically calculated based on a percentage of assets under management, which increased by $16 billion, or 9%, to $191 billion in 1998 from $175 billion in 1997. This increase was mainly attributable to net cash inflows to customers' accounts of $5 billion and overall market appreciation of $11 billion during 1998. Management and advisory fees earned are not necessarily proportionate to average assets managed due to changes in account mix. Other expenses increased by 18% to $740 million in 1998 from $629 million in 1997. This increase was primarily due to increases in compensation and benefits of $62 million, or 17%, and general and administrative expenses of $49 million, or 19%. Compensation and benefits of $429 million consisted of 50% base compensation and 50% variable compensation. Base compensation increased by $31 million, or 17%, to $215 million in 1998 from $184 million in 1997, primarily due to annual salary increases and higher staffing. Variable compensation increased by $31 million, or 17%, to $214 million in 1998 from $183 million in 1997, due to increased incentive payments based on profitability, investment portfolio performance, new business sales and growth in revenues and profits. General and administrative expenses increased by $49 million, or 19%, to $311 million in 1998 from $262 million in 1997, due to expanded business activities and distribution and marketing initiatives. Minority interest increased by $9 million, or 18%, to $59 million in 1998 from $50 million in 1997. AUTO & HOME The following table presents summary consolidated financial information for Auto & Home for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Premiums................................................. $1,751 $1,403 $1,354 Net investment income.................................... 103 81 71 Other revenues........................................... 21 36 25 Net realized investment gains............................ 1 122 9 ------ ------ ------ 1,876 1,642 1,459 ------ ------ ------ EXPENSES Policyholder benefits and claims......................... 1,301 1,029 1,003 Other expenses........................................... 514 386 351 ------ ------ ------ 1,815 1,415 1,354 ------ ------ ------ Income before provision for income taxes................. 61 227 105 Provision for income taxes............................... 5 66 31 ------ ------ ------ Net income............................................... $ 56 $ 161 $ 74 ====== ====== ======
71 74 YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 -- AUTO & HOME Premiums increased by 25% to $1,751 million in 1999 from $1,403 million in 1998 primarily due to the St. Paul acquisition. Excluding the impact of the St. Paul acquisition, premiums increased $88 million, or 6%. Auto premiums increased by $54 million, or 5%, to $1,218 million in 1999 from $1,164 million in 1998. This increase was due to growth in both our standard and non-standard auto insurance books of business. "Non-standard" auto insurance is insurance for risks bearing higher loss experience or loss potential than risks covered by standard auto insurance policies. In addition, the standard auto policyholder retention increased 1% to 88%. Homeowner premiums increased by $30 million, or 13%, to $255 million in 1999 from $225 million in 1998 due to higher new business production, an average premium increase of 1% and increased policyholder retention to 90% in 1999 from 89% in 1998. Premiums from other personal lines increased to $18 million in 1999 from $14 million in 1998. Other revenues decreased by 42% to $21 million in 1999 from $36 million in 1998. This decrease was primarily attributable to a decrease in payments resulting from experience-related adjustments under a reinsurance agreement related to the disposition of our reinsurance business in 1990. Expenses increased by 28% to $1,815 million in 1999 from $1,415 million in 1998. This resulted in an increase in the COMBINED RATIO to 103.7% in 1999 from 100.8% in 1998. Excluding the impact of the St. Paul acquisition, expenses increased by $116 million, or 8%, which resulted in an increase in the combined ratio to 102.8% in 1999 from 100.8% in 1998. This increase was primarily due to higher overall loss costs in the auto and homeowners line as discussed below. In addition, both lines experienced modestly elevated acquisition expenses due to increased levels of new business premiums. Policyholder benefits and claims increased by 26% to $1,301 million in 1999 from $1,029 million in 1998. Correspondingly, the auto and homeowners loss ratios increased to 76.1% from 74.9% and to 67.2% from 65.0% in 1999 and 1998, respectively. Excluding the impact of the St. Paul acquisition, policyholder benefits and claims increased by $85 million, or 8%. Auto policyholder benefits and claims increased by $67 million, or 8%, to $939 million in 1999 from $872 million in 1998, due to a 6% increase in the number of policies in force and $23 million of unfavorable claims development due to lower than expected savings resulting from the implementation of a new technology platform. Correspondingly, the AUTO LOSS RATIO increased to 77.1% in 1999 from 74.9% in 1998. Homeowners benefits and claims increased $17 million, or 12%, to $163 million in 1999 from $146 million in 1998 due to increased volume of this book of business. The homeowners loss ratio decreased by 0.6% to 64.4% in 1999 from 65.0% in 1998. Other personal lines benefits and claims increased by $1 million to $12 million in 1999 from $11 million in 1998. Other expenses increased by 33% to $514 million in 1999 from $386 million in 1998, which resulted in an increase in our EXPENSE RATIO to 29.3% in 1999 from 27.4% in 1998. Excluding the impact of the St. Paul acquisition, operating expenses increased $31 million, or 8%, resulting in an increase in our expense ratio to 27.9% in 1999 from 27.4% in 1998. This increase was primarily due to $10 million in additional administration expenses and $23 million in new business acquisition expenses, which were partially offset by a reduction in employee-related expenses. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 -- AUTO & HOME Premiums increased by 4% in 1998 to $1,403 million from $1,354 million in 1997. Auto premiums increased by $41 million, or 4%, to $1,164 million in 1998 from $1,123 million in 1997. This increase was caused by continued growth in premiums from our non-standard auto insurance book of business. In addition, our overall auto policyholder retention increased to 87% 72 75 from 86%. These increases were offset in part by a mandated rate decrease for standard auto insurance of $9 million, or 4%, in 1998 in Massachusetts, which comprised 19% of our total auto premiums in both 1998 and 1997. Homeowners premiums increased by $8 million, or 4%, to $225 million in 1998 from $217 million in 1997. This increase was attributable to contractual inflationary adjustments of 2% and an average rate increase of 3% in 1998, which outpaced a 1% decline in the number of policies in force. This decline in the number of policies in force, which occurred in states having greater exposure to severe hurricanes, reflects our continued efforts to reduce catastrophe losses. Premiums from other personal lines were stable at $14 million in both 1998 and 1997. Other revenues increased by 44% to $36 million in 1998 from $25 million in 1997. This increase was primarily attributable to an increase of payments to us resulting from experience-related adjustments under a reinsurance agreement related to the disposition of our reinsurance business in 1990. Expenses increased by 5% to $1,415 million in 1998 from $1,354 million in 1997, primarily due to higher catastrophe-related policyholder benefits and claims of $35 million, resulting in our combined ratio increasing to 100.8% in 1998 from 99.9% in 1997. The remaining increase in expenses was more than offset by higher net earned premiums, resulting in our combined ratio, excluding catastrophes, decreasing to 96.8% in 1998 from 98.6% in 1997. Policyholder benefits and claims increased by 3% to $1,029 million in 1998 from $1,003 million in 1997. Excluding catastrophes, auto policyholder benefits and claims decreased slightly to $857 million in 1998 compared with $864 million in 1997. Correspondingly, our auto loss ratio decreased to 74.9% in 1998 compared with 77.1% in 1997. These decreases reflect our ongoing efforts to improve the claims adjusting process through technological efficiencies and heightened fraud detection efforts. While the impact of severe weather on auto has historically been low, our auto catastrophe ratio increased to 1.3% of net earned premiums in 1998 compared with 0.2% in 1997, due primarily to Midwestern hail storms. Excluding catastrophes, homeowners policyholder benefits and claims decreased to $104 million in 1998 from $116 million in 1997 and our loss ratio decreased to 46.5% in 1998 from 53.6% in 1997. These decreases reflect changes in our underwriting practices, physical reinspections of selected in-force policies and the use of credit report data for selecting new risks and for reunderwriting at the time of renewal. Reinsurance costs decreased by $5 million, or 23%, to $17 million in 1998 from $22 million in 1997, reflecting the continuing reduction in our exposure to hurricanes and the current competitive pricing environment within the reinsurance market. Homeowners' catastrophes increased by $26 million to $41 million in 1998 from $15 million in 1997, reflecting Midwestern hail storms and spring storms in the southeast. The property and casualty industry as a whole experienced a more typical amount of losses resulting from events classified as catastrophes in 1998 and a lower than average amount of losses in 1997. Other personal lines increased by $9 million to $12 million in 1998 from $3 million in 1997, due to an above average number of new claims. Other expenses increased by 10% to $386 million in 1998 from $351 million in 1997. Other expenses related to auto insurance increased by $27 million, or 10%, to $305 million in 1998 from $278 million in 1997, primarily due to higher general and administrative expenses which resulted in an increase in our expense ratio to 27.4% in 1998 from 25.9% in 1997. Other expenses related to homeowners insurance and other personal lines increased $8 million, or 11%, to $81 million in 1998 from $73 million in 1997, primarily due to increased administrative expenses and new business acquisition expenses. 73 76 INTERNATIONAL The following table presents summary consolidated financial information for International for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Premiums................................................... $523 $ 618 $ 908 Universal life and investment-type product policy fees..... 48 68 137 Net investment income...................................... 206 343 504 Other revenues............................................. 12 33 54 Net realized investment gains.............................. 1 117 142 ---- ------ ------ 790 1,179 1,745 ---- ------ ------ EXPENSES Policyholder benefits and claims........................... 463 597 869 Interest credited to policyholder account balances......... 52 89 137 Policyholder dividends..................................... 22 64 97 Other expenses............................................. 248 352 497 ---- ------ ------ 785 1,102 1,600 ---- ------ ------ Income before provision (benefit) for income taxes......... 5 77 145 Provision (benefit) for income taxes....................... (16) 21 19 ---- ------ ------ Net income................................................. $ 21 $ 56 $ 126 ==== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 -- INTERNATIONAL Premiums decreased by 15% to $523 million in 1999 from $618 million in 1998, primarily due to the disposition of a substantial portion of our Canadian operations. Excluding the impact of this sale, premiums increased by $109 million, or 26%, to $523 million from $414 million. Argentina's premiums increased $11 million primarily due to expanded business operations. Korea's and Taiwan's premiums increased $24 and $39 million, respectively, due to improved economic environments. Spain's premiums increased $24 million primarily due to increased sales from our joint venture partnership. Universal life and investment type-product policy fees decreased by 29% to $48 million in 1999 from $68 million in 1998. Excluding the impact of the Canadian divestiture, universal life and investment type-product policy fees increased by $2 million, or 4%, to $48 million in 1999 from $46 million in 1998, primarily due to expanded business operations in Argentina. Other revenues decreased by 64% to $12 million in 1999 from $33 million in 1998. Excluding the impact of the Canadian divestiture, other revenues increased slightly to $12 million in 1999 from $10 million in 1998. Policyholder benefits and claims decreased by 22% to $463 million in 1999 from $597 million in 1998. Excluding the impact of the Canadian divestiture, policyholder benefits and claims increased $106 million, or 30%, to $463 million in 1999 from $357 million in 1998. This increase is commensurate with the aforementioned increase in premiums. Interest credited to policyholder account balances decreased by 42% to $52 million in 1999 from $89 million in 1998. Excluding the impact of the Canadian divestiture, interest credited to policyholder account balances increased $1 million, or 2%, to $52 million in 1999 from $51 million in 1998 in line with increased account balances. Policyholder dividends decreased by 66% to $22 million in 1999 from $64 million in 1998. Excluding the impact of the Canadian divestiture, policyholder dividends decreased $1 million, or 74 77 5%, to $22 million in 1999 from $21 million in 1998, primarily due to less favorable experience on participating policies in Spain. Other expenses decreased by 30% to $248 million in 1999 from $352 million in 1998. Excluding the impact of the Canadian divestiture, other expenses decreased $7 million, or 3%, to $248 million in 1999 from $255 million in 1998. This decrease was primarily attributable to ongoing cost reduction initiatives. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 -- INTERNATIONAL Premiums decreased by 32% to $618 million in 1998 from $908 million in 1997, primarily due to the dispositions of a substantial portion of our U.K. operations in October 1997 and of our Canadian operations in July 1998. Excluding the impact of these sales, premiums decreased by $31 million, or 7%, to $414 million in 1998 from $445 million in 1997, primarily attributable to a $64 million, or 40%, reduction in premiums in South Korea due to a significant economic downturn in this country. This decrease was partially offset by a $15 million, or 48%, increase in Spain related to the effect of a full year's activity under a revised sales agreement entered into with Banco Santander during September 1997. Universal life and investment-type product policy fees decreased by 50% to $68 million in 1998 from $137 million in 1997, primarily due to the U.K. and Canadian divestitures. Other revenues decreased by 39% to $33 million in 1998 from $54 million in 1997. Excluding the impact of the U.K. and Canadian divestitures, other revenues increased to $10 million in 1998 from $7 million in 1997. Policyholder benefits and claims decreased by 31% to $597 million in 1998 from $869 million in 1997. Excluding the impact of the U.K. and Canadian divestitures, policyholder benefit and claims decreased by 5% to $357 million in 1998 from $374 million in 1997. This decrease was primarily attributable to the decline in premiums of $64 million in South Korea and was offset in part by minor increases in several other countries. Interest credited to policyholder account balances decreased by 35% to $89 million in 1998 from $137 million in 1997. Excluding the impact of the U.K. and Canadian divestitures, interest credited to policyholder account balances decreased by 9% to $51 million in 1998 from $56 million in 1997. This decrease was attributable to lower variable crediting rates in South Korea reflecting a reduction in interest rates. Policyholder dividends decreased by 34% to $64 million in 1998 from $97 million in 1997. Excluding the impact of the U.K. and Canadian divestitures, policyholder dividends were essentially unchanged at $21 million in 1998 compared with $22 million in 1997. Other expenses decreased by 29% to $352 million in 1998 from $497 million in 1997. Excluding the impact of the U.K. and Canadian divestitures, other expenses increased by 5% to $255 million in 1998 from $242 million in 1997. This increase was primarily due to higher business development costs. CORPORATE Total revenues for our Corporate segment, which consisted of net investment income and realized investment gains and losses that are not allocated to our business segments, were $623 million in 1999, a decrease of $849 million, or 58%, from $1,472 million in 1998, primarily due to a reduction in investment gains and investment income of $722 million due to the sale of MetLife Capital Holdings, Inc. in 1998. Total Corporate expenses were $1,031 million in 1999, a decrease of $1,560 million, or 60%, from $2,591 million in 1998. This decrease is primarily due to a $1,895 million charge in 1998 for sales practices claims and claims for personal injuries caused by 75 78 exposure to asbestos or asbestos-containing products as well as the elimination of $270 million of expenses due to the sale of MetLife Capital Holdings. These decreases were partially offset by a $499 million charge in 1999 principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. Total revenues for our Corporate segment were $1,472 million in 1998, an increase of $427 million, or 41%, from $1,045 million in 1997, primarily due to the realized investment gain from the sale of MetLife Capital Holdings of $433 million. Total Corporate expenses were $2,591 million in 1998, an increase of $1,625 million, or 168%, from $966 million in 1997, primarily due to the aforementioned charges for sales practices claims and asbestos-related claims in 1998. LIQUIDITY AND CAPITAL RESOURCES METLIFE, INC. Following the effective date of the plan, Metropolitan Life Insurance Company will become a wholly-owned subsidiary and the principal asset of MetLife, Inc. The primary uses of liquidity of MetLife, Inc. will include payment of dividends on our common stock, interest payments on our debentures issued to MetLife Capital Trust I and other debt servicing, contributions to our subsidiaries and payment of general operating expenses. The primary source of our liquidity will be dividends we may receive from Metropolitan Life Insurance Company and the interest received from Metropolitan Life Insurance Company under the capital note described below. In addition, we expect to retain up to $340 million from the proceeds of the offerings and the private placements at MetLife, Inc., which will be available to pay dividends to our stockholders, make contributions to our subsidiaries, make payments on the debentures issued to MetLife Capital Trust I and meet our other obligations. Our ability, on a continuing basis, to meet our cash needs depends primarily upon the receipt of dividends and the interest on the capital note from Metropolitan Life Insurance Company. Under the New York Insurance Law, Metropolitan Life Insurance Company will be permitted to pay a stockholder dividend to MetLife, Inc. only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Insurance and the New York Superintendent does not disapprove the distribution. Under the New York Insurance Law, the New York Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of dividends to its stockholders. The New York Insurance Department has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. We cannot provide assurance that Metropolitan Life Insurance Company will have statutory earnings to support the payment of dividends to MetLife, Inc. in an amount sufficient to fund our cash requirements and pay cash dividends or that the New York Superintendent will not disapprove any dividends that Metropolitan Life Insurance Company may seek to pay. Our other insurance subsidiaries are also subject to restrictions on the payment of dividends. The dividend limitation is based on statutory financial results. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with generally accepted accounting principles. The significant differences relate to deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. Furthermore, although the impact cannot be determined at this time, the recent adoption of the Codification of Statutory Accounting Principles by the NAIC may reduce STATUTORY SURPLUS, thereby making the dividend limitation more restrictive. See "-- Metropolitan Life Insurance Company -- Risk-based capital". See Note 13 of Notes to Consolidated Financial Statements for a reconciliation of the difference between statutory financial results with those determined in conformity with generally accepted accounting principles. 76 79 In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described under "Use of Proceeds", Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its % mandatorily convertible capital note due 2005 having the following principal terms: PRINCIPAL AMOUNT.............. $1 billion MATURITY...................... , 2005 INTEREST...................... % (equal to initial interest rate on MetLife, Inc. debentures issued to MetLife Capital Trust I), payable quarterly, subject to reset and deferral provisions substantially identical to those set forth in the debentures. PAYMENT RESTRICTIONS.......... As required by the New York Insurance Law, the capital note will provide that Metropolitan Life Insurance Company may not make any payment of the interest on or the principal of the capital note so long as specified payment restrictions exist and have not been waived by the New York Superintendent of Insurance. Payment restrictions would exist if the level of Metropolitan Life Insurance Company's statutory total adjusted capital falls below certain thresholds relative to the level of its statutory risk-based capital or the amount of its outstanding capital notes, surplus notes or similar obligations. As of the date hereof, Metropolitan Life Insurance Company's statutory total adjusted capital significantly exceeds these limitations. Interest will continue to accrue while payment restrictions exist. CONVERSION.................... At , 2004 and at the stated maturity of the capital note, the capital note shall be mandatorily convertible, without any further action by MetLife, Inc. or Metropolitan Life Insurance Company, into 500 shares at each such date of common stock of Metropolitan Life Insurance Company. The capital note will also become immediately convertible into 1,000 shares upon an acceleration of the capital note. The issuance of such shares will be in full satisfaction of Metropolitan Life Insurance Company's obligation to pay the principal of the note. RANKING....................... The capital note will be unsecured and will be subordinated to all present and future indebtedness, policy claims and other creditor claims (each as defined in the capital note) of Metropolitan Life Insurance Company. The capital note will rank pari passu with all existing surplus notes of Metropolitan Life Insurance Company and with all capital notes, surplus notes or similar obligations of Metropolitan Life Insurance Company thereafter issued, made or incurred. As required by the New York Insurance Law, the terms of the capital note must be approved by the New York Superintendent of Insurance as not adverse to the interests of Metropolitan Life Insurance Company's policyholders. If the New York Superintendent does not approve the issuance of the capital note, or the payment of interest is prevented by application of the payment restrictions described above, the interest on the capital note will not be available as a source of liquidity for MetLife, Inc. 77 80 Based on the historic cash flows and the current financial results of Metropolitan Life Insurance Company, subject to any dividend limitations which may be imposed upon Metropolitan Life Insurance Company or its subsidiaries by regulatory authorities, we believe that cash flows from operating activities, together with up to $340 million of proceeds from the offerings and the private placements to be retained by MetLife, Inc. and the interest received on the capital note from Metropolitan Life Insurance Company, will be sufficient to enable us to make dividend payments on our common stock as described in "Dividend Policy", to pay all operating expenses, make payments on the debentures issued to MetLife Capital Trust I and meet our other obligations. METROPOLITAN LIFE INSURANCE COMPANY LIQUIDITY SOURCES. Metropolitan Life Insurance Company's principal cash inflows from its insurance activities come from life insurance premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contract holder and policyholder withdrawal. Metropolitan Life Insurance Company seeks to include provisions limiting withdrawal rights from general account institutional pension products (generally group annuities, including guaranteed interest contracts and certain deposit fund liabilities) sold to employee benefit plan sponsors. Metropolitan Life Insurance Company's principal cash inflows from its investment activities result from repayments of principal and proceeds from maturities and sales of invested assets, investment income, as well as dividends and distributions from subsidiaries. The primary liquidity concerns with respect to these cash inflows are the risks of default by debtors, interest rate and other market volatilities and potential illiquidity of subsidiaries. Metropolitan Life Insurance Company closely monitors and manages these risks. See "Business -- Investments". Additional sources of liquidity to meet unexpected cash outflows are available from Metropolitan Life Insurance Company's portfolio of liquid assets. These liquid assets include substantial holdings of U.S. treasury securities, short-term investments, common stocks and marketable fixed maturity securities. Metropolitan Life Insurance Company's available portfolio of liquid assets was approximately $88 billion and $91 billion at December 31, 1999 and 1998, respectively. Sources of liquidity also include facilities for short- and long-term borrowing as needed, primarily arranged through MetLife Funding, Inc., a subsidiary of Metropolitan Life Insurance Company. See "-- Financing". LIQUIDITY USES. Metropolitan Life Insurance Company's principal cash outflows primarily relate to the liabilities associated with its various life insurance, annuity and group pension products, operating expenses, income taxes, contributions to subsidiaries, principal and interest on its outstanding debt obligations, including the capital note described above, as well as dividend payments that may be declared and are payable to MetLife, Inc. Liabilities arising from its insurance activities primarily relate to benefit payments under the above-named products, as well as payments for policy surrenders, withdrawals and loans. Management of Metropolitan Life Insurance Company believes that its sources of liquidity are more than adequate to meet its current cash requirements. LITIGATION. Various litigation claims and assessments against us have arisen in the course of our business, including in connection with our activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other authorities regularly make inquiries and conduct investigations concerning our compliance with applicable insurance and other laws and regulations. In some of these matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. While it is not feasible to predict or determine the ultimate outcome 78 81 of all pending investigations and legal proceedings or to provide reasonable ranges of potential losses, it is the opinion of our management that their outcomes, after consideration of available insurance and reinsurance and the provisions made in our consolidated financial statements, are not likely to have a material adverse effect on our consolidated financial condition. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our operating results or cash flows in particular quarterly or annual periods. We have recorded, in other expenses, charges of $499 million ($317 million after-tax), $1,895 million ($1,203 million after-tax) and $300 million ($190 million after-tax) for the years ended December 31, 1999, 1998 and 1997, respectively, for sales practice claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. The charge for the year ended December 31, 1999 was principally related to the settlement of the multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The 1998 charge of $1,895 million was comprised of $925 million and $970 million for sales practices claims and asbestos-related claims, respectively. We recorded the accrual for sales practices claims based on preliminary settlement discussions and the settlement history of other insurers. Prior to the fourth quarter of 1998, we established a liability for asbestos-related claims based on settlement costs for claims that we had settled, estimates of settlement costs for claims pending against us and an estimate of settlement costs for unasserted claims. The amount for unasserted claims was based on management's estimate of unasserted claims that would be probable of assertion. A liability is not established for claims which we believe are only reasonably possible of assertion. Based on this process, our accrual for asbestos-related claims at December 31, 1997 was $386 million. Our potential liabilities for asbestos-related claims are not easily quantified, due to the nature of the allegations against us, which are not related to the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products, adding to the uncertainty as to the number of claims brought against us. During 1998, we decided to pursue the purchase of insurance to limit our exposure to asbestos-related claims. In connection with our negotiations with the casualty insurers to obtain this insurance, we obtained information that caused us to reassess our accruals for asbestos-related claims. This information included: - Information from the insurers regarding the asbestos-related claims experience of other insureds, which indicated that the number of claims that were probable of assertion against us in the future was significantly greater than we had assumed in our accruals. The number of claims brought against us is generally a reflection of the number of asbestos-related claims brought against asbestos defendants generally and the percentage of those claims in which we are included as a defendant. The information provided to us relating to other insureds indicated that we had been included as defendants for a significant percentage of total asbestos-related claims and that we may be included in a larger percentage of claims in the future, because of greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers and because of the bankruptcy and reorganization or the exhaustion of insurance coverage of other asbestos defendants and that, although volatile, there was an upward trend in the number of total claims brought against asbestos defendants. - Information derived from actuarial calculations we made in the fourth quarter of 1998 in connection with these negotiations, which helped us to frame, define and quantify this liability. These calculations were made using, among other things, current information regarding our claims and settlement experience (which reflected our decision to resolve an increased number of these claims by settlement), recent and historic claims and 79 82 settlement experience of selected other companies and information obtained from the insurers. Based on this information, we concluded that certain claims that previously were considered as only reasonably possible of assertion were now probable of assertion, increasing the number of assumed claims to approximately three times the number assumed in prior periods. As a result of this reassessment, we increased our liability for asbestos-related claims to $1,278 million at December 31, 1998. During 1998, we paid $1,407 million of premiums for excess of loss reinsurance and insurance agreements and policies, consisting of $529 million for the excess of loss reinsurance agreements for sales practices claims and excess mortality losses and $878 million for the excess insurance policies for asbestos-related claims. We obtained the excess of loss reinsurance agreements to provide reinsurance with respect to sales practices claims made on or prior to December 31, 1999 and for certain mortality losses in 1999. These reinsurance agreements have a maximum aggregate limit of $650 million, with a maximum sublimit of $550 million for losses for sales practices claims. This coverage is in excess of an aggregate self-insured retention of $385 million with respect to sales practices claims and $506 million, plus our statutory policy reserves released upon the death of insureds, with respect to life mortality losses. At December 31, 1999, the subject losses under the reinsurance agreements due to sales practices claims and related counsel fees from the time Metropolitan Life Insurance Company entered into the reinsurance agreements did not exceed that self-insured retention. The maximum sublimit of $550 million for sales practices claims was within a range of losses that management believed was reasonably possible at December 31, 1998. Each excess of loss reinsurance agreement for sales practices claims and mortality losses contains an experience fund, which provides for payments to us at the commutation date if experience is favorable at such date. We account for the aggregate excess of loss reinsurance agreements as reinsurance; however, if deposit accounting were applied, the effect on our consolidated financial statements in 1998, and in 1999 and 2000, would not be significant. Under reinsurance accounting, the excess of the liability recorded for sales practices losses recoverable under the agreements of $550 million over the premium paid of $529 million results in a deferred gain of $21 million which is being amortized into income over the settlement period from January 1999 through April 2000. Under deposit accounting, the premium would be recorded as an other asset rather than as an expense, and the reinsurance loss recoverable and the deferred gain would not have been recorded. Because the agreements also contain an experience fund which increases with the passage of time, the increase in the experience fund in 1999 and 2000 under deposit accounting would be recognized as interest income in an amount approximately equal to the deferred gain that will be amortized into income under reinsurance accounting. The excess insurance policies for asbestos-related claims provide for recovery of losses of up to $1,500 million, which is in excess of a $400 million self-insured retention ($878 million of which was recorded as a recoverable at December 31, 1999 and 1998). The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies and agreements annually with respect to claims paid during the prior calendar year. Although amounts paid in any given year that are recoverable under the policies and agreements will be reflected as a reduction in our operating cash flow for that year, management believes that the payments will not have a material adverse effect on our liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to us at the commutation date if experience under the policy to such date has been favorable, or pro rata reductions from time to time in the loss reimbursement to us if the cumulative return on the reference fund is less than the return specified in the experience fund. We believe that the excess of loss reinsurance agreements should provide coverage for a portion of the multidistrict sales practices settlement described above, although we have yet to file a claim under those agreements. The increase in liabilities for death benefits and policy 80 83 adjustments and the cash payments to be made under the settlement should be substantially offset by amounts recoverable under those agreements, as well as amounts provided in our consolidated financial statements, and accordingly we do not believe that they will have a material adverse effect on our business, results of operations, financial condition or cash flows in future periods. We believe adequate provision has been made in our consolidated financial statements for all reasonably probable and estimable losses for sales practices and asbestos-related claims. RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires that New York life insurers report their RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Section 1322 gives the New York Superintendent of Insurance explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. At December 31, 1999, Metropolitan Life Insurance Company's total adjusted capital was in excess of each of those RBC levels. See "Business -- Regulation -- Insurance regulation -- Risk-based capital". Each of the U.S. insurance subsidiaries of Metropolitan Life Insurance Company is subject to these same RBC requirements. At December 31, 1999, the total adjusted capital of each of these insurance subsidiaries was in excess of each of these RBC levels. The NAIC has recently adopted the Codification of Statutory Accounting Principles for life insurers, which is to become effective on January 1, 2001. Prior to implementation by Metropolitan Life Insurance Company, the Codification requires adoption by the New York Insurance Department. Based on a study commissioned by the NAIC, the overall impact to life insurers resulting from adoption of the Codification is not expected to be materially adverse; however, a detailed analysis will be necessary to determine the actual impact of the Codification on the statutory results of operations and statutory financial position of Metropolitan Life Insurance Company and its U.S. insurance subsidiaries. FINANCING. MetLife Funding, Inc. serves as a centralized finance unit for Metropolitan Life Insurance Company. Pursuant to a support agreement, Metropolitan Life Insurance Company has agreed to cause MetLife Funding to have a tangible net worth of at least one dollar. At December 31, 1999 and 1998, MetLife Funding had a tangible net worth of $10.5 million and $10.9 million, respectively. MetLife Funding raises funds from various funding sources and uses the proceeds to extend loans to Metropolitan Life Insurance Company and its other subsidiaries. MetLife Funding manages its funding sources to enhance the financial flexibility and liquidity of MetLife. At December 31, 1999 and 1998, MetLife Funding had total outstanding liabilities of $4.2 billion and $3.6 billion, respectively, consisting primarily of commercial paper. In connection with our acquisition of the stock of GenAmerica, we incurred $900 million of short-term debt, consisting primarily of commercial paper. We intend to repay up to $450 million of that debt with proceeds from the offerings. We also incurred approximately $3.2 billion of short-term debt, consisting primarily of commercial paper, in connection with our October 1, 1999 exchange offer to holders of General American Life funding agreements. Through December 31, 1999, approximately $1.5 billion of this debt was repaid. The remaining $1.7 billion was included in the outstanding liabilities of MetLife Funding at December 31, 1999. See "Business -- Acquisition of GenAmerica". MetLife Funding and Metropolitan Life Insurance Company also maintained $7 billion ($5 billion of which served as back-up for the commercial paper incurred in connection with the exchange offer to holders of General American Life funding agreements) and $2 billion in committed credit facilities at December 31, 1999 and 1998, respectively, which served as back-up for MetLife Funding's commercial paper program and for general corporate purposes. These credit facilities were not utilized during 1999 or 1998. 81 84 SUPPORT AGREEMENTS. In addition to its support agreement with MetLife Funding, Metropolitan Life Insurance Company has entered into a net worth maintenance agreement with New England Life Insurance Company ("NELICO"), whereby it is obligated to maintain NELICO's statutory capital and surplus at the greater of $10 million or the amount necessary to prevent certain regulatory action by Massachusetts, the state of domicile of this subsidiary. The capital and surplus of NELICO at December 31, 1999 and 1998, respectively, was significantly in excess of the amount that would trigger such an event. Furthermore, Metropolitan Life Insurance Company has never been called upon to provide support to NELICO. In connection with Metropolitan Life Insurance Company's acquisition of GenAmerica Corporation, Metropolitan Life Insurance Company entered into a net worth maintenance agreement with General American Life Insurance Company, whereby Metropolitan Life Insurance Company is obligated to maintain General American Life's statutory capital and surplus at the greater of $10 million or the amount necessary to maintain the capital and surplus of General American Life at a level not less than 180% of the NAIC Risk Based Capitalization Model and to ensure that General American Life's liquidity is sufficient to meet its current obligations on a timely basis. The capital and surplus of General American Life Insurance Company at December 31, 1999 was in excess of the required amount. Metropolitan Life Insurance Company has also entered into arrangements with some of its other subsidiaries and affiliates to assist such subsidiaries and affiliates in meeting various jurisdictions' regulatory requirements regarding capital and surplus. In addition, Metropolitan Life Insurance Company has entered into a support arrangement with respect to reinsurance obligations of its wholly-owned subsidiary, Metropolitan Insurance and Annuity Company. Management does not anticipate that these arrangements will place any significant demands upon MetLife's liquidity resources. CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was $3.9 billion, $0.8 billion and $2.9 billion for the years ended December 31, 1999, 1998 and 1997, respectively. In 1999, the change in cash provided by operating activities was primarily due to strong growth in our Institutional and Auto & Home segments. The growth in our Institutional segment was primarily related to strong sales and improved policyholder retention in non-medical health, primarily in our dental and disability businesses. The growth in Auto & Home was primarily due to the acquisition of the standard personal lines property and casualty insurance operations of The St. Paul Companies, as well as growth in both standard and non-standard auto insurance businesses. In 1998, the change in cash provided by operating activities was primarily attributable to $1.4 billion paid in 1998 for excess insurance policies providing coverage for amounts which may be paid in connection with exposure to asbestos claims and reinsurance agreements providing coverage for, among other things, amounts which may be paid or incurred in connection with specified sales practices claims. Net cash provided by operating activities in 1999, 1998 and 1997 was more than adequate to meet liquidity requirements. Net cash (used in) provided by investing activities were $(2.4) billion, $2.7 billion and $(1.7) billion for the years ended December 31, 1999, 1998 and 1997, respectively. Purchases of investments exceeded sales, maturities and repayments by $0.5 billion, $7.6 billion and $1.6 billion in 1999, 1998 and 1997, respectively. In 1999, the significant decrease in net purchases of investments resulted from a decrease in the reinvestment of sales proceeds as a result of the funding agreement exchange offer in connection with the GenAmerica acquisition, as well as the purchase of the individual disability income business of Lincoln National Life Insurance Company. In 1998, the significant increase in net purchases of investments resulted from the reinvestment of proceeds from the sale of MetLife Capital Holdings, Inc. and a substantial portion of our Canadian operations and cash from our securities lending program. Prior to 1998, our securities lending program activity was not reflected in our consolidated balance sheets or consolidated statements of cash flows. Cash flows for investing activities also increased by $2.7 billion and $3.8 billion in 1999 and 1998, respectively, as a result of activity from our securities lending program. 82 85 Net cash used in financing activities was $2.0 billion, $3.1 billion and $0.6 billion for the years ended December 31, 1999, 1998 and 1997, respectively. Withdrawals from policyholders' account balances exceeded deposits by $2.2 billion, $2.3 billion and $2.8 billion in 1999, 1998 and 1997, respectively. Short-term financings increased $0.6 billion in 1999 compared with a decrease of $1.0 billion in 1998, while net reductions in long-term debt were $389 million in 1999 compared with net additions of $212 million in 1998. The operating, investing and financing activities described above resulted in a decrease in cash and cash equivalents of $512 million for the year ended December 31, 1999 compared with increases of $390 million and $586 million for the years ended December 1998 and 1997, respectively. EFFECTS OF INFLATION We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates. See "Risk Factors -- Changes in interest rates may significantly affect our profitability". MARKET RISK DISCLOSURE We must effectively manage, measure and monitor the market risk associated with our invested assets and interest rate sensitive insurance contracts. We have developed an integrated process for managing risk, which we conduct through our Corporate Risk Management Department, several asset/liability committees and additional specialists at the business segment level. We have established and implemented comprehensive policies and procedures at both the corporate and business segment level to minimize the effects of potential market volatility. MARKET RISK EXPOSURES We have exposure to market risk through our insurance operations and investment activities. For purposes of this disclosure, "market risk" is defined as the risk of loss resulting from changes in interest rates, equity prices and foreign exchange rates. INTEREST RATES. Our exposure to interest rate changes results from our significant holdings of fixed maturities, as well as our interest rate sensitive liabilities. The fixed maturities include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds and mortgage-backed securities, all of which are mainly exposed to changes in medium- and long-term treasury rates. Our interest rate sensitive liabilities for purposes of this disclosure include guaranteed interest contracts and fixed annuities, which have the same interest rate exposure (medium- and long-term treasury rates) as the fixed maturities. We employ product design, pricing and asset/liability management strategies to reduce the adverse effects of interest rate volatility. Product design and pricing strategies include the use of SURRENDER CHARGES or restrictions on withdrawals in some products. Asset/liability management strategies include the use of derivatives, the purchase of securities structured to protect against prepayments, prepayment restrictions and related fees on mortgage loans and consistent monitoring of the pricing of our products in order to better match the duration of the assets and the liabilities they support. EQUITY PRICES. Our investments in equity securities expose us to changes in equity prices. We manage this risk on an integrated basis with other risks through our asset/liability management strategies. We also manage equity price risk through industry and issuer diversification and asset allocation techniques. FOREIGN EXCHANGE RATES. Our exposure to fluctuations in foreign exchange rates against the U.S. dollar results from our holdings in non-U.S. dollar denominated fixed maturity securities and equity securities and through our investments in foreign subsidiaries. The principal currencies which create foreign exchange rate risk in our investment portfolios are Canadian dollars, Euros, 83 86 German marks, French francs, Spanish pesetas and British pounds. We mitigate the majority of our fixed maturities' foreign exchange rate risk through the utilization of foreign currency swaps and forward contracts. Through our investments in foreign subsidiaries, we are primarily exposed to the Spanish peseta, Mexican peso, Argentinean dollar and Korean won. We have denominated all assets and liabilities of our foreign subsidiaries in their respective local currencies, thereby minimizing our risk to foreign exchange rate fluctuations. RISK MANAGEMENT CORPORATE RISK MANAGEMENT. We have established several financial and non-financial senior management committees as part of our risk management process. These committees manage capital and risk positions, approve asset/liability management strategies and establish appropriate corporate business standards. We also have a separate Corporate Risk Management Department, which is responsible for risk throughout MetLife and reports directly to our Chief Actuary. The Corporate Risk Management Department's primary responsibilities consist of: - implementing a board of directors-approved corporate risk framework, which outlines our approach for managing risk on an enterprise-wide basis; - developing policies and procedures for managing, measuring and monitoring those risks identified in the corporate risk framework; - establishing appropriate corporate risk tolerance levels; - deploying capital on a risk-adjusted basis; and - reporting on a periodic basis to the Audit Committee of the board of directors and our various financial and non-financial senior management committees. ASSET/LIABILITY MANAGEMENT. At MetLife, asset/liability management is the responsibility of the General Account Portfolio Management Department ("GAPM"), the operating business segments and various GAPM boards. The GAPM boards are comprised of senior officers from the investment department, senior managers from each business segment and the Chief Actuary. The GAPM boards' duties include setting broad asset/liability management policy and strategy, reviewing and approving target portfolios, establishing investment guidelines and limits and providing oversight of the portfolio management process. The portfolio managers and asset sector specialists, who have responsibility on a day-to-day basis for risk management of their respective investing activities, implement the goals and objectives established by the GAPM boards. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while ensuring that the assets and liabilities are managed on a cash flow and duration basis. The risk management objectives established by the GAPM boards stress quality, diversification, asset/liability matching, liquidity and investment return. Each of our business segments has an asset/liability officer who works with portfolio managers in the investment department to monitor investment, product pricing, hedge strategy and liability management issues. We establish target asset portfolios for each major insurance product, which represent the investment strategies used to profitably fund our liabilities within acceptable levels of risk. These strategies include objectives for effective duration, yield curve sensitivity, convexity, liquidity, asset sector concentration and credit quality. To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our securities investments and liabilities to interest rate movements. These projections involve evaluating the potential gain or loss on most of our in-force business under various increasing and decreasing interest rate environments. We have 84 87 developed models of our in-force business that reflect specific product characteristics and include assumptions based on current and anticipated experience regarding lapse, mortality and interest crediting rates. In addition, these models include asset cash flow projections reflecting interest payments, sinking fund payments, principal payments, bond calls, mortgage prepayments and defaults. New York Insurance Department regulations require that we perform some of these analyses annually as part of the annual proof of the sufficiency of our regulatory reserves to meet adverse interest rate scenarios. HEDGING ACTIVITIES. Our risk management strategies incorporate the use of various interest rate derivatives that are used to adjust the overall duration and cash flow profile of our invested asset portfolios to better match the duration and cash flow profile of our liabilities to reduce interest rate risk. Such instruments include interest rate swaps, futures and caps. We also use foreign currency swaps and forward contracts to hedge our foreign currency denominated fixed income investments. RISK MEASUREMENT; SENSITIVITY ANALYSIS We measure market risk related to our holdings of invested assets and other financial instruments, including certain market risk sensitive insurance contracts ("other financial instruments"), based on changes in interest rates, equity prices and foreign currency rates, utilizing a sensitivity analysis. This analysis estimates the potential changes in fair value, cash flows and earnings based on a hypothetical 10% change (increase or decrease) in interest rates, equity prices and currency exchange rates. We believe that a 10% change (increase or decrease) in these market rates and prices is reasonably possible in the near-term. In performing this analysis, we used market rates at December 31, 1999 to re-price our invested assets and other financial instruments. The sensitivity analysis separately calculated each of our market risk exposures (interest rate, equity price and currency rate) related to our non-trading invested assets and other financial instruments. We do not maintain a trading portfolio. The sensitivity analysis we performed included the market risk sensitive holdings described above under "Market Risk Disclosure". We modeled the impact of changes in market rates and prices on the fair values of our invested assets, earnings and cash flows as follows: FAIR VALUES. We base our potential loss in fair values on an immediate change (increase or decrease) in: - the net present values of our interest rate sensitive exposures resulting from a 10% change (increase or decrease) in interest rates; - the U.S. dollar equivalent balances of our currency exposures due to a 10% change (increase or decrease) in currency exchange rates; and - the market value of our equity positions due to a 10% change (increase or decrease) in equity prices. EARNINGS AND CASH FLOWS. We calculate the potential loss in earnings and cash flows on the change in our earnings and cash flows over a one-year period based on an immediate 10% change (increase or decrease) in market rates and equity prices. The following factors were incorporated into our earnings and cash flows sensitivity analyses: - the reinvestment of fixed maturity securities; - the reinvestment of payments and prepayments of principal related to mortgage-backed securities; - prepayment rates on mortgage-backed securities were re-estimated for each 10% change (increase or decrease) in the interest rates; and 85 88 - expected turnover (sales) of fixed maturities and equity securities, including the reinvestment of the resulting proceeds. The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot assure that our actual losses in any particular year will not exceed the amounts indicated in the table below. Limitations related to this sensitivity analysis include: - the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on our mortgages; - the analysis excludes other significant real estate holdings and liabilities pursuant to insurance contracts; and - the model assumes that the composition of our assets and liabilities remains unchanged throughout the year. Accordingly, we use such models as tools and not substitutes for the experience and judgment of our corporate risk and asset/liability management personnel. Based on our analysis of the impact of a 10% change (increase or decrease) in market rates and prices, we have determined that such a change could have a material adverse effect on the fair value of our interest rate sensitive invested assets. The equity and foreign currency portfolios do not expose us to material market risk. The table below illustrates the potential loss in fair value of our interest rate sensitive financial instruments at December 31, 1999. In addition, the potential loss with respect to fair value of currency exchange rates and our equity price sensitive positions at December 31, 1999 is set forth in the table below. The potential loss in fair value for each market risk exposure of our portfolio, all of which is non-trading, for the periods indicated was (in millions):
AT DECEMBER 31, -------------------- 1999 1998 -------- -------- Interest rate risk............................... $5,044.3 $3,977.1 Equity price risk................................ $ 198.0 $ 247.6 Currency exchange rate risk...................... $ 262.5 $ 260.0
YEAR 2000 READINESS The Year 2000 issue is the result of many computer hardware and software systems using only two digits, rather than four, to represent a calendar year. Without appropriate remediation or replacement, such systems may not process dates beyond 1999. This system problem could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions and engage in normal business activities. Given the potential impact of the Year 2000 issue on us, in 1996 we established a centralized Project Management Office within our Information Technology Department. The Project Management Office developed a plan that identified the processes and steps to take so that all of MetLife's own computer applications, as well as our voice and data communication systems, would continue to function properly in and beyond the Year 2000. The scope of our Year 2000 plan included testing the readiness of: applications, operating systems and hardware on mainframes, personal computers and local area network platforms; voice and data network software and hardware; and some non-information technology systems in buildings, facilities and equipment, including, but not limited to, security systems and building controls. In addition, we established procedures to contact key suppliers, customers, joint venture partners and other business parties regarding their Year 2000 readiness. 86 89 The phases of our Year 2000 plan were: (1) identifying Year 2000 problems and assigning priorities; (2) assessing the Year 2000 compliance of each of our business segments; (3) remediating or replacing items for Year 2000 compliance; (4) testing items for Year 2000 compliance at each of our business segments; and (5) designing and implementing Year 2000 contingency and business continuity plans. We completed phases (1) through (4) by June 30, 1999. We completed phase (5) by the end of 1999. As to our systems certification, each of our business segments conducted testing for Year 2000 compliance. We evaluated and tested each system using a standard certification process and used both internal and external resources in connection with our certification process. The certification process included, among other procedures, testing of future dates near the end of 1999, after the beginning of 2000 and for the leap year. We also conducted tests of our business-critical systems on an enterprise-wide basis. At December 31, 1999, approximately 100% of our information technology applications and systems, security systems, building controls and utilities located in facilities owned and operated by MetLife were Year 2000 compliant. As part of our Year 2000 plan, we initiated formal communications with all of our significant business partners, such as suppliers and customers, to determine the extent to which we may have been vulnerable to those third parties' failure to remediate their own Year 2000 issues. A majority of our significant business partners gave assurances that they were Year 2000 ready by December 31, 1999. As of the date of this prospectus, we are not aware of any material Year 2000-related problems experienced by our information technology and non-information technology systems. We have not been informed by any other companies, governmental agencies or other entities on which we rely that any such parties experienced any material Year 2000-related problems. We cannot guarantee, however, that we or the other companies, governmental agencies or other entities on which we rely will not experience any Year 2000-related problems in the future. If such problems do occur, there can be no assurance that they will not have a material adverse effect on our business, results of operations and financial condition. Through December 31, 1999, we had incurred and expensed approximately $220 million related to assessment and remediation or replacement in connection with our Year 2000 plan. We funded these costs through operating cash flows, expensed as incurred. During 2000, we expect to have additional Year 2000-related expenses of approximately $5 million. Detailed business contingency plans have been developed to address Year 2000 risks that may affect our ability to conduct business. However, we cannot guarantee that such contingency plans will mitigate all future Year 2000 issues or prevent future Year 2000 issues from having a material adverse effect on our business, results of operations and financial condition. INSOLVENCY ASSESSMENTS Most of the jurisdictions in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed life insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. Assessments levied against us from January 1, 1997 through December 31, 1999 aggregated $62 million. We maintained a liability of $31 million at December 31, 1999 for future assessments in respect of currently impaired, insolvent or failed insurers. 87 90 THE DEMUTUALIZATION The following is a summary of the material terms of Metropolitan Life Insurance Company's plan of reorganization. Although we believe the material provisions of the plan of reorganization have been accurately summarized, you should refer to the plan of reorganization itself, a copy of which is filed as an exhibit to the registration statement of which this prospectus forms a part. PURPOSE The main purpose of the demutualization is to change our corporate structure to increase our potential for long-term growth and financial strength. We believe that our ability, as a stock company, to issue shares of stock will enable us to raise money more efficiently and will provide us with greater flexibility to make business acquisitions and combinations. This will allow us to increase our market leadership, financial strength and strategic position, providing additional security to our policyholders. The demutualization will also make it easier for us to take advantage of changes in laws removing restrictions on affiliations between insurers and other types of financial services companies, such as banks. In addition, the demutualization will provide previously unavailable economic value to eligible policyholders in the form of allocated shares of MetLife, Inc. common stock (which will be held in the MetLife Policyholder Trust), cash or policy credits, in exchange for their policyholders' membership interests in Metropolitan Life Insurance Company. SUMMARY OF THE PLAN OF REORGANIZATION On the date the plan of reorganization becomes effective (which will be the date of the closings of the initial public offering, the offering of units and the private placements), Metropolitan Life Insurance Company will convert from a mutual life insurance company to a stock life insurance company, and become a wholly-owned subsidiary of MetLife, Inc. Each policyholder's membership interest will be extinguished on the plan effective date and, in consideration thereof, each eligible policyholder will be entitled to receive, in exchange for that interest, trust interests representing shares of common stock, cash or an adjustment to their policy values in the form of policy credits, as provided in the plan. We will allocate consideration among eligible policyholders based on actuarial principles. For a description of the actuarial principles used in this allocation, see "The Demutualization -- Payment of Consideration to Eligible Policyholders". The plan of reorganization requires us to make the initial public offering and to raise proceeds from the initial public offering, together with the offering of units and the private placements, in an amount, net of underwriting commissions and related expenses, at least equal to the amounts required for us to reimburse Metropolitan Life Insurance Company for the crediting of policy credits and payment of mandatory cash payments to eligible policyholders pursuant to the plan of reorganization and to reimburse Metropolitan Life Insurance Company for the cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998, as well as to pay the fees and expenses we have incurred in connection with the demutualization. The plan also permits us to complete one or more private placements and other specified capital raising transactions on the effective date of the plan. Concurrently with this offering, we expect to sell not less than 14,900,000 shares nor more than 73,000,000 shares in the aggregate to Banco Santander Central Hispano, S.A. and Credit Suisse Group or their respective affiliates in private placements. In addition, we and a trust we own are offering 20,000,000 equity security units for an aggregate offering of $1,000 million, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full. Each unit consists of (a) a contract to purchase shares of our common stock and (b) a capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. For a description of the units, see "Description of the Equity Security Units". Under the plan of reorganization, the total proceeds raised in the offering of units cannot exceed one-third of the total proceeds raised in that 88 91 offering, the initial public offering and the private placements. The amount of proceeds from and final terms of the units will depend on market conditions and our capital needs at the time of issuance. We cannot proceed with any offering relating to the units and the private placements without the approval of the New York Superintendent of Insurance. In addition, the final terms of the initial public offering, the offering of units and the private placements must be approved by the New York Superintendent. Pursuant to the New York Insurance Law, the board of directors of Metropolitan Life Insurance Company adopted the plan of reorganization on September 28, 1999, and subsequently adopted amendments to the plan. The plan of reorganization must also be approved by at least two-thirds of the votes validly cast by the eligible policyholders. The plan of reorganization defines eligible policyholders as the owners on September 28, 1999, the adoption date of the plan, of certain policies and interests issued by Metropolitan Life Insurance Company that were in force on that date. The plan was approved by more than two-thirds of eligible policyholders who voted in voting completed on February 7, 2000. The vote of our policyholders was 2,572,832 votes in favor, 188,914 votes opposed. The plan of reorganization will not become effective unless, after conducting a public hearing on the plan, the New York Superintendent approves it based on a finding, among other things, that the plan is fair and equitable to policyholders. The New York Superintendent held a public hearing on the plan on January 24, 2000. At the public hearing, some policyholders and others raised objections to certain aspects of the plan. Six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent of Insurance. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. The plaintiffs in three of the New York County cases have moved to consolidate their cases into a single proceeding. Metropolitan Life Insurance Company has entered into a stipulation with those plaintiffs in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of Insurance's approval may adversely affect the terms of the demutualization and the market price of our common stock". We began incurring expenses related directly or indirectly to the demutualization during 1998. We estimate that expenses relating to the demutualization, excluding costs relating to the offerings and the private placements, will total approximately $361 million, net of income taxes of 89 92 $83 million. Demutualization expenses consist of our cost of printing and mailing materials to policyholders and our aggregate cost of engaging independent accounting, actuarial, compensation, financial, investment banking and legal advisors and other consultants to advise us in the demutualization process and related matters, as well as other administrative costs. The New York Superintendent has also engaged experts to provide actuarial, investment banking, legal and auditing advice. Pursuant to the New York Insurance Law, we must pay the fees and expenses of such consultants, which fees and expenses are included in the above amounts. We have also agreed to indemnify certain of our consultants and consultants to the New York Superintendent against liabilities arising out of their engagements in connection with the demutualization. PAYMENT OF CONSIDERATION TO ELIGIBLE POLICYHOLDERS On the effective date of the plan of reorganization: - the policyholders' membership interests will be extinguished and each eligible policyholder will be allocated a number of trust interests equal to the number of shares of our common stock allocated to such policyholder, except that some eligible policyholders will receive cash or an adjustment to their policy values, known as policy credits; and - Metropolitan Life Insurance Company will become a stock life insurance company and a wholly-owned subsidiary of MetLife, Inc. We will distribute cash to: - each eligible policyholder whose mailing address is outside the U.S.; - each eligible policyholder or class of eligible policyholders for whom we determine in good faith, to the satisfaction of the New York Superintendent of Insurance, that it is not reasonably feasible or appropriate to provide consideration in the form that such policyholder would otherwise receive; - each owner of an industrial life insurance policy in reduced paid-up status with respect to whom we have a reasonable belief, after a reasonable effort to locate such policyholder, that the mailing address as shown on our records is an address at which mail to such policyholder is undeliverable; and - each group eligible policyholder that is an owner of an individual retirement annuity or a tax sheltered annuity, and elects to receive cash instead of common stock (but this provision will apply only to that policy). In addition to the cash payments described above, we will make cash payments to any eligible policyholder (other than an eligible policyholder required to receive policy credits or cash) that has affirmatively elected on or before February 7, 2000 to receive cash for such policyholder's allocated shares. There may be a limit to the amount of funds available to pay cash compensation to eligible policyholders that elect to receive cash. The plan provides that the initial public offering and the offering of units must raise proceeds, net of underwriting commissions and related expenses, in an amount at least equal to the amount paid by Metropolitan Life Insurance Company to fund mandatory cash payments pursuant to the plan and policy credits to policyholders and to pay fees and expenses incurred by Metropolitan Life Insurance Company related to the demutualization, as well as to reimburse Metropolitan Life Insurance Company for amounts to be paid by its Canadian branch to certain former Canadian policyholders. If the initial public offering, the offering of units and the private placements are not of a sufficient size to fund the payment of cash to all eligible policyholders that elect to receive cash, it is possible that the plan will become effective but that cash will not be paid to all eligible policyholders electing to receive cash. If this were to happen, cash will be paid as follows: - each individual eligible policyholder that elects to receive cash will receive consideration in the form of cash; 90 93 - each group eligible policyholder that elects to receive cash and is allocated not more than 25,000 shares will receive consideration in the form of cash; and - each group eligible policyholder that elects to receive cash and is allocated more than 25,000 shares will receive consideration in the form of: - cash, with respect to the first 25,000 shares allocated to the eligible policyholder; and - either shares of common stock (to be held in the trust) or a combination of cash and shares of common stock (to be held in the trust), with respect to the remaining shares allocated to the eligible policyholder. Such cash will be allocated to each such eligible policyholder on a pro rata basis based on the proportion that the total number of shares in excess of 25,000 shares allocated to such eligible policyholder bears to the total number of shares in excess of 25,000 shares allocated to all eligible policyholders allocated more than 25,000 shares that have elected to receive cash. These proration provisions will not apply to any group eligible policyholder that is an owner of an individual retirement annuity or a tax sheltered annuity who elects to receive cash instead of common stock (to be held in the trust), but only with respect to that policy. The maximum number of allocated shares for which cash will be available will depend on a number of factors, including the number of policyholders that elect to receive cash, market conditions and the size of the initial public offering, the offering of units and the private placements. Until the second year after the plan effective date, if there is an underwritten public offering by us of common stock, we will offer to each trust beneficiary holding at the time more than 25,000 trust interests and whose cash election was not fully satisfied the opportunity to include a number of shares equal to all of the trust beneficiary's trust interests in the offering. Each such trust beneficiary may then elect whether it wants to include some or all of its common stock (held in the trust) in the offering. We will include all shares desired to be sold in the offering. However, if, based on the advice of a nationally recognized investment banking firm selected by us, our board of directors believes that including all such shares would be likely to have an adverse effect on the price, timing or distribution of the offering, only those shares, if any, that the board of directors determines can be included without adversely affecting the offering will be included. If this were to occur, we will prorate the number of shares that each such trust beneficiary may include in the offering based on the number of trust interests that each such trust beneficiary elected to have included in the offering. We will enter into an underwriting agreement with the underwriters, which will contain indemnification and other terms acceptable to us and the underwriters. We will bear the costs of conducting the offering, including the fees and expenses of the underwriters for the offering. We will establish reasonable procedures for the participation of such trust beneficiaries in any such offering. Eligible policyholders owning policies that are individual retirement annuities, tax sheltered annuities, tax qualified individual life insurance policies and individual annuity contracts, life or health insurance funding accounts and guaranteed life insurance funding accounts are required to receive consideration in the form of policy credits. However, if any such policy has matured by death or otherwise been surrendered or terminated after September 28, 1999, but prior to the date on which the policy credits would have been credited, cash in the amount of the policy credits will be paid in lieu of the policy credits to the person to whom the death benefit, surrender value or other payment at termination was made under such policy. The remaining eligible policyholders will be entitled to receive on the effective date of the plan their allocated shares of Metropolitan Life Insurance Company common stock, which will then be exchanged on such date for an equal number of shares of our common stock to be held by the MetLife Policyholder Trust. We will distribute consideration to eligible policyholders receiving cash or policy credits as soon as reasonably practicable following the effective date of the plan, but in any event not later than 60 days after the effective date, or such later date as may be approved by the New York Superintendent of Insurance. 91 94 Regardless of whether an eligible policyholder is receiving allocated trust interests, cash or policy credits, the consideration an eligible policyholder receives under the plan of reorganization will be based on the number of shares of common stock allocated to the eligible policyholder pursuant to the terms of the plan of reorganization. The formula for allocating shares of common stock among eligible policyholders consists of two components. We will allocate a fixed number of shares of common stock equal to ten shares to each eligible policyholder, regardless of the number of policies owned by that eligible policyholder. Additional shares will also be allocated to each eligible policyholder holding a participating policy -- that is, a policy that is not by its terms ineligible for dividend payments. The number of such additional shares will vary for each such eligible policyholder based upon an actuarial formula, specified in the plan of reorganization, that takes into account, among other things, the past and future contributions to our statutory surplus from policies held by the eligible policyholder, as determined by historical experience and expected future performance. The amount of the consideration to be paid to an eligible policyholder in the form of cash or policy credits will generally equal the number of shares of common stock allocated to the eligible policyholder multiplied by the price per share at which our common stock is offered to the public in the initial public offering. The initial public offering price, which will be established through arm's length negotiations with representatives of the underwriters, will be based on, among other things, prevailing market conditions, our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and consideration of the above factors in relation to market valuations of companies in related businesses. In addition, the final terms of the initial public offering, including the initial public offering price of our common stock, will be subject to the approval of the New York Superintendent of Insurance. We have retained PricewaterhouseCoopers LLP to advise us in connection with actuarial matters involved in the development of the plan of reorganization and the payment of consideration to eligible policyholders. The opinion of Kenneth M. Beck, a principal with the firm of PricewaterhouseCoopers LLP, dated November 16, 1999, states that the plan for allocation of consideration to eligible policyholders (as defined in the plan of reorganization) as set forth in the plan of reorganization is fair and equitable to the policyholders of Metropolitan Life Insurance Company as required by Section 7312 of the New York Insurance Law. This opinion is included as Annex A of this prospectus. ESTABLISHMENT AND OPERATION OF THE METLIFE POLICYHOLDER TRUST Under our plan of reorganization, we will establish the MetLife Policyholder Trust to hold the shares of our common stock allocated to eligible policyholders not receiving cash or policy credits. Each trust beneficiary will have the right to elect to withdraw from the trust shares of common stock for sale, without the payment of commissions or brokerage fees, pursuant to the purchase and sale program described below. Sales may be made at any time after the later of (1) the termination of any stabilization arrangements and trading restrictions in connection with the initial public offering and (2) the closing of all underwriters' over-allotment options which have been exercised and the expiration of all unexercised options in connection with the initial public offering. We expect that these sales may begin within approximately 30 days after the plan effective date. In addition, beginning one year after the plan effective date, trust beneficiaries may elect to withdraw all (but not less than all) of their allocated shares of our common stock held through the trust to hold the shares directly, in book entry or certificated form, or to sell the shares themselves independently, if they wish. Each trust beneficiary holding fewer than 1,000 trust interests may also purchase additional shares of our common stock (to be held in the trust) through the purchase and sale program to increase the trust beneficiary's interests up to a maximum of 1,000 interests. 92 95 The purchase and sale program will be administered by ChaseMellon Shareholder Services, L.L.C., the program agent for the purchase and sale program and the custodian for the trust. Generally, each beneficiary may elect to withdraw from the trust the beneficiary's allocated shares of our common stock for sale through the purchase and sale program, subject to the following limitations: - each trust beneficiary holding 199 or fewer trust interests may elect to withdraw from the trust for sale the number of shares of our common stock held by the trust equal to all, but not less than all, of the beneficiary's trust interests; - each trust beneficiary holding more than 199 trust interests may elect to withdraw from the trust for sale a number of shares of our common stock held by the trust equal to all or part of the beneficiary's trust interests, subject to the limitation that partial withdrawals may be made only in increments of 100 shares, and that following any such withdrawal for sale of part of the trust beneficiary's trust interests the trust beneficiary holds at least 100 trust interests; and - for the first 300 days following the effective date of the plan, each trust beneficiary holding more than 25,000 trust interests will be subject to the volume limitations described below. Under the purchase and sale program procedures, if the total shares of our common stock to be sold on the open market on behalf of trust beneficiaries holding more than 25,000 trust interests on any day exceed the lesser of (i) 1/20th of 1% of the number of shares of our common stock outstanding and (ii) 25% of the average daily trading volume for the 20 trading days (or such shorter period, if fewer than 20 trading days have elapsed since the plan effective date) preceding the trade, the broker-dealer will only process trades on the open market up to that limit for trust beneficiaries holding more than 25,000 shares. The broker-dealer affiliate of the program agent will either defer the excess shares to the next trading day (which will be subject to the same volume limitations on that day) or sell the shares as principal through a block trade or through a nationally recognized brokerage firm that will sell the shares, as agent, at market clearing prices. For a period of 90 days following the plan effective date, only the lead managing underwriters for the initial public offering may sell, as joint agents, the excess shares. After the first 300 days, these limitations will no longer apply and withdrawals for sale may be made as permitted under the trust agreement and the purchase and sale program procedures. Except for the limitations on sales by trust beneficiaries holding more than 25,000 trust interests, purchases and sales will generally be processed on the first or second trading day after the day on which instructions are received, subject to limited exceptions such as an act of God or significant market disruption. In addition, the trust agreement allows trust beneficiaries to instruct the trust custodian to withdraw their allocated trust shares to participate in any tender or exchange offer or counter offer for our common stock and to make any cash or share election, or perfect any dissenter's rights, in connection with a merger of MetLife, Inc. In addition to the sale features of the purchase and sale program, the program will permit trust beneficiaries holding fewer than 1,000 trust interests to elect to purchase additional shares of our common stock (to be held in the trust) on their behalf, subject to the conditions that upon completion of the purchase the beneficiary holds no more than 1,000 interests and the total cost for the purchased shares is at least $250 (or such lesser amount required to purchase a number of shares that would cause it to hold the 1,000 maximum number of interests at the closing price of our common stock on the trading day immediately prior to the mailing of such funds). These purchases may be made at any time beginning on the first trading day following the 90th day after the effective date of the plan of reorganization. 93 96 Trust beneficiaries making such purchase or sale elections will not be required to pay any brokerage commissions, mailing charges, registration fees or other administrative or similar expenses. All purchase and sale elections received by the program agent for the purchase and sale program will be processed pursuant to policies and procedures set forth as Exhibit J to the plan of reorganization, a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus forms a part. These procedures may be amended in the future. Trust beneficiaries will be notified of any changes to the purchase and sale program procedures in the future. Any changes to the procedures before the first anniversary of the effective date of the plan of demutualization would require the approval of the New York Superintendent of Insurance. The trustee has the exclusive and absolute right to vote, assent or consent the shares of common stock held in the trust at all times during the term of the trust. Generally, on all matters brought to our stockholders for a vote, the trustee will vote in accordance with the recommendation given by our board of directors to our stockholders or, if no such recommendation is given, as directed by our board. However, if the matter concerns any of the matters described below, the trustee will solicit instructions from the trust beneficiaries and will vote, assent or consent all trust shares, including for purposes of determining a quorum, in favor of, in opposition to or abstaining from the matter in the same ratio as trust interests of the trust beneficiaries who returned voting instructions to the trustee indicated preferences for voting in favor of, in opposition to or abstaining from such matter. If any such calculation of votes would require a fractional vote, the trustee will vote the next lower number of whole shares. In these matters, instructions actually given by trust beneficiaries would have disproportionate weight in the voting. These matters are: - an election or removal of directors in which a stockholder has properly nominated one or more candidates in opposition to a nominee or nominees of our board of directors or a vote on a stockholder's proposal to oppose a board nominee for director, remove a director for cause or fill the vacancy caused by the removal of a director by stockholders, provided that the stockholder making the nomination or proposal deposits funds for the payment of postage and other expenses for mailing proxy materials to all of the trust beneficiaries, or such lesser number, holding at least a majority of the trust interests, that the stockholder seeks to solicit; - a merger or consolidation, a sale, lease or exchange of all or substantially all of the assets, or a recapitalization or dissolution of, MetLife, Inc., in each case requiring a vote of our stockholders under applicable Delaware law; - any transaction that would result in an exchange or conversion of shares of common stock held by the trust for cash, securities or other property; - issuances of our common stock during the first year after the effective date of the plan at a price materially less than the then prevailing market price of our common stock, if a vote of our stockholders is required to approve the issuance under Delaware law, other than issuances in an underwritten public offering or pursuant to an employee benefit plan; - for the first year after the effective date of the plan, any matter that requires a supermajority vote of our outstanding stock entitled to vote thereon under Delaware law or our certificate of incorporation or by-laws, and any amendment to our certificate of incorporation or by-laws that is submitted for approval to our stockholders; and - any proposal requiring our board of directors to amend or redeem the rights under our stockholder rights plan, other than a proposal with respect to which we have received advice of nationally-recognized legal counsel to the effect that the proposal is not a proper subject for stockholder action under Delaware law. In the event that voting instructions are required to be solicited from trust beneficiaries, trust beneficiaries will be mailed proxy statements, annual reports and other materials with respect to any matter upon which they will direct the voting of the shares held by the trust. In addition, the 94 97 custodian will prepare and mail to each beneficiary (1) an annual statement regarding the status of such beneficiary's trust interests and any dividends and distributions received by the trustee with respect to such interests, as well as any interest earned by the trust with respect to such dividends and distributions, and the procedures for notifying the custodian of any discrepancies or errors with respect to such statement, and (2) a notice of the beneficiary's right to make purchase, sale and withdrawal elections. The custodian will also prepare, file and mail to each beneficiary all information reports required under federal, state and local law in respect of the trust beneficiaries. The trustee will register the trust interests under the Securities Exchange Act of 1934, as amended, and will prepare and file all periodic and other reports and other documents pursuant to that Act, including annual reports on Form 10-K containing financial information regarding the trust, including the amount of dividends received on the shares of our common stock held by the trust, income from investments made by the trust and the distribution of those amounts to trust beneficiaries. The trust will file a similar report on Form 8-K whenever non-annual distributions are made to trust beneficiaries. The custodian will inform trust beneficiaries annually, in connection with the expected annual mailing of dividend checks and account statements, of the availability of the annual report, and trust beneficiaries who telephone the toll-free number in order to participate in the purchase and sale program or to obtain further information will be informed that the annual report is available on our website or by mail upon request. Beneficiaries will be prohibited from selling, transferring, assigning, encumbering, or granting any option or any other interest in, or otherwise disposing of, their trust interests, except in limited circumstances set forth in the trust agreement. Cash dividends, if any, collected or received by the trustee with respect to the shares of our common stock held by the trust will be invested by the trustee and distributed, together with interest earned thereon and net of any applicable withholding taxes, through the custodian of the trust to the beneficiaries. Regular cash dividends, including interest net of income taxes, received by June 30 in any calendar year will be distributed on the following July 31, and those received by December 31 will be distributed on the following January 31, provided that in no event will such distribution be made more than 90 days after the receipt of dividends by the trustee. Notwithstanding this provision, we currently expect to pay dividends directly to the trust beneficiaries at the same time they are paid to stockholders. Dividends or other distributions in common stock will be allocated to the beneficiaries pro rata in accordance with their respective interests in the trust and held by the trustee as part of the corpus of the trust. All other distributions we may make to stockholders will be held by the trustee and distributed through the custodian of the trust as provided in the trust agreement. We will reimburse the trustee and the custodian for all taxes, fees, commissions and other reasonable out-of-pocket expenses incurred by the trustee and the custodian, respectively, except that we will not reimburse the trustee and the custodian for the expense of mailing to beneficiaries any proxy or other materials received by the trustee on behalf of persons other than us. Unless it shall have been previously terminated, the trust will terminate upon the earlier of: - 90 days after the trustee receives notice from us that the number of shares of our common stock held by the trust is 10% or less of the number of issued and outstanding shares of our common stock; or - the date on which the last share of our common stock held by the trust has been withdrawn, distributed or exchanged. The trust may be terminated earlier upon the first to occur of the following: - the 90th day after the trustee receives written notice from us, given in our discretion, that the number of shares of our common stock held by the trust is 25% or less of the number of issued and outstanding shares of our common stock; 95 98 - the trustee receives written notice that our board of directors has determined that continuation of the trust is or is reasonably expected to become burdensome to us or the trust beneficiaries because of changes in law or other circumstances; - any rights issued under a stockholder rights plan adopted by us and held by the trust pursuant to the trust agreement become separately tradeable from the shares of our common stock held by the trust to which they relate; or - the entry of a final order for termination or dissolution of the trust or similar relief by a court of competent jurisdiction. If the trust has not otherwise terminated, it will terminate on the date necessary to avoid a violation of the rule against perpetuities, if such rule is applicable. Upon termination of the trust, the remaining shares of our common stock held by the trust will be distributed to the trust beneficiaries pro rata, in accordance with their respective interests in the trust, in book entry form, to the extent permitted by applicable law, or as otherwise directed by each trust beneficiary, together with the trust beneficiaries' pro rata share of all unpaid distributions and dividends and interest earned thereon. The trust provides that, concurrently with the winding up of the trust, we may, in our discretion, offer to purchase all or a portion of the shares of our common stock from the trust at a price equal to the average of the closing prices of our common stock on the 20 consecutive trading days preceding such offer. ESTABLISHMENT AND OPERATION OF THE CLOSED BLOCK The closed block is an accounting mechanism established to ensure that the reasonable dividend expectations of policyholders who own certain individual insurance policies are met. As set forth in the closed block memorandum included as a schedule to the plan of reorganization, a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus forms a part, we will allocate assets to the closed block in an amount that produces cash flows which, together with anticipated revenue from the closed block policies, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes and for continuation of policyholder dividend scales in effect for 1999, if the experience underlying such scales continues, and for appropriate adjustments in such scales if the experience changes. The establishment and operation of the closed block will not modify or amend the provisions of the policies included therein. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies included in the closed block. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to our stockholders. See Note 1 of "Notes to Pro Forma Consolidated Financial Information" for a more detailed description of the manner in which the financial results of the closed block will affect the accounting presentation of our results of operations. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience relating to the closed block are, in the aggregate, more or less favorable than assumed in establishing the closed block, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Dividends on policies included in the closed block, as in the past, will be declared at the discretion of the board of directors of Metropolitan Life Insurance Company, may vary from time to time, reflecting changes in investment income, mortality, persistency and other experience factors, and are not guaranteed. We will not be required to support the payment of dividends on closed block policies from Metropolitan Life Insurance Company's general funds, although we could choose to provide such support. 96 99 Metropolitan Life Insurance Company will continue to pay guaranteed benefits under all policies in accordance with their terms, including the policies included in the closed block. If the assets allocated to the closed block, the investment cash flows from those assets and the revenues from the policies included in the closed block prove to be insufficient to pay the benefits guaranteed under the policies included in the closed block, Metropolitan Life Insurance Company will be required to make such payments from its general funds. Since the closed block has been funded to provide for payment of guaranteed benefits, as well as for continuation of policyholder dividend scales in effect for 1999, if experience underlying such scales continues, it should not be necessary to use general funds to pay guaranteed benefits, unless the policies included in the closed block experience substantial adverse deviations in investment income, mortality, persistency or other experience factors. We will use our best efforts to support the policies included in the closed block with the assets allocated to the closed block. The assets allocated to the closed block will be subject to the same liabilities (with the same priority in liquidation) as assets outside the closed block. As specified in the plan of reorganization, the policies included in the closed block will generally consist of all classes of United States dollar denominated individual life insurance policies for which Metropolitan Life Insurance Company has a dividend scale in effect for 1999, but generally only to the extent such policies are in force on any date between December 31, 1998 and the effective date of the plan. A policy may be within a class for which there is an experience-based dividend scale in effect for 1999 even if it does not receive a 1999 dividend, and, therefore, the policy would be included in the closed block. Experience-based dividend scales are actuarial formulas used by life insurers to determine amounts payable as dividends on participating policies based on experience factors relating to, among other things, investment results, mortality, lapse rates, expenses, premium taxes and policy loan interest and utilization rates. The fact that a policy is included in the closed block has no bearing on whether the holder of that policy is entitled to receive consideration under the plan or the amount of consideration allocated to the policyholder. The closed block includes policies of New England Mutual Life Insurance Company that were participating policies at the time of its merger with Metropolitan Life Insurance Company in 1996. Under the terms of the merger, Metropolitan Life Insurance Company agreed to establish a separate segment within its general account consisting of assets associated with those policies plus additional assets. In the aggregate, such assets had a value of $226.4 million at December 31, 1998. As provided in the plan of reorganization, Metropolitan Life Insurance Company will add to the closed block premiums and other amounts received by, and withdraw from the closed block policy benefits and other amounts paid by, Metropolitan Life Insurance Company on the policies included in the closed block. Metropolitan Life Insurance Company will charge the closed block with federal income taxes, state and local premium taxes, and other additive state or local taxes, as well as investment management expenses relating to the closed block as provided in the plan of reorganization. Metropolitan Life Insurance Company will also charge the closed block for expenses of maintaining the policies included in the closed block. Cash payments with respect to certain reinsurance will be withdrawn from or paid to the closed block. The board of directors of Metropolitan Life Insurance Company will set the dividends on the closed block policies annually, in accordance with applicable law and consistent with the objective of minimizing tontine effects and exhausting the assets of the closed block with the final payment made to the last policy included in the closed block. Metropolitan Life Insurance Company will retain an independent actuary to review the operations of the closed block every five years as required by the plan. Additionally, Metropolitan Life Insurance Company will review the operation of, and prepare an internal report regarding, the investment operations of the closed block annually. 97 100 The closed block will continue in effect until the last policy in the closed block is no longer in force. The expected life of the closed block is over 100 years. CLOSED BLOCK ASSETS AND LIABILITIES In accordance with the plan of reorganization, we will allocate a portion of Metropolitan Life Insurance Company's invested assets, as well as cash and short-term investments, to the closed block. If we had established the closed block at December 31, 1999, cash and invested assets and their carrying values would have been as follows:
AT DECEMBER 31, 1999 ---------------------------- CARRYING VALUE % OF TOTAL -------------- ---------- (DOLLARS IN MILLIONS) Fixed maturities available-for-sale, at fair value.......... $21,729 70% Mortgage loans on real estate............................... 4,785 16 Policy loans................................................ 3,747 12 Other invested assets....................................... 404 1 Short-term investments...................................... 8 0 Cash and cash equivalents................................... 251 1 ------- --- Total....................................................... $30,924 100% ======= ===
The composition of assets in the closed block will change over time as a result of new investments. New investments for the closed block acquired on and after December 31, 1999 with closed block cash flows will be allocated to the closed block upon acquisition and will consist only of investments permitted by the plan of reorganization. The assets allocated to the closed block will be subject to the same liabilities (with the same priority in liquidation) as all assets in the general account of Metropolitan Life Insurance Company. If we had established the closed block at December 31, 1999, the policy liabilities and accruals associated with the closed block would have aggregated $39,627 million. This amount would have included $38,888 million of policyholder liabilities, $712 million of dividends payable to policyholders, current income taxes payable of $14 million and other liabilities of $13 million. See "Pro Forma Consolidated Financial Information -- Pro Forma Consolidated Balance Sheet". We have retained PricewaterhouseCoopers LLP to advise us in connection with actuarial matters involved in the establishment and operation of the closed block. The opinion of Kenneth M. Beck, a principal with the firm of PricewaterhouseCoopers LLP, dated November 16, 1999, states (in reliance upon the matters and subject to the limitations described in such opinion), among other things, that MetLife's assets set aside as of December 31, 1998 (including subsequent adjustments as provided for in the plan), to establish the closed block, as set forth in the plan, are adequate because they are expected to produce cash flows which, together with anticipated revenues from the closed block business, are reasonably expected to be sufficient to support the closed block business including, but not limited to, provisions for payment of claims and certain expenses and taxes, and to provide for continuation of dividend scales payable in 1999, if the experience underlying such scales continues. This opinion is included as Annex A of this prospectus. TRANSFERRED CANADIAN POLICIES In July 1998, Metropolitan Life Insurance Company sold a substantial portion of its Canadian operations to Clarica Life Insurance Company. As part of that sale, a large block of policies in effect with Metropolitan Life Insurance Company in Canada were transferred to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of Metropolitan Life Insurance Company and, therefore, are not entitled to compensation under the plan of reorganization. However, as a 98 101 result of a commitment made in connection with obtaining Canadian regulatory approval of that sale, if Metropolitan Life Insurance Company demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of these transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The proceeds of the initial public offering, as well as the net proceeds from the offering of the units, must be sufficient to reimburse Metropolitan Life Insurance Company for those payments, as well as to fund mandatory cash payments pursuant to the plan and policy credits to policyholders and to pay fees and expenses incurred by Metropolitan Life Insurance Company related to the demutualization. See Notes 2 and 7 of Notes to Pro Forma Consolidated Financial Information. FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION We have received a private letter ruling from the Internal Revenue Service to the effect that: - The MetLife Policyholder Trust will be treated as a "grantor trust" for federal income tax purposes, and each beneficiary of the trust will be treated for federal income tax purposes as if the beneficiary were the direct owner of a proportionate interest in the shares of our common stock (or other property) held in the trust; - Beneficiaries of the trust will not recognize gain or loss for federal income tax purposes as a result of the deposit of shares of our common stock in the trust or their withdrawal of shares from the trust; and - The deposit of shares of our common stock in the trust under the terms of the plan of reorganization will not adversely affect the federal income tax treatment to eligible policyholders of consideration received under the plan, or of MetLife, resulting from the conversion of Metropolitan Life Insurance Company from a mutual life insurance company into a stock life insurance company owned by MetLife, Inc. The Internal Revenue Service rulings are based on the accuracy of certain representations made by us. Under the terms of the plan of reorganization, the demutualization will not become effective unless we receive an opinion of our special tax counsel, Debevoise & Plimpton (or other nationally-recognized tax counsel), to the effect that: - Policies issued by Metropolitan Life Insurance Company before the effective date of the plan will not be treated as newly-issued policies for any material federal income tax purpose as a result of the demutualization of Metropolitan Life Insurance Company under the plan; - Eligible policyholders receiving solely interests in the trust will not recognize gain or loss for federal income tax purposes as a result of the demutualization of Metropolitan Life Insurance Company under the plan; - The consummation of the plan of reorganization, including the crediting of policy credits to a policy under the terms of the plan, will not adversely affect any tax-favored status accorded to the policy under the Internal Revenue Code, and will not be treated as a contribution or distribution that results in penalties to the holder; and - The summary of the principal U.S. federal income tax consequences to eligible policyholders of their receipt of consideration under the plan of reorganization that is contained under the heading "Federal Income Tax Consequences" in the information booklet provided to policyholders is correct and complete in all material respects. 99 102 In addition to the required opinion described above regarding the federal income tax treatment to policyholders, it is also a condition to the effectiveness of the plan that we receive an opinion from our special tax counsel to the effect that: - MetLife, Inc. will not recognize any gain or loss for federal income tax purposes as a result of (1) its issuance of its common stock to the trust; (2) its receipt of shares of Metropolitan Life Insurance Company common stock; (3) its cancellation, for no consideration, of its common stock previously issued to and held by the Metropolitan Life Insurance Company immediately prior to the effective date of the plan; or (4) its sale of shares of its common stock in the initial public offering for cash; and - The conversion of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company will qualify as a "reorganization" under the Internal Revenue Code. We have received an additional opinion from Debevoise & Plimpton, our special tax counsel, which is not required under the terms of the plan, to the effect that, under the Internal Revenue Code, the regulations issued thereunder, and current Internal Revenue Service and judicial interpretations of the Internal Revenue Code and regulations: - The affiliated federal income tax group of which Metropolitan Life Insurance Company is the common parent immediately before the demutualization will remain in existence after the effectiveness of the plan, with MetLife, Inc. as the common parent; and - Following its conversion from a mutual life insurance company to a stock life insurance company, Metropolitan Life Insurance Company will continue to be an eligible member for inclusion in that affiliated federal income tax group. Based on the Internal Revenue Service rulings we have received and the opinions of our special tax counsel described above, we believe that MetLife will not realize significant income, gain or loss for federal income tax purposes as a result of the consummation of the demutualization under the terms of the plan of reorganization. The opinions of special tax counsel described above are based on the accuracy of representations and undertakings made by us. We have not sought a private letter ruling from the Internal Revenue Service regarding the matters addressed by the opinions of special tax counsel described above. 100 103 BUSINESS We are a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. We currently provide individual insurance, annuities and investment products to approximately nine million households, or one of every eleven households in the U.S. We also provide group insurance and retirement and savings products and services to approximately 64,000 corporations and other institutions, including 86 of the FORTUNE 100 largest companies. Our institutional clients have approximately 33 million employees and members. We are a leader in each of our major U.S. businesses. We believe that our unparalleled franchises and brand names uniquely position us to be the preeminent provider of insurance and financial services in the U.S. businesses in which we compete. We are one of the largest and best capitalized insurance and financial services companies in the U.S. Our revenues for 1999 were $25.4 billion and our net income was $617 million. We had total consolidated assets of $225.2 billion and equity of $13.7 billion at December 31, 1999. We are organized into five major business segments: Individual Business, Institutional Business, Asset Management, Auto & Home and International. INDIVIDUAL BUSINESS. Individual Business offers a wide variety of protection and asset accumulation products for individuals, including life insurance and annuities. Individual Business also distributes products provided by our other business segments, including mutual funds and auto and homeowners insurance. Reflecting overall trends in the insurance industry, sales of our traditional life insurance products have declined in recent years, while first-year premiums and deposits from variable life insurance products have grown at a compound annual rate of 33.1% for the five years ended 1999 and represented 67.4% of our total life insurance sales for Individual Business in 1999. Our principal distribution channels are the MetLife career agency and the New England Financial general agency distribution systems and, after our recent acquisition of GenAmerica Corporation, GenAmerica's independent general agency system. We also have dedicated sales forces that market to non-profit organizations and banks and their customers. In total, we had approximately 11,000 active sales representatives in 1999. In addition to these distribution channels, we are increasing the distribution of our products through independent insurance agents and registered representatives. We believe our ability to effectively manage these multiple distribution channels represents a significant competitive advantage. Individual Business had $11.1 billion of revenues, or 43.5% of our total revenues, and $565 million of operating income in 1999. INSTITUTIONAL BUSINESS. Institutional Business offers a broad range of group insurance and retirement and savings products and services. Our group insurance products and services include group life insurance and non-medical health insurance such as short- and long-term disability, long-term care and dental insurance, as well as other related products and services. Our group insurance premiums, fees and other income, which totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0% for the three years ended 1999. Our retirement and savings products and services include administrative services sold to sponsors of 401(k) and other defined contribution plans, guaranteed interest products and separate account products. We distribute our Institutional Business products through a sales force of approximately 300 MetLife employees that is organized by both customer size and product. In total, we have approximately 64,000 institutional customers, including 86 of the FORTUNE 100 largest companies. Institutional Business had $10.4 billion of revenues, or 40.8% of our total revenues, and $585 million of operating income in 1999. ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street Research & Management Company, and our controlling interest in Nvest Companies, L.P. and its affiliates, Asset Management provides a broad variety of asset management products and services primarily to third-party institutions and individuals. Our Asset Management segment 101 104 managed $189.8 billion of our total assets under management at December 31, 1999, including $54.9 billion of assets in mutual funds and in separate accounts supporting individual variable life and annuity products. For the five years ended 1999, this segment's assets under management grew at a compound annual rate of 14.2%. We distribute our asset management products through several distribution channels, including State Street Research's and Nvest's dedicated sales forces and also through our Individual Business and Institutional Business distribution channels. Asset Management had $0.9 billion of revenues, or 3.5% of our total revenues, and $51 million of operating income in 1999. AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance and other personal property and casualty insurance products. We sell these products directly to employees through employer-sponsored programs, as well as through a variety of retail distribution channels. These channels include agents in the MetLife career agency system, approximately 6,000 independent agents and brokers, which includes those of The St. Paul Companies acquired in 1999, and approximately 385 Auto & Home specialists. We are the leading provider of personal auto and homeowners insurance through employer-sponsored programs in the U.S. Net premiums earned from products sold through employer-sponsored programs have grown at a 14.3% compound annual rate for the five years ended 1999. On September 30, 1999, our Auto & Home segment acquired the standard personal insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion, substantially increasing the size of our personal lines business, making us the eleventh largest personal property and casualty insurer in the U.S. based on 1998 net premiums written. See "Business -- Auto & Home". Auto & Home had $1.9 billion of revenues, or 7.4% of our total revenues, and $54 million of operating income in 1999. INTERNATIONAL. We have international insurance operations in ten countries, with a focus on the Asia/Pacific region, Latin America and selected European countries. Our International segment offers life insurance, accident and health insurance, annuities and retirement and savings products and services to both individuals and groups and auto and homeowners coverage to individuals. Assets of our International segment, as adjusted for the recent divestitures of a substantial portion of our U.K. and Canadian operations, have grown at a compound annual rate of 21.4% for the five years ended 1999. International had $0.8 billion of revenues, or 3.1% of our total revenues, and $18 million of operating income in 1999. STRATEGY Our mission is to build financial freedom for everyone. Consistent with this mission, our goal is to be the preeminent provider of insurance and financial services in each of the U.S. businesses in which we compete. In order to achieve that goal, we will pursue the following strategies across all of our business segments: BUILD ON WIDELY RECOGNIZED BRAND NAMES Our widely recognized brand names are among our most valuable assets. We believe that our leading market share positions in the insurance and financial services industries, our long history of innovation, integrity and reliability, and our reputation for high quality products and services to individuals and institutions have resulted in the MetLife name becoming one of the most well-known brand names in the U.S. We have also been successful in utilizing additional brand names, such as New England Financial, Security First Group and State Street Research, for specific market segments. We believe our recent acquisition of GenAmerica and RGA further strengthens our brand portfolio. In addition, we believe that our brand names give us a key competitive advantage, allowing us to continue to build and maintain strong relationships with our customers and distributors. We intend to continue to aggressively capitalize on our brand recognition across multiple products, distribution channels and customer groups. 102 105 CAPITALIZE ON LARGE CUSTOMER BASE As a leading provider of insurance and financial services for over 130 years, we have built an unparalleled base of customers, including nine million households, or one of every eleven households in the U.S., and approximately 64,000 institutional customers with approximately 33 million employees and members. We believe that our large, existing customer base represents a significant growth opportunity. We intend to pursue the following growth initiatives: - enhancing our relationships with our existing individual customers by: - offering a broad array of products that meets the needs of our customers throughout their entire life cycle of financial needs; - improving the training of our agents and other financial services representatives to strengthen their ability to serve the needs of our customers; - developing direct marketing programs in partnership with our agency sales force to identify additional sales opportunities among our existing customers; and - pursuing the establishment of a bank, which could begin operations as early as the first quarter of 2001, to serve the banking needs of our individual customers; - offering financial advice and education, retirement planning and beneficiary assistance services directly to employees of our institutional customers; and - increasing sales to our institutional customers by expanding the offering of voluntary (employee-paid) products, including auto and homeowners and long-term care insurance and pre-paid legal services plans. EXPAND MULTIPLE DISTRIBUTION CHANNELS We believe that our development and successful management of multiple distribution channels represent a significant competitive advantage. Our multiple distribution channels include our proprietary career and general agency distribution systems and our nationwide Institutional Business sales force, as well as a wide variety of other distribution channels in each of our business segments. We intend to grow our core distribution channels and to continue to build complementary distribution channels for sales of our products. We believe our career agency and general agency systems provide us with important advantages, allowing us to more effectively control our distribution and build and maintain long-term relationships with our customers. Our objective is to increase the size and productivity of our agency distribution systems by: - expanding our investment in the recruiting, training and retention of agents, including changing our compensation practices to improve incentives for more productive agents and increasing our recruiting of agencies as well as individual agents; and - enhancing the technology that supports agents, including improving their access to product and client information and offering more sophisticated client management systems to enable them to service larger numbers of clients and prospects more effectively. Our four-year agent retention rate has improved from 10.2% in 1995 to 24.2% in 1999. The industry average in 1998 was 14.2%. During the period from 1995 to 1999, the productivity of our career and general agency distribution systems, as measured by NET SALES CREDITS per agent, an industry measure for agent productivity, has grown at a compound annual rate of 12.0%. In addition to our core distribution channels, we have also developed and seek to expand additional complementary distribution channels that provide opportunities for further growth. Examples of our initiatives include: - our recent acquisition of GenAmerica, which sells its life insurance and annuity products through multiple distribution channels; 103 106 - our recent acquisitions of Security First Group and the Nathan & Lewis companies, which increased our presence in the fast-growing bank and broker-dealer distribution channels; - expanding our marketing efforts to the independent agency community by introducing new products and programs; - establishing the Small Business Center, which has offices located throughout the U.S., to better access the rapidly growing small-sized institutional markets; - entering into joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of our Institutional Business products and services; - establishing additional distribution channels for Asset Management, including the development of a dedicated sales force for State Street Research and increased coordination of distribution among Nvest's investment managers; and - introducing a direct response marketing program to generate additional Auto & Home sales. Complementary distribution channels within Individual Business accounted for 2.4% of first-year life insurance premiums and deposits and 32.2% of annuity premiums and deposits in 1999. In addition, premiums and other income from products sold through Institutional Business' Small Business Center have grown at a compound annual rate of 28.1% for the three years ended 1999 and totaled $328 million in 1999. CONTINUE TO INTRODUCE INNOVATIVE AND COMPETITIVE PRODUCTS The products and services offered by the financial services industry continue to evolve as the financial needs of consumers change. We intend to be at the forefront of the insurance and financial services industries in offering innovative and competitive products to our customers. Recent initiatives include: - new or revised products covering a substantial portion of our individual product offerings, including the introduction of a new variable universal life product, a long-term care insurance product and an equity additions feature to our traditional participating whole life insurance product, which allows policyholder dividends to be invested in an equity index account; and - new voluntary institutional products, including long-term care and auto and homeowners insurance, as well as pre-paid legal services plans, for employees of our Institutional Business customers. INCREASE FOCUS ON ASSET ACCUMULATION PRODUCTS We intend to expand our assets under management in both our insurance operations and our Asset Management segment by increasing our focus on sales of asset accumulation products, including variable life and annuity products, mutual funds and 401(k) plan products, which we believe provide a stable source of fee income as well as a higher operating return on equity compared with traditional insurance products. During the five years ended 1999, the separate account liabilities related to our individual variable annuity products grew at a 38.2% compound annual rate, and totaled $20.7 billion at December 31, 1999. Assets under management for mutual funds and separate accounts supporting individual variable life and annuity products grew at a compound annual rate of 16.7% for the five years ended 1999, and totaled $54.9 billion at December 31, 1999. In addition, primarily through two recent acquisitions, our Institutional Business segment has become a leading provider of administrative services in the defined contribution 401(k) plan market. We intend to use this position to attract more 401(k) plan assets for our Asset Management segment. 104 107 REDUCE OPERATING EXPENSES We are committed to improving profitability by reducing operating expenses. As part of an overall program to reduce operating expenses and enhance the efficiency of our operations, we have implemented the following programs: - during 1998, we reduced the number of non-sales positions by 2,267, an 11% reduction, and during 1999, we reduced the number of non-sales positions by 1,856, or 7%; - in 1999, as part of an internal reorganization, we began to integrate the operations of New England Financial, which since its merger with MetLife had been operated as a separate division, with the individual insurance operations of MetLife, and further consolidate administrative services throughout our organization; we believe this will reduce operating expenses by eliminating redundancies; and - we have made substantial investments in technological improvements in recent years, totaling approximately $925 million for the three years ended 1999, which we believe will enhance the efficiency of our operations, as well as improve our customer service and financial reporting. STRENGTHEN PERFORMANCE-ORIENTED CULTURE Our management team intends to strengthen the performance-oriented culture throughout our organization. We have implemented a number of initiatives to significantly enhance the performance of our employees, including: - establishing a new compensation program to better align compensation with individual and MetLife performance; - enhancing the expertise of our management and workforce by selectively hiring experienced new employees at all levels of our organization, with 28% of new officer appointments for the three years ended 1999 coming from outside MetLife; - expanding our training effort, including new management training programs for all of our officers and expanded training for our employees; and - implementing a new performance measurement and review program for our employees to increase individual accountability and better align individual and corporate goals. CONTINUE TO OPTIMIZE OPERATING RETURNS FROM INVESTMENT PORTFOLIO The return on our invested assets has contributed significantly to our earnings growth. Over the past three years, we have repositioned our investment portfolio in order to provide a higher operating rate of return on our invested assets. In connection with that repositioning, we reduced our investments in treasury securities and corporate equities and have increased our investments in fixed maturities with higher current yields. At the same time, we have continued to maintain a prudent asset mix, with investment grade fixed maturities constituting 91.0% of our total fixed maturities at December 31, 1999. We believe that the expertise of our investment department will enable us to continue to optimize the operating returns on our invested assets in the future. ENHANCE CAPITAL EFFICIENCY OF OUR OPERATIONS We seek to maximize our operating return on equity by enhancing the capital efficiency of our operations. We have recently implemented a new internal capital allocation system that we believe will allow us to more effectively invest our capital. Consistent with a more disciplined approach to capital allocation, we have divested operations that did not meet targeted rates of return or growth, including our medical insurance operations, substantial portions of our U.K. and Canadian operations and our commercial leasing business. We also intend to increase sales of asset accumulation products, such as variable life and annuity products, that require less capital 105 108 than traditional insurance products. In addition, as a publicly traded stock company, we will have a greater ability to make acquisitions and raise external capital in a more efficient manner, which we believe will increase our adjusted operating return on equity and enhance stockholder value. FOCUS INTERNATIONAL OPERATIONS ON GROWING MARKETS We have established insurance operations in selected international markets that are experiencing significant growth in demand for insurance products and where we believe we can gain significant market share. We intend to expand our international operations by continuing to make capital investments in countries in which we have existing operations, as well as in selected new markets, either through start-up operations or by acquisition. We now have operations in ten emerging insurance markets, including Indonesia and Uruguay, which we entered in 1998, and Brazil, which we entered in 1999. In addition, at the end of 1999, we obtained a license to sell life insurance in Poland. As part of our strategy to focus on growth markets, as well as to divest operations that would not meet our financial objectives, we disposed of substantial portions of our operations in the U.K. in 1997 and in Canada in 1998. INDIVIDUAL BUSINESS Our Individual Business segment offers a wide variety of protection and asset accumulation products aimed at serving the financial needs of our customers throughout their entire life cycle. Products offered by Individual Business include insurance products such as traditional, universal and variable life insurance, individual disability insurance and long-term care insurance and annuities and investment products such as variable and fixed annuities and mutual funds. Our principal distribution channels are the MetLife career agency and the New England Financial general agency distribution systems and, after our recent acquisition of GenAmerica Corporation, GenAmerica's independent general agency system. We also have dedicated sales forces that market to non-profit organizations and banks and their customers. In total, we had approximately 11,000 active sales representatives in 1999. In addition to these distribution channels, we are increasing the distribution of our products through independent insurance agents and registered representatives. Our broadly recognized brand names and strong distribution channels have allowed us to maintain our position as the largest provider of individual life insurance and annuities in the U.S., with $11.5 billion of total individual life and annuity premiums and deposits in 1999. Through September 30, 1999 we were also the largest issuer of individual variable life insurance in the U.S. with $278.7 million in first-year premiums and deposits, and the seventh largest variable annuity writer with approximately $24.1 billion in variable annuity assets managed. The U.S. individual life insurance industry had approximately $12.7 trillion of insurance in force and $1.3 trillion of total annuity assets at or for the year ended December 31, 1998. The U.S. insurance and investment market has undergone tremendous change in recent years, as Americans have begun to rely less on traditional life insurance, defined benefit retirement plans, social security and other government programs and the "baby-boom" generation has begun to enter their prime savings years. At the same time, technology advances have greatly increased the availability and timeliness of information so consumers are better informed about financial products and the state of their financial affairs. As a result of these trends, sales of mutual funds, variable annuities and other savings products have increased. We believe that the growth of annuities and investment products will continue and that, as the baby-boom generation begins to retire, asset payout products will also increase in importance. We believe that, as these trends continue, the types of products we offer, including variable life insurance, fixed and variable annuities and long-term care insurance, will become the products of choice for the protection and transfer of wealth. 106 109 INDIVIDUAL BUSINESS STRATEGY BUILD ON WIDELY RECOGNIZED BRAND NAMES. We believe we have one of the most well-known brand names in the U.S., built through our leading market share positions in the insurance and financial services industries, our reputation for high quality products and services and our long practice of advertising the MetLife name and Peanuts(TM) characters. We have also successfully used additional brand names in our Individual Business segment, such as New England Financial, Security First Group and Texas Life, to focus on specific market segments. We believe our recent acquisition of GenAmerica further strengthens our brand portfolio. In addition, we believe that our brand names give us a key competitive advantage, allowing us to continue to build and maintain strong relationships with our customers and distributors. We intend to continue to aggressively capitalize on our brand recognition across multiple products, distribution channels and customer groups. CAPITALIZE ON LARGE CUSTOMER BASE. We believe consumers increasingly seek comprehensive financial advice and information regarding their financial affairs and superior products that serve them throughout the different stages of their lives. We believe that building long-term relationships with our large existing customer base represents a significant growth opportunity. Approximately nine million households, or one of every eleven households in the U.S., own a MetLife individual product. Our goal is to obtain a larger share of the individual insurance, annuities and investment products purchased by these households by providing them with the best products and services that are available to meet their needs. We intend to pursue the following key initiatives: - offering a broad array of products that meet the financial needs of our customers throughout their entire life cycle, including protection products, such as life and disability insurance; asset accumulation products, such as annuities and mutual funds; asset distribution products, such as payout annuities; and wealth transfer products, such as life insurance and long-term care insurance; - improving the training of our agents and other financial services representatives to strengthen their ability to offer sophisticated financial advice to our customers; and - developing direct marketing programs in partnership with our agency sales force to identify additional sales opportunities among our existing customers. We also seek to utilize our historically strong position among our institutional customers to provide programs offering financial advice and education, retirement planning and beneficiary assistance services to their employees. GROW CORE DISTRIBUTION CHANNELS. Although we utilize a number of different distribution channels to market our individual products, we believe that our core career agency and general agency distribution systems are among our most valuable assets, allowing us to more effectively control our distribution and build and maintain long-term relationships with our customers. We intend to increase the size and productivity of our agency distribution systems by: - expanding our investment in the recruiting, training and retention of agents, including changing our compensation practices to improve incentives for more productive agents and increasing our recruiting of agencies as well as individual agents; and - enhancing the technology that serves agents, including improving their access to product and client information and offering more sophisticated client management systems to enable them to service larger groups of clients and prospects more effectively. The productivity of our career and general agency distribution systems, as measured by net sales credits per agent, an industry measure for agent productivity, has grown at a compound annual rate of 12.0% for the five years ended 1999. During that period, our four-year agent retention rate has improved from 10.2% in 1995 to 24.2% in 1999. The industry average in 1998 was 14.2%. 107 110 INCREASE DISTRIBUTION THROUGH OTHER CHANNELS. We expect to continue aggressively seeking opportunities to expand our distribution capabilities in attractive markets. In 1997, we acquired Security First Group, which expanded our distribution through the rapidly growing bank market for annuities and investment products and to the nonprofit, educational and health care markets. In 1998, we purchased Nathan & Lewis, which increased our presence in the fast-growing broker-dealer distribution channel. Our recent acquisition of GenAmerica added its multiple distribution channels, including its independent general agency system. We also expect to increase our use of independent life agents and registered representatives in the future. Sales through additional channels represented 2.4% of annualized first-year life insurance premiums and deposits and 32.2% of individual annuity premiums and deposits in 1999. CONTINUE TO INTRODUCE INNOVATIVE AND COMPETITIVE PRODUCTS. The products offered by the financial services industry continue to evolve as the financial needs of consumers change and as technology improves. We intend to be at the forefront of the insurance and financial services industries in offering innovative and competitive products to our customers. Recent initiatives include: - continuing to enhance the competitiveness of our products, such as the 1998 introduction of new or revised products covering a substantial portion of our product offerings; - creating products to reflect the needs of specific distribution channels and by marketing products under several brand names, including MetLife, New England Financial, Security First, Texas Life and General American Life; and - distributing products created by others, such as mutual funds and 401(k) plans, which may be offered under one of our own brand names or carry the name of the company that created them. MARKETING AND DISTRIBUTION We target the large, middle-income market, as well as affluent individuals, owners of small businesses and executives of small to medium-sized companies. We have also been successful in selling our products in various multicultural markets. We distribute our individual products nationwide through multiple channels, with the primary distribution systems being the MetLife career agency system and the New England Financial general agency system. While continuing to invest in our traditional distribution channels, we have also expanded into additional channels in order to supplement our growth or penetrate specific target markets. During the year ended December 31, 1999, the MetLife career agency and the New England Financial general agency systems and our additional distribution channels accounted for 49.8%, 47.8% and 2.4%, respectively, of first-year premiums and deposits for individual life insurance and 54.9%, 12.9% and 32.2%, respectively, of individual annuity deposits. METLIFE CAREER AGENCY SYSTEM. The MetLife career agency system had 6,866 agents in 318 agencies at December 31, 1999. Our career agency sales force focuses on the large, middle-income market, including multicultural markets. The average face amount of a life insurance policy sold through the career agency system in 1999 was approximately $160,000. Agents in our career agency system are full-time MetLife employees whom we compensate primarily with commissions based on sales. As our employees, they also receive certain benefits. Agents in our career agency system may not offer products of other insurers without our approval. At December 31, 1999, approximately 93% of the agents in our career agency system were licensed to sell one or more of the following products: variable life insurance, variable annuities or mutual funds. We support our efforts in multicultural markets through targeted advertising, specially trained agents and sales literature written in non-English languages. We estimate sales in multicultural markets represent one-fourth of MetLife's career agency individual life sales. 108 111 From 1994 to 1998, the number of agents in the MetLife career agency system declined, from 9,521 to 6,853. Most of this decline was due to a reduction in the number of less experienced agents, with the number of agents having at least five years of experience at MetLife declining from approximately 4,100 to approximately 3,400 during this period. We believe that this decline was principally the result of the adverse impact of sales practices litigation brought against us beginning in the early 1990s, the establishment of more stringent company-wide criteria for recruiting and retaining agents and a consolidation of sales offices and changes in compensation practices for our sales force during this period. We have undertaken several initiatives to grow our career agency force in the future, including expanding our investment in the recruiting, training and retention of agents, changing our compensation practices to improve incentives for more productive agents and increasing our recruiting of agencies as well as individual agents. At December 31, 1999, the number of agents in the MetLife career agency system was 6,866. In addition, our career agency system is increasingly productive, with net sales credits per agent, an industry measure for agent productivity, growing at a compound annual rate of 10.6% for the five years ended 1999. NEW ENGLAND FINANCIAL GENERAL AGENCY SYSTEM. In 1996, we merged with the parent company of New England Life Insurance Company, which afforded us better access to its target market of affluent individuals, owners of small businesses and executives of small- to medium-sized companies. We operate the New England Life Insurance Company business through our New England Financial division. The average face amount of a life insurance policy sold through the New England Financial general agency system in 1999 was approximately $310,000. At December 31, 1999, New England Financial's sales force comprised 76 general agencies providing support to 2,825 agents and a network of independent brokers throughout the U.S. The compensation of both agents, who are independent contractors, and general agents, who have exclusive contracts with New England Financial, is based on sales, although we also provide general agents with an allowance for benefits and other expenses. New England Financial has a highly trained general agency sales force and, according to The American College, in 1998 ranked third in the insurance industry in the percentage of agents who are Chartered Life Underwriters and Chartered Financial Consultants. Approximately 92% of New England Financial's general agents are licensed to sell variable products and mutual funds. New England Financial's general agency sales force increased total agent count by 123 agents in 1999; we believe it is one of the few life insurance organizations to register a significant increase in agents in 1999. To capitalize on its distribution strengths and achieve even higher levels of performance and agent retention, New England Financial is creating a compensation system in which the interests of the company and its top performing agents and field managers are more closely aligned. Productivity of the New England Financial general agency force, as measured by net sales credits, has grown at a compound annual rate of 13.8% for the five years ended 1999. ADDITIONAL DISTRIBUTION CHANNELS. We also distribute our individual insurance and investment products through several additional distribution channels, including Nathan & Lewis, MetLife Brokerage, New England Financial's Independent Producer Network, the Security First Group, MetLife Resources and Texas Life. Nathan & Lewis. Nathan & Lewis Securities, Inc., a MetLife subsidiary acquired in 1998, is a broker-dealer that markets mutual funds and other securities, as well as variable life insurance and variable annuity products, through approximately 1,000 independent registered representatives. With the acquisition, we obtained the use of Nathan & Lewis's account information and client management systems, which we intend to integrate into our other broker-dealer operations. Independent Distribution Network. In 1999, Individual Business combined MetLife Brokerage, a division of MetLife, and New England Financial's Independent Producer Network to create the Independent Distribution Network (IDN). IDN will market integrated, 109 112 specially-designed insurance products to upper income customers in the wealth preservation market through approximately 1,000 independent retail and wholesale insurance brokerage agencies, independent producers and agents in the career and general agency systems. Security First Group. Security First Group, a MetLife subsidiary acquired in 1997, distributes proprietary and third-party fixed and variable annuity products and mutual funds to customers of approximately 65 national, regional and community banks. MetLife Resources. MetLife Resources, a division of MetLife, markets retirement, annuity and other financial products on a national basis through approximately 415 agents and independent brokers. MetLife Resources targets the nonprofit, educational and health care markets. Texas Life. Texas Life, a MetLife subsidiary, markets whole life and universal life insurance products under the Texas Life name through approximately 1,585 active independent insurance brokers. These brokers are independent contractors that sell insurance for Texas Life on a nonexclusive basis. Recently, a number of MetLife career agents have also begun to market Texas Life products. Texas Life sells permanent life insurance policies with low cash values that are marketed through the use of brochures, as well as payroll deduction life insurance products. PRODUCTS We offer a wide variety of individual insurance, annuities and investment products aimed at serving our customers' financial needs throughout their entire life cycle. Our individual insurance products consist of variable life, universal life, whole life, term life and other insurance products. Our individual annuities and investment products consist of variable and fixed annuities and mutual funds. The following table sets forth selected financial information regarding our individual insurance, annuities and investment products at the dates or for the periods indicated: INDIVIDUAL INSURANCE, ANNUITIES AND INVESTMENT PRODUCTS
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) INSURANCE PRODUCTS: Variable life: First-year premiums/Deposits.............................. $ 389.1 $ 371.0 $ 242.2 Premiums/Deposits......................................... $ 997.7 $ 857.1 $ 657.3 Number of policies........................................ 480,107 415,933 360,790 Future policy benefits/Policy account balance............. $ 381.4 $ 289.7 $ 226.8 Separate account liability................................ $ 4,160.0 $ 3,148.4 $ 2,063.1 Life insurance in force................................... $ 81,146.8 $ 65,902.1 $ 52,647.2 Universal life: First-year premiums/Deposits.............................. $ 14.8 $ 20.7 $ 28.7 Premiums/Deposits......................................... $ 556.1 $ 578.0 $ 613.6 Number of policies........................................ 907,214 1,058,081 1,097,026 Future policy benefits/Policy account balance............. $ 5,870.0 $ 5,793.2 $ 5,688.0 Life insurance in force................................... $ 78,729.0 $ 82,330.3 $ 86,016.9 Whole life: First-year premiums/Deposits.............................. $ 135.8 $ 162.2 $ 198.7 Premiums/Deposits......................................... $ 3,834.2 $ 3,843.7 $ 3,859.4 Number of policies........................................ 7,788,905 8,160,567 8,532,166 Future policy benefits/Policy account balance............. $ 36,887.6 $ 35,725.8 $ 34,589.8 Life insurance in force................................... $193,522.8 $193,819.5 $196,785.8
110 113
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Term life: First-year premiums/Deposits.............................. $ 37.2 $ 42.6 $ 29.7 Premiums/Deposits......................................... $ 312.3 $ 307.6 $ 284.8 Number of policies........................................ 659,742 675,362 689,767 Future policy benefits/Policy account balance............. $ 483.6 $ 454.0 $ 435.6 Life insurance in force................................... $126,511.6 $123,561.8 $117,443.2 Other Individual insurance products:(1) First-year premiums/Deposits.............................. $ 432.9 $ 295.7 $ 269.0 Premiums/Deposits......................................... $ 1,221.3 $ 1,082.2 $ 1,011.5 Number of policies........................................ 3,004,914 3,173,831 3,411,881 Future policy benefits/Policy account balance............. $ 5,213.4 $ 5,186.2 $ 5,549.9 Separate account liability................................ $ 3,950.1 $ 4,020.8 $ 3,457.3 ANNUITIES AND INVESTMENT PRODUCTS: Annuities: Premiums/Deposits......................................... $ 4,547.0 $ 3,992.6 $ 3,167.1 Number of contracts....................................... 1,483,874 1,453,943 1,411,103 Future policy benefits/policy account balance............. $ 21,022.3 $ 21,100.2 $ 21,313.2 Separate account liability................................ $ 20,718.2 $ 15,844.0 $ 11,686.4 Mutual funds: Deposits.................................................. $ 3,848.2 $ 3,303.1 $ 2,540.4
- --------------- (1) Consists of individual disability insurance products; individual long-term care insurance products; small face amount life insurance policies sold by our agents until 1964, known as industrial policies; and employee benefit products and group pension products sold through New England Financial. Reflecting trends in the insurance industry, sales of mutual funds, variable annuities, variable life insurance policies and other savings products have increased in recent years, while sales of our traditional insurance products have declined. During the five years ended 1999, the separate account liabilities related to our individual variable annuity products grew at a 38.2% compound annual rate, and totaled $20.7 billion at December 31, 1999. First-year premiums and deposits for variable life insurance products have grown at a 33.1% compound annual rate and were $389.1 million in 1999. During this same period, mutual fund sales have grown at a 29.7% compound annual rate and in 1999 accounted for $3.8 billion of deposits. Sales of whole and term life insurance products, however, declined during this period, to $173.0 million of first-year premiums and deposits in 1999 from $341.6 million in 1995, which represented an annual rate of decline of 15.6%. INSURANCE PRODUCTS Our individual insurance products include variable life products, universal life products, traditional life products, including whole life and term insurance, and other insurance products, including individual disability insurance and long-term care insurance products, which are designed to meet a multitude of consumer needs. We continually review and update our products. We have introduced new products and features designed to increase the competitiveness of our portfolio and the flexibility of our products to meet the broad range of asset accumulation, protection and distribution needs of our customers. Some of these updates have included the introduction of a new variable universal life product, a long-term care insurance product and an equity additions feature to our traditional participating whole life insurance product, which allows policyholder dividends to be invested in a stock index investment account. 111 114 Distribution options under life policies and under both fixed and variable annuities include level payments guaranteed for the lifetime of the owner or beneficiary, for a specified term or combinations of these two options. Distribution options may be accessed through an immediate annuity or following the accumulation phase of a deferred annuity. VARIABLE LIFE. Variable life products provide insurance coverage through a contract which gives the policyholder flexibility in investment choices and, depending on the product, in premium payments and coverage amounts, with certain guarantees. For example, we retain the right within limits to adjust the fees we assess for providing administrative services and death benefit coverage. Most importantly, with variable life products, premiums and cash value can be directed by the policyholder into a variety of separate investment accounts or directed to our general account. In the separate investment accounts, the policyholder bears the entire risk of the investment results. We collect specified fees for the management of these various investment accounts and any net return is credited directly to the policyholder's account. In some instances, third-party money management firms manage investment accounts that support variable insurance products. With some products, by maintaining a certain premium level, policyholders may have the benefit of various death benefit guarantees that may protect the death benefit from adverse investment experience. UNIVERSAL LIFE. Universal life products provide insurance coverage on the same basis as variable life, except that they allow premiums, and the resulting accumulated balances, to be allocated only to our general account. Universal life products may allow the insured to increase or decrease the amount of death benefit coverage over the term of the contract and may allow the owner to adjust the frequency and amount of premium payments. We credit premiums, net of specified expenses, to an account maintained for the policyholder, as well as interest, at rates we determine, subject to specified minimums. Specific charges are made against the account for the cost of insurance protection and for expenses. WHOLE LIFE INSURANCE. Whole life insurance products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the whole of the contract period, to a specified age or for a specified period, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, increase cash values available upon surrender or reduce the premiums required to maintain the contract in force. In certain jurisdictions, dividends may be directed into an equity investment account. Because the use of dividends is specified by the policyholder, this group of products provides significant flexibility to individuals to tailor the product to suit their specific needs and circumstances, while at the same time providing guaranteed benefits. We intend to continue offering participating policies after the demutualization. We will be subject to statutory restrictions that limit to 10% the amount of statutory profits on participating policies written after the demutualization (measured before dividends to policyholders) that can inure to the benefit of stockholders. We believe that the impact of these restrictions on our earnings will not be significant. TERM INSURANCE. Term insurance provides a guaranteed benefit upon the death of the insured within a specified time period in return for the periodic payment of premiums. Specified coverage periods range from one year to 20 years, but in no event are longer than the period over which premiums are paid. Death benefits may be level over the period or decreasing. Decreasing coverage is used principally to provide for loan repayment in the event of death. Premiums may be guaranteed at a level amount for the coverage period or may be non-level and non-guaranteed. Term insurance products are sometimes referred to as pure protection products, in that there are normally little or no savings or investment elements. Term contracts expire without value at the end of the coverage period if the insured party is still alive. 112 115 OTHER INDIVIDUAL INSURANCE PRODUCTS. Individual disability insurance. Individual disability products provide a benefit in the event of the disability of the insured. In most instances, this benefit is in the form of a monthly income paid to age 65. In addition to income replacement, the product may be used to provide for the payment of business overhead expenses for disabled business owners or mortgage payment protection. We also distribute individual disability policies through a joint venture between New England Financial and Provident Companies, Inc. Although policies are issued in New England Financial's name, all underwriting, administration and servicing is handled by Provident, and 80% of the risk on all these new disability policies is reinsured by Provident. Individual long-term care insurance. Our long-term care insurance provides reimbursement for certain costs associated with nursing home care and other services that may be provided to older individuals unable to perform the activities of daily living. Other products. In addition to these products, we operate a closed block of small face amount life insurance policies that our agents sold until 1964, known as industrial policies. New England Financial also sells a small amount of employee benefit products and group pension products, which are included in the financial results of our Individual Business segment. ANNUITIES AND INVESTMENT PRODUCTS We offer a variety of individual annuities and investment products, including variable and fixed annuities and mutual funds. VARIABLE ANNUITIES. We offer variable annuities for both asset accumulation and asset distribution needs. Variable annuities allow the contractholder to make deposits into various investment accounts, as determined by the contractholder. The investment accounts are separate accounts of MetLife or New England Financial, and risks associated with investments in the separate accounts are borne entirely by the contractholders. Contractholders may also choose to allocate all or a portion of their account to our general account, in which case we credit interest at rates we determine, subject to certain minimums. They may also elect certain death benefit guarantees. Separate account investments may be managed by us or by various unaffiliated third-party portfolio managers. Third-party managers include such well-known names as Janus Capital Corp., T. Rowe Price Associates, Inc., Scudder Kemper Investments, Inc., Neuberger Berman Management Inc. and Fidelity Investments. The availability of these managers depends on the particular product series and distribution channel used by the contractholder. At December 31, 1999, $15.0 billion of variable annuity assets were allocated to separate accounts managed by us, $5.7 billion to separate accounts managed by third parties and $8.0 billion to our general account. FIXED ANNUITIES. Fixed annuities are used for both asset accumulation and asset distribution needs. Fixed annuities do not allow the same investment flexibility provided by variable annuities but provide guarantees related to preservation of principal and credited interest. Deposits made into these contracts are allocated to the general account and are credited with interest at rates we determine, subject to certain minimums. Credited interest rates may be guaranteed not to change for certain limited periods of time, normally one year. MUTUAL FUNDS AND SECURITIES. We offer both proprietary and non-proprietary mutual funds. Proprietary funds include those of State Street Research and the Nvest Funds Group. We also offer investment accounts for mutual funds and general securities that allow customers to buy, sell and retain holdings in one centralized location, as well as brokerage accounts that offer the accessibility and liquidity of a money market mutual fund. Of the mutual funds we sold in 1999, $1,667 million of the deposited assets were managed by our Asset Management segment and $2,181 million by third parties. 113 116 INSTITUTIONAL BUSINESS Our Institutional Business segment offers a broad range of group insurance and retirement and savings products and services to corporations and other institutions. Our group insurance products and services include group life insurance, non-medical health insurance, such as short- and long-term disability, long-term care and dental insurance and related administrative services, as well as other benefits such as employer-sponsored auto and homeowners insurance provided through our Auto & Home segment and prepaid legal services plans. We sell these products either as an employer-paid benefit or as a voluntary benefit in which the premiums are paid by the employee. Revenues from our group insurance products and services were $7 billion in 1999, representing 67.3% of total Institutional Business revenues of $10.4 billion. Group insurance operating income was $334 million in 1999. Our retirement and savings products and services include administrative services sold to sponsors of 401(k) and other defined contribution plans, guaranteed interest products and other retirement and savings products and services, including separate account contracts for the investment of defined benefit and defined contribution plan assets. Revenues from our retirement and savings products were $3.4 billion in 1999, representing 32.7% of total Institutional Business revenues. Retirement and savings operating income was $251 million in 1999. We are a leader in the U.S. group insurance market. In 1999, we were: - the largest group life insurer, with $5.3 billion of total statutory direct premiums written; - the second largest group long-term disability carrier and the largest provider of group short-term disability and group long-term care based on premiums and equivalents. In addition, we were the second largest commercial dental carrier based on premiums and equivalents with the largest commercial preferred provider organization in the U.S., having approximately 44,000 participating dentists at December 31, 1999; - a leading provider of administrative services to 401(k) and other defined contribution plans, with 1.6 million participants; and - one of the largest insurer managers of retirement and savings products, as measured by assets under management, with approximately $64.2 billion in retirement and savings assets under management at December 31, 1999. We have built this position through long-standing relationships with many of the largest corporate employers in the U.S. In 1999, 86 of the FORTUNE 100 largest companies purchased our products; these companies have been our customers for an average of approximately 20 years. We believe that these large customers provide an important and stable base from which to grow our institutional business. The employee benefit market served by Institutional Business has begun to change dramatically in recent years. As the U.S. employment market has become more competitive, employers are seeking to enhance their ability to hire and retain employees by providing attractive benefit plans. The market also reflects increasing concern of employees about the future of government-funded retirement and safety-net programs, an increasingly mobile workforce and the desire of employers to share the market risk of retirement benefits with employees. We believe these trends are facilitating the introduction of new "voluntary" products, such as long-term care and auto and homeowners insurance, as well as leading more employers to adopt defined contribution pension arrangements such as 401(k) plans. Voluntary products, which give valued benefits to employees at little or no cost to the employer, are attractive to employees since they are generally priced at group rates and are usually paid through payroll deduction, making them convenient to purchase and maintain. Voluntary products are particularly popular as workforces become more diverse and prefer to 114 117 tailor benefits to their individual circumstances. Voluntary products have become an increasingly important part of our group insurance product offerings. A substantial portion of our group insurance products are offered on a voluntary basis. Premiums for our voluntary products, which include employer-sponsored auto and homeowners insurance, were $2.1 billion in 1999. INSTITUTIONAL BUSINESS STRATEGY INCREASE EMPHASIS ON VOLUNTARY PRODUCTS. We seek to increase sales to our institutional customers by expanding the offering of voluntary, or employee-paid products, including auto and homeowners and long-term care insurance and prepaid legal services plans. We believe that voluntary products represent a substantial growth area. Although many employers still do not offer these products, we believe that they will be an increasingly important part of the benefits offered to attract and retain employees as the cost and convenience advantages receive more recognition in the marketplace. Since they are generally paid through payroll deduction, we believe they provide us with a stable customer base and source of revenues. FOCUS ON DEFINED CONTRIBUTION MARKET. With the acquisitions of Benefit Services Corporation, which specializes in the small and mid-size markets, and the defined contribution record keeping and participant services business formerly owned by Bankers Trust Corporation, which focuses on the large corporate market, we have become a leading provider of administrative services in the 401(k) plan market. At December 31, 1999, we provided administrative services for $85.9 billion of defined contribution plan assets. We intend to use our position as a leading administrator of defined contribution plans to capture more assets under management for our Asset Management segment. INCREASE OUR PRESENCE IN SMALL AND MID-SIZE EMPLOYER MARKET. We believe there is an opportunity to build on our strong brand name and experience to increase our sales to small and mid-size employers. To address this opportunity, we formed the Small Business Center in 1994 to focus on small employers and the brokers and intermediaries who service them and expanded our marketing to mid-sized employers through this channel in 1999. From 1997 to 1999, our premiums and other income from products currently sold through the Small Business Center have grown from $200 million to $328 million, a compound annual rate of 28.1%. MARKETING AND DISTRIBUTION Institutional Business markets our products through separate sales forces, comprised of MetLife employees, for both our group insurance and retirement and savings lines. We distribute our group insurance products and services through a regional sales force that is segmented by the size of the target customer. Marketing representatives sell either directly to corporate and other institutional customers or through an intermediary, such as a broker or a consultant. Voluntary products are sold through the same sales channels, as well as by specialists for these products. As of December 31, 1999, the group insurance sales channels had approximately 300 marketing representatives. Our group insurance products are distributed through the following channels: - The National Accounts unit focuses exclusively on our largest 125 customers, generally those having more than 25,000 employees. This unit assigns account executives and other administrative and technical personnel to a discrete customer or group of customers in order to provide them with individualized products and services; - Our regional sales force operates from 27 offices and generally concentrates on sales to employers with fewer than 25,000 employees, through selected national and regional brokers, as well as through consultants; and 115 118 - The Small Business Center focuses on improving our position in the smaller end of the market. Currently, seventeen individual offices staffed with sales and administrative employees are located throughout the U.S. These centers provide comprehensive support services on a local basis to brokers and other intermediaries by providing an array of products and services designed for smaller businesses. We distribute our retirement and savings products primarily through separate sales forces for each of our major product groups. We market pension and other investment-related products to sponsors of retirement and savings plans covering employees of large private sector companies with plan assets in excess of $600 million, mid-size and smaller private sector companies, plans covering public employees, collective bargaining units, nonprofit organizations and other institutions and individuals. Pension and other investment-related products are marketed and sold through approximately 50 marketing representatives. Defined contribution services are marketed through several distribution channels depending on the target market. For mid- and large-size employers, a dedicated sales force focuses on new relationships and cross-selling opportunities with other Institutional Business distribution channels. With respect to the small plan segment, generally those with less than 500 lives, defined contribution services are distributed through the agency system, the Small Business Center and our group regional sales force. We have entered into several joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of our Institutional Business products and services. - In February 1998, in cooperation with the AXA Group of France, we launched the MAXIS Employee Benefits Network to better serve our multinational clients. The MAXIS Network consists of insurers in more than 50 countries, including MetLife and AXA and their international affiliates, offering multinational customers the ability to pool the experience of local insurance plans and to obtain their insurance needs through a single program. - In April 1998, we formed an alliance with Travelers Property Casualty Corp. to offer Synchrony(SM), a product which combines administration of short- and long-term disability benefits with workers' compensation benefits from Travelers. - In 1998, we entered into an agreement with American Express Company to offer our 401(k) plan investment management and administrative services to their small employer customers. We also seek to sell our Institutional Business products and services through sponsoring organizations and affinity groups. In 1998, AARP, the nation's leading organization for people 50 years and older, selected us to offer long-term care insurance to its members. In 1999, we had $75.3 million in long-term care premiums from this group. In addition, we were selected in 1998 as the preferred provider of long-term care products by the National Long Term Care Coalition, a national organization of large companies. GROUP INSURANCE PRODUCTS AND SERVICES Our group insurance products and services include group life insurance and non-medical health insurance such as short- and long-term disability, long-term care and dental insurance. Other products include employer-sponsored auto and homeowners insurance provided through our Auto & Home segment and prepaid legal plans. The following table sets forth premiums and 116 119 fees and other selected data for each of our group insurance products and services for the periods indicated: GROUP INSURANCE PRODUCTS(1)
AT OR FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS, EXCEPT AS INDICATED) Group Life: Premiums, fees and other income........................... $ 3,985 $ 3,815 $ 3,592 Policyholder liabilities.................................. $12,176 $11,656 $10,598 Life insurance in-force (in billions)..................... $ 1,196 $ 1,096 $ 1,135 Group Non-Medical Health: Premiums, fees and other income........................... $ 1,913 $ 1,570 $ 1,281 Policyholder liabilities.................................. $ 3,854 $ 3,178 $ 3,169
- --------------- (1) Premiums from our employer-sponsored auto and homeowners insurance are reported in our Auto & Home segment. GROUP LIFE. Group life insurance products and services include group term, group universal life, group variable universal life, dependent life and survivor benefits. These products and services can be standard products or tailored to meet specific customer needs. This category also includes high face amount life insurance products covering senior executives for compensation-related or benefit-funding purposes. GROUP NON-MEDICAL HEALTH. Group non-medical health insurance consists of short- and long-term disability, long-term care, dental and accidental death and dismemberment. We also sell excess risk and administrative services only arrangements to some employers. We sold our medical insurance operations in 1995. OTHER PRODUCTS AND SERVICES. We are the market leader in auto and homeowners insurance programs that are sponsored by employers and offered on a voluntary basis. Through our Auto & Home segment, we offer auto and homeowners insurance to employees in the workplace, which is usually paid for through payroll deduction. See "-- Auto & Home". Other products and services include prepaid legal plans, which are offered through approximately 250 corporate sponsors. Prepaid legal plans are generally voluntary products that provide employees with access to covered legal services at competitive prices. RETIREMENT AND SAVINGS PRODUCTS AND SERVICES Our retirement and savings products and services include administrative services sold to 401(k) and other defined contribution plans, guaranteed interest products and other retirement and savings products and services. The following table sets forth selected data for each of our retirement and savings products and services for the periods indicated: RETIREMENT AND SAVINGS PRODUCTS AND SERVICES
AT DECEMBER 31, ----------------------- 1999 1998 1997 ----- ---- ---- (DOLLARS IN BILLIONS) Defined Contribution Plans Services: Number of participants (in millions)...................... 1.6 1.7 1.6 Assets administered....................................... $85.9 $79.4 $67.1 Liabilities for guaranteed interest products................ $20.4 $21.8 $20.6 Liabilities for other retirement and savings products....... $41.2 $43.1 $42.6
117 120 DEFINED CONTRIBUTION PLAN SERVICES. Since 1996, we have made a number of key acquisitions in the defined contribution marketplace, making us a leading provider of administrative services to 401(k) and other defined contribution plans. We provide full service defined contribution programs to companies of all sizes in the expanding 401(k) plan market, as well as to the nonprofit, educational and health care markets. Our programs involve a full range of record-keeping (including employee communications) services, either on a stand-alone basis or combined with asset management services. GUARANTEED INTEREST PRODUCTS. We offer guaranteed interest contracts, known as GICs, our Met Managed GIC and similar products. In traditional GICs and funding agreements, corporations and other institutions invest their funds in products in which the principal and interest are guaranteed by the issuing insurance company for a specified period of time. We also sell annuity guarantee products, generally in connection with the termination of pension plans, funds available from defined contribution plans or the funding of structured settlements. Sales of guaranteed interest products declined in 1999 and 1998, primarily as a result of a shift in customers' investment preferences from guaranteed interest products to separate account alternatives as interest rates declined in those years. Substantially all of our GICs contain provisions limiting early terminations, including penalties for early terminations and minimum notice requirements. Included in our guaranteed interest products at December 31, 1999 are $2.5 billion of funding agreements, $0.6 billion of which we assumed from General American Life Insurance Company. Of the $2.5 billion of funding agreements, $29 million, $708 million, $452 million and $1,117 million may be terminated after 1-day, 7-day, 30-day and 90-day notice periods, respectively. The remaining $176 million of the $2.5 billion of funding agreements may not be put by the holder prior to their maturity. Excluded from this total is $5.1 billion of funding agreements assumed from General American Life Insurance Company, which were terminated on October 1, 1999 in connection with our exchange offer. See "Business -- Acquisition of GenAmerica". The Met Managed GIC is an investment product that complements traditional GICs through the added feature of customer participation in the investment results of the funds underlying the Met Managed GIC product. We are the industry leader in assets under management for this type of product with assets of $11.9 billion in 1999. The Met Managed GICs allow the contractholders to receive, at termination, the market value of their accounts or to transfer their accounts at book value to a traditional GIC product, in which case the interest rate credited will be adjusted to reflect any difference between the market value of the transferred account and its book value. OTHER RETIREMENT AND SAVINGS PRODUCTS AND SERVICES. Other retirement and savings products and services include separate account contracts for the investment and management of defined benefit and defined contribution plans on behalf of corporations and other institutions. Customer funds are deposited in separate accounts managed by us or by an independent manager, and invested in a variety of assets including fixed income instruments, common stock and real estate. In 1999, 88.3% of our institutional separate account assets were managed by a MetLife affiliate and 11.7% were managed by non-affiliates. We report asset management fees for assets managed by us in our Asset Management segment, while administrative fees are reported in our Institutional Business segment. ASSET MANAGEMENT Through our wholly-owned subsidiary State Street Research and our controlling interest in Nvest Companies, L.P. and its affiliates, Asset Management provides a broad variety of asset management products and services primarily to third-party institutions and individuals. Asset Management had total assets under management of $189.8 billion at December 31, 1999, growing at a compound annual rate of 14.2% for the five years ended 1999. Included in this total was $54.9 billion in mutual funds and separate accounts supporting individual variable life and annuity products, which have grown at a compound annual rate of 16.7% for the five years ended 1999. At December 31, 1999, Asset Management's assets under management consisted of 118 121 equities, representing 44% of Asset Management's total assets under management, fixed income investments (45%), money market investments (6%) and real estate (5%). We distribute our asset management products and services through numerous distribution channels, including State Street Research's and Nvest's dedicated sales forces, and also through our Individual Business and Institutional Business distribution channels. The investment management industry, which includes both retail mutual funds and institutional asset management, has experienced strong growth over the last ten years. Mutual fund assets have grown at a compound annual rate of 23.8% for the ten years ended December 31, 1998. During the same period, institutional assets, including corporate, government and endowments and foundations, have grown at a compound annual rate of 10.3%. The number of prime savers (persons aged 40 to 60 years) has grown 37% between 1988 and 1998. While overall industry growth has been strong, there has been a shift in preference from defined benefit plans to defined contribution plans and mutual funds due to favorable legislation regarding individual savings, a more transient workforce for whom defined benefit plans are not the best solution and uncertainty surrounding the long-term viability of Social Security. We believe we are well-positioned to benefit from this shift due to our broad offering of both institutional and retail products and our multi-channel distribution network. ASSET MANAGEMENT STRATEGY The primary objective of our asset management strategy is to grow assets under management. To attain this goal, we have implemented the following strategies: OFFER EXPANDED LINE OF PRODUCTS AND SERVICES. We seek to grow Asset Management by offering customers a diverse line of products and services that focus on the distinct capabilities of each of our subsidiaries. Each of Nvest's investment management firms implements an independent investment specialty and philosophy. We believe this approach fosters an entrepreneurial environment that encourages the development of new, innovative investment management products and services, while maintaining access to the significant resources of the larger organization. State Street Research seeks to grow its business by targeting markets outside its core large institutional retirement plan market, including the fast growing mid-size plan market and mutual funds. EXECUTE STRATEGIC ACQUISITIONS. Each of our Asset Management subsidiaries seeks acquisition opportunities that provide diversification of asset classes and methods of distribution. We believe Nvest's public holding company structure provides it with an opportunity to make acquisitions that enhance the overall business while retaining the acquired company's independent identity. Key employees are generally expected to continue as active participants in the acquired business and the acquired firm's executive personnel are responsible for reviewing their firm's results, plans and budgets. State Street Research also seeks acquisitions that will enhance the products and services it offers. For instance, in 1997 a team of professionals specializing in managing money for professional athletes joined State Street Research, and it has since expanded its distribution to high net worth individuals through financial services supermarkets, brokers and financial planners. ENHANCED DISTRIBUTION SYSTEMS. We seek to increase sales of our products and services through enhanced distribution systems, including improved coordination of the independent distribution systems of Nvest, and through increased utilization of our Individual Business and Institutional Business distribution channels. We believe that further opportunities exist to increase sales in many of the markets served by these channels, including sales of mutual funds to individuals and asset management services to 401(k) plans served by Institutional Business. 119 122 NVEST Nvest Companies, L.P. offers a broad array of investment management products and services across a wide range of asset categories to institutions, mutual funds and private accounts. Nvest operates as a holding company for twelve investment management firms and six principal distribution and consulting firms, all but one of which are wholly owned by Nvest. The twelve investment management firms operate as independent entities, with each company having responsibility for its own investment strategy and decisions, business plans, product development and management fee schedules. Through its distribution and consulting firms, Nvest makes available certain distribution, consulting and administrative services that Nvest's subsidiary investment management firms draw on as needed. These services include marketing, product development and administrative support such as financial, management information and employee benefits services. We are the general partner and, at December 31, 1999, owned approximately 48% of the total economic interest of Nvest and its affiliates. Through Nvest, L.P., a New York Stock Exchange-listed limited partnership, approximately 14% of the economic interest in Nvest is publicly traded, with the remaining 38% owned by others. We acquired our interest in Nvest in August 1996 as part of our merger with New England Mutual Life Insurance Company. During the five years ended 1999, Nvest's assets under management have grown at a compound annual rate of 14.6% to $133 billion. At December 31, 1999, Nvest's assets under management consisted of equities, representing 44% of Nvest's total assets under management, fixed income investments (43%), money market investments (8%) and real estate (5%). The following table summarizes Nvest's assets under management by investor type at the dates indicated:
AT DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN BILLIONS) Institutional............................................... $ 86 $ 87 $ 80 Mutual Funds................................................ 36 36 33 Private Accounts............................................ 11 12 12 ---- ---- ---- $133 $135 $125 ==== ==== ====
INVESTMENT MANAGEMENT FIRMS Each of the following twelve investment management firms pursues an independent investment strategy and philosophy: - Loomis, Sayles & Company, L.P. actively manages portfolios of publicly traded fixed-income securities, equity securities and other financial instruments for a client base consisting of institutional clients, endowments, foundations and third-party corporate investment portfolios, manages assets for high net worth individuals and advises the Loomis Sayles Funds. - Harris Associates L.P. is primarily a value-equity style investment advisory firm with institutional, private account and multi-manager product offerings; it also serves as the investment advisor for The Oakmark Family of Funds. - AEW Capital Management, L.P. is a real estate advisory firm which utilizes its real estate, research and capital markets expertise to focus on high-yield equity and debt strategies, real estate securities and directly held interests in real estate portfolios. - Back Bay Advisors, L.P., which manages mutual funds in two mutual fund groups sponsored by Nvest affiliates, as well as institutional funds for the pension and foundation marketplace, specializes in fixed-income management. 120 123 - Jurika & Voyles, L.P. provides investment advisory services to institutions, individuals and mutual funds utilizing a fundamental, research-driven investment approach which seeks to invest at opportunistic prices in the stock of companies exhibiting growth in cash flow. - Kobrick Funds, LLC provides investment management services for equity mutual funds. - Reich & Tang Funds, a division of Reich & Tang Asset Management L.P., manages money market mutual funds that are marketed primarily through brokerage houses and regional commercial banks and acts as administrator for mutual funds advised by third parties and for the equity funds managed by Reich & Tang Capital Management. - Reich & Tang Capital Management, a division of Reich & Tang Asset Management L.P., manages mutual funds, private investment partnerships and equity funds for institutions and individuals. - Snyder Capital Management, L.P. provides investment advisory services primarily to institutions and high net worth individuals and families, and specializes in investing in small- to mid-capitalization equities. - Vaughan, Nelson, Scarborough & McCullough, L.P. manages equity, fixed income and balanced portfolios for foundations, endowments, institutions and high net worth individuals. - Westpeak Investment Advisors, L.P. provides customized equity management for institutional investors, such as pension plans, foundations and endowments, and mutual funds, utilizing an active, quantitative research capability. - Capital Growth Management Limited Partnership provides investment management services for mutual funds and for a limited number of large institutions and individual clients. Nvest's investment management firms market their services to institutions, individually managed private accounts for high net worth individuals and mutual funds. The institutional market for investment management services includes corporate, government and union pension plans, endowments and foundations and corporations purchasing investment management services for their own account. Nvest's management firms also advise or sub-advise approximately 100 mutual funds, the great majority of which are grouped into eight fund "families" and are marketed through a variety of channels. DISTRIBUTION AND CONSULTING FIRMS Nvest and its six principal distribution and consulting firms listed below provide distribution, marketing and administrative services to Nvest's investment management firms: - Nvest Funds Distributor, L.P. serves as the distributor and is responsible for all sales-related activities of the Nvest Funds Group, a proprietary group of mutual funds. It distributes mutual funds through retail sales networks of regional and national brokerage firms and other distribution channels, including our Individual and Institutional channels. - Nvest Associates, Inc. provides institutional marketing and consulting services to Nvest's investment management firms. - Nvest Advisor Services assists in the marketing and distribution of mutual funds advised by several of Nvest's investment management firms through financial planners and advisors. - Nvest Managed Account Services assists in the marketing and distribution of investment products to mutual fund wrap programs. - Nvest Retirement Services assists in the marketing and distribution of mutual funds advised by several of Nvest's investment management firms to retirement plan sponsors, large 401(k) plan providers and consultants. 121 124 - Nvest Services Company, Inc. provides fund administration, legal and compliance and human resources services to the Nvest Funds Group. It also provides its services, on a voluntary basis, to Nvest's other affiliates and fund families. STATE STREET RESEARCH State Street Research conducts its operations through two wholly-owned subsidiaries, State Street Research & Management Company, a full-service investment management firm, and SSR Realty Advisors, Inc., a full-service real estate investment advisor. State Street Research offers investment management services in all major investment disciplines through multiple channels of distribution in both the retail and institutional marketplaces. State Street Research had assets under management of $56.8 billion, having grown at a compound annual rate of 13.2% for the five years ended 1999. At December 31, 1999, State Street Research's assets under management consisted of equities, representing 44% of State Street Research's total assets under management, fixed income investments (50%), money market investments (1%) and real estate (5%). State Street Research is currently an investment manager for ten of the twelve largest U.S. corporate pension plans. The majority of State Street Research's institutional business is concentrated in qualified retirement funds, including both defined benefit and defined contribution plans. State Street Research also provides investment management services to foundations and endowments. In addition, State Street Research serves as advisor or subadvisor for 37 mutual funds, as well as five mutual fund portfolios underlying MetLife's variable life and annuity products, collectively with $18.9 billion of assets under management at December 31, 1999. The following table summarizes State Street Research's assets under management by investor type for the periods indicated:
AT DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN BILLIONS) Institutional............................................... $37.6 $38.8 $35.4 Mutual Funds................................................ 18.9 17.0 14.7 Private Accounts............................................ 0.3 0.2 -- ----- ----- ----- $56.8 $56.0 $50.1 ===== ===== =====
MARKETING AND DISTRIBUTION State Street Research distributes its investment products to institutions through its own institutional sales force, MetLife's institutional sales force and pension consultants. Our Institutional Business sales force is the largest contributor to State Street Research institutional sales, representing 68% of the 1999 total. State Street Research's mutual fund products are distributed primarily through large retail brokerage firms (40.5% of mutual fund sales) and by the MetLife career agency sales force (59.5% of mutual fund sales). In addition to the primary distribution channels, State Street Research has developed distribution capabilities through regional brokerage firms, mutual fund supermarkets, registered investment advisors and financial planners. State Street Research also offers its products to the defined contribution market through Institutional Business' defined contribution group, as well as directly through its own distribution channel. AUTO & HOME Auto & Home, operating primarily through Metropolitan Property and Casualty Insurance Company, a wholly-owned subsidiary of MetLife, offers personal lines property and casualty insurance directly to employees through employer-sponsored programs, as well as through a 122 125 variety of retail distribution channels, including the MetLife career agency system, independent agents and Auto & Home specialists. Auto & Home primarily sells auto insurance, which represented 79.0% of Auto & Home's total net premiums earned in 1999, and homeowners insurance, which represented 19.8% of Auto & Home's total net premiums earned in 1999. Auto insurance includes both standard and non-standard (insurance for risks having higher loss experience or loss potential than risks covered by standard insurance) policies. On September 30, 1999, our Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion and approximately 3,000 independent agents and brokers. This acquisition substantially increased the size of this segment's business, making us the eleventh largest personal property and casualty insurer in the U.S. based on 1998 net premiums written, and will also give us a strong presence in a number of additional states. AUTO & HOME STRATEGY EXPAND EMPLOYER-SPONSORED PROGRAMS. We believe the employer-sponsored distribution channel represents a significant growth opportunity to expand sales of our Auto & Home products to our Institutional Business clients. The rapid growth and acceptance of employer-sponsored marketing of auto and homeowners insurance is a relatively recent development, and most employers do not currently offer it as a benefit. Currently only a small percentage of our Institutional Business clients offer Auto & Home products. We also anticipate significant growth of existing employer-sponsored programs through greater penetration of the employee base. CONTINUE BUILDING DIRECT MARKETING CAPABILITY. In the third quarter of 1998, Auto & Home launched a direct response marketing distribution channel. We expect the direct marketing distribution channel to generate sales through target mailings, telemarketing, broad advertising, affinity groups, agent referrals, bank relationships and the Internet. We believe that our experience with using direct marketing distribution techniques in the employer-sponsored distribution channel, combined with the strength of the MetLife brand name, should enable us to compete successfully in the direct marketing distribution channel. ENHANCE RETAIL DISTRIBUTION. We currently market our products through retail channels in 46 states. Since 1997, we have emphasized, through additional advertising, pricing, and underwriting efforts, certain states in which we believe we have the most potential for profitable growth. CONTINUE TO REDUCE CATASTROPHE EXPOSURE. Since Hurricane Andrew in 1992, our management has worked actively to reduce Auto & Home's exposure to losses from catastrophes. Actions include a reduction in homeowners policies in force in states having greater exposure to severe hurricanes, in conformity with regulatory requirements. At the same time, Auto & Home has significantly enhanced reinsurance coverage in all regions to limit losses from catastrophes. PRODUCTS Auto & Home's insurance products include: - auto, including both standard and non-standard private passenger; - homeowners, including renters, condominium and dwelling fire; and - other personal lines, including umbrella (protection against losses in excess of amounts covered by other liability insurance policies), recreational vehicles and boat owners. 123 126 The following table sets forth net premiums earned and other operating results for Auto & Home for the periods indicated:
AT OR FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) AUTO:(1) Net premiums earned....................................... $1,383 $1,164 $1,123 Loss ratio without catastrophes........................... 75.6% 73.6% 76.9% Loss ratio due to catastrophes............................ 0.5% 1.3% 0.2% ------ ------ ------ Loss ratio................................................ 76.1% 74.9% 77.1% Expense ratio............................................. 27.9% 26.3% 24.8% ------ ------ ------ Combined ratio............................................ 104.0% 101.2% 101.9% Combined ratio without catastrophes....................... 103.5% 99.9% 101.7% HOMEOWNERS:(1) Net premiums earned....................................... $ 347 $ 225 $ 217 Loss ratio without catastrophes........................... 60.9% 46.5% 53.6% Loss ratio due to catastrophes............................ 6.3% 18.5% 7.1% ------ ------ ------ Loss ratio................................................ 67.2% 65.0% 60.7% Expense ratio............................................. 34.3% 32.3% 30.3% ------ ------ ------ Combined ratio............................................ 101.5% 97.3% 91.0% Combined ratio without catastrophes....................... 95.2% 78.8% 83.9% ALL LINES:(1) Net premiums earned....................................... $1,751 $1,403 $1,354 Loss ratio without catastrophes........................... 72.7% 69.4% 72.7% Loss ratio due to catastrophes............................ 1.7% 4.0% 1.3% ------ ------ ------ Loss ratio................................................ 74.4% 73.4% 74.0% Expense ratio............................................. 29.3% 27.4% 25.9% ------ ------ ------ Combined ratio............................................ 103.7% 100.8% 99.9% Combined ratio without catastrophes....................... 102.0% 96.8% 98.6%
- --------------- (1) Loss adjustment expenses are reflected in our loss ratio. We believe this presentation is consistent with the presentation of other property and casualty insurers. AUTO COVERAGES. Auto insurance policies include coverages for private passenger automobiles, utility automobiles and vans, motorcycles, motor homes, antique or classic automobiles and trailers. Auto & Home offers common coverages such as liability, uninsured motorist, no fault or personal injury protection and collision and comprehensive coverages. Auto & Home also offers non-standard auto insurance, which accounted for $128 million in net premiums earned in 1999. HOMEOWNERS COVERAGES. Homeowners insurance provides protection for homeowners, renters, condominium owners and residential landlords against losses arising out of damage to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. Traditional insurance policies for dwellings represent most of Auto & Home's homeowners policies providing protection for loss on a "replacement cost" basis. These policies provide additional coverage for reasonable expenses for normal living expenses incurred by policyholders who have been displaced from their homes. 124 127 MARKETING AND DISTRIBUTION Personal lines auto and homeowners insurance products are directly marketed to employees through employer-sponsored programs. Auto & Home products are also marketed and sold by the MetLife career agency sales force, independent agents and Auto & Home specialists. For the year ended December 31, 1999, employer-sponsored programs, independent agents, the MetLife career agency force, Auto & Home specialists and other distribution channels accounted for 32.0%, 30.5%, 25.0%, 7.9% and 4.6%, respectively, of total net premiums earned by the Auto & Home segment. EMPLOYER-SPONSORED PROGRAMS. Net premiums earned through Auto & Home's employer-sponsored distribution channel have grown from $329.2 million in 1995 to $561.6 million in 1999, a compound annual rate of 14.3%. Auto & Home is the leading provider of employer-sponsored auto and homeowners products. At December 31, 1999, over 1,000 employers offered our Auto & Home products to their employees. Institutional Business marketing representatives market the employer-sponsored Auto & Home products to employers through a variety of means, including broker referrals and cross-selling to our group customers. Once endorsed by the employer, we commence marketing efforts to employees. Employees who are interested in the group auto and homeowners products can call a toll-free number for a quote, and can purchase coverage and authorize payroll deduction over the telephone. Auto & Home has also developed proprietary software that permits an employee to obtain a quote for group auto insurance through Auto & Home's Internet website. In the early 1990s, Auto & Home created a multi-tiered pricing structure that permits Auto & Home to underwrite virtually any individual auto risk, allowing us to offer a policy to virtually all of a company's employees. Auto & Home's multi-tiered pricing structure for auto insurance permits us to write classes of business for which other industry participants do not compete, or compete solely by writing through multiple companies, which is less convenient for employees and more expensive to administer. RETAIL DISTRIBUTION CHANNELS. We market and sell Auto & Home products through the MetLife career agency sales force, independent agents and Auto & Home specialists. In recent years, we have increased our use of independent agents and Auto & Home specialists to sell these products. Independent agents. At December 31, 1999, Auto & Home maintained contracts with approximately 6,000 agents and brokers, which includes those of The St. Paul Companies. Independent agents have been the primary source of new business production for Auto & Home's non-standard auto insurance program. Auto & Home specialists. Approximately 385 Auto & Home specialists sell products for Auto & Home in 19 states. Auto & Home's strategy is to utilize Auto & Home specialists, who are our employees, in geographic markets that are underserved by our career agents. Auto & Home intends to increase the number of Auto & Home specialists in many of the selected states on which we focus. MetLife career agency system. Approximately 2,400 agents in the MetLife career agency system sell Auto & Home insurance products. Sales of Auto & Home products by agents have been declining since the early 1990s, due principally to the reduction in the number of agents in our career agency sales force. See "-- Individual Business -- Marketing and Distribution". OTHER DISTRIBUTION CHANNELS. We believe that Auto & Home's experience with direct response marketing in connection with the employer-sponsored marketing distribution channel, plus the strength of the MetLife brand name, give Auto & Home advantages that can successfully be used to establish a direct response marketing operation. During late 1997 and early 1998, Auto & Home developed pricing, underwriting, financial control and sales capabilities and information technology for our auto products needed to enter the direct response marketing distribution channel. In the third quarter of 1998, Auto & Home commenced direct response 125 128 marketing activities for our auto products in California. During 1999, the direct response channel was extended to Maryland, Michigan and Missouri, and presently represents 5% of new auto insurance sales. The direct response marketing channel will permit sales to be generated through sources such as target mailings, broad advertising, affinity groups, career agent referrals, bank relationships and the Internet. In 1999, Auto & Home's lines of business were concentrated in the following states, as measured by net premiums earned: Massachusetts ($265 million or 15.0% of total net premiums earned), New York ($250 million or 14.2%), Connecticut ($100 million or 5.7%), Florida ($99 million or 5.6%) and Illinois ($84 million or 4.8%). CLAIMS Auto & Home's claims department includes approximately 2,100 employees located in Auto & Home's Warwick, Rhode Island home office, fifteen field claim offices, four law department house counsel offices and drive-in inspection and other sites throughout the United States. These employees include claim adjusters, appraisers, attorneys, managers, medical specialists, investigators, customer service representatives, claim financial analysts and support staff. Claim adjusters, representing the majority of employees, investigate, evaluate and settle over 700,000 claims annually, principally by telephone. Auto & Home seeks to control claims severity by using experienced adjusters, medical management resources and preferred provider organizations. Auto & Home also employs an expert software system incorporating a database of expert medical opinions to evaluate the severity of bodily injury and uninsured motorist bodily injury claims. That system is licensed under an agreement that expires in 2002. Auto & Home is currently installing a new proprietary claims handling system that uses technology with data mining capabilities to help claims personnel provide service and control claims severity while limiting personnel costs. The system is being used in all Auto & Home claims offices, and is expected to be installed, by year-end 2000, in the claims offices acquired as a result of the acquisition of The St. Paul standard personal lines. INTERNATIONAL International provides life insurance, accident and health insurance, annuities and savings and retirement products to both individuals and groups, and auto and homeowners coverage to individuals. We focus on the Asia/Pacific region, Latin America and selected European countries. We currently have insurance operations in South Korea, Taiwan, Hong Kong, Indonesia, Mexico, Argentina, Brazil, Uruguay, Spain and Portugal. In addition, at the end of 1999 we obtained a license to sell life insurance in Poland. We operate in international markets through subsidiary and branch operations, as well as through joint ventures. In 1999, International had over six million customers. INTERNATIONAL STRATEGY We seek to develop a presence in international markets that are experiencing significant demand for insurance products and where we believe we can gain significant market share. We evaluate potential markets in terms of the market opportunity, such as our ability to generate long-term profits, the regulatory and competitive environment and related market risk. We believe that such markets provide us with the opportunity to realize higher growth rates and higher profit margins than we might achieve domestically. Accordingly, we seek higher rates of return on these operations. However, because these operations are not yet mature, we focus not only on current earnings, but on building embedded value. Our primary focus is on developing economies in Asia, Latin America and Europe. We intend to expand our international operations by 126 129 continuing to make investments in countries in which we currently have operations, as well as in selected new markets, either through start-up operations or by acquisition. As part of this strategy to focus on growth markets, as well as to divest operations that would not meet our financial objectives, we disposed of substantial portions of our operations in the U.K. in 1997 and in Canada in 1998. Both operations were located in mature, highly competitive and rapidly consolidating markets in which market share gains were very difficult. The following table sets forth selected data for International for the periods indicated: INTERNATIONAL(1)
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Premiums.................................................... $ 518 $ 414 $ 444 Deposits.................................................... $ 303 $ 530 $ 162 Assets...................................................... $3,289 $2,324 $1,707 Number of agents............................................ 6,591 3,680 5,197 Number of countries......................................... 10 8 8
- --------------- (1) Information in table excludes data for the U.K. and Canada. We disposed of substantial portions of our operations in the U.K. in 1997 and in Canada in 1998. ASIA/PACIFIC REGION SOUTH KOREA. MetLife Saengmyoung Ltd., which became a wholly-owned subsidiary in 1998, has more than 200,000 customers and sells individual life insurance, savings and retirement and non-medical health products. The company also sells group life and savings and retirement products. Premiums and deposits for 1999 were $188 million. TAIWAN. We launched our Taiwanese operations through a branch of Metropolitan Insurance and Annuity Company in May 1989. The branch has approximately 3.3 million customers and sells individual life, accident, non-medical health and personal travel insurance products, as well as group life, accident, and non-medical health insurance products. Individual products are primarily sold through career agents and through direct marketing, while group coverages are sold through agents and brokers. Premiums and deposits for 1999 were $124 million. HONG KONG. Metropolitan Life Insurance Company of Hong Kong Limited, which was established in 1995, sells individual life insurance products through sales agents. In 1998, we signed an agreement to distribute our products through an established brokerage network. We also distribute our products in Hong Kong through other brokers and general agents. In addition, we recently entered into a marketing agreement with the local operations of The Chase Manhattan Bank to offer insurance products to the credit card and retail banking customers of Chase in Hong Kong. INDONESIA. P.T. MetLife Sejahtera was established in November 1997 and began selling its products in March 1998. The joint venture sells individual life insurance products through a full-time agency sales force. LATIN AMERICA MEXICO. We expanded into Latin America in 1992 with the launching of Seguros Genesis, S.A., a wholly-owned subsidiary, in Mexico. Seguros Genesis sells individual and group 127 130 insurance, as well as savings and retirement products, through sales agents and brokers, and is now the fifth largest life insurer in Mexico. Premiums and deposits for 1999 were $207 million. ARGENTINA. We established our Argentine operations through Metropolitan Life Seguros de Vida S.A. and Metropolitan Life Seguros de Retiro S.A. in 1994. Through these affiliates, we sell group life insurance products through established brokers and directly to employers, and individual life insurance and disability products through an agency sales force, as well as through other distribution channels, such as direct marketing and independent agent franchises. In 1997, we began to market group insurance and individual deferred and immediate annuities and currently have over 515,000 customers. Premiums and deposits for 1999 were $64 million. BRAZIL. Metropolitan Life Seguros e Previdencia Privada, S.A., based in Sao Paulo, was formed in 1997 and started business in early 1999, focusing on group life and accident products. URUGUAY. In July 1998, we established Metropolitan Life Seguros de Vida S.A., and started business in early 1999, offering individual life insurance products through an agency sales force. EUROPE SPAIN. We operate in Spain through a 50-50 joint venture with Banco Santander Central Hispano, S.A., Spain's largest financial group. Our Spanish affiliates sell personal life insurance, savings and retirement and non-life insurance products through both their own agency sales force and the branch network of Banco Santander. The affiliates operate under the "Genesis" brand. In November 1995, Genesis launched a direct auto business (Genesis Auto) and there are now over 127,000 Genesis Auto policyholders. Premiums and deposits for 1999 were $193 million. PORTUGAL. In late 1992, we entered the market in Portugal through branches of our Spanish joint venture subsidiaries. Genesis in Portugal distributes personal life insurance, savings and retirement and non-life insurance products through its agency sales force and the branch network of Banco Santander Portugal. Premiums and deposits for 1999 were $41 million. In addition, we obtained a license to sell life insurance in Poland in 1999. ACQUISITION OF GENAMERICA BACKGROUND On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in cash. GenAmerica is a leading provider of life insurance, life reinsurance and other financial services to affluent individuals, businesses, insurers and financial institutions. GenAmerica's products and services include individual life insurance and annuities, life reinsurance, institutional asset management, group life and health insurance and administration, pension benefits administration and software products and technology services for the life insurance industry. GenAmerica's subsidiary, General American Life Insurance Company, distributes its life insurance products through approximately 625 agents in its independent general agency system and approximately 1,575 active independent insurance agents and brokers. GenAmerica is a holding company which owns General American Life Insurance Company. GenAmerica's subsidiaries also include Reinsurance Group of America, Inc. ("RGA"), one of the largest life reinsurers in the United States based on in-force premiums, and Conning Corporation ("Conning"), a manager of investments for General American Life and other insurer and pension clients. Upon completion of the acquisition of GenAmerica, we owned approximately 58% and 61% of the outstanding common stock of RGA and Conning, respectively. On March 9, 2000, we announced that we had agreed to acquire all of the outstanding shares of Conning common stock not already owned by us for $12.50 per share in cash, or approximately $65 million. The transaction is subject to customary terms and conditions, including regulatory approvals. Both 128 131 RGA and Conning are publicly traded. See "Business -- Legal Proceedings" for a description of legal proceedings relating to the Conning offer. We agreed to acquire GenAmerica after it developed liquidity problems and General American Life was placed under administrative supervision by the Missouri Department of Insurance. At July 31, 1999, General American Life's outstanding funding agreements aggregated $6.8 billion, of which $3.4 billion and $1.8 billion were reinsured by ARM Financial Group, Inc. and RGA, respectively. These reinsurance transactions were recorded using the deposit method of accounting. These funding agreements guarantee the holder a return on principal at a stated interest rate for a specified period of time. They also allow the holder to "put" the agreement to General American Life for a payout of the principal and interest within designated time periods of 7, 30 or 90 days. In July 1999, Moody's Investors Services, Inc. downgraded the claims paying ability rating of ARM due to the relative illiquidity of certain of its invested assets, which resulted in General American Life recapturing the obligations and assets related to the funding agreements reinsured by ARM. As a result of the recapture, Moody's downgraded General American Life's claims paying ability rating from A2 with a stable outlook to A3. Upon announcement of the downgrade, a large number of funding agreement holders exercised puts of agreements having outstanding principal amounts aggregating approximately $5.0 billion. General American Life was unable to liquidate sufficient assets in an orderly fashion without incurring significant losses. General American Life notified the Missouri Department of Insurance of a liquidity crisis on August 9, 1999 and the Department placed General American Life under administrative supervision. Shortly thereafter, General American Mutual Holding Company, the parent of GenAmerica, entered into discussions with us and several other companies for the sale of GenAmerica. Those discussions culminated in our execution of a stock purchase agreement with General American Mutual Holding Company on August 26, 1999 and our purchase of GenAmerica on January 6, 2000. REASONS FOR THE ACQUISITION GenAmerica offers us a strategic opportunity to expand our Individual Business distribution system. GenAmerica's independent general agency system, which principally targets affluent individuals, complements the current MetLife and New England distribution systems. GenAmerica also provides us with relationships with regional networks of broker-dealers and a strong geographic presence in the midwest. Additionally, GenAmerica has been a leader in supplying technology to the life insurance industry, having developed a number of sophisticated software products and technology services that are used by a number of life insurers. Finally, the acquisition of RGA and Conning allows us to expand our opportunities in the life reinsurance and investment management businesses. TERMS OF ACQUISITION Pursuant to the stock purchase agreement, we have a first priority perfected security interest in the purchase price proceeds to cover losses that we incur for which GenAmerica's parent, General American Mutual Holding Company, has indemnified us. Such indemnified losses include breaches of representations and warranties, certain legal proceedings brought within three years after the date of closing, alleged breaches of General American Life's funding agreements and guaranteed interest contracts and the acceleration of payments under certain compensation arrangements and benefit plans. Amounts will be released to General American Mutual Holding Company over time, but, subject to holdbacks for disputed pending or threatened claims existing at that time, no later than the third anniversary of the closing date. Costs incurred in connection with any matter covered by the seller's indemnification will be recorded as expenses in our consolidated statement of income in the period they are incurred. Recoveries of such costs will be evaluated and estimated independently of the costs incurred and will be recorded in 129 132 Metropolitan Life Insurance Company's consolidated statement of income for the period recovery is probable. In connection with the acquisition, we offered each holder of a General American Life funding agreement the option to exchange its funding agreement for a MetLife funding agreement with substantially identical terms and conditions or receive cash equal to the principal amount of the funding agreement and accrued interest. Holders of approximately $5.1 billion of the total $5.7 billion of General American Life's remaining funding agreement liabilities elected to receive cash. We completed the funding agreement exchange offer on September 29, 1999. In consideration of this exchange offer, General American Life transferred to Metropolitan Life Insurance Company assets selected by Metropolitan Life Insurance Company and General American Life having a market value equal to the market value of the funding agreement liabilities. In addition, Metropolitan Life Insurance Company has coinsured new and certain existing business of General American Life and some of its affiliates. FINANCING We financed the acquisition of GenAmerica stock from available funds and the proceeds from the issuance of $900 million of short-term debt. We expect to use a portion of the proceeds from the offerings and the private placements to repay up to $450 million of this debt. In addition, we incurred approximately $3.2 billion of short-term debt, consisting primarily of commercial paper, in connection with our exchange offer to holders of General American Life funding agreements. During the fourth quarter of 1999, we repaid $1.5 billion of this debt. On September 29, 1999, MetLife Funding, Inc. and Metropolitan Life Insurance Company obtained an additional committed credit facility for $5 billion, which serves as back-up for this commercial paper. BUSINESS OF GENAMERICA GenAmerica is organized into four major business segments: Life Insurance and Annuity; Life Reinsurance; Institutional Asset Management; and Insurance Services and Related Businesses. GenAmerica also maintains a Corporate and Consolidation/Elimination segment through which it reports items that are not directly allocable to any of its business segments, primarily home office general and administrative expenses and interest expense on long-term debt. This segment includes the elimination of all inter-segment amounts. The accounting policies of these segments, including inter-segment transactions, are consistent, in all material respects, with those described in MetLife's consolidated financial statements. GenAmerica's businesses will be incorporated into our business segments as applicable, except for RGA, which we will separately designate as our Reinsurance segment. The following table sets forth selected data for GenAmerica and for each of GenAmerica's segments for the periods indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN MILLIONS) STATEMENT OF INCOME AND BALANCE SHEET DATA: Total revenues........................................ $ 3,919.5 $ 3,863.6 $ 3,192.9 Operating income(1)................................... $ 28.1 $ 120.9 $ 98.9 Net income (loss)..................................... $ (174.3) $ 113.5 $ 96.2 Assets................................................ $23,594.3 $28,949.2 $23,947.2 Policyholder liabilities.............................. $14,117.2 $20,559.0 $16,995.7 Separate account liabilities.......................... $ 6,892.0 $ 5,194.9 $ 4,052.0
130 133
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN MILLIONS) SEGMENT DATA:(2) LIFE INSURANCE AND ANNUITY: Total revenues........................................ $ 1,442.3 $ 1,497.6 $ 1,350.7 Operating income(1)................................... $ 35.9 $ 52.5 $ 41.3 Net income............................................ $ 14.9 $ 51.9 $ 45.1 Assets................................................ $15,154.5 $14,256.9 $13,333.9 LIFE REINSURANCE: Total revenues........................................ $ 1,721.4 $ 1,503.1 $ 1,071.8 Operating income(1)................................... $ 49.1 $ 49.3 $ 43.7 Net income............................................ $ 17.5 $ 34.1 $ 32.5 Assets................................................ $ 5,107.5 $ 6,329.6 $ 4,680.5 INSTITUTIONAL ASSET MANAGEMENT: Total revenues........................................ $ 47.3 $ 191.1 $ 137.1 Operating income(1)................................... $ 9.2 $ 15.9 $ 12.5 Net income (loss)..................................... $ (188.6) $ 15.7 $ 13.2 Assets................................................ $ 104.7 $ 7,108.1 $ 4,293.0 INSURANCE SERVICES AND RELATED BUSINESSES: Total revenues........................................ $ 738.2 $ 691.6 $ 645.7 Operating income (loss)(1)............................ $ (13.8) $ 10.8 $ 10.7 Net income............................................ $ 17.0 $ 12.7 $ 12.4 Assets................................................ $ 3,314.0 $ 2,994.8 $ 2,663.0 CORPORATE AND CONSOLIDATION/ELIMINATION: Total revenues........................................ $ (29.7) $ (19.8) $ (12.4) Operating loss........................................ $ (52.3) $ (7.6) $ (9.3) Net loss.............................................. $ (35.1) $ (0.9) $ (7.0) Assets................................................ $ (86.4) $(1,740.2) $(1,023.2)
- --------------- (1) Operating income (loss) is calculated as net income (loss) less (i) realized investment gains and losses, (ii) GenAmerica's share of RGA's gains or losses on operations that are classified as discontinued in RGA's consolidated financial statements, but included in GenAmerica's operating income (loss), (iii) surplus tax, and (iv) fees to exit the funding agreement business. Realized investment gains and losses have been adjusted for (a) deferred policy acquisition amortization to the extent that such amortization results from realized investment gains and losses and (b) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains. This presentation may not be comparable to presentations made by other insurers. 131 134 The following provides a reconciliation of net income (loss) to operating income for GenAmerica consolidated:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------- ------ ------ (DOLLARS IN MILLIONS) Net income (loss)........................................... $(174.3) $113.5 $ 96.2 Adjustments to reconcile net income (loss) to operating income Gross realized investment (gains) losses.................. 164.0 (12.4) (28.4) Income tax on gross realized investment gains and losses.................................................. (54.4) 3.9 10.0 ------- ------ ------ Realized investment (gains) losses, net of income tax... 109.6 (8.5) (18.4) ------- ------ ------ Amounts allocated to investment gains and losses.......... (8.4) (0.5) 6.8 Income tax on amounts allocated to investment gains and losses.................................................. 3.0 0.2 (2.4) ------- ------ ------ Amount allocated to investment gains and losses, net of income tax............................................ (5.4) (0.3) 4.4 ------- ------ ------ Loss from discontinued operations, net of income tax...... 6.3 16.2 11.4 ------- ------ ------ Surplus tax............................................... -- -- 5.3 ------- ------ ------ Fees to exit funding agreement business, net of income tax of $49.5................................................ 91.9 -- -- ------- ------ ------ Operating income............................................ $ 28.1 $120.9 $ 98.9 ======= ====== ======
The following provides a reconciliation of net income to operating income for the Life Insurance and Annuity segment of GenAmerica:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $14.9 $51.9 $45.1 Adjustments to reconcile net income to operating income: Gross realized investments (gains) losses................. 36.2 1.1 (15.1) Income tax on gross realized investment gains and losses.................................................. (9.7) (0.3) 5.3 ----- ----- ----- Realized investment (gains) losses, net of income tax... 26.5 0.8 (9.8) ----- ----- ----- Amounts allocated to investment gains and losses.......... (8.5) (0.4) 6.8 Income tax on amounts allocated to investment gains and losses.................................................. 3.0 0.2 (2.4) ----- ----- ----- Amount allocated to investment gains and losses, net of income tax............................................. (5.5) (0.2) 4.4 ----- ----- ----- Surplus tax............................................... -- -- 1.6 ----- ----- ----- Operating income............................................ $35.9 $52.5 $41.3 ===== ===== =====
The following provides a reconciliation of net income to operating income for the Life Reinsurance segment of GenAmerica:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ------ ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $ 17.5 $34.1 $32.5 Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 38.9 (1.7) (0.3) Income tax on gross realized investment gains and losses.................................................. (13.6) 0.7 0.1 ------ ----- ----- Realized investment (gains) losses, net of income tax... 25.3 (1.0) (0.2) ------ ----- ----- Loss from discontinued operations, net of income tax...... 6.3 16.2 11.4 ------ ----- ----- Operating income............................................ $ 49.1 $49.3 $43.7 ====== ===== =====
132 135 The following provides a reconciliation of net income (loss) to operating income to operating income for the Institutional Asset Management segment of GenAmerica:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------- ----- ----- (DOLLARS IN MILLIONS) Net income (loss)........................................... $(188.6) $15.7 $13.2 Adjustments to reconcile net income (loss) to operating income: Gross realized investment (gains) losses.................. 163.0 0.3 (1.3) Income tax on gross realized investment gains and losses.................................................. (57.1) (0.1) 0.4 ------- ----- ----- Realized investment (gains) losses, net of income tax... 105.9 0.2 (0.9) ------- ----- ----- Surplus tax............................................. -- -- 0.2 ------- ----- ----- Fees to exit funding agreement business, net of income tax of $49.5................................................ 91.9 -- -- ------- ----- ----- Operating income............................................ $ 9.2 $15.9 $12.5 ======= ===== =====
The following provides a reconciliation of net income to operating income (loss) for the Insurance Services and Related Businesses segment of GenAmerica:
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ------ ----- ----- (DOLLARS IN MILLIONS) Net income.................................................. $ 17.0 $12.7 $12.4 Adjustments to reconcile net income to operating income (loss): Gross realized investment gains........................... (47.5) (2.1) (3.8) Income tax on gross realized investment gains............. 16.6 0.3 1.3 ------ ----- ----- Realized investment gains, net of income tax............ (30.9) (1.8) (2.5) ------ ----- ----- Amounts allocated to investment gains..................... 0.1 (0.1) -- Income tax on amounts allocated to investment gains....... -- -- -- ------ ----- ----- Amount allocated to investment gains, net of income tax.................................................... 0.1 (0.1) -- ------ ----- ----- Surplus tax............................................... -- -- 0.8 ------ ----- ----- Operating income (loss)..................................... $(13.8) $10.8 $10.7 ====== ===== =====
The following provides a reconciliation of net loss to operating loss for the Corporate and Consolidation/Elimination segment of GenAmerica:
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ (DOLLARS IN MILLIONS) Net loss.................................................... $(35.1) $ (0.9) $ (7.0) Adjustments to reconcile net loss to operating loss Gross realized investment gains........................... (26.6) (10.0) (7.9) Income tax on gross realized investment gains............. 9.4 3.3 2.9 ------ ------ ------ Realized investment gains, net of income tax............ (17.2) (6.7) (5.0) ------ ------ ------ Surplus tax............................................... -- -- 2.7 ------ ------ ------ Operating loss.............................................. $(52.3) $ (7.6) $ (9.3) ====== ====== ======
We believe the supplemental operating information presented above allows for a more complete analysis of results of operations. Realized investment gains and losses have been excluded due to their volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating income (loss) should not be considered as a substitute for any GAAP measure of performance. Our method of calculating operating income (loss) may be different from the method used by other companies and therefore comparability may be limited. 133 136 (2) Segment data does not include consolidation and elimination entries related to intersegment amounts. After General American Life was placed under administrative supervision by the Missouri Department of Insurance, sales of new insurance policies and annuity contracts by GenAmerica declined significantly and surrender levels for existing policyholders and annuity owners increased. Although we intend to quickly integrate GenAmerica into our existing operations, we cannot guarantee that we will be able to do so or that sales by GenAmerica of new insurance policies and annuity contracts and surrender rates for existing policies and contracts will return to pre-supervision levels. GenAmerica incurred a net loss in 1999, principally due to losses from the sale of invested assets to meet funding agreement and other policy obligations and the write-down of assets to their current market value; there can be no assurance that future profitability will not be adversely affected. LIFE INSURANCE AND ANNUITY. GenAmerica's Life Insurance and Annuity segment, which represented approximately 37% of GenAmerica's total revenues in 1999, offers a wide variety of life insurance and annuity products to individual customers. GenAmerica's individual life insurance products consist of universal and variable universal life, whole life and term life. GenAmerica's annuity products consist of variable annuities and fixed annuities. GenAmerica sells these products primarily to professionals, business owners and other affluent individuals, resulting in an average face value of approximately $340,000, one of the highest average face values per policy in the insurance industry. GenAmerica uses multiple distribution channels to sell its life insurance and annuity products, including approximately 275 independent general agencies, representing a total of approximately 625 agents in its independent general agency system and approximately 1,575 active independent insurance agents and brokers. GenAmerica markets its various products through additional channels, including consultants, insurance brokers, worksite, affinity group and direct marketing to businesses and affluent individuals. The Life Insurance and Annuity segment's revenues, excluding realized investment gains and losses, grew from $1.3 billion in 1997 to $1.5 billion in 1999, a compound annual rate of 7.4%. In 1999, operating income declined by 31.6% to $35.9 million and net income declined by 71.3% to $14.9 million as a result of the effect of GenAmerica's liquidity problems on its sales, expenses and investment performance. LIFE REINSURANCE. GenAmerica's Life Reinsurance segment, which represented approximately 44% of GenAmerica's total revenues in 1999, sells reinsurance products to life insurers in the U.S. and internationally. GenAmerica conducts this business through its publicly traded subsidiary RGA. RGA is one of the largest life reinsurers in North America based on in-force business. It markets life reinsurance primarily to the largest U.S. life insurers and, in 1999, held treaties with most of the top 100 U.S. life insurers. U.S. insurers accounted for 72.2% of RGA's net premiums in 1999. Outside of the U.S., RGA operates principally in Canada, Latin America and the Asia Pacific region. These international operations are rapidly expanding and accounted for 27.8% of RGA's net premiums in 1999. RGA's business principally consists of traditional, mortality-based reinsurance, written on both facultative and automatic treaty bases. RGA also writes non-traditional reinsurance, including asset intensive products and financial reinsurance. RGA distributes these products and services in the U.S. through a regionalized direct sales force and internationally primarily through a direct sales force located in the respective international locations. RGA also makes limited use of reinsurance intermediaries and brokers to help supplement sales to its targeted market. The Life Reinsurance segment's revenues, excluding realized investment gains and losses, grew at a compound annual rate of 27.9% from $1.1 billion in 1997 to $1.8 billion in 1999. Operating income in 1999 was $49.1 million, which was essentially unchanged from the 1998 reported amount. Net income declined 48.7% to $17.5 million in 1999 due to exiting the funding agreement business. 134 137 INSTITUTIONAL ASSET MANAGEMENT. GenAmerica's Institutional Asset Management segment, which represented approximately 1.2% of GenAmerica's total revenues in 1999, offers asset management and related products and services primarily to the insurance industry. GenAmerica conducts its asset management business through Conning. Conning's assets under management grew from $26.0 billion in 1997 to $33.2 billion in 1999, a compound annual rate of 13.0%. At December 31, 1999, of Conning's $33.2 billion of assets under management, approximately $11.6 billion, or 34.9%, were GenAmerica assets. The products and services provided by Conning consist of: (1) institutional asset management and related services; (2) private equity funds; (3) mortgage loan origination and real estate management; and (4) insurance industry research. Also reported in GenAmerica's Institutional Asset Management segment are the results relating to GenAmerica's funding agreement business. GenAmerica exited the funding agreement business on September 29, 1999. See "-- Terms of Acquisition". The Institutional Asset Management segment's revenues, excluding realized gains and losses, grew from $135.8 million in 1997 to $210.3 million in 1999, a compound annual rate of 24.4%. In 1999, its operating income declined 42.1% to $9.2 million. This segment incurred a net loss of $188.6 million due to exiting the funding agreement business and due to the large investment losses sustained in raising liquidity and transferring assets to MetLife. In March 2000, GenAmerica and its subsidiaries began withdrawing from Conning approximately $7.7 billion of their assets that Conning had managed and transferring the management of those assets to Metropolitan Life Insurance Company. INSURANCE SERVICES AND RELATED BUSINESSES. GenAmerica's Insurance Services and Related Businesses segment, which represented approximately 19% of total revenues in 1999, provides administrative services and insurance products for employers and their employees, as well as software products and technology services to companies in the life insurance industry. In its administrative services business, GenAmerica provides administrative support services to employer sponsored health plans and investment products and investment, administrative and consulting services to 401(k) and pension plans. Through its wholly-owned subsidiary NaviSys, GenAmerica also provides software products and technology services that include life and annuity administration systems, insurance underwriting systems, sales illustration software, and electronic commerce and Internet-related products and services. The Insurance Services and Related Businesses segment's revenues, excluding realized investment gains and losses, grew from $641.9 million in 1997 to $690.8 million in 1999, a compound annual rate of 3.7%. This segment incurred an operating loss of $13.8 million as a result of the aforementioned liquidity problem and subsequent sale of the group health business. Net income increased 33.9% to $17.0 million primarily due to a realized investment gain related to the sale of a non-strategic subsidiary. On January 1, 2000, GenAmerica exited the group medical business through a co-insurance agreement with Great-West Life & Annuity Insurance Company (Great-West). This co-insurance agreement also includes any life and health business that is directly associated with the medical business. GenAmerica is required to reimburse Great-West for up to $10 million in net operating losses incurred during 2000. These amounts have been reflected in the 1999 consolidated financial statements of GenAmerica. GenAmerica must also compensate Great-West for certain amounts receivable related to this business should they be deemed uncollectible. GENAMERICA INVESTMENTS GenAmerica had total consolidated assets at December 31, 1999 of $23.6 billion. Of its total consolidated assets, $16.7 billion were held in the general accounts of its insurance subsidiaries while the remaining $6.9 billion were held in the separate accounts of its insurance subsidiaries. 135 138 Of the $16.7 billion of assets held in the general accounts, $13.1 billion consisted of cash and invested assets. The following table summarizes the consolidated cash and invested assets held in the general accounts of GenAmerica's insurance subsidiaries at the dates indicated. GENAMERICA INVESTED ASSETS
AT DECEMBER 31, ----------------------------------------------- 1999 1998 ---------------------- ---------------------- CARRYING CARRYING VALUE % OF TOTAL VALUE % OF TOTAL -------- ---------- -------- ---------- (DOLLARS IN MILLIONS) Fixed maturities(1)............................... $ 6,959.6 53.0% $11,230.9 65.4% Equity securities(1).............................. 42.5 0.3 38.8 0.2 Commercial mortgage loans......................... 1,678.9 12.8 2,337.5 13.6 Policy loans...................................... 2,243.9 17.1 2,151.0 12.5 Real estate....................................... 131.2 1.0 129.9 0.8 Other invested assets............................. 898.8 6.8 457.6 2.7 Short-term investments............................ 295.3 2.2 200.4 1.2 Cash and cash equivalents......................... 888.3 6.8 619.5 3.6 --------- ----- --------- ----- Total invested assets............................. $13,138.5 100.0% $17,165.6 100.0% ========= ===== ========= =====
- --------------- (1) All fixed maturities and equity securities are classified as available-for-sale and carried at estimated fair value. The yield on general account invested assets (including net realized gains and losses on investments) was 6.6%, 7.3% and 7.5% for the years ended December 31, 1999, 1998 and 1997, respectively. FIXED MATURITIES. Fixed maturities consist of publicly traded and privately placed debt securities, primarily of United States corporations, mortgage-backed securities, asset-backed securities and obligations of the Canadian government and provinces. The portion of funds invested in Canadian dollar obligations supports corresponding Canadian liabilities. Fixed maturities represented approximately 53.0% and 65.4% of GenAmerica's total invested assets at December 31, 1999 and 1998, respectively. The following table summarizes GenAmerica's total fixed maturities by NAIC designation or, if not rated by the NAIC, by the comparable rating of Moody's or S&P or, if not rated by Moody's or S&P, by GenAmerica's internal rating system. GENAMERICA TOTAL FIXED MATURITIES BY CREDIT QUALITY
AT DECEMBER 31, ---------------------------------------------------------------- 1999 1998 ------------------------------ ------------------------------ NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED DESIGNATION EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE - ----------- ---------------------- --------- ----- ---------- --------- ----- ---------- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A........... $4,267.3 55.9% $3,980.0 $ 6,842.0 62.8% $ 7,157.5 2 Baa................ 2,802.5 36.7 2,534.5 3,555.4 32.6 3,619.1 3 Bb................. 421.4 5.6 351.7 400.9 3.7 378.1 4 B.................. 102.3 1.3 66.8 64.1 0.6 47.2 5 Caa and lower...... 22.9 0.3 14.4 31.1 0.3 25.3 6 In or near default... 15.4 0.2 12.2 4.1 0.0 3.7 -------- ----- -------- --------- ----- --------- Total fixed maturities............ $7,631.8 100.0% $6,959.6 $10,897.6 100.0% $11,230.9 ======== ===== ======== ========= ===== =========
136 139 Mortgage-backed securities and asset-backed securities represented approximately 16.3% and 20.2% of GenAmerica's total invested assets at December 31, 1999 and 1998, respectively. GenAmerica invests in pass-through and collateralized mortgage obligations collateralized by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, Governmental National Mortgage Association and Canadian Housing Authority collateral. The following table sets forth the types of mortgage-backed securities, as well as other asset-backed securities, held by GenAmerica as of the dates indicated. GENAMERICA MORTGAGE AND ASSET-BACKED SECURITIES
AT DECEMBER 31, ---------------------- 1999 1998 ---- ---- (DOLLARS IN MILLIONS) CMOs........................................................ $ 741.7 $1,584.2 Commercial mortgage-backed securities....................... 145.0 211.9 Principal only/interest only................................ 27.2 1.8 Other mortgage-backed securities............................ 26.9 42.8 Asset-backed securities..................................... 1,198.1 1,632.8 -------- -------- Total mortgage-backed securities and asset-backed securities................................................ $2,138.9 $3,473.5 ======== ========
COMMERCIAL MORTGAGE LOANS. GenAmerica's commercial mortgage loan portfolio comprised 12.8% and 13.6% of its total invested assets at December 31, 1999 and 1998, respectively. During the years ended December 31, 1999, 1998 and 1997, the average yield on its commercial mortgage loans was 8.8%, 8.4%, and 9.1% per year, respectively. The carrying value of commercial mortgage loans at December 31, 1999 was $1.7 billion. This amount is net of valuation allowances aggregating $29.1 million. The net valuation allowances represent GenAmerica's best estimate of the cumulative impairments on these loans at that date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any such increases may have a material adverse effect on GenAmerica's financial position and results of operations. At December 31, 1999, the carrying value of potential problem, problem and restructured commercial mortgage loans was $48.8 million, $8.6 million and $12.6 million, respectively, net of valuation allowances of $29.1 million in the aggregate. Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans' original terms was approximately $0.1 million, $1.6 million and $3.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. 137 140 The following table presents the carrying amounts of potential problem, problem and restructured commercial mortgages relative to the carrying value of all commercial mortgages as of the dates indicated: GENAMERICA POTENTIAL PROBLEM, PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING VALUE
AT DECEMBER 31, --------------------- 1999 1998 ---- ---- (DOLLARS IN MILLIONS) Total commercial mortgages.................................. $1,678.9 $2,337.5 ======== ======== Potential problem commercial mortgages...................... $ 48.8 $ 85.2 Problem commercial mortgages................................ 8.6 20.1 Restructured commercial mortgages........................... 12.6 29.5 -------- -------- Total potential problem, problem and restructured commercial mortgages................................................. $ 70.0 $ 134.8 ======== ======== Total potential problem, problem and restructured commercial mortgages as a percent of total commercial mortgages...... 4.2% 5.8% ======== ========
FUTURE POLICY BENEFITS For all of our product lines, we establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our policy obligations at such time as an annuitant takes income, a policy matures or surrenders or an insured dies or becomes disabled. We compute the amounts for future policy benefits in our consolidated financial statements in conformity with generally accepted accounting principles. We distinguish between short duration and long duration contracts. Short duration contracts arise from our group life and group dental business. The liability for future policy benefits for short duration contracts consists of gross unearned premiums as of the valuation date and the discounted amount of the future payments on pending claims as of the valuation date. Our long duration contracts consist of traditional life, term, non-participating whole life, individual disability income, group long-term disability and long-term care contracts. We determine future policy benefits for long duration contracts using assumptions based on current experience, plus a margin for adverse deviation for these policies. Where they exist, we amortize deferred policy acquisition costs in relation to the associated premium. We also distinguish between investment contracts, limited pay contracts and universal life type contracts. The future policy benefits for these products primarily consist of policyholders' account balances. We also establish liabilities for future policy benefits (associated with base policies and riders, unearned mortality charges and future disability benefits), for other policyholder funds (associated with unearned revenues and claims payable) and for unearned revenue (the unamortized portion of front-end loads charged). Investment contracts primarily consist of individual annuity and certain group pension contracts that have limited or no mortality risk. We amortize the deferred policy acquisition costs on these contracts in relation to estimated gross profits. Limited pay contracts primarily consist of single premium immediate individual and group pension annuities. For limited pay contracts, we defer the excess of the gross premium over the net premium and recognize such excess into income in relation to anticipated future benefit payments. Universal life type contracts consist of universal and variable life contracts. We amortize deferred policy acquisition costs for limited pay and universal type contracts using the product's estimated gross profits. For universal life type contracts with front-end loads, we defer the charge and amortize the unearned revenue using the product's estimated gross profits. The liability for future policy benefits for our participating traditional life insurance is the net level reserve using the policy's guaranteed mortality rates and the dividend fund interest rate or 138 141 nonforfeiture interest rate, as applicable. We amortize deferred policy acquisition costs in relation to the product's estimated gross margins. We establish liabilities to account for the estimated ultimate costs of losses and LOSS ADJUSTMENT EXPENSES ("LAE") for claims that have been reported but not yet settled, and claims incurred but not reported for the Auto & Home segment. We base unpaid losses and loss adjustment expenses on: - case estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; - estimates of incurred but not reported losses based upon past experience; - estimates of losses on insurance assumed primarily from involuntary market mechanisms; and - estimates of future expenses to be incurred in settlement of claims. We deduct estimated amounts of salvage and subrogation from unpaid losses and loss adjustment expenses. Implicit in all these estimates are underlying inflation assumptions because we determine all estimates using expected actual amounts to be paid. We derive estimates for development of reported claims and for incurred but not reported claims principally from actuarial analyses of historical patterns of claims and development for each line of business. Similarly, we derive estimates of unpaid loss adjustment expenses principally from actuarial analyses of historical development patterns of the relationship of loss adjustment expenses to losses for each line of business. We anticipate ultimate recoveries from salvage and subrogation principally on the basis of historical recovery patterns. Pursuant to state insurance laws, our insurance subsidiaries also establish STATUTORY RESERVES, carried as liabilities, to meet their obligations on their policies. We establish these statutory reserves in amounts sufficient to meet our policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves generally differ from liabilities for future policy benefits determined using generally accepted accounting principles. The New York Insurance Law and regulations require us to submit to the New York Superintendent of Insurance, with each annual report, an opinion and memorandum of a "qualified actuary" that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for our statutory liabilities with respect to these obligations. Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of our liabilities, we cannot precisely determine the amounts that we will ultimately pay with respect to these liabilities, and the ultimate amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future. However, we believe our liabilities for future benefits adequately cover the ultimate benefits. We periodically review our estimates for liabilities for future benefits and compare them with our actual experience. We revise our estimates when we determine that future expected experience differs from assumptions used in the development of our liabilities. If the liabilities originally recorded prove inadequate, we must increase our liabilities, which may have a material adverse effect on our business, results of operations and financial condition. 139 142 UNDERWRITING AND PRICING INDIVIDUAL AND INSTITUTIONAL BUSINESSES Our individual and group insurance underwriting involves an evaluation of applications for life, disability, dental, retirement and savings and long-term care insurance products and services by a professional staff of underwriters and actuaries, who determine the type and the amount of risk that we are willing to accept. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify risks before issuing a policy to qualified applicants or groups. Individual underwriting considers not only an applicant's medical history, but other factors such as financial profiles, foreign travel, avocations and alcohol, drug and tobacco use. Our group underwriters generally evaluate the risk characteristics of each prospective insured group, although with certain products employees may be underwritten on an individual basis. Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and generally a policy is not issued unless the particular risk or group has been examined and approved for underwriting. Underwriting is generally done on a centralized basis by our employees, although some policies are underwritten by intermediaries under strict guidelines we have established. In order to maintain high standards of underwriting quality and consistency, we engage in a multilevel series of ongoing internal underwriting audits, and are subject to external audits by our reinsurers, at both our remote underwriting offices and our corporate underwriting office. We have established senior level oversight of this process that facilitates quality sales, serving the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and MORBIDITY assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the representative and us. Individual and group product pricing reflects our insurance underwriting standards. Product pricing on insurance products is based on the expected payout of benefits calculated through the use of assumptions for mortality, morbidity, expenses, persistency and investment returns, as well as certain macroeconomic factors such as inflation. Investment-oriented products are priced based on various factors, including investment return, expenses and persistency, depending on the specific product features. Product specifications are designed to prevent greater than expected mortality, and we periodically monitor mortality and morbidity assumptions. Unique to group insurance pricing is experience rating, the process by which the rate charged to a group policyholder reflects credit for positive past claim experience or a charge for poor experience. We employ both prospective and retrospective experience rating. Prospective experience rating involves the evaluation of past experience for the purpose of determining future premium rates. Retrospective experience rating involves the evaluation of past experience for the purpose of determining the actual cost of providing insurance for the customer for the time period in question. We continually review our underwriting and pricing guidelines so that our policies remain progressive, competitive and supportive of our marketing strategies and profitability goals. Decisions are based on established actuarial pricing and risk selection principles to ensure that our underwriting and pricing guidelines are appropriate. 140 143 AUTO & HOME Auto & Home's underwriting function has six principal aspects: - evaluating potential worksite marketing employer accounts and independent agencies; - establishing guidelines for the binding of risks by agents with binding authority; - reviewing coverage bound by agents; - on a case by case basis, underwriting potential insureds presented by agents outside the scope of their binding authority; - pursuing information necessary in certain cases to enable Auto & Home to issue a policy within our guidelines; and - ensuring that renewal policies continue to be written at rates commensurate with risk. Subject to very few exceptions, agents in each of our distribution channels have binding authority for risks which fall within Auto & Home's published underwriting guidelines. Risks falling outside the underwriting guidelines may be submitted for approval to the underwriting department; alternatively, agents in such a situation may call the underwriting department to obtain authorization to bind the risk themselves. In most states, Auto & Home generally has the right within a specified period (usually 60 days) to cancel any policy. Auto & Home establishes prices for our major lines of insurance based on our proprietary data base, rather than relying on rating bureaus. Auto & Home determines prices in part from a number of variables specific to each risk. The pricing of personal lines insurance products takes into account, among other things, the expected frequency and severity of losses, the costs of providing coverage (including the costs of acquiring policyholders and administering policy benefits and other administrative and overhead costs), competitive factors and profit considerations. The major pricing variables for personal lines automobile insurance include characteristics of the automobile itself, such as age, make and model, characteristics of insureds, such as driving record and experience, and the insured's personal financial management. Auto & Home's ability to set and change rates is subject to regulatory oversight. As a condition of our license to do business in each state, Auto & Home, like all other automobile insurers, is required to write or share the cost of private passenger automobile insurance for higher risk individuals who would otherwise be unable to obtain such insurance. This "involuntary" market, also called the "shared market," is governed by the applicable laws and regulations of each state, and policies written in this market are generally written at higher than standard rates. In homeowners' insurance, price is driven by, among other factors, the frequency of the occurrence of covered perils, the cost to repair or replace damaged or lost property and the cost of litigation associated with liability claims. Major underwriting considerations include the condition and maintenance of the property, adequacy of fire protection and characteristics of insureds, such as personal financial management. Most homeowners insurance policies have a provision for automatic annual adjustments in coverage and premium due to inflation in building and labor costs. Homeowners pricing also includes the consideration of the incidence and severity of natural catastrophes, such as hurricanes and earthquakes, over a long-term period. REINSURANCE We cede premiums to other insurers under various agreements that cover individual risks, group risks or defined blocks of business, on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread the risk and minimize the effect 141 144 on us of losses. The amount of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event the claim is paid. However, we remain liable to our policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations assumed by it. Since we bear the risk of nonpayment by one or more of our reinsurers, we cede reinsurance to well-capitalized, highly rated reinsurers. INDIVIDUAL BUSINESS In recent periods, in response to the reduced cost of reinsurance coverage, we have increased the amount of individual mortality risk coverage purchased from third-party reinsurers. Since 1996, we have entered into reinsurance agreements that cede substantially all of the mortality risk on term insurance policies issued during 1996 and subsequent years, and on survivorship whole life insurance policies issued in 1997 and subsequent years. In 1998, we reinsured substantially all of the mortality risk on our universal life policies issued since 1983. We are continuing to reinsure substantially all of the mortality risk on the universal life policies. As a result of these transactions, we now reinsure up to 90% of the mortality risk for all new individual insurance policies that we write. In addition to these reinsurance policies, we reinsure risk on specific coverages. While our retention limit on any one life is $25 million ($30 million for joint life cases), we may cede amounts below those limits on a case-by-case basis depending on the characteristics of a particular risk. In addition, we routinely reinsure certain classes of risks in order to limit our exposure to particular travel, avocation and lifestyle hazards. We have several individual life reinsurance agreements with a diversified group of third-party reinsurers. These automatic pools have permitted us to enhance product performance, while decreasing business risk. INSTITUTIONAL BUSINESS We generally do not utilize reinsurance for our group insurance products, but we do reinsure when capital requirements and the economic terms of the reinsurance make it appropriate to do so. AUTO & HOME Auto & Home purchases reinsurance to control our exposure to large losses (primarily catastrophe losses), to stabilize earnings and to protect surplus. Auto & Home cedes to reinsurers a portion of risks and pays premiums based upon the risk and exposure of the policies subject to reinsurance. To control our exposure to large property and casualty losses, Auto & Home utilizes three varieties of reinsurance agreements in which protection is provided for a specified type or category of risks. First, we utilize property catastrophe excess of loss agreements. Second, we utilize casualty excess of loss agreements. Third, we utilize property per risk excess of loss agreements. PROPERTY CATASTROPHE EXCESS OF LOSS. Protection against hurricane losses in Florida is obtained through (1) the state-run Catastrophe Fund, which provides coverage of 90% of $153 million in excess of $36 million, (2) privately placed reinsurance of $52.5 million in excess of $200 million, and (3) a multi-year treaty for Florida second-event coverage in which the maximum recoverable is $46.5 million in excess of $50 million. This multi-year treaty is subject to a 24-month activation period and upon activation the contract period is 36 months. This coverage becomes activated when the aggregate incurred losses for the insurance industry exceed $8 billion or the Florida Hurricane Catastrophe Fund is depleted. For other regions, on January 1, 142 145 2000, Auto & Home entered into a multi-year treaty in which the maximum recoverable amounts are $37.5 million for any one loss occurrence in excess of $75 million, $75 million for any one annual period and no more than $112.5 million during the four-year contract term. On January 1, 2000, Auto & Home also entered into an annual treaty in which the maximum recoverable amount is $122.5 million for each and every loss occurrence in excess of $125 million. The aggregate effect of these coverages is to limit Auto & Home's probable maximum after-tax loss from a one in 250-year hurricane in Florida or a one in 100-year hurricane in the Northeast to less than 10% of Auto & Home's statutory surplus. PROPERTY PER RISK EXCESS OF LOSS. Auto & Home's property per risk excess of loss coverage has three layers of protection: each current layer is effective through June 30, 2000. The first layer of coverage provides up to $1 million of recoveries for each loss in excess of $1 million. The second layer provides up to $3 million of coverage for each loss in excess of $2 million. The third layer provides up to $10 million of coverage for each loss in excess of $5 million. For a given occurrence, the entire program provides maximum coverage of $24 million. CASUALTY EXCESS OF LOSS. Auto & Home's casualty excess of loss coverage has three layers of protection: each current layer is effective through June 30, 2000. The first layer covers up to $3 million of losses for each occurrence in excess of $2 million. The second layer covers up to $5 million of losses for each occurrence in excess of $5 million. The third layer covers up to $10 million of losses for each occurrence in excess of $10 million. INVESTMENTS We had total cash and invested assets at December 31, 1999 of $138.6 billion. In addition, we had $64.9 billion held in our separate accounts, for which we generally do not bear investment risk. Our primary investment objective is to maximize after-tax operating income consistent with acceptable risk parameters. We are exposed to three primary sources of investment risk: - 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; and - market valuation risk for equity holdings. We manage credit risk through in-house fundamental analysis of the underlying obligors, issuers, transaction structures and real estate properties. We also manage credit risk and valuation risk through industry and issuer diversification and asset allocation. For real estate and agricultural assets, we manage credit risk and valuation risk through geographic, property type, and product type diversification and asset allocation. We manage interest rate risk as part of our asset and liability management strategies, product design, such as the use of market value adjustment features and surrender charges, and proactive monitoring and management of certain non-guaranteed elements of our products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. For further information on our management of interest rate risk and market valuation risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk Disclosure". 143 146 The following table summarizes our cash and invested assets at December 31, 1999 and 1998: INVESTED ASSETS
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Fixed maturities available-for-sale, at fair value.......... $ 96,981 69.9% $100,767 72.5% Mortgage loans on real estate............................... 19,739 14.2 16,827 12.1 Equity real estate and real estate joint ventures........... 5,649 4.1 6,287 4.5 Policy loans................................................ 5,598 4.0 5,600 4.0 Equity securities, at fair value............................ 2,006 1.5 2,340 1.7 Cash and cash equivalents................................... 2,789 2.0 3,301 2.4 Other limited partnership interests......................... 1,331 1.0 1,047 0.7 Short-term investments...................................... 3,055 2.2 1,369 1.0 Other invested assets....................................... 1,501 1.1 1,484 1.1 -------- ----- -------- ----- Total cash and invested assets..................... $138,649 100.0% $139,022 100.0% ======== ===== ======== =====
INVESTMENT RESULTS The yield on general account cash and invested assets, excluding net realized investment gains and losses, was 7.3%, 7.5% and 7.1% for the years ended December 31, 1999, 1998 and 1997, respectively. The following table illustrates the yields on average assets for each of the components of our investment portfolio for the years ended December 31, 1999, 1998 and 1997:
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------- ------------------ YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- ------ -------- ------ -------- ------ (DOLLARS IN MILLIONS) FIXED MATURITIES:(2) Investment income.............................. 7.5% $ 7,171 7.4% $ 6,990 7.4% $ 6,481 Net realized gains (losses).................... (538) 573 118 ------- -------- ------- Total........................................ $ 6,633 $ 7,563 $ 6,599 ------- -------- ------- Ending assets.................................. $96,981 $100,767 $92,630 ------- -------- ------- MORTGAGE LOANS:(3) Investment income.............................. 8.1% $ 1,484 8.5% $ 1,580 8.6% $ 1,692 Net realized gains............................. 28 23 56 ------- -------- ------- Total........................................ $ 1,512 $ 1,603 $ 1,748 ------- -------- ------- Ending assets.................................. $19,739 $ 16,827 $20,193 ------- -------- ------- EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES:(4) Investment income, net of expenses............. 9.7% $ 581 10.4% $ 687 7.5% $ 586 Net realized gains............................. 265 424 446 ------- -------- ------- Total........................................ $ 846 $ 1,111 $ 1,032 ------- -------- ------- Ending assets.................................. $ 5,649 $ 6,287 $ 7,080 ------- -------- ------- POLICY LOANS: Investment income.............................. 6.1% $ 340 6.6% $ 387 6.3% $ 368 ------- -------- ------- Ending assets.................................. $ 5,598 $ 5,600 $ 5,846 ------- -------- -------
144 147
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------- ------------------ YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- ------ -------- ------ -------- ------ (DOLLARS IN MILLIONS) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Investment income.............................. 4.2% $ 173 5.3% $ 187 5.1% $ 169 ------- -------- ------- Ending assets.................................. $ 5,844 $ 4,670 $ 3,590 ------- -------- ------- EQUITY SECURITIES: Investment income.............................. 1.8% $ 40 2.0% $ 78 1.4% $ 50 Net realized gains............................. 99 994 224 ------- -------- ------- Total........................................ $ 139 $ 1,072 $ 274 ------- -------- ------- Ending assets.................................. $ 2,006 $ 2,340 $ 4,250 ------- -------- ------- OTHER LIMITED PARTNERSHIP INTERESTS: Investment income.............................. 17.2% $ 199 20.3% $ 196 32.7% $ 302 Net realized gains............................. 33 13 12 ------- -------- ------- Total........................................ $ 232 $ 209 $ 314 ------- -------- ------- Ending assets.................................. $ 1,331 $ 1,047 $ 855 ------- -------- ------- OTHER INVESTED ASSETS: Investment income.............................. 6.0% $ 91 12.2% $ 406 7.3% $ 324 Net realized gains (losses).................... (24) 71 23 ------- -------- ------- Total........................................ $ 67 $ 477 $ 347 ------- -------- ------- Ending assets.................................. $ 1,501 $ 1,484 $ 4,456 ------- -------- ------- TOTAL INVESTMENTS: Investment income before expenses and fees..... 7.5% $10,079 7.7% $ 10,511 7.5% $ 9,972 Investment expenses and fees................... (0.2%) (263) (0.2%) (283) (0.4%) (481) ---- ------- ---- -------- ---- ------- Net investment income.......................... 7.3% $ 9,816 7.5% $ 10,228 7.1% $ 9,491 Net realized gains (losses).................... (137) 2,098 879 Realized gains from sales of subsidiaries...... -- 531 139 Adjustments to realized gains (losses)(5)...... 67 (608) (231) ------- -------- ------- Total........................................ $ 9,746 $ 12,249 $10,278 ======= ======== =======
- --------------- (1) Yields are based on quarterly average asset carrying values for 1999 and 1998, and annual average asset carrying values for 1997 excluding unrealized investment gains(losses), and for yield calculation purposes, average assets exclude fixed maturities associated with our security lending program. Fixed maturity investment income has been reduced by rebates paid under the program. (2) Included in fixed maturities are equity linked notes of $1,079 million, $916 million and $860 million at December 31, 1999, 1998 and 1997, respectively, which include an equity component as part of the notes' return. Investment income for fixed maturities includes prepayment fees and income from the securities lending program that has been reclassed from net investment income. (3) Investment income from mortgage loans includes prepayment fees. (4) Equity real estate and real estate joint venture income is shown net of operating expenses, including depreciation of $247 million, $282 million and $338 million in 1999, 1998 and 1997, respectively. (5) Adjustments to realized gains (losses) include accelerated amortization of deferred acquisition costs, loss recognition for policy liabilities related to the assets sold and additional credits to participating contracts. 145 148 FIXED MATURITIES Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 69.9% and 72.5% of total cash and invested assets at December 31, 1999 and 1998, respectively. Based on estimated fair value, public fixed maturities and private fixed maturities comprised 82.6% and 17.4% of total fixed maturities at December 31, 1999, respectively, and 83.3% and 16.7% at December 31, 1998, respectively. We invest in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than can ordinarily be obtained with comparable public market securities. Generally, private placements provide us with protective covenants, call protection features and, where applicable, a higher level of collateral. However, we may not freely trade our private placements because of restrictions imposed by federal and state securities laws and illiquid trading markets. The Securities Valuation Office of the NAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC designations". The NAIC designations parallel the credit ratings of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC designations 1 and 2 include bonds considered investment grade (rated "Baa3" or higher by Moody's, or rated "BBB-" or higher by S&P) by such rating organizations. NAIC designations 3 through 6 include bonds considered below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P). The following tables present our public, private and total fixed maturities by NAIC designation and the equivalent ratings of the Nationally Recognized Statistical Rating Organizations at December 31, 1999 and 1998, as well as the percentage, based on estimated fair value, that each designation comprises: PUBLIC FIXED MATURITIES BY CREDIT QUALITY
AT DECEMBER 31, ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- ESTIMATED ESTIMATED NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL - ------ ---------------------- --------- --------- ----- --------- --------- ----- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A.................... $55,258 $54,511 68.1% $57,003 $60,735 72.4% 2 Baa......................... 19,908 19,106 23.8 16,472 17,001 20.2 3 Ba.......................... 4,355 4,232 5.3 4,635 4,609 5.5 4 B........................... 2,184 2,153 2.7 1,532 1,477 1.8 5 Caa and lower............... 64 54 0.1 138 106 0.1 6 In or near default.......... 23 23 0.0 2 5 0.0 ------- ------- ----- ------- ------- ----- Total public fixed maturities................ $81,792 $80,079 100.0% $79,782 $83,933 100.0% ======= ======= ===== ======= ======= =====
146 149 PRIVATE FIXED MATURITIES BY CREDIT QUALITY
AT DECEMBER 31, ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- ESTIMATED ESTIMATED NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL - ------ ---------------------- --------- --------- ----- --------- --------- ----- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A...................... $ 7,597 $ 7,696 45.5% $ 7,372 $ 7,865 46.7% 2 Baa........................... 6,975 6,845 40.5 6,637 6,862 40.8 3 Ba............................ 1,453 1,404 8.3 1,391 1,362 8.1 4 B............................. 833 816 4.8 621 606 3.6 5 Caa and lower................. 104 87 0.5 129 110 0.6 6 In or near default............ 45 44 0.3 11 14 0.1 ------- ------- ----- ------- -------- ----- Subtotal...................... 17,007 16,892 99.9 16,161 16,819 99.9 Redeemable preferred stock.... 10 10 0.1 15 15 0.1 ------- ------- ----- ------- -------- ----- Total private fixed maturities.................. $17,017 $16,902 100.0% $16,176 $ 16,834 100.0% ======= ======= ===== ======= ======== =====
TOTAL FIXED MATURITIES BY CREDIT QUALITY
AT DECEMBER 31, ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- ESTIMATED ESTIMATED NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL - ------ ---------------------- --------- --------- ----- --------- --------- ----- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A...................... $62,855 $62,207 64.2% $64,375 $ 68,600 68.1% 2 Baa........................... 26,883 25,951 26.8 23,109 23,863 23.7 3 Ba............................ 5,808 5,636 5.8 6,026 5,971 5.9 4 B............................. 3,017 2,969 3.1 2,153 2,083 2.1 5 Caa and lower................. 168 141 0.1 267 216 0.2 6 In or near default............ 68 67 0.0 13 19 0.0 ------- ------- ----- ------- -------- ----- Subtotal...................... 98,799 96,971 100.0 95,943 100,752 100.0 Redeemable preferred stock.... 10 10 0.0 15 15 0.0 ------- ------- ----- ------- -------- ----- Total fixed maturities........ $98,809 $96,981 100.0% $95,958 $100,767 100.0% ======= ======= ===== ======= ======== =====
Based on estimated fair values, total investment grade public and private placement fixed maturities comprised 91.0% and 91.8% of total fixed maturities in the general account at December 31, 1999 and 1998, respectively. 147 150 The following table shows the amortized cost and estimated fair value of fixed maturities, by contractual maturity dates (excluding scheduled sinking funds), at December 31, 1999 and 1998: FIXED MATURITIES BY CONTRACTUAL MATURITY DATES
AT DECEMBER 31, ----------------------------------------------- 1999 1998 ---------------------- ---------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- --------- --------- --------- (DOLLARS IN MILLIONS) Due in one year or less.......................... $ 3,180 $ 3,217 $ 2,380 $ 2,462 Due after one year through five years............ 18,152 18,061 17,062 17,527 Due after five years through ten years........... 23,755 23,114 23,769 24,714 Due after ten years.............................. 26,316 25,918 26,276 29,070 ------- ------- ------- -------- Subtotal....................................... 71,403 70,310 69,487 73,773 Mortgage-backed and other asset-backed securities..................................... 27,396 26,661 26,456 26,979 ------- ------- ------- -------- Subtotal....................................... 98,799 96,971 95,943 100,752 Redeemable preferred stock....................... 10 10 15 15 ------- ------- ------- -------- Total fixed maturities........................... $98,809 $96,981 $95,958 $100,767 ======= ======= ======= ========
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. We monitor fixed maturities to identify investments that management considers to be problems or potential problems. We also monitor investments that have been restructured. We define problem securities in the fixed maturities category as securities as to which principal or interest payments are in default or are to be restructured pursuant to commenced negotiations, or as securities issued by a debtor that has subsequently entered bankruptcy. We define potential problem securities in the fixed maturity category as securities of an issuer deemed to be experiencing significant operating problems or difficult industry conditions. We use various criteria, including the following, to identify potential problem securities: - debt service coverage or cash flow falling below certain thresholds which vary according to the issuer's industry and other relevant factors; - significant declines in revenues or margins; - violation of financial covenants; - public securities trading at a substantial discount as a result of specific credit concerns; and - other subjective factors. We define restructured securities in the fixed maturities category as securities to which we have granted a concession that we would not have otherwise considered but for the financial difficulties of the obligor or issuer. We enter into a restructuring when we believe we will realize a greater economic value under the new terms than through liquidation or disposition. The terms of the restructuring may involve some or all of the following characteristics: a reduction in the interest or dividend rate, an extension of the maturity date, an exchange of debt for equity or a partial forgiveness of principal or interest. 148 151 The following table presents the estimated fair value of our total fixed maturities classified as performing, problem, potential problem and restructured fixed maturities at December 31, 1999 and 1998: PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES
AT DECEMBER 31, ------------------------------------------ 1999 1998 ------------------- ------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Performing......................................... $96,464 99.5% $100,409 99.6% Problem............................................ 20 0.0 152 0.2 Potential problem.................................. 482 0.5 192 0.2 Restructured....................................... 15 0.0 14 0.0 ------- ----- -------- ----- Total............................................ $96,981 100.0% $100,767 100.0% ======= ===== ======== =====
We classify all of our fixed maturities as available-for-sale and mark them to market. We write down to management's expectations of ultimate realizable value fixed maturities that we deem to be other than temporarily impaired. We record write-downs as realized losses and include them in earnings and adjust the cost basis of the fixed maturities accordingly. We do not change the revised cost basis for subsequent recoveries in value. Such writedowns were $98 million and $7 million for the years ended December 31, 1999 and 1998, respectively. Cumulative write-downs on fixed maturities owned were $76 million and $16 million at December 31, 1999 and 1998, respectively. FIXED MATURITIES BY SECTOR. We diversify our fixed maturities by security sector. The following tables set forth the estimated fair value of our fixed maturities by sector, as well as the percentage of the total fixed maturities holdings that each security sector comprised at December 31, 1999 and 1998, and show by security type the relative amounts of publicly traded and privately placed securities: FIXED MATURITIES BY SECTOR
AT DECEMBER 31, 1999 -------------------------------------------------------------- PUBLICLY TRADED PRIVATELY PLACED TOTAL ------------------ ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) U.S. treasuries/agencies.......... $ 6,298 7.9% $ 1 0.0% $ 6,299 6.5% Corporate securities.............. 40,207 50.2 15,336 90.7 55,543 57.3 Foreign government securities..... 4,095 5.1 111 0.7 4,206 4.3 Mortgage-backed securities........ 20,032 25.0 247 1.5 20,279 20.9 Asset-backed securities........... 5,715 7.1 667 3.9 6,382 6.6 Other fixed income assets......... 3,732 4.7 540 3.2 4,272 4.4 ------- ----- ------- ----- ------- ----- Total........................... $80,079 100.0% $16,902 100.0% $96,981 100.0% ======= ===== ======= ===== ======= =====
149 152 FIXED MATURITIES BY SECTOR
AT DECEMBER 31, 1998 -------------------------------------------------------------- PUBLICLY TRADED PRIVATELY PLACED TOTAL ------------------ ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) U.S. treasuries/agencies.......... $ 7,744 9.2% $ 3 0.0% $ 7,747 7.7% Corporate securities.............. 42,525 50.6 15,453 91.8 57,978 57.5 Foreign government securities..... 4,173 5.0 117 0.7 4,290 4.3 Mortgage-backed securities........ 20,452 24.4 440 2.6 20,892 20.7 Asset-backed securities........... 5,852 7.0 235 1.4 6,087 6.0 Other fixed income assets......... 3,187 3.8 586 3.5 3,773 3.8 ------- ----- ------- ----- -------- ----- Total........................... $83,933 100.0% $16,834 100.0% $100,767 100.0% ======= ===== ======= ===== ======== =====
CORPORATE FIXED MATURITIES. The table below shows the major industry types that comprise our corporate bond holdings at the dates indicated:
AT DECEMBER 31, ------------------------------------------ 1999 1998 ------------------- ------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Industrial.......................................... $26,480 47.6% $28,388 49.0% Utility............................................. 6,487 11.7 7,690 13.2 Finance............................................. 11,631 21.0 11,252 19.4 Yankee/Foreign(1)................................... 10,423 18.8 10,295 17.8 Other............................................... 522 0.9 353 0.6 ------- ----- ------- ----- Total............................................. $55,543 100.0% $57,978 100.0% ======= ===== ======= =====
- --------------- (1) Includes dollar-denominated debt obligations of foreign obligors, known as Yankee bonds, and other foreign investments. We diversify our corporate bond holdings by industry and issuer. The portfolio has no significant exposure to any single issuer. At December 31, 1999, our combined holdings in the ten issuers to which we had the greatest exposure totaled $3,154 million, which was less than 3% of our total invested assets at such date. The exposure to the largest single issuer of corporate bonds we held at December 31, 1999 was $388 million, which was less than 1% of our total invested assets at such date. At December 31, 1999, investments of $4,182 million, or 40.1% of the Yankee/Foreign sector, represented exposure to traditional "Yankee" bonds, which are dollar-denominated debt obligations of foreign obligors. The balance of this exposure is primarily dollar-denominated, foreign private placements and project finance loans. We diversify the Yankee/Foreign portfolio by country and issuer. We do not have material exposure to foreign currency risk in our invested assets. In our international insurance operations, both our assets and liabilities are denominated in local currencies. Foreign currency denominated securities supporting U.S. dollar liabilities are generally swapped back into U.S. dollars. 150 153 MORTGAGE-BACKED SECURITIES. The following table shows the types of mortgage-backed securities we held at December 31, 1999 and 1998: MORTGAGE-BACKED SECURITIES
AT DECEMBER 31, ------------------------------------------ 1999 1998 ------------------- ------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Pass-through securities............................. $ 8,478 41.8% $ 8,546 40.9% ------- ----- ------- ----- Collateralized mortgage obligations Planned amortization class........................ 3,974 19.6 4,593 22.0 Sequential pay class.............................. 3,359 16.5 3,827 18.3 Other............................................. 361 1.8 141 0.7 ------- ----- ------- ----- Subtotal....................................... 7,694 37.9 8,561 41.0 Commercial mortgage-backed securities............... 4,107 20.3 3,785 18.1 ------- ----- ------- ----- Total..................................... $20,279 100.0% $20,892 100.0% ======= ===== ======= =====
At December 31, 1999, pass-through and collateralized mortgage obligations totaled $16,172 million, or 79.7% of total mortgage-backed securities, and a majority of this amount represented agency-issued pass-through and collateralized mortgage obligations guaranteed or otherwise supported by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association. Other types of mortgage-backed securities comprised the balance of such amounts reflected in the table. At December 31, 1999, approximately $2,614 million, or 63.6% of the commercial mortgage-backed securities and $13,880 million, or 85.9% of the pass-through securities and collateralized mortgage obligations were rated Aaa/AAA by Moody's or S&P. Mortgage-backed securities are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit risk and cash flow risk. The majority of the mortgage-backed securities in our investment portfolio have relatively low cash flow variability. The principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flow will be received. Our active monitoring of our mortgage-backed securities mitigates exposure to losses from cash flow risk associated with interest rate fluctuations. Mortgage-backed pass-through certificates are the most liquid assets in the mortgage-backed sector. Pass-through securities represented 41.8% and 40.9% of our mortgage-backed securities distribute, on a pro rata basis to their holders, the monthly cash flows of principal and interest, both scheduled and prepayments, generated by the underlying mortgages. We also invested 37.9% and 41.0% of our mortgage-backed securities at December 31, 1999 and 1998, respectively, in collateralized mortgage obligations ("CMOs") which have a greater degree of cash flow stability than pass-throughs. Planned Amortization Class bonds ("PAC") represented 19.6% and 22.0% of our mortgage-backed securities at December 31, 1999 and 1998, respectively. These bonds or tranches are structured to provide more certain cash flows to the investor and therefore are subject to less prepayment and extension risk than other mortgage-backed securities. PAC tranches derive their 151 154 stability from having a specified principal payment schedule, provided prepayments of the underlying securities remain within their expected range. The other tranches of a CMO absorb prepayment variations so that PACs maintain a better defined maturity profile than other mortgage-backed securities. By buying PACs, we accept a lower yield in return for more certain cash flow. The principal risk of holding PACs is that prepayments may differ significantly from expectations and we will not receive the expected yield on the PAC. In contrast, Sequential Pay Class tranches receive principal payments in a prescribed sequence without a pre-determined prepayment schedule. In addition to our PACs and Sequential Pay Class tranches, we had approximately $108 million invested in interest-only or principal-only mortgage-backed securities at December 31, 1999. ASSET-BACKED SECURITIES. The following table below shows the types of asset-backed securities we held at December 31, 1999 and 1998: ASSET-BACKED SECURITIES
AT DECEMBER 31, ------------------------------------------------ 1999 1998 --------------------- --------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Credit card receivables..................... $1,960 30.7% $2,885 47.4% Automobile receivables...................... 1,070 16.8 1,432 23.5 Home equity loans........................... 1,541 24.1 1,026 16.9 Other....................................... 1,811 28.4 744 12.2 ------ ----- ------ ----- Total..................................... $6,382 100.0% $6,087 100.0% ====== ===== ====== =====
Asset-backed securities are purchased both to diversify the overall risks of our fixed maturities assets and to provide attractive returns. Our asset-backed securities are diversified both by type of asset and by issuer. Credit card receivables constitute the largest exposure in our asset-backed securities investments. Except for asset-backed securities backed by home equity loans, the asset-backed securities investments generally have little sensitivity to changes in interest rates. At December 31, 1999, approximately $3,661 million, or 57.4%, of the total was rated Aaa/AAA by Moody's or S&P. The principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the security's priority in the issuer's capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include consumer or corporate credits such as credit card holders, equipment lessees, and corporate obligors. Capital market risks include the general level of interest rates and the liquidity for these securities in the market place. MORTGAGE LOANS Our mortgage loans are collateralized by commercial, agricultural and residential properties. Mortgage loans comprised 14.2% and 12.1% of our total cash and invested assets at December 31, 1999 and 1998, respectively. The carrying value of mortgage loans is stated at original cost net of repayments, amortization of premiums, accretion of discounts and valuation 152 155 allowances. The following table shows the carrying value of our mortgage loans by such types at December 31, 1999 and 1998: MORTGAGE LOANS BY PORTFOLIO
AT DECEMBER 31, -------------------------------------------- 1999 1998 ------------------- ------------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Commercial................................... $14,862 75.3% $12,360 73.5% Agricultural................................. 4,798 24.3 4,227 25.1 Residential.................................. 79 0.4 240 1.4 ------- ----- ------- ----- Total...................................... $19,739 100.0% $16,827 100.0% ======= ===== ======= =====
COMMERCIAL MORTGAGE LOANS. We diversify our commercial mortgage loans by both geographic region and property type, and manage these investments through a network of regional offices overseen by our investment department. The following table presents the distribution across geographic regions and property types for commercial mortgage loans at December 31, 1999 and 1998: COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC REGION AND PROPERTY TYPE
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) REGION South Atlantic....................................... $ 4,098 27.6% $ 3,463 28.0% Middle Atlantic...................................... 2,703 18.2 2,220 18.0 Pacific.............................................. 2,596 17.5 1,935 15.7 East North Central................................... 1,865 12.5 1,832 14.8 New England.......................................... 1,095 7.4 1,077 8.7 West South Central................................... 1,012 6.8 676 5.5 West North Central................................... 652 4.4 569 4.6 Mountain............................................. 490 3.3 335 2.7 East South Central................................... 149 1.0 152 1.2 International........................................ 202 1.3 101 0.8 ------- ----- ------- ----- Total.............................................. $14,862 100.0% $12,360 100.0% ======= ===== ======= ===== PROPERTY TYPE Office............................................... $ 6,789 45.7% $ 6,118 49.5% Retail............................................... 3,620 24.4 2,286 18.5 Apartments........................................... 2,382 16.0 2,378 19.2 Industrial........................................... 1,136 7.6 848 6.9 Hotel................................................ 843 5.7 657 5.3 Other................................................ 92 0.6 73 0.6 ------- ----- ------- ----- Total.............................................. $14,862 100.0% $12,360 100.0% ======= ===== ======= =====
153 156 The following table presents the scheduled maturities for our commercial mortgage loans at December 31, 1999 and 1998: COMMERCIAL MORTGAGE LOAN SCHEDULED MATURITIES
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Due in 1 year or less................................ $ 806 5.4% $ 808 6.5% Due after 1 year through 2 years..................... 482 3.2 816 6.6 Due after 2 years through 3 years.................... 708 4.8 532 4.3 Due after 3 years through 4 years.................... 787 5.3 679 5.5 Due after 4 years through 5 years.................... 1,608 10.8 881 7.1 Due after 5 years.................................... 10,471 70.5 8,644 70.0 ------- ----- ------- ----- Total.............................................. $14,862 100.0% $12,360 100.0% ======= ===== ======= =====
We monitor our mortgage loans on a continual basis. Through this monitoring process, we review loans that are restructured, delinquent or under foreclosure and identify those that management considers to be potentially delinquent. These loan classifications are generally consistent with those used in industry practice. We define restructured mortgage loans, consistent with industry practice, as loans in which we, for economic or legal reasons related to the debtor's financial difficulties, grant a concession to the debtor that we would not otherwise consider. This definition provides for loans to exit the restructured category under certain conditions. We define delinquent mortgage loans, consistent with industry practice, as loans as to which two or more interest or principal payments are past due. We define mortgage loans under foreclosure, consistent with industry practice, as loans as to which foreclosure proceedings have formally commenced. We define potentially delinquent loans as loans which, in management's opinion, have a high probability of becoming delinquent. We review all mortgage loans on an annual basis. These reviews may include an analysis of the property financial statement and rent roll, lease rollover analysis, property inspections, market analysis and tenant creditworthiness. We also review loan-to-value ratios and debt coverage ratios for restructured loans, delinquent loans, loans under foreclosure, potentially delinquent loans, loans with an existing valuation allowance, loans maturing within two years and loans with a loan-to-value ratio greater than 90% as determined in the prior year. We establish valuation allowances for loans that we deem impaired, as determined through our annual review process. We define impaired loans consistent with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as loans as to which we probably will not collect all amounts due according to applicable contractual terms of the agreement. We base valuation allowances upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the value of the loan's collateral. We record valuation allowances as realized losses and include them in earnings. We record subsequent adjustments to allowances as realized gains or losses and include them in earnings. 154 157 The following table presents the amortized cost and valuation allowances for commercial mortgage loans distributed by loan classification at December 31, 1999 and 1998: COMMERCIAL MORTGAGE LOAN DISTRIBUTION AND VALUATION ALLOWANCE BY LOAN CLASSIFICATION
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing.............. $14,098 94.5% $11 0.1% $11,490 91.9% $ 44 0.4% Restructured............ 810 5.4 52 6.4% 953 7.7 85 8.9% Delinquent or under foreclosure........... 17 0.1 4 25.0% 55 0.4 10 18.2% Potentially delinquent............ 6 0.0 2 33.3% 4 0.0 3 75.0% ------- ----- --- ------- ----- ---- Total................. $14,931 100.0% $69 0.5% $12,502 100.0% $142 1.1% ======= ===== === ======= ===== ====
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for commercial mortgage loans for the years ended December 31, 1999, 1998 and 1997: CHANGES IN COMMERCIAL MORTGAGE LOAN VALUATION ALLOWANCES
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ----- (DOLLARS IN MILLIONS) Balance, beginning of year.................................. $ 142 $ 259 $ 454 Additions................................................... 36 30 46 Deductions for writedowns and dispositions(1)............... (109) (147) (241) ----- ----- ----- Balance, end of year........................................ $ 69 $ 142 $ 259 ===== ===== =====
- --------------- (1) Includes $26 million related to commercial mortgage loans held by entities sold in 1998. The principal risks in holding commercial mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the geographic location of the property, the physical condition of the property, the diversity of tenants and the rollover of their leases and the ability of the property manager to attract tenants and manage expenses. Supply and demand risks include changes in the supply and/or demand for rental space which cause changes in vacancy rates and/or rental rates. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for refinancing of a loan. 155 158 AGRICULTURAL MORTGAGE LOANS. We diversify our agricultural mortgage loans by both geographic region and product type. We manage these investments through a network of regional offices and field professionals overseen by our investment department. The following table presents the distribution across geographic regions and product types for agricultural mortgage loans at December 31, 1999 and 1998: AGRICULTURAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC REGION AND BY PRODUCT TYPE
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) REGION Pacific................................................ $1,184 24.7% $1,085 25.6% West North Central..................................... 1,053 21.9 931 22.0 South Atlantic......................................... 840 17.5 734 17.4 East North Central..................................... 737 15.4 671 15.9 West South Central..................................... 405 8.5 356 8.4 Mountain............................................... 371 7.7 327 7.7 East South Central..................................... 189 3.9 108 2.6 New England............................................ 19 0.4 15 0.4 ------ ----- ------ ----- Total................................................ $4,798 100.0% $4,227 100.0% ====== ===== ====== ===== PRODUCT TYPE Annual Crop............................................ $2,276 47.4% $2,128 50.3% Permanent.............................................. 932 19.5 848 20.1 Agribusiness........................................... 761 15.8 578 13.7 Livestock.............................................. 655 13.7 564 13.3 Timber................................................. 174 3.6 109 2.6 ------ ----- ------ ----- Total................................................ $4,798 100.0% $4,227 100.0% ====== ===== ====== =====
The following table presents the scheduled maturities for our agricultural mortgage loans at December 31, 1999 and 1998: AGRICULTURAL MORTGAGE LOAN MATURITY PROFILE
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Due in 1 year or less.................................. $ 99 2.1% $ 70 1.7% Due after 1 year through 2 years....................... 74 1.5 76 1.8 Due after 2 years through 3 years...................... 97 2.0 88 2.1 Due after 3 years through 4 years...................... 135 2.8 112 2.6 Due after 4 years through 5 years...................... 134 2.8 161 3.8 Due after 5 years...................................... 4,259 88.8 3,720 88.0 ------ ----- ------ ----- Total................................................ $4,798 100.0% $4,227 100.0% ====== ===== ====== =====
Approximately 62% of the $4,798 million of agricultural mortgage loans outstanding at December 31, 1999 was subject to rate resets prior to maturity. A substantial portion of these loans are successfully renegotiated and remain outstanding to maturity. The process and policies 156 159 for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial mortgage loans. The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at December 31, 1999 and 1998: AGRICULTURAL MORTGAGE LOAN DISTRIBUTION AND VALUATION ALLOWANCE BY LOAN CLASSIFICATION
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing............. $4,616 95.8% $ 1 0.0% $4,051 95.2% $10 0.2% Restructured........... 165 3.4 11 6.7% 182 4.3 14 7.7% Delinquent or under foreclosure.......... 27 0.6 2 7.4% 10 0.2 -- 0.0% Potentially delinquent........... 8 0.2 4 50.0% 12 0.3 4 33.3% ------ ----- --- ------ ----- --- Total................ $4,816 100.0% $18 0.4% $4,255 100.0% $28 0.7% ====== ===== === ====== ===== ===
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for agricultural mortgage loans for the years ended December 31, 1999, 1998 and 1997: CHANGES IN AGRICULTURAL MORTGAGE LOAN VALUATION ALLOWANCES
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- (DOLLARS IN MILLIONS) Balance, beginning of year.................................. $ 28 $27 $12 Additions................................................... 4 10 15 Deductions for writedowns and dispositions.................. (14) (9) -- ---- --- --- Balance, end of year........................................ $ 18 $28 $27 ==== === ===
The principal risks in holding agricultural mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the location of the property, soil types, weather conditions and the other factors that may impact the borrower's personal guaranty. Supply and demand risks include the supply and demand for the commodities produced on the specific property and the related price for those commodities. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for refinancing of a loan. EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES Our equity real estate and real estate joint venture investments consist of commercial and agricultural properties located throughout the U.S. and Canada. We manage these investments through a network of regional offices overseen by our investment department. At December 31, 1999 and 1998, the carrying value of our equity real estate and real estate joint ventures was $5,649 million and $6,287 million, respectively, or 4.1% and 4.5% of total cash and invested assets. The carrying value of equity real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at our equity in the real estate joint ventures net of impairments and valuation allowances. These holdings consist of equity real estate, interests in real estate joint ventures and real estate acquired upon foreclosure 157 160 of commercial and agricultural mortgage loans. The following table presents the carrying value of our equity real estate and real estate joint ventures at December 31, 1999 and 1998: EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) TYPE Equity real estate..................................... $5,271 93.3% $5,559 88.5% Real estate joint ventures............................. 331 5.9 574 9.1 ------ ----- ------ ----- Subtotal............................................. 5,602 99.2 6,133 97.6 Foreclosed real estate................................. 47 0.8 154 2.4 ------ ----- ------ ----- Total................................................ $5,649 100.0% $6,287 100.0% ====== ===== ====== =====
These investments are diversified by geographic location and property types. The following table presents the distribution across geographic regions and property types for equity real estate and real estate joint ventures at December 31, 1999 and 1998: EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES DISTRIBUTION BY GEOGRAPHIC REGION AND PROPERTY TYPE
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) REGION East................................................... $1,863 33.0% $1,960 31.2% West................................................... 1,657 29.3 1,828 29.1 South.................................................. 1,416 25.1 1,628 25.9 Midwest................................................ 544 9.6 681 10.8 International.......................................... 169 3.0 190 3.0 ------ ----- ------ ----- Total................................................ $5,649 100.0% $6,287 100.0% ====== ===== ====== ===== PROPERTY TYPE Office................................................. $3,846 68.1% $4,265 67.8% Retail................................................. 587 10.4 640 10.2 Apartments............................................. 474 8.4 418 6.6 Land................................................... 258 4.6 313 5.0 Industrial............................................. 160 2.8 168 2.7 Hotel.................................................. 151 2.7 169 2.7 Agriculture............................................ 96 1.7 195 3.1 Other.................................................. 77 1.3 119 1.9 ------ ----- ------ ----- Total................................................ $5,649 100.0% $6,287 100.0% ====== ===== ====== =====
Office properties representing 68.1% and 67.8% of our equity real estate and real estate joint venture holdings at December 31, 1999 and 1998, respectively, are well diversified geographically. The average occupancy level of office properties was 92% and 93% at December 31, 1999 and 1998, respectively. 158 161 We classify equity real estate and real estate joint ventures as held for investment or held for sale. The following table presents the carrying value of equity real estate and real estate joint ventures by such classifications at December 31, 1999 and 1998: EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES CLASSIFICATION BY HELD FOR INVESTMENT AND HELD FOR SALE
AT DECEMBER 31, ----------------------------------- 1999 1998 ---------------- ---------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Equity real estate and real estate joint ventures held for investment............................................... $5,151 91.2% $5,893 93.7% Equity real estate and real estate joint ventures held for sale..................................................... 498 8.8 394 6.3 ------ ----- -------- ----- Total.................................................... $5,649 100.0% $6,287 100.0% ====== ===== ======== =====
Ongoing management of these investments includes quarterly appraisals, as well as an annual market update and review of each property's budget, financial returns, lease rollover status and our exit strategy. In addition to individual property reviews, we employ an overall strategy of selective dispositions and acquisitions as market opportunities arise. Our current strategy follows the completion of a program to substantially reduce the size of our total real estate holdings. Our disposition effort began in 1995, when the carrying value of our holdings at year end was $9,514 million, and ended in 1998 with a carrying value of our holdings at $6,287 million. We adjust the carrying value of equity real estate and real estate joint ventures held for investment for impairments whenever events or changes in circumstances indicate that the carrying value of the property may not be recoverable. We write down impaired real estate to estimated fair value, which we generally compute using the present value of future cash flows from the property, discounted at a rate commensurate with the underlying risks. We record writedowns as realized losses through earnings and we reduce the cost basis of the properties accordingly. We do not change the new cost basis for subsequent recoveries in value. Cumulative writedowns on equity real estate and real estate joint ventures that are held for investment, excluding real estate acquired upon foreclosure of commercial and agricultural mortgage loans, were $289 million and $408 million at December 31, 1999 and 1998, respectively. We record real estate acquired upon foreclosure of commercial and agricultural mortgage loans at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure. Once we identify a property to be sold and commence a firm plan for marketing the property, we establish and periodically revise, if necessary, a valuation allowance to adjust the carrying value of the property to its expected sales value, less associated selling costs, if it is lower than the property's carrying value. We record allowances as realized losses and include them in earnings. We record subsequent adjustments to allowances as realized gains or losses and include them in earnings. Our carrying value of equity real estate and real estate joint ventures held for sale, including real estate acquired upon foreclosure of commercial and agricultural mortgage loans, in the amounts of $498 million and $394 million at December 31, 1999 and 1998, respectively, are net of impairments of $187 million and $119 million and net of valuation allowances of $34 million and $33 million, respectively. 159 162 EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS Our equity securities primarily consist of investments in common stocks. Substantially all of the common stock is publicly traded on major securities exchanges. The other limited partnership interests primarily represent ownership interests in pooled investment funds that make private equity investments in companies in the U.S. and overseas. We classify our investments in common stocks as available-for-sale and mark them to market except for non-marketable private equities which are generally carried at cost. We account for our investments in limited partnership interests in which we do not have a controlling interest in accordance with the equity method of accounting. Our investments in equity securities represented 1.5% and 1.7% of cash and invested assets at December 31, 1999 and 1998, respectively. The following table presents the carrying values of our investments in equity securities and other limited partnership interests at December 31, 1999 and 1998: INVESTMENTS IN EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
AT DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Equity securities...................................... $2,006 60.1% $2,340 69.1% Other limited partnership interests.................... 1,331 39.9 1,047 30.9 ------ ----- ------ ----- Total................................................ $3,337 100.0% $3,387 100.0% ====== ===== ====== =====
Equity securities include, at December 31, 1999 and 1998, $237 million and $239 million, respectively, of private equity securities. We may not freely trade our private equity securities, because of restrictions imposed by federal and state securities laws and illiquid trading markets. At December 31, 1999 and 1998, approximately $380 million and $452 million, respectively, of our equity securities holdings were effectively fixed at a minimum value of $355 million and $371 million in these respective periods, primarily through the use of convertible securities and other derivatives. In 1998, one exchangeable subordinated debt security was terminated resulting in realized investment gains of $32 million. The remaining exchangeable subordinated debt securities mature through 2002 and we may terminate them earlier at our discretion. PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS We monitor our equity securities and other limited partnership interests on a continual basis. Through this monitoring process, we identify investments that management considers to be problems or potential problems. Problem equity securities and other limited partnership interests are defined as securities (1) in which significant declines in revenues and/or margins threaten the ability of the issuer to continue operating or (2) where the issuer has subsequently entered bankruptcy. Potential problem equity securities and other limited partnership interests are defined as securities issued by a company that is experiencing significant operating problems or difficult industry conditions. Criteria generally indicative of these problems or conditions are (1) cash flows falling below varying thresholds established for the industry and other relevant factors, (2) significant declines in revenues and/or margins, (3) public securities trading at a substantial discount as a result of specific credit concerns and (4) other information that becomes available. Equity securities or other limited partnership interests which are deemed to be other than temporarily impaired are written down to management's expectation of ultimate realizable value. Writedowns are recorded as realized investment losses and are included in earnings and the cost 160 163 basis of the equity securities and other limited partnership interests are adjusted accordingly. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 1999 and 1998, such writedowns were $35 million and $38 million, respectively. Cumulative writedowns on equity securities and other limited partnership interests owned at December 31, 1999 and 1998 were $35 million and $55 million, respectively. OTHER INVESTED ASSETS Our other invested assets consist principally of leveraged leases, which are recorded net of non-recourse debt. We participate in lease transactions which are diversified by geographic area. We regularly review residual values and write down residuals to expected values as needed. Our other invested assets represented 1.1% of cash and invested assets at both December 31, 1999 and 1998. DERIVATIVE FINANCIAL INSTRUMENTS We use derivative instruments to manage market risk through one of four principal risk management strategies: the hedging of invested assets, liabilities, portfolios of assets or liabilities and anticipated transactions. Our derivative strategy employs a variety of instruments including financial futures, financial forwards foreign exchange contracts, foreign currency swaps, interest rate swaps, interest rate caps and options. We held the following positions in derivative financial instruments (other than equity options) at December 31, 1999 and 1998: DERIVATIVE FINANCIAL INSTRUMENTS
AT DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ---------------- NOTIONAL % OF NOTIONAL % OF AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Financial futures...................................... $ 3,140 15.1% $ 2,190 17.0% Foreign exchange contracts............................. -- 0.0 136 1.1 Foreign currency swaps................................. 4,002 19.2 580 4.5 Interest rate swaps.................................... 1,316 6.3 1,621 12.5 Interest rate caps..................................... 12,376 59.4 8,391 64.9 ------- ----- ------- ----- Total................................................ $20,834 100.0% $12,918 100.0% ======= ===== ======= =====
SECURITIES LENDING Pursuant to our securities lending program, we lend securities to major brokerage firms. Our policy requires a minimum of 102% of the fair value of the loaned securities as collateral, calculated on a daily basis. Our securities on loan at December 31, 1999 and 1998 had estimated fair values of $6,391 million and $4,552 million, respectively. SEPARATE ACCOUNT ASSETS We manage each separate account's assets in accordance with the prescribed investment policy that applies to that specific separate account. We establish separate accounts on a single client and multi-client commingled basis in conformity with insurance laws. Generally, separate accounts are not chargeable with liabilities that arise from any other business of ours. Separate account assets are subject to our general account's claims only to the extent that the value of such assets exceeds the separate account liabilities, as defined by the account's contract. If we use a separate account to support a contract providing guaranteed benefits, we must comply 161 164 with the asset maintenance requirements stipulated under Regulation 128 of the New York Insurance Department. We monitor these requirements at least monthly and in addition perform cash flow analyses, similar to those conducted for the general account, on an annual basis. We report separately as assets and liabilities investments held in separate accounts and liabilities of the separate accounts. We report substantially all separate account assets at their fair market value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders, and, accordingly, we do not reflect them in our consolidated statements of income and cash flows. We reflect in our revenues fees charged to the separate accounts by us, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. REGULATION INSURANCE REGULATION Metropolitan Life Insurance Company is licensed to transact insurance business in, and is subject to regulation and supervision by, all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada and each of its 11 provinces. Each of our other insurance subsidiaries is licensed and regulated in all U.S. and international jurisdictions where it conducts insurance business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurers, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. The New York Insurance Law limits the sales commissions and certain other marketing expenses that may be incurred in connection with the sale of life insurance policies and annuity contracts. Our insurance subsidiaries are each required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which they do business, and their operations and accounts are subject to periodic examination by such authorities. Our subsidiaries must also file, and in many jurisdictions and in some lines of insurance obtain regulatory approval for, rules, rates and forms relating to the insurance written in the jurisdictions in which they operate. The NAIC has established a program of accrediting state insurance departments. NAIC accreditation permits accredited states to conduct periodic examinations of insurers domiciled in such states. NAIC-accredited states will not accept reports of examination of insurers from unaccredited states, except under limited circumstances. As a direct result, insurers domiciled in unaccredited states may be subject to financial examination by accredited states in which they are licensed, in addition to any examinations conducted by their domiciliary states. The accreditation of the New York Insurance Department, our principal insurance regulator, has been suspended as a result of the New York legislature's failure to adopt certain model NAIC laws, including provisions restricting dividends to holding companies. We believe that the suspension of the NAIC accreditation of the Department, even if continued, will not have a significant impact upon our ability to conduct our insurance businesses. State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries regarding compliance by our insurance subsidiaries with insurance, securities and other laws and regulations regarding the conduct of our insurance and securities businesses. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. HOLDING COMPANY REGULATION. We and our insurance subsidiaries are subject to regulation under the insurance holding company laws of various jurisdictions. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require an 162 165 insurance holding company (and insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning their capital structure, ownership, financial condition, certain intercompany transactions and general business operations. State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates. See "Risk Factors -- Dividends and payments on our indebtedness may be affected by limitations imposed on Metropolitan Life Insurance Company and our other subsidiaries" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." The New York Insurance Law and the regulations thereunder also restrict the aggregate amount of investments Metropolitan Life Insurance Company may make in non-life insurance subsidiaries, and provide for detailed periodic reporting on subsidiaries. GUARANTY ASSOCIATIONS AND SIMILAR ARRANGEMENTS. Most of the jurisdictions in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed life insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. In none of the past five years have the aggregate assessments levied against Metropolitan Life Insurance Company and its insurance subsidiaries been material. While the amount and timing of future assessments are not predictable, we have established liabilities for guarantee fund assessments that we consider adequate for assessments with respect to insurers that are currently subject to insolvency proceedings. STATUTORY EXAMINATION. As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records and accounts of insurers domiciled in their states. These examinations are generally conducted in cooperation with the departments of two or three other states under guidelines promulgated by the NAIC. The New York Insurance Department recently completed an examination of Metropolitan Life Insurance Company for the five-year period ended December 31, 1993. The New York Insurance Department's Report on Examination of Metropolitan Life Insurance Company as of December 31, 1993 found that, during the five-year examination period 1989 through 1993, Metropolitan Life Insurance Company failed to fully comply with the disclosure requirements of a New York Insurance Department regulation regarding replacements of certain of its insurance policies with other policies issued by it, and used certain policy forms that had not been filed with or approved by the Insurance Department. These findings resulted in a $250,000 fine and other remedies which, in our view, are not material to our business, financial condition or results of operations. The Report contained other findings which did not result in a fine. The New York Insurance Department recently commenced an examination of Metropolitan Life Insurance Company for each of the five years in the period ended December 31, 1998. State insurance departments also periodically conduct market conduct examinations of the sales practices of insurance companies, including our life insurance subsidiaries. Regulatory authorities in a small number of states, including both insurance departments and attorneys general, have ongoing investigations of our sales of individual life insurance policies or annuities, including investigations of alleged improper replacement transactions and alleged improper sales of insurance with inaccurate or inadequate disclosures as to the period for which premiums would be payable. Over the past several years, we have resolved a number of investigations by 163 166 other regulatory authorities for monetary payments and certain other relief, and may continue to do so in the future. NAIC RATIOS. On the basis of statutory financial statements filed with state insurance regulators, the NAIC calculates annually twelve financial ratios to assist state regulators in monitoring the financial condition of insurers. A "usual range" of results for each ratio is used as a benchmark. Departure from the "usual range" on four or more of the ratios can lead to inquiries from individual state insurance departments. In each of the years 1996 through 1999, at most one ratio for Metropolitan Life Insurance Company fell outside the usual range. POLICY AND CONTRACT RESERVE SUFFICIENCY ANALYSIS. Under the New York Insurance Law, Metropolitan Life Insurance Company is required to conduct annually an analysis of the sufficiency of all life and health insurance and annuity statutory reserves. A qualified actuary must submit an opinion which states that the statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from surplus. Since the inception of this requirement, we have provided this opinion without any qualifications. STATUTORY INVESTMENT RESERVES. Statutory accounting practices require a life insurer to maintain both an asset valuation reserve and an interest maintenance reserve to absorb both realized and unrealized gains and losses on a portion of its investments. The asset valuation reserve is a statutory reserve for fixed maturity securities, equity securities, mortgage loans, equity real estate and other invested assets. The asset valuation reserve is designed to capture all realized and unrealized gains and losses on such assets, other than those resulting from changes in interest rates. The level of the asset valuation reserve is based on both the type of investment and its credit rating. In addition, the reserves required for similar investments, for example, fixed maturity securities, differ according to the credit ratings of the investments, which are based upon ratings established periodically by the NAIC Securities Valuation Office. The interest maintenance reserve applies to all types of fixed maturity securities, including bonds, preferred stocks, mortgage-backed securities, asset-backed securities and mortgage loans. The interest maintenance reserve is designed to capture the net gains which are realized upon the sale of such investments and which result from changes in the overall level of interest rates. The captured net realized gains or losses are then amortized into income over the remaining period to the stated maturity of the investment sold. Any increase in the asset valuation reserve and interest maintenance reserve causes a reduction in our insurance companies' statutory capital and surplus which, in turn, reduces funds available for stockholder dividends. SURPLUS AND CAPITAL. The New York Insurance Law requires Metropolitan Life Insurance Company, as a New York domestic insurer, to maintain at least $300,000 in surplus. After the demutualization, Metropolitan Life Insurance Company will be required to maintain $2,000,000 in capital. In addition, prior to the demutualization, the New York Insurance Law limited the amount of surplus that Metropolitan Life Insurance Company, as a New York domestic mutual insurer, could accumulate. We intend to continue offering participating policies after the demutualization. We will be subject to statutory restrictions that limit to 10% the amount of statutory profits on participating policies written after the demutualization (measured before dividends to policyholders) that can inure to the benefit of stockholders. We believe that the impact of these restrictions on our earnings will not be significant. Our U.S. insurance subsidiaries are subject to the supervision of the regulators in each jurisdiction in which they are licensed to transact business. Regulators have discretionary authority, in connection with the continued licensing of these insurance subsidiaries, to limit or prohibit sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or if further transaction of business will be hazardous to policyholders. 164 167 RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires that New York life insurers report their RBC based on a formula calculated by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The New York Insurance Department uses the formula only as an early warning regulatory tool to identify possibly inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. Section 1322 imposes broad confidentiality requirements on those engaged in the insurance business (including insurers, agents, brokers and others) and on the Insurance Department as to the use and publication of RBC data. Section 1322 gives the New York Superintendent of Insurance explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. At December 31, 1999, Metropolitan Life Insurance Company's total adjusted capital was in excess of each of those RBC levels. The U.S. insurance subsidiaries of Metropolitan Life Insurance Company are also subject, each individually, to these same RBC requirements. At December 31, 1999, the total adjusted capital of each of these insurance subsidiaries also was in excess of each of those RBC levels. The NAIC has recently adopted the Codification of Statutory Accounting Principles for life insurers, which is to become effective on January 1, 2001. Prior to implementation by Metropolitan Life Insurance Company, the Codification requires adoption by the New York Insurance Department, which may adopt the standards, in full or in part, or fail to adopt the standards. Based on a study commissioned by the NAIC, the overall impact to life insurers resulting from adoption of the codification is not expected to have a material adverse impact; however, a detailed analysis will be necessary to determine the actual impact of Codification on the statutory results of operations and statutory financial position of Metropolitan Life Insurance Company. REGULATION OF INVESTMENTS. Metropolitan Life Insurance Company and each of its insurance subsidiaries are subject to state laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain asset categories such as below investment grade fixed income securities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as NON-ADMITTED ASSETS for purposes of measuring surplus, and, in some instances, would require divestiture of such non-qualifying investments. We believe that the investments made by Metropolitan Life Insurance Company and each of its insurance subsidiaries complied with such regulations at December 31, 1999. FEDERAL INSURANCE INITIATIVES. Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity and minimum solvency requirements. For a discussion of the Gramm-Leach-Bliley Act of 1999, permitting affiliations between banks and insurers, see "Business -- Competition". VALUATION OF LIFE INSURANCE POLICIES MODEL REGULATION. The NAIC has adopted a revision to the Valuation of Life Insurance Policies Model Regulation (known as XXX Regulation). This model regulation would establish new minimum statutory reserve requirements for certain individual life insurance policies written in the future. Before the new reserve standards can become effective, individual states must adopt the model regulation. If these reserve standards were adopted in their current form, insurers selling certain individual life insurance products such as term life insurance with guaranteed premium periods and universal life insurance products with no-lapse guarantees would be required to redesign their products or hold increased reserves to be consistent with the new minimum standards with respect to policies issued after the effective date of the regulation. It is likely that the industry will encourage the states to adopt 165 168 the regulation with an effective date of January 1, 2000. New York State adopted a regulation similar to the model regulation in 1994, and amended its regulation on March 13, 2000 to be consistent with XXX Regulation. BROKER-DEALER AND SECURITIES REGULATION Metropolitan Life Insurance Company, some of its subsidiaries and certain policies and contracts offered by them are subject to various levels of regulation under the federal securities laws administered by the Securities and Exchange Commission. Metropolitan Life Insurance Company and some of its subsidiaries are investment advisers registered under the Investment Advisers Act of 1940, as amended. In addition, some separate accounts and a variety of mutual funds are registered under the Investment Company Act of 1940, as amended. Some annuity contracts and insurance policies issued by Metropolitan Life Insurance Company and some of its subsidiaries are funded by separate accounts, the interests in which are registered under the Securities Act of 1933, as amended. Metropolitan Life Insurance Company and some of its subsidiaries are registered as broker-dealers under the Securities Exchange Act of 1934, as amended, and with the National Association of Securities Dealers, Inc. Metropolitan Life Insurance Company also has certain pooled investment vehicles that are exempt from registration under the Securities Act and the Investment Company Act, but may be subject to certain other provisions of such acts. Federal and state securities regulatory authorities from time to time make inquiries regarding compliance by Metropolitan Life Insurance Company and its subsidiaries with securities and other laws and regulations regarding the conduct of their securities businesses. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. These laws and regulations are primarily intended to protect investors in the securities markets and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. We may also be subject to similar laws and regulations in the states and foreign countries in which we provide investment advisory services, offer the products described above or conduct other securities-related activities. ENVIRONMENTAL CONSIDERATIONS As owners and operators of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities, although we routinely have environmental assessments performed with respect to real estate being acquired for investment and real property to be acquired through foreclosure. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to management, management believes that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, results of operations and financial condition. ERISA CONSIDERATIONS We provide certain products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the Internal Revenue Code of 1986, as amended ("Code"). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries and the requirement under ERISA and the Code that fiduciaries may not cause a 166 169 covered plan to engage in certain prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation. On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank. The Court held that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by John Hancock in its general account under a participating group annuity contract are "plan assets" and therefore subject to certain fiduciary obligations under ERISA, which specifies that fiduciaries must perform their duties solely in the interest of ERISA plan participants and beneficiaries. The Court limited the imposition of ERISA fiduciary obligations in these instances to certain assets in an insurer's general account that were not reserved to pay benefits of guaranteed benefit policies. On January 5, 2000, the Secretary of Labor issued final regulations providing guidance for the purpose of determining, in cases where an insurer issues one or more policies backed by the insurer's general account to or for the benefit of an employee benefit plan, the extent to which assets of the insurer constitute plan assets for purposes of ERISA and the Code. The regulations apply only with respect to a policy issued by an insurer on or before December 31, 1998 ("Transition Policy"). In the case of such a policy, the regulations generally become applicable on July 5, 2001. Generally, no person will be liable under ERISA or the Code for conduct occurring prior to the applicability dates, where the basis of a claim is that insurance company general account assets constitute plan assets. Insurers issuing new policies after December 31, 1998 that are not guaranteed benefit policies will generally be subject to fiduciary obligations under ERISA. The regulations indicate the requirements that must be met so that assets supporting a Transition Policy will not be considered plan assets for purposes of ERISA and the Code. These requirements include detailed disclosures to be made to the employee benefits plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 days' notice and receive without penalty, at the policyholder's option, either (1) the unallocated accumulated fund balance (which may be subject to market value adjustment) or (2) a book value payment of such amount in annual installments with interest. We have taken and are continuing to take steps designed to ensure compliance with these regulations, as appropriate. COMPETITION We believe that competition with our business segments is based on a number of factors, including service, product features, price, commission structure, financial strength, claims-paying ratings and name recognition. We compete with a large number of other insurers, as well as non-insurance financial services companies, such as banks, broker-dealers and asset managers, for individual consumers, employer and other group customers and agents and other distributors of insurance and investment products. Some of these companies offer a broader array of products, have more competitive pricing or, with respect to other insurers, have higher claims paying ability ratings. Some may also have greater financial resources with which to compete. National banks, with their pre-existing customer bases for financial services products, may increasingly compete with insurers who sell annuities, as a result of the U.S. Supreme Court's 1994 decision in NationsBank of North Carolina v. Variable Annuity Life Insurance Company. That decision permits national banks to sell annuity products of life insurers in some circumstances. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the regulation of the financial services industry in the U.S. The Act permits mergers that combine commercial banks, insurers and securities firms under one holding company. Under the Act, national banks retain their existing ability to sell insurance products in some circumstances. In addition, bank holding companies that qualify and elect to be treated as "financial holding companies" may engage in activities, and acquire 167 170 companies engaged in activities, that are "financial" in nature or "incidental" or "complementary" to such financial activities, including acting as principal, agent or broker in selling life, property and casualty and other forms of insurance and annuities. A financial holding company can own any kind of insurer or insurance broker or agent, but its bank subsidiary cannot own the insurer. Under state law, the financial holding company would need to apply to the insurance commissioner in the insurer's state of domicile for prior approval of the acquisition of the insurer, and the Act provides that the commissioner, in considering the application, may not discriminate against the financial holding company because it is affiliated with a bank. Under the Act, no state may prevent or interfere with affiliations between banks and insurers, insurance agents or brokers, or the licensing of a bank or affiliate as an insurer or agent or broker. Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933, as amended, had limited the ability of banks to engage in securities-related businesses, and the Bank Holding Company Act of 1956, as amended, had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, among other things, bank holding companies may acquire insurers, and insurance holding companies may acquire banks. The ability of banks to affiliate with insurers may materially adversely affect all of our product lines by substantially increasing the number, size and financial strength of potential competitors. We must attract and retain productive sales representatives to sell our insurance, annuities and investment products. Strong competition exists among insurers for sales representatives with demonstrated ability. We compete with other insurers for sales representatives primarily on the basis of our financial position, support services and compensation and product features. From 1994 to 1998, the number of agents in the MetLife career agency system declined, from 9,521 to 6,853. We have undertaken several initiatives to grow our career agency force in the future. At December 31, 1999, the number of agents in the MetLife career agency system was 6,866. See "Business -- Individual Business -- Marketing and Distribution". We cannot provide assurance that these initiatives will succeed in attracting and retaining new agents. Sales of individual insurance, annuities and investment products and our results of operations and financial position could be materially adversely affected if we are unsuccessful in attracting and retaining agents. Many of our insurance products, particularly those offered by our Institutional Business segment, are underwritten yearly, and, accordingly, group purchasers may be able to obtain more favorable terms from competitors rather than renewing coverage with us. The effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future. The investment management and securities brokerage businesses have relatively few barriers to entry and continually attract new entrants. Many of our competitors in these businesses offer a broader array of investment products and services and are better known than we as sellers of annuities and other investment products. The Clinton Administration and various members of Congress have also proposed reforms to the nation's health care system. While we do offer non-medical health insurance products (such as group dental insurance, long-term care and disability insurance), we generally do not offer medical indemnity products or managed care products, and, accordingly, do not expect to be directly affected by such proposals to any significant degree. However, the uncertain environment resulting from health care reform could cause group health insurance providers to enter some of the markets in which we do business, thereby increasing competition. CLAIMS PAYING ABILITY RATINGS Claims paying ability and financial strength ratings are a factor in establishing the competitive position of insurers. A ratings downgrade (or the potential for such a downgrade) of Metropolitan Life Insurance Company or any of our other subsidiaries could, among other things, 168 171 increase the number of policies surrendered and withdrawals by policyholders of cash values from their policies, adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services, negatively impact new sales, adversely affect our ability to compete and thereby have a material adverse effect on our business, results of operations and financial condition. Our current claims paying ability and financial strength ratings are listed in the table below:
RATING AGENCY COMPANIES RATED RATING RATING STRUCTURE Standard & Metropolitan Life Insurance AA Second highest of nine Poor's Company, New England Life ("Very Strong") ratings categories and Ratings Insurance Company, Security mid-range within the Services First Life Insurance Company, category based on modifiers Metropolitan Insurance and (e.g., AA+, AA and AA- are Annuity Company, Metropolitan "Very Strong") Property and Casualty Insurance Company and RGA Reinsurance Company General American Life Insurance AA- Second highest of nine Company, COVA Financial ("Very Strong") ratings categories and Services Life Insurance lowest within the category Company, COVA Financial Life based on modifiers Insurance Company, First COVA Life Insurance Company, General Life Insurance Company, General Life Insurance Company of America, Paragon Life Insurance Company and Security Equity Life Insurance Company Moody's Metropolitan Life Insurance Aa2 Second highest of nine Investors Company, New England Life ("Excellent") ratings categories and Service, Insurance Company, General mid-range within the Inc. American Life Insurance Company category based on modifiers and COVA Financial Services (e.g., Aa1, Aa2 and Aa3 are Life Insurance Company "Excellent") Security First Life Insurance Aa3 Second highest of nine Company, Metropolitan Insurance ("Excellent") ratings categories and and Annuity Company and lower-range within the Metropolitan Property and category based on modifiers Casualty Insurance Company RGA Reinsurance Company A1 Third highest of nine ("Good") ratings categories and highest within the category based on modifiers
169 172
RATING AGENCY COMPANIES RATED RATING RATING STRUCTURE A.M. Best Metropolitan Life Insurance A+ Highest of nine ratings Company, Company and Metropolitan Tower ("Superior") categories and second Inc. Life Insurance Company highest within the category based on modifiers (e.g., A++ and A+ are "Superior" while A and A- are "Excellent") New England Life Insurance A Second highest of nine Company, Security First Life ("Excellent") ratings categories and Insurance Company, Metropolitan highest within the category Insurance and Annuity Company, based on modifiers Texas Life Insurance Company, Metropolitan Property and Casualty Insurance Company, General American Life Insurance Company, RGA Reinsurance Company, COVA Financial Services Life Insurance Company, COVA Financial Life Insurance Company, First COVA Life Insurance Company, General Life Insurance Company, General Life Insurance Company of America, Paragon Life Insurance Company and Security Equity Life Insurance Company Duff & Metropolitan Life Insurance AA+ Second highest of eight Phelps Company, New England Life ("Very High") ratings categories and Credit Insurance Company, Security highest within the category Rating Co. First Life Insurance Company, based on modifiers (e.g., General American Life Insurance AA+, AA and AA- are "Very Company, COVA Financial High") Services Life Insurance Company, Paragon Life Insurance Company and Security Equity Life Insurance Company
The foregoing ratings reflect each rating agency's opinion of Metropolitan Life Insurance Company's and our other subsidiaries' financial strength, operating performance and ability to meet our obligations to policyholders, and are not evaluations directed toward the protection of holders of MetLife, Inc.'s common stock or the units. EMPLOYEES At December 31, 1999, we employed approximately 42,300 employees. We believe that our relations with our employees are satisfactory. 170 173 LEGAL PROCEEDINGS Metropolitan Life Insurance Company and its affiliates are currently defendants in approximately 500 lawsuits raising allegations of improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." On December 28, 1999, after a fairness hearing, the United States District Court for the Western District of Pennsylvania approved a class action settlement resolving a multidistrict litigation proceeding involving alleged sales practices claims. The settlement class includes most of the owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. This class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. In addition to dismissing the consolidated class actions, the District Court's order also bars sales practices claims by class members for sales by the defendant insurers during the class period, effectively resolving all pending class actions against these insurers. The defendants are in the process of having these claims dismissed. Under the terms of the order, only those class members who excluded themselves from the settlement may continue an existing, or start a new, sales practices lawsuit against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company for sales that occurred during the class period. Approximately 20,000 class members elected to exclude themselves from the settlement. Over 400 of the approximately 500 lawsuits noted above are brought by individuals who elected to exclude themselves from the settlement. The settlement provides three forms of relief. General relief, in the form of free death benefits, is provided automatically to class members who did not exclude themselves from the settlement or who did not elect the claim evaluation procedures set forth in the settlement. The claim evaluation procedures permit a class member to have a claim evaluated by a third party under procedures set forth in the settlement. Claim awards made under the claim evaluation procedures will be in the form of policy adjustments, free death benefits or, in some instances, cash payments. In addition, class members who have or had an ownership interest in specified policies will also automatically receive deferred acquisition cost tax relief in the form of free death benefits. The settlement fixes the aggregate amounts that are available under each form of relief. We expect that the total cost to us of the settlement will be approximately $957 million. This amount is equal to the amount of the increase in liabilities for the death benefits and policy adjustments and the present value of expected cash payments to be provided to included class members, as well as attorneys' fees and expenses and estimated other administrative costs, but does not include the cost of litigation with policyholders who are excluded from the settlement. We believe that the cost to us of the settlement will be substantially covered by available reinsurance and the provisions made in our consolidated financial statements, and thus will not have a material adverse effect on our business, results of operations or financial position. We have not yet made a claim under those reinsurance agreements and, although there is a risk that the carriers will refuse coverage for all or part of the claim, we believe this is very unlikely to occur. We believe we have made adequate provision in our consolidated financial statements for all probable losses for sales practices claims, including litigation costs involving policyholders who are excluded from the settlement. 171 174 The class action settlement does not resolve nine purported or certified class actions currently pending against New England Mutual Life Insurance Company with which we merged in 1996. Eight of those actions have been consolidated as a multidistrict proceeding for pre-trial purposes in the United States District Court in Massachusetts. That Court certified a mandatory class as to those claims. Following an appeal of that certification, the United States Court of Appeals remanded the case to the District Court for further consideration. We are negotiating a settlement with class counsel. The class action settlement also does not resolve three putative sales practices class action lawsuits which have been brought against General American Life Insurance Company. These lawsuits have been consolidated in a single proceeding in the United States District Court for the Eastern District of Missouri. General American Life Insurance Company and counsel for plaintiffs have negotiated a settlement in principle of this consolidated proceeding. General American Life Insurance Company has not reached agreement with plaintiffs' counsel on the attorneys' fees to be paid. However, negotiations are ongoing. In addition, the class action settlement does not resolve two putative class actions involving sales practices claims filed against Metropolitan Life Insurance Company in Canada. The class action settlement also does not resolve a certified class action with conditionally certified subclasses against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company, Metropolitan Tower Life Insurance Company and various individual defendants alleging improper sales abroad. That lawsuit is pending in a New York federal court. In the past, we have resolved some individual sales practices claims through settlement, dispositive motion or, in a few instances, trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to our marketing and sales of individual life insurance may be commenced in the future. The following table sets forth the number of sales practices claims pending against Metropolitan Life Insurance Company and its affiliates, as of the dates indicated, the number of new claims during the periods ending on those dates and the total settlement payments made to resolve sales practices claims during those periods:
AT OR FOR THE YEARS ENDED DECEMBER 31(1) --------------------------- 1999 1998 1997 ------- ------- ------- Sales practices claims at period end (approximate).......... 447 458 321 Number of new claims during period (approximate)............ 194 136 79 Settlement payments during period (Dollars in millions)(2).............................................. $13.7 $15.3 $12.4
- --------------- (1) The table does not include information concerning sales practices claims against General American Life Insurance Company. (2) Settlement payments represent payments made during the period in connection with settlements made in that period and in prior periods. Amounts do not include our attorneys' fees and expenses. Regulatory authorities in a small number of states, including both insurance departments and one state attorney general, as well as the National Association of Securities Dealers, Inc., have ongoing investigations or inquiries relating to our sales of individual life insurance policies or annuities, including investigations or inquiries of alleged improper replacement transactions and alleged improper sales of insurance with inaccurate or inadequate disclosures as to the period for which premiums would be payable. Over the past several years, we have resolved a number of investigations by other regulatory authorities for monetary payments and certain other relief, and may continue to do so in the future. 172 175 Metropolitan Life Insurance Company is also a defendant in numerous lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. We have never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. Rather, these lawsuits, currently numbering in the thousands, have principally been based upon allegations relating to certain research, publication and other activities of one or more of Metropolitan Life Insurance Company's employees during the period from the 1920s through approximately the 1950s and alleging that Metropolitan Life Insurance Company learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Legal theories asserted against Metropolitan Life Insurance Company have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. While Metropolitan Life Insurance Company believes it has meritorious defenses to these claims, and has not suffered any adverse judgments in respect of these claims, most of the cases have been resolved by settlements. Metropolitan Life Insurance Company intends to continue to exercise its best judgment regarding settlement or defense of such cases. The number of such cases that may be brought or the aggregate amount of any liability that Metropolitan Life Insurance Company may ultimately incur is uncertain. Significant portions of amounts paid in settlement of such cases have been funded with proceeds from a previously resolved dispute with Metropolitan Life Insurance Company's primary, umbrella and first level excess liability insurance carriers. Metropolitan Life Insurance Company is presently in litigation with several of its excess liability insurers regarding amounts payable under its policies with respect to coverage for these claims. The trial court has granted summary judgment to these insurers. Metropolitan Life Insurance Company has appealed. There can be no assurances regarding the outcome of this litigation or the amount and timing of recoveries, if any, from these excess liability insurers. Metropolitan Life Insurance Company's asbestos-related litigation with these insurers should have no effect on its recoveries under the excess insurance policies described below. The following table sets forth the total number of asbestos personal injury claims pending against Metropolitan Life Insurance Company as of the dates indicated, the number of new claims during the periods ending on those dates and the total settlement payments made to resolve asbestos personal injury claims during those periods:
AT OR FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ Asbestos personal injury claims at period end (approximate)............................................. 60,000 72,000 71,000 Number of new claims during period (approximate)............ 35,500 31,000 28,000 Settlement payments during period (Dollars in millions)(1).............................................. $113.3 $47.0 $27.3
- --------------- (1) Settlement payments represent payments made during the period in connection with settlements made in that period and in prior periods. Amounts do not include our attorneys' fees and expenses and do not reflect amounts received from insurance carriers. We have recorded, in other expenses, charges of $499 million ($317 million after-tax), $1,895 million ($1,203 million after-tax) and $300 million ($190 million after-tax) for the years ended December 31, 1999, 1998 and 1997, respectively, for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. The charge for the year ended December 31, 1999 was principally related to the settlement of the multidistrict litigation proceeding involving alleged improper sales practices claims, accruals for sales practices claims not covered by the settlement and other legal costs. The 1998 charge of $1,895 million was comprised of $925 million and $970 million for sales practices claims and asbestos-related claims, respectively. We recorded the charges for sales practices claims based on preliminary settlement discussions and the settlement history of other insurers. 173 176 Prior to the fourth quarter of 1998, we established a liability for asbestos-related claims based on settlement costs for claims that we had settled, estimates of settlement costs for claims pending against us and an estimate of settlement costs for unasserted claims. The amount for unasserted claims was based on management's estimate of unasserted claims that would be probable of assertion. A liability is not established for claims which we believe are only reasonably possible of assertion. Based on this process, the accrual for asbestos-related claims at December 31, 1997 was $386 million. Potential liabilities for asbestos-related claims are not easily quantified, due to the nature of the allegations against us, which are not related to the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products, adding to the uncertainty as to the number of claims that may be brought against us. During 1998, we decided to pursue the purchase of excess insurance to limit our exposure to asbestos-related claims. In connection with our negotiations with the casualty insurers to obtain this insurance, we obtained information that caused us to reassess our accruals for asbestos-related claims. This information included: - Information from the insurers regarding the asbestos-related claims experience of other insureds, which indicated that the number of claims that were probable of assertion against us in the future was significantly greater than we had assumed in our accruals. The number of claims brought against us is generally a reflection of the number of asbestos-related claims brought against asbestos defendants generally and the percentage of those claims in which we are included as a defendant. The information provided to us relating to other insureds indicated that we had been included as a defendant for a significant percentage of total asbestos-related claims and that we may be included in a larger percentage of claims in the future, because of greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers and because of the bankruptcy and reorganization or the exhaustion of insurance coverage of other asbestos defendants; and that, although volatile, there was an upward trend in the number of total claims brought against asbestos defendants. - Information derived from actuarial calculations we made in the fourth quarter of 1998 in connection with these negotiations, which helped us to frame, define and quantify this liability. These calculations were made using, among other things, current information regarding our claims and settlement experience (which reflected our decision to resolve an increased number of these claims by settlement), recent and historic claims and settlement experience of selected other companies and information obtained from the insurers. Based on this information, we concluded that certain claims that previously were considered as only reasonably possible of assertion were now probable of assertion, increasing the number of assumed claims to approximately three times the number assumed in prior periods. As a result of this reassessment, we increased our liability for asbestos-related claims to $1,278 million at December 31, 1998. During 1998, we paid $1,407 million of premiums for excess of loss reinsurance agreements and excess insurance policies, consisting of $529 million for the excess of loss reinsurance agreements for sales practices claims and excess mortality losses and $878 million for the excess insurance policies for asbestos-related claims. We obtained the excess of loss reinsurance agreements to provide reinsurance with respect to sales practices claims made on or prior to December 31, 1999 and for certain mortality losses in 1999. These reinsurance agreements have a maximum aggregate limit of $650 million, with a maximum sublimit of $550 million for losses for sales practices claims. This coverage is in excess of an aggregate self-insured retention of $385 million with respect to sales practices claims and $506 million, plus our statutory policy reserves released upon the death of insureds, with respect to life mortality losses. At December 31, 1999, the subject losses under the reinsurance agreements due to sales practices claims and related counsel fees from the time 174 177 Metropolitan Life Insurance Company entered into the reinsurance agreements did not exceed that self-insured retention. The maximum sublimit of $550 million for sales practices claims was within a range of losses that management believed were reasonably possible at December 31, 1998. Each excess of loss reinsurance agreement for sales practices claims and mortality losses contains an experience fund, which provides for payments to us at the commutation date if experience is favorable at such date. We account for the aggregate excess of loss reinsurance agreements as reinsurance; however, if deposit accounting were applied, the effect on our consolidated financial statements in 1998, 1999 and 2000 would not be significant. Under reinsurance accounting, the excess of the liability recorded for sales practices losses recoverable under the agreements of $550 million over the premium paid of $529 million results in a deferred gain of $21 million which is being amortized into income over the settlement period from January 1999 through April 2000. Under deposit accounting, the premium would be recorded as an other asset rather than as an expense, and the reinsurance loss recoverable and the deferred gain would not have been recorded. Because the agreements also contain an experience fund which increases with the passage of time, the increase in the experience fund in 1999 and 2000 under deposit accounting would be recognized as interest income in an amount approximately equal to the deferred gain that will be amortized into income under reinsurance accounting. The excess insurance policies for asbestos-related claims provide for recovery of losses of up to $1,500 million, which is in excess of a $400 million self-insured retention ($878 million of which was recorded as a recoverable at December 31, 1999 and 1998). The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid in any given year that are recoverable under the policies will be reflected as a reduction in our operating cash flows for that year, management believes that the payments will not have a material adverse effect on our liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to us at the commutation date if experience under the policy to such date has been favorable, or pro rata reductions from time to time in the loss reimbursements to us if the cumulative return on the reference fund is less than the return specified in the experience fund. We believe that the excess of loss reinsurance agreements should provide coverage for a portion of the multidistrict sales practices settlement described above, although we have yet to file a claim under those agreements. The increase in liabilities for death benefits and policy adjustments and the cash payments to be made under the settlement should be substantially offset by amounts recoverable under those agreements, as well as amounts provided in our consolidated financial statements, and accordingly we do not believe that they will have a material adverse effect on our business, results of operations, financial position or cash flows in future periods. We believe adequate provision has been made in our consolidated financial statements for all reasonably probable and estimable losses for sales practices and asbestos-related claims. A purported class action suit involving policyholders in 32 states has been filed in a Rhode Island state court against Metropolitan Life Insurance Company's subsidiary, Metropolitan Property and Casualty Insurance Company, with respect to claims by policyholders for the alleged diminished value of automobiles after accident-related repairs. A similar "diminished value" allegation was made recently in a Texas Deceptive Trade Practices Act letter and lawsuit which involve a Metropolitan Property and Casualty Insurance Company policyholder. A purported class action has been filed against Metropolitan Property and Casualty Insurance Company and its subsidiary, Metropolitan Casualty Insurance Company, in Florida by a policyholder alleging breach of contract and unfair trade practices with respect to Metropolitan Casualty Insurance Company allowing the use of parts not made by the original manufacturer to repair damaged automobiles. These suits are in the early stages of litigation and Metropolitan 175 178 Property and Casualty Insurance Company and Metropolitan Casualty Insurance Company intend to vigorously defend themselves against these suits. Similar suits have been filed against several other personal lines property and casualty insurers. The U. S., the Commonwealth of Puerto Rico and various hotels and individuals have sued MetLife Capital Corporation, a former subsidiary of Metropolitan Life Insurance Company, seeking damages for clean up costs, natural resource damages, personal injuries and lost profits and taxes based upon, among other things, a release of oil from a barge which was being towed by the M/V Emily S. In connection with the sale of MetLife Capital, we acquired MetLife Capital's potential liability with respect to the M/V Emily S lawsuit. MetLife Capital had entered into a sale and leaseback financing arrangement with respect to the M/V Emily S. The plaintiffs have taken the position that MetLife Capital, as the owner of record of the M/V Emily S, is responsible for all damages caused by the barge, including the oil spill. The governments of the U. S. and Puerto Rico have claimed damages in excess of $150 million. At a mediation, the action brought by the U. S. and Puerto Rico was conditionally settled, provided that the governments have access to additional sums from a fund contributed to by oil companies to help remediate oil spills. We can provide no assurance that this action will be settled in this manner. Three putative class actions have been filed by Conning shareholders alleging that Metropolitan Life Insurance Company's announced offer to purchase the publicly-held Conning shares is inadequate and constitutes a breach of fiduciary duty. We believe the actions are without merit, and expect that they will not materially affect our offer to purchase the shares. In addition, six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent of Insurance. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. The plaintiffs in three of the New York County cases have moved to consolidate their cases into a single proceeding. Metropolitan Life Insurance Company has entered into a stipulation with those plaintiffs in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. Various litigation, claims and assessments against us, in addition to those discussed above and those otherwise provided for in our consolidated financial statements, have arisen in the course of our business, including, but not limited to, in connection with our activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct 176 179 investigations concerning our compliance with applicable insurance and other laws and regulations. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. While it is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, it is the opinion of our management that their outcomes, after consideration of available insurance and reinsurance and the provisions made in our consolidated financial statements, are not likely to have a material adverse effect on our consolidated financial condition. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our operating results or cash flows in particular quarterly or annual periods. PROPERTIES One Madison Avenue in New York, New York, serves as our headquarters, and it, along with the adjacent MetLife Tower, contains approximately 1.1 million rentable square feet, most of which we occupy. In addition to this property, we own 24 other buildings in the U.S. that we use in the operation of our business. These buildings contain approximately 5.5 million rentable square feet and are in the following states: Florida, Illinois, Massachusetts, Minnesota, Missouri, New York, New Jersey, Ohio, Oklahoma, Pennsylvania, Rhode Island and Texas. We also lease space in approximately 1,000 other locations throughout the U.S., and these leased facilities consist of approximately 7.6 million rentable square feet. Approximately 56% of these leases are occupied as sales offices for Individual Business, and we use the balance for our other business activities. We also own several buildings outside the U.S., comprising more than 48,000 rentable square feet. We lease approximately 367,000 rentable square feet in various locations outside the U.S. We believe that our properties are suitable and adequate for our current and anticipated business operations. TRADEMARKS We have a worldwide trademark portfolio that we consider important in the marketing of our products and services, including, among others, the trademarks "MetLife" and the use of the Peanuts(TM) characters. We have the exclusive right to use the Peanuts(TM) characters in the area of financial services and health care services in the U.S. and some foreign countries under an advertising and premium agreement with United Feature Syndicate. The agreement with United Feature Syndicate expires on December 31, 2002. We believe that our rights in our trademarks are adequately protected. 177 180 MANAGEMENT Set forth below is information regarding the directors and executive officers of MetLife, Inc. and Metropolitan Life Insurance Company.
NAME AGE(1) POSITION - ---- ------ -------- Robert H. Benmosche......... 55 Chairman of the Board, President, Chief Executive Officer and Director Curtis H. Barnette.......... 65 Director Gerald Clark................ 56 Vice-Chairman of the Board, Chief Investment Officer and Director Joan Ganz Cooney............ 70 Director Burton A. Dole, Jr.......... 62 Director James R. Houghton........... 63 Director Harry P. Kamen.............. 66 Director Helene L. Kaplan............ 66 Director Charles M. Leighton......... 64 Director Allen E. Murray............. 70 Director Stewart G. Nagler........... 57 Vice-Chairman of the Board, Chief Financial Officer and Director John J. Phelan, Jr.......... 68 Director Hugh B. Price............... 58 Director Ruth J. Simmons............. 54 Director William C. Steere, Jr....... 63 Director Gary A. Beller.............. 61 Senior Executive Vice-President and General Counsel James M. Benson............. 53 President, Individual Business; Chairman of the Board, Chief Executive Officer and President, New England Life Insurance Company C. Robert Henrikson......... 52 President, Institutional Business Richard A. Liddy............ 64 Senior Executive Vice-President Catherine A. Rein........... 57 Senior Executive Vice-President; President and Chief Executive Officer of Metropolitan Property and Casualty Insurance Company William J. Toppeta.......... 51 President, Client Services and Chief Administrative Officer John H. Tweedie............. 54 Senior Executive Vice-President Lisa M. Weber............... 38 Executive Vice-President Judy E. Weiss............... 47 Executive Vice-President and Chief Actuary
- --------------- (1) At February 29, 2000. Set forth below is biographical information for the directors and executive officers of MetLife, Inc. and Metropolitan Life Insurance Company: Robert H. Benmosche has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1997. Mr. Benmosche has been Chairman of the Board, President and Chief Executive Officer of MetLife, Inc. since September 1999. He has been Chairman of the Board, President and Chief Executive Officer of Metropolitan Life Insurance Company since July 1998, was President and Chief Operating Officer from November 1997 to June 1998, and was Executive Vice-President from September 1995 to October 1997. Previously, he was Executive Vice-President of PaineWebber Group Incorporated from 1989 to 1995. 178 181 Curtis H. Barnette has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1994. Mr. Barnette has been Chairman of the Board and Chief Executive Officer of Bethlehem Steel Corporation since November 1992. He is a director of Owens Corning Incorporated. Gerald Clark has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1997. Mr. Clark has been Vice-Chairman of the Board and Chief Investment Officer of MetLife, Inc. since September 1999. He has been Vice-Chairman of the Board and Chief Investment Officer of Metropolitan Life Insurance Company since July 1998, was Senior Executive Vice-President and Chief Investment Officer from December 1995 to July 1998, and was Executive Vice-President and Chief Investment Officer from September 1992 to December 1995. Mr. Clark is a director of Credit Suisse Group. Joan Ganz Cooney has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1980. Ms. Cooney has been Chairman of the Executive Committee of Children's Television Workshop since 1990. Ms. Cooney is a director of Johnson & Johnson Inc. Burton A. Dole, Jr. has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1996. Mr. Dole was Chairman of the Board of Nellcor Puritan Bennett, Incorporated from 1995 until his retirement in 1997. He had been the Chairman of the Board, President and Chief Executive Officer of Puritan Bennett, Incorporated from 1986 to 1995 and the President and Chief Executive Officer of Puritan Bennett, Incorporated from 1980 to 1986. James R. Houghton has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1975. Mr. Houghton has been Chairman of the Board Emeritus of Corning Incorporated since 1996. He was the Chairman of the Board of Corning Incorporated from 1983 until his retirement in 1996. Mr. Houghton is a director of Corning Incorporated, Exxon Mobil Corporation and J.P. Morgan & Co. Incorporated. Harry P. Kamen has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1992. He was the Chairman of the Board and Chief Executive Officer of Metropolitan Life Insurance Company from April 1993 until his retirement in July 1998 and, in addition, was its President from December 1995 to November 1997. Mr. Kamen is a director of Banco Santander Central Hispano SA (Spain), Bethlehem Steel Corporation, the National Association of Securities Dealers, Inc., Nvest Corporation, a subsidiary of Metropolitan Life Insurance Company, and Pfizer, Inc. Helene L. Kaplan has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1987. Ms. Kaplan is of counsel to the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Ms. Kaplan is a director of Bell Atlantic Corporation, The Chase Manhattan Corporation, The May Department Stores Company and Exxon Mobil Corporation. Charles M. Leighton has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1996. Mr. Leighton was the Chairman of the Board and Chief Executive Officer of the CML Group, Inc. from 1969 until his retirement in March 1998. CML Group, Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in December 1998. Mr. Leighton is a director of Nvest Corporation, a subsidiary of Metropolitan Life Insurance Company. Allen E. Murray has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1983. Mr. Murray was Chairman of the Board, President and Chief Executive Officer of Mobil Corporation from February 1986 until March 1993, and was Chairman of the Board and Chief Executive Officer from March 1993 until his retirement 179 182 in March 1994. Mr. Murray is a director of Morgan Stanley Dean Witter & Co. and Minnesota Mining & Manufacturing Company. Stewart G. Nagler has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1997. Mr. Nagler has been Vice-Chairman of the Board and Chief Financial Officer of MetLife, Inc. since September 1999. He has been Vice-Chairman of the Board and Chief Financial Officer of Metropolitan Life Insurance Company since July 1998, and was its Senior Executive Vice-President and Chief Financial Officer from April 1993 to July 1998. John J. Phelan, Jr. has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1985. Mr. Phelan has been a senior advisor to the Boston Consulting Group since 1992. Prior to that time, Mr. Phelan was Chairman and Chief Executive Officer of the New York Stock Exchange. Mr. Phelan is a director of Eastman Kodak Company and Merrill Lynch & Co., Inc. Hugh B. Price has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1994. Mr. Price has been President and Chief Executive Officer of the National Urban League, Inc. since 1994. Mr. Price is a director of Sears, Roebuck and Co. and Bell Atlantic Corporation. Ruth J. Simmons has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1995. Dr. Simmons has been President of Smith College since 1995. Prior to that time, she was Vice-Provost of Princeton University from 1992 to 1995. Dr. Simmons is a director of Goldman, Sachs & Co., Pfizer Inc. and Texas Instruments, Inc. William C. Steere, Jr. has been a director of MetLife, Inc. since August 1999 and a director of Metropolitan Life Insurance Company since 1997. Mr. Steere has been Chairman of the Board and Chief Executive Officer of Pfizer Inc. since 1992. Mr. Steere is a director of Dow Jones & Company, Inc., Minerals Technologies, Inc. and Texaco Inc. Gary A. Beller has been Senior Executive Vice-President and General Counsel of MetLife, Inc. since September 1999 and of Metropolitan Life Insurance Company since February 1998. He was Executive Vice-President and General Counsel of Metropolitan Life Insurance Company from August 1996 to January 1998. Mr. Beller served as Executive Vice-President and Chief Legal Officer from November 1994 to July 1996. James M. Benson has been President of Individual Business of MetLife, Inc. since September 1999 and of Individual Business of Metropolitan Life Insurance Company since May 1999. He has been Chairman of the Board of New England Life Insurance Company since May 1998, Chief Executive Officer since January 1998, and President since June 1997. He was Chief Operating Officer of New England Life Insurance Company from June 1997 to December 1997. Mr. Benson was the President and Chief Operating Officer of The Equitable Companies Incorporated from February 1996 to May 1997, and was President of The Equitable Life Assurance Society of the United States from February 1994 to May 1997, Chief Executive Officer from February 1996 to May 1997, and Chief Operating Officer from February 1994 to February 1996. C. Robert Henrikson has been President of Institutional Business of MetLife, Inc. since September 1999 and of Institutional Business of Metropolitan Life Insurance Company since May 1999. He was Senior Executive Vice-President, Institutional Business of Metropolitan Life Insurance Company, from December 1997 to May 1999, Executive Vice-President, Institutional Business, from January 1996 to December 1997, Executive Vice-President, Pensions, from January 1995 to January 1996, and Senior Vice-President, Pensions, from January 1991 to January 1995. 180 183 Richard A. Liddy has been Senior Executive Vice-President of MetLife, Inc. and of Metropolitan Life Insurance Company since February 2000. He has been Chairman, President and Chief Executive Officer of GenAmerica Corporation since January 1997 and has held the same offices at General American Life Insurance Company since 1995. Mr. Liddy is a director of Reinsurance Group of America, Inc., Conning Corporation, Brown Shoe Company, Ralston Purina Company, Energizer Holdings, Inc. and Ameren Corporation. Catherine A. Rein has been Senior Executive Vice-President of MetLife, Inc. since September 1999 and President and Chief Executive Officer of Metropolitan Property and Casualty Insurance Company since March 1999. She has been Senior Executive Vice-President of Metropolitan Life Insurance Company since February 1998 and was Executive Vice-President from October 1989 to February 1998. Ms. Rein is a director of Corning Incorporated, The Bank of New York Company, Inc. and GPU, Inc. William J. Toppeta has been President of Client Services and Chief Administrative Officer of MetLife, Inc. since September 1999 and President of Client Services and Chief Administrative Officer of Metropolitan Life Insurance Company since May 1999. He was Senior Executive Vice-President, Head of Client Services, of Metropolitan Life Insurance Company from March 1999 to May 1999, Senior Executive Vice-President, Individual Business, from February 1998 to March 1999, Executive Vice-President, Individual Business, from July 1996 to February 1998, Senior Vice-President from October 1995 to July 1996 and President and Chief Executive Officer, Canadian Operations, from January 1994 to October 1995. John H. Tweedie has been Senior Executive Vice-President of MetLife, Inc. since September 1999 and Senior Executive Vice-President, Finance and International, of Metropolitan Life Insurance Company since March 1999. He was Senior Executive Vice-President of Metropolitan Life Insurance Company from May 1998 to March 1999 and Executive Vice-President from January 1994 to April 1998. Lisa M. Weber has been Executive Vice-President of MetLife, Inc. and Metropolitan Life Insurance Company since December 1999 and head of Human Resources since March 1998. She was Senior Vice-President of MetLife, Inc. from September 1999 to November 1999 and Senior Vice-President of Metropolitan Life Insurance Company from March 1998 to November 1999. Previously, she was Senior Vice-President of Human Resources of PaineWebber Group Incorporated, where she was employed for ten years. Judy E. Weiss has been Executive Vice-President and Chief Actuary of MetLife, Inc. since September 1999 and of Metropolitan Life Insurance Company since February 1998. She was Senior Vice-President and Chief Actuary of Metropolitan Life Insurance Company from June 1996 to February 1998 and Senior Vice-President from May 1991 to June 1996. INFORMATION ABOUT THE BOARD OF DIRECTORS OF METLIFE, INC. RESPONSIBILITIES AND COMPOSITION OF THE BOARD The business of MetLife, Inc. is managed under the direction of its board of directors. The board currently consists of 15 directors, a majority of whom are Outside Directors. An "Outside Director" of MetLife, Inc. is a director who is not an officer or employee of MetLife, Inc. or of any entity controlling, controlled by or under common control with MetLife, Inc., and is not the beneficial owner of a controlling interest in the voting stock of MetLife, Inc. or of any such entity. MetLife, Inc.'s certificate of incorporation provides that the directors will be divided into three classes, as nearly equal in number as possible, with the term of office of each class to be three years. The classes serve staggered terms, such that the term of office of one class of directors expires each year. 181 184 BOARD COMMITTEES There are five standing committees of MetLife, Inc.'s board of directors that perform essential functions of the Board. The responsibilities of the standing committees are summarized below. Only Outside Directors may be members of the Audit, Compensation and Nominating and Corporate Governance committees. From time to time, the board, in its discretion, may form other committees. Not less than one-third of the members of any board committee, including the standing committees, may consist of Outside Directors. THE EXECUTIVE COMMITTEE The Executive Committee, except as otherwise provided in MetLife, Inc.'s certificate of incorporation, in the intervals between meetings of the board of directors, will have and may exercise the powers and authority of the board of directors in the management of the property, affairs and business of MetLife, Inc., including the power to declare dividends. The Executive Committee currently consists of the following seven members: Robert H. Benmosche, Chairman; James R. Houghton; Harry P. Kamen; Helene L. Kaplan; Charles M. Leighton; Allen E. Murray; and John J. Phelan, Jr. THE AUDIT COMMITTEE The Audit Committee, except as otherwise provided in any resolution of the board of directors, will have and may exercise the authority of the board of directors: - to recommend to the board of directors the selection of MetLife, Inc.'s independent certified public accountants; - to review the scope, plans and results relating to the internal and external audits of MetLife, Inc. and its financial statements; - to review the financial condition of MetLife, Inc.; - to monitor and evaluate the integrity of MetLife, Inc.'s financial reporting processes and procedures; - to assess the significant business and financial risks and exposures of MetLife, Inc. and to evaluate the adequacy of its internal controls in connection with such risks and exposures, including, but not limited to, accounting and audit controls over cash, securities, receipts, disbursements and other financial transactions; and - to review MetLife, Inc.'s policies on ethical business conduct and monitor its compliance with those policies. The Audit Committee currently consists of the following six members: James R. Houghton, Chairman; Curtis H. Barnette; Burton A. Dole, Jr.; John J. Phelan, Jr.; Hugh B. Price; and William C. Steere, Jr. THE COMPENSATION COMMITTEE The Compensation Committee, except as otherwise provided in any resolution of the board of directors, will have and may exercise all the authority of the board of directors with respect to compensation, benefits and personnel administration of MetLife, Inc.'s employees, and: - will nominate persons for election or appointment by the board of directors of all principal officers (as determined by the Committee) and such other officers as the Committee may determine to elect or appoint as officers; - will evaluate the performance and recommend to the board of directors the compensation of such principal officers and such other officers as the Committee may determine; 182 185 - may elect or appoint officers as provided in MetLife, Inc.'s by-laws; - may recommend to the board of directors any plan to issue options for the purchase of shares of the stock of MetLife, Inc. to its officers or employees and those of its subsidiaries; and - will administer the MetLife, Inc. 2000 Stock Incentive Plan. The Compensation Committee currently consists of the following seven members: Allen E. Murray, Chairman; Curtis H. Barnette; Joan Ganz Cooney; James R. Houghton; Charles M. Leighton; Ruth J. Simmons; and William C. Steere, Jr. THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE The Nominating and Corporate Governance Committee, except as otherwise provided in any resolution of the board of directors: - will make recommendations to the board of directors with respect to electing directors and filling vacancies on the Board; - will review and make recommendations to the board of directors with respect to the organization, structure, size, composition and operation of the board and its committees, including, but not limited to, the compensation for non-employee directors; - may recommend to the board of directors any plan to issue options for the purchase of shares of the stock of MetLife, Inc. to its non-employee directors; - will administer the MetLife, Inc. 2000 Directors Stock Plan; and - will review and make recommendations with respect to other corporate governance matters and matters that relate to the status of MetLife, Inc. as a publicly-traded company. The Nominating and Corporate Governance Committee currently consists of the following seven members: Helene L. Kaplan, Chairman; Curtis H. Barnette; James R. Houghton; Harry P. Kamen; Allen E. Murray; John J. Phelan, Jr.; and William C. Steere, Jr. THE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE The Corporate Social Responsibility Committee, except as otherwise provided in any resolution of the board of directors, will exercise general supervision of MetLife, Inc.'s charitable contributions, public benefit programs and other corporate responsibility matters. The Corporate Social Responsibility Committee currently consists of the following six members: Joan Ganz Cooney, Chairman; Gerald Clark; Burton A. Dole, Jr.; Helene L. Kaplan; Stewart G. Nagler; and Hugh B. Price. COMPENSATION OF DIRECTORS In 1999, Outside Directors received an annual retainer fee of $50,000. At January 1, 2000, the annual retainer increased to $60,000. Each chairman of a board committee who is an Outside Director receives an additional $5,000 annual retainer. Outside Directors are paid attendance fees of $2,000 on days that they attend one or two board or committee meetings held on the same day. If they attend more than two meetings on a single day, they are paid an additional $1,000 for each other meeting they attend on that day. Directors may defer the receipt of the payment of all or a portion of their retainer and attendance fees. MetLife provides $200,000 of life insurance to each Outside Director. MetLife will recover the premiums for each policy upon the death of the Outside Director. The cost to MetLife of providing this life insurance is nominal. MetLife also provides each of the Outside Directors with business travel accident coverage while traveling on MetLife business. The Outside Directors are eligible to participate in MetLife's Long-Term Care Insurance Program on a fully contributory basis. 183 186 Outside Directors elected prior to October 1, 1999 participate in a charitable gift program under which each Outside Director is able to recommend one or more charitable or educational institutions to receive, in the aggregate, a $1 million contribution from MetLife in the name of the Outside Director. In connection with this program, MetLife purchased and pays the premiums on life insurance policies covering such Outside Directors. The death benefits under the policies will be paid to MetLife. The cost to MetLife of providing this program is not significant. Outside Directors elected on or after October 1, 1999 are not eligible to participate in this program. Under the MetLife, Inc. 2000 Directors Stock Plan, the Nominating and Corporate Governance Committee may determine that up to one-half of an Outside Director's retainer and attendance fees be paid in common stock. The Directors Stock Plan also provides that the Nominating and Corporate Governance Committee may, with the board's approval, grant non-qualified stock options to the Outside Directors to purchase shares of MetLife, Inc. common stock at a price no less than the fair market value of a share of common stock on the grant date of the stock option. Any options granted before the fifth anniversary of the effective date of the plan of reorganization will replace all or any portion of the Outside Directors' fees otherwise payable in cash. No stock options may be granted and no stock may be issued under the Directors Stock Plan in lieu of Outside Directors' fees before the first anniversary of the effective date of the plan of reorganization. Up to a maximum of 500,000 shares may be issued under the Directors Stock Plan in lieu of fees and no more than 0.05% of the shares outstanding immediately after the effective date of the plan of reorganization may be issued with respect to stock options under the Directors Stock Plan. Common stock paid in lieu of fees under the Directors Stock Plan may not be sold prior to the second anniversary of the effective date of the plan of reorganization. Stock options granted under the Directors Stock Plan will generally be exercisable on the date of grant, but in no event exercised before the second anniversary of the effective date of the plan of reorganization. Outside Directors may elect to receive all or a portion of their retainer and attendance fees that would otherwise be paid in cash with respect to services rendered after the second anniversary of the effective date of the plan of reorganization in the form of common stock. In addition, an Outside Director may elect to defer receipt of any shares issuable under the terms of the Directors Stock Plan in lieu of their retainer and attendance fees and any dividends payable on the shares, until after he or she is no longer a director of MetLife, Inc. The board of directors may terminate, modify or amend the Directors Stock Plan at any time, subject, in certain instances, to shareholder approval, and prior to the fifth anniversary of the effective date of the plan of reorganization, the approval of the New York Superintendent of Insurance. Unless terminated earlier by action of the board of directors, the 2000 Directors Stock Plan will continue in effect until no more shares are available for issuance pursuant to it. Metropolitan Life Insurance Company entered into an agreement with Harry P. Kamen pursuant to which he served as a consultant from July 1, 1998 to June 30, 1999 for a fee of $500,000. Upon the expiration of that agreement by its terms, a new agreement between Metropolitan Life Insurance Company and Mr. Kamen became effective pursuant to which Mr. Kamen serves as a consultant for the one-year period of July 1, 1999 to June 30, 2000. Mr. Kamen will be paid for services rendered under the agreement up to an aggregate amount of $50,000. Pursuant to the agreement, Metropolitan Life Insurance Company provides Mr. Kamen, at no charge to him, an office and secretarial support, as well as a car for use in connection with the services rendered under the agreement. 184 187 MANAGEMENT COMPENSATION EXECUTIVE COMPENSATION Since the formation of MetLife, Inc., in August 1999, none of its officers or other personnel has received any compensation from MetLife, Inc. All compensation has been paid by Metropolitan Life Insurance Company or New England Financial. It is expected that after the demutualization, all employees of MetLife, Inc., including the executive officers, will continue to be paid only by Metropolitan Life Insurance Company or its subsidiary, as applicable, with an allocation of their compensation to be made for services rendered to MetLife, Inc. MetLife, Inc. will pay the amount of such allocation to Metropolitan Life Insurance Company or its subsidiary, as applicable, pursuant to a cost allocation agreement. The information set forth below describes the components of the total compensation of the Chief Executive Officer and the four other most highly compensated executive officers of Metropolitan Life Insurance Company and MetLife, Inc. for services rendered during the fiscal year ended December 31, 1999 ("Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION --------------------------------------------- ------------ OTHER ANNUAL LTIP(2) ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION PAYOUTS COMPENSATION - --------------------------- ---- ------ -------- ------------ ------- ------------ Robert H. Benmosche...... 1999 $1,000,000 $2,714,200 -- $3,422,200 $225,143(3) Chairman of the Board, President and Chief Executive Officer Stewart G. Nagler........ 1999 630,000 1,100,000 -- 2,387,000 133,741(3) Vice-Chairman of the Board and Chief Financial Officer Gerald Clark............. 1999 630,000 900,000 -- 2,387,000 138,986(3) Vice-Chairman of the Board and Chief Investment Officer James M. Benson.......... 1999 600,000 900,000 737,549(5) 1,800,000 38,130(4) President, Individual Business; Chairman of the Board, Chief Executive Officer and President, New England Life Insurance Company C. Robert Henrikson...... 1999 500,000 875,000 -- 1,743,000 92,543(3) President, Institutional Business
- --------------- (1) Actual annual incentive awards based on 1999 performance were paid in the first quarter of 2000. For all Named Executive Officers, other than Mr. Benson, such award was paid pursuant to the MetLife Annual Variable Incentive Plan. Mr. Benson's award was paid pursuant to The New England Short-Term Incentive Plan. (2) Long-term compensation plan payouts to all Named Executive Officers for services performed during the three-year performance period 1997-1999 were made in the first quarter of 2000. For all Named Executive Officers, other than Mr. Benson, such payouts were made pursuant to the MetLife Long-Term Performance Compensation Plan. Mr. Benson's payout was made pursuant to the New England Financial Long-Term Incentive Plan. 185 188 (3) Includes: MetLife contributions to the Savings and Investment Plan for Employees of MetLife and Participating Affiliates of $6,400 for each of the above named individuals; MetLife contributions to, or with respect to, the Auxiliary Savings and Investment Plan as follows: Mr. Benmosche: $87,077; Mr. Nagler: $54,240; Mr. Clark: $58,240; and Mr. Henrikson: $40,640; payments representing the dollar value of the benefit of the portion of split dollar life insurance premiums paid by MetLife as follows: Mr. Benmosche: $131,666; Mr. Nagler: $73,101; Mr. Clark: $74,346; and Mr. Henrikson: $45,503. (4) Includes: company contributions to The New England 401(k) Plan and Trust of $8,200; $29,660 to The New England Life Insurance Company Select Employees Supplemental 401(k) Plan and $270 representing the premium paid by New England Life Insurance Company with respect to term life insurance covering Mr. Benson. (5) Amount paid on Mr. Benson's behalf pursuant to The New England Financial Relocation Policy. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK OR OTHER PRICE-BASED PLANS PERIOD ---------------------------------------- UNTIL ESTIMATED MATURATION THRESHOLD TARGET MAXIMUM NAME OR PAYOUT PAYMENT PAYMENT(A) PAYMENT - ---- ----------- --------- ---------- ------- Robert H. Benmosche..................... 1999-2001 $0 $2,500,000 $5,000,000 Stewart G. Nagler....................... 1999-2001 0 1,260,000 2,520,000 Gerald Clark............................ 1999-2001 0 1,260,000 2,520,000 James M. Benson......................... 1999-2001 0 1,200,000 2,400,000 C. Robert Henrikson..................... 1999-2001 0 975,000 1,950,000
- --------------- (a) Estimated target payments under the MetLife Long-Term Performance Compensation Plan for all Named Executive Officers other than Mr. Benson, whose payment is made pursuant to the New England Financial Long-Term Incentive Plan. Actual target payments will be based on the average of the year-end annual base salaries over the three-year performance period, except in the case of Mr. Benson, whose target will remain at $1,200,000, regardless of changes in his annual base salary. 186 189 METLIFE RETIREMENT PLAN INFORMATION The following table shows the estimated annual retirement benefits payable at normal retirement age (generally 65) to a person retiring with the indicated final average pay and years of credited service on a 30% joint and survivor basis, if married, and on a straight life annuity basis with a 5-year guarantee, if single, under the Metropolitan Life Retirement Plan for United States Employees ("Retirement Plan"), as supplemented by the Metropolitan Life Supplemental Retirement Benefit Plan ("Supplemental Retirement Plan"), each as described below. Except for Mr. Benson, each of the Named Executive Officers participates in the Retirement Plan and the Supplemental Retirement Plan. Mr. Benson participates in separate New England Financial plans. ESTIMATED ANNUAL BENEFITS AT RETIREMENT WITH INDICATED YEARS OF CREDITED SERVICE
FINAL AVERAGE PAY 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS - ----------- ------- -------- -------- -------- -------- -------- -------- -------- $ 500,000 $ 41,400 $ 82,900 $124,300 $165,800 $ 207,200 $ 248,700 $ 290,100 $ 302,600 750,000 62,700 125,400 188,100 250,800 313,500 376,200 438,900 457,600 1,000,000 83,900 167,900 251,800 335,800 419,700 503,700 587,600 612,600 1,250,000 105,200 210,400 315,600 420,800 526,000 631,200 736,400 767,600 1,500,000 126,400 252,900 379,300 505,800 632,200 758,700 885,100 922,600 1,750,000 147,700 295,400 443,100 590,800 738,500 886,200 1,033,900 1,077,600 2,000,000 168,900 337,900 506,800 675,800 844,700 1,013,700 1,182,600 1,232,600 2,250,000 190,200 380,400 570,600 760,800 951,000 1,141,200 1,331,400 1,387,600 2,500,000 211,400 422,900 634,300 845,800 1,057,200 1,268,700 1,480,100 1,542,600
The annual retirement benefit under the Retirement Plan and the Supplemental Retirement Plan is generally equal to the sum of (a)(i) a percentage of an executive's "final average compensation" up to his or her "covered compensation" (i.e., the average of the social security taxable wage base for the 35 years up to the date the executive attains social security retirement age), plus (ii) a percentage of the executive's "final average compensation" in excess of his or her "covered compensation", and the sum thereof times (iii) years of "credited service" not exceeding 35 years, and (b) a percentage of "final average compensation" multiplied by years of "credited service" in excess of 35 years. "Final average compensation" is defined as the highest average "annual compensation" of an executive for any 60 consecutive months in the 120 months of service prior to the executive's retirement. "Annual Compensation" used to determine the retirement benefit under the Retirement Plan and the Supplemental Retirement Plan consists of "annual basic compensation" which includes annual base salary and "annual variable incentive compensation" which includes payments under the annual variable incentive plan. Such "compensation" is generally the same as the compensation reflected in the "salary" and "bonus" columns of the Summary Compensation Table. The Supplemental Retirement Plan is designed to provide benefits which eligible employees would have received under the Retirement Plan but for limits applicable under the Retirement Plan. Benefits payable under the Retirement Plan and the Supplemental Retirement Plan are not subject to reduction for social security benefits or other offset amounts. At December 31, 1999 (assuming retirement as of such date), the estimated "final average compensation" under the Retirement Plan and the Supplemental Retirement Plan is $1,581,710 for Mr. Benmosche, $1,281,350 for Mr. Nagler, $1,258,000 for Mr. Clark and $904,980 for Mr. Henrikson. The estimated years of credited service under the Retirement Plan and the Supplemental Retirement Plan as of such date is four years for Mr. Benmosche, 37 years for Mr. Nagler, 31 years for Mr. Clark and 27 years for Mr. Henrikson. 187 190 NEW ENGLAND RETIREMENT PLAN INFORMATION The following table shows the estimated annual retirement benefits payable at normal retirement age (generally 65) to a person retiring with the indicated final average pay and years of credited service on a straight life annuity basis under The New England Retirement Plan and Trust, as supplemented by The New England Life Insurance Company Supplemental Retirement Plan and The New England Life Insurance Company Select Employees Supplemental Retirement Plan, each as described below. ESTIMATED ANNUAL BENEFITS AT RETIREMENT WITH INDICATED YEARS OF CREDITED SERVICE
FINAL AVERAGE PAY 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS ----------- ------- -------- -------- -------- -------- -------- -------- -------- $ 500,000 $ 48,300 $ 96,600 $144,800 $193,100 $ 241,400 $ 253,900 $ 253,900 $ 253,900 750,000 73,300 146,600 219,800 293,100 366,400 385,200 385,200 385,200 1,000,000 98,300 196,600 294,800 393,100 491,400 516,400 516,400 516,400 1,250,000 123,300 246,600 369,800 493,100 616,400 647,700 647,700 647,700 1,500,000 148,300 296,600 444,800 593,100 741,400 778,900 778,900 778,900 1,750,000 173,300 346,600 519,800 693,100 866,400 910,200 910,200 910,200 2,000,000 198,300 396,600 594,800 793,100 991,400 1,041,400 1,041,400 1,041,400 2,250,000 223,300 446,600 669,800 893,100 1,116,400 1,172,700 1,172,700 1,172,700 2,500,000 248,300 496,600 744,800 993,100 1,241,400 1,303,900 1,303,900 1,303,900
The annual benefit under The New England Retirement Plan and Trust, The New England Life Insurance Company Supplemental Retirement Plan and The New England Life Insurance Company Select Employees Supplemental Retirement Plan is generally equal to the sum of (a) the product of a percentage of an executive's "final average compensation" times years of service up to 25 and (b) the product of a percentage of an executive's "final average compensation" for years 26 to 30 times such years of service, less (c) the product of a percentage of an executive's age 65 social security benefit times years of service up to 25 years of service. "Final average compensation" is defined as the highest five years of eligible compensation of an executive during the last ten years of service prior to the executive's retirement. "Annual Compensation" used to determine the retirement benefit under The New England Retirement Plan and Trust, The New England Life Insurance Company Supplemental Retirement Plan and The New England Life Insurance Company Select Employees Supplemental Retirement Plan consists of salary paid to an executive. Such Annual Compensation is generally the same as the compensation reflected in the "salary" and "bonus" columns of the Summary Compensation Table. The New England Life Insurance Company Supplemental Retirement Plan and The New England Life Insurance Company Select Employees Supplemental Retirement Plan are designed to provide benefits which eligible employees would have received under The New England Retirement Plan and Trust but for limits applicable under The New England Retirement Plan and Trust. The estimated "final average pay" for Mr. Benson under The New England Retirement Plan and Trust, The New England Life Insurance Company Supplemental Retirement Plan and The New England Life Insurance Company Select Employees Supplemental Retirement Plan at December 31, 1999 (assuming retirement at such date) is $1,419,800 and the estimated years of credited service under such Plans at such date is 2 years. In addition, Mr. Benson's employment agreement provides for an enhanced retirement benefit of $400,000 vesting in equal annual installments over ten years and payable at age 62 as a 20-year continuous and certain annuity. At December 31, 1999, Mr. Benson was vested as to 20% of this benefit, or $80,000 per annum. In the event of a termination by New England Life Insurance Company "without cause" or by Mr. Benson for "good reason" (as each such term is defined in the agreement), the enhanced retirement benefit will retroactively vest at double the above rate. 188 191 LONG-TERM INCENTIVE COMPENSATION PLANS METLIFE LONG-TERM PERFORMANCE COMPENSATION PLAN. All officers at the level of senior vice-president and above and select vice-presidents are eligible to participate in the MetLife Long-Term Performance Compensation Plan ("Long-Term Plan"). The Long-Term Plan is a three-year plan with a new plan period beginning each January 1. Under the Long-Term Plan, performance objectives for the enterprise are established at the beginning of each three-year performance period and may include specific objectives for earnings and return on equity, as well as management performance against select strategic objectives. At the end of the performance period, the performance of MetLife is judged against the set objectives, with some results compared relatively to the results of other companies in the insurance and financial service industries. Actual performance, expressed as a percentage, may range from 0% to 200%. This percentage is multiplied by the participants' total incentive opportunities to establish the aggregate incentive fund for distribution. Individual awards are recommended by management and are reflective of the participant's individual performance and relative contribution to the long-range results of MetLife. Senior management approves all awards before they are submitted to the Compensation Committee of the board, which is comprised of Outside Directors, and to the full board for approval. Any award under the Long-Term Plan in each performance period will become payable only upon approval of the board in its discretion and will be paid in the year immediately following the end of each performance period. NEW ENGLAND FINANCIAL LONG-TERM INCENTIVE PLAN. From 1997 through 1999, New England Financial maintained a substantially similar long-term incentive plan for the benefit of certain of its officers, under which any amounts payable are determined based on the performance of New England Financial and the individual's contribution to its success. The personnel committee awards certain of its officers "growth units" that measure value creation over a three-year performance cycle based on growth in equity computed pursuant to generally accepted accounting principles and the present value of future profits on in-force business. At the end of the three-year performance cycle, the growth in value of the "growth units" is determined by New England Financial's board and paid in cash to each participant still employed with New England Financial. In 2000, New England Financial adopted a long-term incentive plan identical to the MetLife Long-Term Plan. Each of the Named Executive Officers participates in the MetLife Long-Term Plan, except Mr. Benson who participates in The New England Financial Long-Term Incentive Plan. See "-- Management Compensation -- Long-Term Incentive Plan Awards in Last Fiscal Year". SHORT-TERM INCENTIVE PLANS METLIFE ANNUAL VARIABLE INCENTIVE PLAN. Persons exempt from the Fair Labor Standards Act who are not participating in an alternative annual incentive plan are eligible to participate in the Annual Variable Incentive Plan ("Annual Incentive Plan"). Under the Annual Incentive Plan, a formula including performance objectives for operating earnings and return on equity is established at the beginning of each calendar year to determine the maximum aggregate incentive pool for distribution under the Annual Incentive Plan. The actual incentive pool will be established at the end of each year based on the actual operating earnings relative to return on equity target by using the formula. Eighty percent of this pool is distributed based on corporate results, while 20% is distributed based on business unit performance. In all incentive award determinations, individual performance is a significant factor in the manager's determination of the amount of an individual's actual final incentive award. Final approval of individual incentive awards rests with senior management. Awards for certain senior officers (executive vice-president and above) are submitted to the Compensation Committee of the board, comprised of Outside Directors, and to the full board for approval and endorsement. Awards are payable in 189 192 cash as soon as practicable after individual award amounts have been approved. There is no maximum on individual awards, but there is no guarantee an individual will receive an award. The total of all individual awards may not exceed the maximum aggregate incentive pool. Each of the Named Executive Officers participates in the MetLife Annual Incentive Plan, except Mr. Benson, who participates in the New England Short-Term Incentive Plan. THE NEW ENGLAND SHORT-TERM INCENTIVE PLAN. In 1999, New England Financial maintained a substantially similar short-term executive incentive plan ("The New England Short-Term Incentive Plan") for the benefit of certain of its officers, under which any amounts payable are determined based on the performance of New England Financial and the individual's contribution to its success. Under The New England Short-Term Incentive Plan, in determining the amounts available for incentive payments, key considerations include financial results and growth compared to target and business plan, together with non-financial objectives and judgment of the Personnel Committee, and results are compared with the results of other insurance and financial services companies. Specific percentages are established under The New England Short-Term Incentive Plan with respect to the portion of the award that is based on business unit performance, and such performance is an important consideration in determining an individual's award. The maximum award payable to any given individual under The New England Short-Term Incentive Plan is capped at 200% of the target award amount. In 2000, New England Financial adopted a short-term incentive plan identical to the MetLife Annual Incentive Plan. METLIFE, INC. 2000 STOCK INCENTIVE PLAN The Compensation Committee of the board of directors of MetLife, Inc. will administer the MetLife, Inc. 2000 Stock Incentive Plan ("Stock Incentive Plan"). Under the Stock Incentive Plan, the Compensation Committee may from time to time grant stock options for the purchase of common stock to officers (including officers who are also directors), employees and insurance agents of MetLife, Inc. and its subsidiaries, provided that the Compensation Committee may not grant any stock or stock options prior to the first anniversary of the effective date of the plan of reorganization. The Compensation Committee may, in its discretion, delegate its authority and power under the Stock Incentive Plan to MetLife, Inc.'s Chief Executive Officer with respect to individuals who are below the rank of Senior Vice-President. Such delegation of authority is limited to 1.5% of the total number of shares authorized for issuance under the Stock Incentive Plan, and no individual may receive more than 5% of the shares of the Chief Executive Officer's total authorization in any twelve-month period. The maximum number of shares issuable under the Stock Incentive Plan is 5% of the shares outstanding immediately after the effective date of the plan of reorganization, reduced by the shares issuable pursuant to options granted under the MetLife, Inc. 2000 Directors Stock Plan. The maximum number of shares which may be subject to awards under the Stock Incentive Plan may not exceed 60% of the shares available under the Stock Incentive Plan prior to the second anniversary of the effective date of the plan of reorganization or 80% of the shares available under the Stock Incentive Plan prior to the third anniversary of the effective date of the plan of reorganization. No participant in the Stock Incentive Plan may be granted, during any five-year period, options in respect of more than 5% of the shares available for issuance under the Stock Incentive Plan. The shares to be issued under the Stock Incentive Plan may be authorized but unissued shares or treasury shares. Upon the occurrence of certain events that affect the capitalization of MetLife, Inc., appropriate adjustments will be made in the number of shares that may be issued under the Stock Incentive Plan in the future and in the number of shares and the exercise price under outstanding grants made before the event. If any grant is for any reason canceled, terminated or otherwise settled without the issuance of some or all of the shares of common stock subject to the grant, such shares will be available for future grants. The board of directors of MetLife, Inc. may terminate, modify or amend (subject, in some cases, to the approval of its stockholders and, prior to the fifth anniversary of the effective date 190 193 of the plan of reorganization, to the approval of the New York Superintendent of Insurance) the Stock Incentive Plan at any time, but such termination, modification or amendment may not adversely affect any stock option then outstanding under the Stock Incentive Plan without the consent of the recipient thereof. The Stock Incentive Plan will continue in effect until it is terminated by the board of directors or until no more shares are available for issuance, but stock options granted prior to such date will continue in effect until they expire in accordance with their terms. The Compensation Committee may grant nonqualified stock options ("Nonqualified Stock Options") and stock options qualifying as incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended. The exercise price per share of common stock subject to either a Nonqualified Stock Option or an ISO will be not less than the fair market value (as defined in the Stock Incentive Plan) of such share on the date of grant of such option. To exercise an option, a holder may pay the exercise price as permitted by the Compensation Committee (1) in cash, (2) by delivering on the date of exercise other shares of common stock owned by the holder, (3) through an arrangement with a broker approved by MetLife, Inc. for the payment of the exercise price with the proceeds of the sale of shares of common stock owned by the holder, or (4) by a combination of the foregoing. Options generally may not be transferred by the grantee, except in the event of death. The Compensation Committee may, in its discretion, permit the transfer of Nonqualified Stock Options by gift or domestic relations order to the participant's immediate family members. Unless otherwise specified, each option will become exercisable on a cumulative basis in three approximately equal installments on each of the first three anniversaries of the date of grant thereof, provided, that in no event will any option be or become exercisable prior to the second anniversary of the effective date of the plan of reorganization. In addition, the Compensation Committee may establish longer periods of service or performance-based criteria at the time of the grant. The term of each option will be fixed by the Compensation Committee but may not be more than ten years from its date of grant. Any option granted to an insurance agent will comply with the provisions of Section 4228 of the New York Insurance Law and any regulations thereunder. In the event of the termination of service of a grantee by reason of death, any options previously granted to such grantee will become immediately exercisable in full and may be exercised by the grantee's designated beneficiary at any time prior to the expiration of the term of the options or within three years following the grantee's death, whichever occurs first (or such shorter time as the Compensation Committee may determine at the time of grant). In the event of the termination of service of a grantee by reason of disability or approved retirement (as defined in the Stock Incentive Plan), any option previously granted to such grantee will continue to vest as if the grantee's service had not terminated. A grantee may exercise any vested option in full for a period of three years following termination of employment (or such shorter period as the Compensation Committee shall determine at the time of grant) or, if earlier, the expiration of the term of the option. In the event of the termination of service of a grantee for cause (as defined in the Stock Incentive Plan), the grantee will forfeit any outstanding options. In the event of the termination of service of a grantee in connection with a divestiture of a business unit or subsidiary or similar transaction, the Compensation Committee may provide that all or some outstanding options will continue to become exercisable and may be exercised at any time prior to the expiration of the term of the options or within three years following the grantee's termination of service (or such shorter time as the Compensation Committee may determine at or following the time of grant) or, if earlier, the expiration of the term of the option. In general, in the event of the termination of service of a grantee for any reason other than in connection with certain divestitures of a subsidiary or business unit, for disability, death, approved retirement or cause, any options granted to such grantee exercisable 191 194 at the date of termination will remain exercisable for a period of 30 days (or, if earlier, the expiration of the term of the options). Upon a change of control (as defined in the Stock Incentive Plan), each option then outstanding will become fully exercisable regardless of the exercise schedule otherwise applicable. In connection with such change of control, the Compensation Committee may, in its discretion, require that, upon the change of control, each such option be canceled in exchange for a payment in an amount equal to the excess, if any, of the change of control price (as defined in the Stock Incentive Plan) over the exercise price of the option. In addition, no cancellation, acceleration of exercisability, cash settlement or other payment for options will occur upon a change of control if the Compensation Committee determines in good faith that an alternate award (as defined in the Stock Incentive Plan) will be issued by the acquiror in the change of control. FEDERAL INCOME TAX ASPECTS The following is a brief summary of the federal income tax consequences of awards under the Stock Incentive Plan based on the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences. No taxable income is realized by the grantee upon the grant or exercise of an ISO. If a grantee does not sell the stock received upon the exercise of an ISO ("ISO Shares") for at least two years from the date of grant and one year from the date of exercise, when the ISO Shares are sold any gain or loss realized will be treated as long-term capital gain or loss. In such circumstances, no deduction will be allowed to the grantee's employer for federal income tax purposes. If ISO Shares are disposed of prior to the expiration of the holding periods described above, the grantee generally will realize ordinary income at that time equal to the lesser of the excess of the fair market value of the shares at exercise over the price paid for such ISO Shares or the actual gain on the disposition. The grantee's employer will generally be entitled to deduct any such recognized amount. Any further gain or loss realized by the grantee will be taxed as short-term or long-term capital gain or loss. Subject to certain exceptions for disability or death, if an ISO is exercised more than three months following the termination of the grantee's employment, the ISO will generally be taxed as a Nonqualified Stock Option. No income is realized by the grantee at the time a Nonqualified Stock Option is granted. Generally upon exercise of a Nonqualified Stock Option, the grantee will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. The grantee's employer will generally be entitled to a tax deduction in the same amount and at the same time as the grantee recognizes ordinary income. Any appreciation or depreciation after the date of exercise will be treated as either short-term or long-term capital gain or loss, depending upon the length of time that the grantee has held the shares. EMPLOYMENT-RELATED AGREEMENTS Metropolitan Life Insurance Company has entered into employment continuation agreements with several of its key executives, including each of the Named Executive Officers. These agreements, the provisions of which only become effective upon the occurrence of a change of control or a potential change of control (as defined in such agreements), are intended generally to preserve for the covered executives the same duties, responsibilities and compensation opportunities for a period of three years following a change of control as were in effect prior to such an event. Accordingly, after the occurrence of such a change of control event, the agreements provide for certain minimum levels with respect to a covered executive's base salary, incentive compensation opportunities and participation in employee benefit plans. These agreements also generally assure the covered executive that he or she will not incur a significant 192 195 change in the other terms and conditions of his or her employment. If the successor management does not honor these assurances, a covered executive may terminate employment for "good reason". In such case, or in the event that, after these agreements become effective, the executive's employment is terminated without "cause", the executive will receive certain termination benefits, including a lump sum severance payment equal to three times the sum of the executive's: - base salary; - average annual bonus award over the preceding three years; and - average long-term incentive award over the preceding three years (reduced by the value conveyed to the executive in the change of control under any equity compensation awards). Notwithstanding the foregoing, the amount of any such termination benefits will be reduced, to the extent necessary, so that no amount payable to such executives will fail to be deductible by Metropolitan Life Insurance Company (or, in the case of the executives, be subject to a special excise tax) under the so-called "golden parachute" provisions of the Internal Revenue Code of 1986, as amended. In addition, Messrs. Benmosche, Nagler and Clark may also generally elect to terminate employment voluntarily, during the 30-day period beginning six months after the date on which a change of control occurs, and receive the same termination benefits they would receive had such executive's employment terminated without cause. New England Life Insurance Company has entered into an employment agreement with Mr. Benson, which expires on June 16, 2000, pursuant to which Mr. Benson serves as its Chief Executive Officer. Under the agreement, Mr. Benson is entitled to a minimum base salary and participation in the New England Financial annual and long-term incentive plans described above. The agreement also provides Mr. Benson with an enhanced retirement benefit of $400,000 vesting in equal annual installments over ten years and payable at age 62 as a 20-year continuous and certain annuity. At December 31, 1999, Mr. Benson had vested as to 20% of this benefit, or $80,000 per annum. In the event that Mr. Benson's employment is terminated by New England Life Insurance Company "without cause" or by Mr. Benson for "good reason" (as each such term is defined in the agreement), Mr. Benson will receive severance benefits equal to two times the sum of his annual base salary and his target annual bonus for the year of termination, as well as the earned and unpaid salary and the award payable for any long-term incentive period then in effect and an annual bonus for the year of termination, in each case pro-rated to the date of his termination. In addition, the enhanced retirement benefit will retroactively vest at double the above rate. Except in the event that Mr. Benson terminates his employment voluntarily without good reason or his employment is terminated for cause, he and his spouse will be eligible to receive the same retiree medical benefits generally made available to MetLife executives, except that any service requirement to obtain such benefits will be waived and such benefits will be secondary in all circumstances to any other coverage that Mr. Benson or his spouse may be eligible to receive. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Helene L. Kaplan, a director of MetLife, Inc. and Metropolitan Life Insurance Company and the chairman of the Nominating and Compensation Committee of Metropolitan Life Insurance Company in 1999, is of counsel to Skadden, Arps, Slate, Meagher & Flom LLP. Skadden, Arps, Slate, Meagher & Flom LLP has in the past performed, and continues to perform, legal services for Metropolitan Life Insurance Company and its affiliates. 193 196 OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding the beneficial ownership of MetLife, Inc.'s common stock as of the effective date of the plan of reorganization by: - each person who we believe will own beneficially more than 5% of the outstanding shares of MetLife, Inc.'s common stock; - each director and each Named Executive Officer; and - all of our directors and Named Executive Officers as a group. The number of shares of common stock beneficially owned by each director and executive officer is based upon an estimate of the number of shares each director and Named Executive Officer and certain persons and entities affiliated with each director and Named Executive Officer will receive as eligible policyholders pursuant to the plan of reorganization. The plan of reorganization provides that for the first five years after the plan effective date, officers, directors and employees of Metropolitan Life Insurance Company, MetLife, Inc. and their affiliates, including their family members and their spouses, may not acquire common stock in any manner except through the following acquisitions: - officers, directors and employees who are eligible policyholders may receive common stock (to be held in the trust) in exchange for their policyholders' membership interests under the plan of reorganization; - officers and directors and their spouses and family members may purchase common stock through the purchase and sale program (if eligible) or in open market purchases through a broker or dealer registered with the Securities and Exchange Commission beginning two years after the plan effective date; - other employees and their spouses and family members may purchase common stock through the purchase and sale program (if eligible) or in open market purchases through a registered broker or dealer on or after the plan effective date; and - subject to certain limitations as to both the amount and timing of the acquisition of stock, officers, directors, employees and insurance agents may acquire common stock (or interests in common stock) under one or more of the MetLife, Inc. 2000 Stock Incentive Plan, the MetLife, Inc. 2000 Directors Stock Plan and specified other savings and investment plans, incentive compensation plans and deferred compensation plans. 194 197 See "Management -- Management Compensation -- MetLife, Inc. 2000 Stock Incentive Plan" and "Management -- Information about the Board of Directors of MetLife, Inc. -- Compensation of Directors". No person will own more than 5% of the outstanding shares of common stock, other than the MetLife Policyholder Trust, as a result of the shares distributed pursuant to the plan of reorganization. Except as noted below, each holder listed below will have sole investment and voting power with respect to the shares beneficially owned by the holder. The number of shares of common stock owned by the trust is based on our preliminary calculation of the allocation of consideration to be distributed under the plan of reorganization and assumptions described under "Pro Forma Consolidated Financial Information".
NUMBER OF SHARES TO BE NAME BENEFICIALLY OWNED - ---- ------------------ MetLife Policyholder Trust.................................. (1) Robert H. Benmosche......................................... * Curtis H. Barnette.......................................... * Gerald Clark................................................ * Joan Ganz Cooney............................................ * Burton A. Dole, Jr. ........................................ * James R. Houghton........................................... * Harry P. Kamen.............................................. * Helene L. Kaplan............................................ * Charles M. Leighton......................................... * Allen E. Murray............................................. * Stewart G. Nagler........................................... * John J. Phelan, Jr. ........................................ * Hugh B. Price............................................... * Robert G. Schwartz.......................................... * Ruth J. Simmons............................................. * William C. Steere, Jr....................................... * Gary A. Beller.............................................. * James M. Benson............................................. * C. Robert Henrikson......................................... * Catherine A. Rein........................................... * William J. Toppeta.......................................... * John H. Tweedie............................................. * Lisa M. Weber............................................... * Judy E. Weiss............................................... * Board of directors of MetLife, Inc., but not in each director's individual capacity............................ 493,476,118(1) All directors and Named Executive Officers as a group....... * (2)
- --------------- * Number of shares represents less than one percent of the number of shares of common stock expected to be outstanding on the effective date of the plan. (1) The board of directors of MetLife, Inc., but not in each director's individual capacity, is deemed to beneficially own the shares of common stock held by the MetLife Policyholder Trust because the board will direct the voting of these shares on certain matters submitted to a vote of stockholders. See "The Demutualization -- Establishment and Operation of the MetLife Policyholder Trust". The amount shown does not include shares beneficially owned by a director in the director's individual capacity. (2) Does not include shares of common stock held by the MetLife Policyholder Trust beneficially owned by the board of directors, other than in each director's individual capacity. 195 198 COMMON STOCK ELIGIBLE FOR FUTURE SALE The MetLife Policyholder Trust will hold 493,476,118 shares of common stock on behalf of the approximately nine million eligible policyholders that we estimate will become beneficiaries of the trust in the demutualization. The trust provides that a trust beneficiary may sell the beneficiary's allocated shares of MetLife, Inc.'s common stock through the purchase and sale program, subject to certain limitations. Sales may be made at any time beginning on the later of (1) termination of any stabilization arrangements and trading restrictions in connection with the initial public offering or (2) the closing of all underwriters' over-allotment options which have been exercised and the expiration of all unexercised options. We expect that these sales may begin within 30 days after the effective date of the plan of reorganization. In addition, beginning one year after that effective date, trust beneficiaries may also withdraw all (but not less than all) of their allocated shares of MetLife, Inc.'s common stock from the trust and hold or dispose of their shares. Shares withdrawn from the trust will be issued in book-entry form as uncertificated shares, to the extent permitted by applicable law, unless a trust beneficiary requests a certificate for the shares. See "The Demutualization -- Establishment and Operation of the MetLife Policyholder Trust" for a description of the purchase and sale program and its limitations. Counsel has advised us that those beneficiaries who are not "affiliates" of MetLife, Inc. within the meaning of Rule 144 under the Securities Act of 1933, as amended, may resell their shares in the purchase and sale program or otherwise without registration under that Securities Act and without compliance with the time, volume, manner of sale and other limitations set forth in Rule 144. Substantially all of the shares of MetLife, Inc.'s common stock allocated in the demutualization to policyholders that will be beneficiaries of the trust will be allocated to non-affiliates of MetLife, Inc. Accordingly, most trust beneficiaries may freely transfer such shares, without limitations, through the purchase and sale program. In addition to the shares issued in the demutualization, the shares of common stock sold in the initial public offering and the shares issued upon settlement of the units will be freely transferable without restriction in the public market, except to the extent that those shares are acquired by affiliates of MetLife, Inc. and are therefore subject to restrictions under Rule 144. Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle that they or their respective affiliates will purchase from us in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units described below. We will determine at the time of the pricing of the initial public offering whether to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public under this prospectus. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. We expect each of these purchasers to enter into an agreement with us that provides that any shares purchased by it will be restricted, subject to certain limited exceptions, from sale or transfer for a period of one year after the initial public offering, except for sales to affiliates or pursuant to a tender or exchange offer recommended by our board of directors. In addition, we expect each purchaser to agree that it will not, without our consent, increase its ownership of voting securities above 4.9% of the outstanding shares (or 5.0% with the New York Superintendent of Insurance's approval), seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. Although these investors will receive common stock which has not been registered under the Securities Act, they will also receive registration rights with respect to such stock, which rights are not exercisable until one year after the closing of the initial public offering. Pursuant to these registration rights, the purchasers will be able to have their shares of common stock registered for resale under the Securities Act, beginning after the first anniversary of the 196 199 closing, on not more than one occasion for each purchaser each year, or not more than five occasions for each purchaser in total (known as a "demand" registration right). In addition, we expect to agree to use our reasonable efforts to register the shares for resale on a registration statement on Form S-3 as soon as practicable after the first anniversary of the closing. If the shares are registered on a Form S-3, each purchaser will be allowed to make not more than two offerings each year, subject to a minimum of $50,000,000 per offering, although underwritten offerings will be subject to the limitations on the number of demand registrations described above. The purchasers will also be able to participate, subject to specified limitations, in registrations effected by us for our own account or others. The private placements are subject to the negotiation of definitive documentation. Sales of substantial amounts of MetLife, Inc. common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. 197 200 DESCRIPTION OF THE EQUITY SECURITY UNITS THE UNITS Concurrently with the closings of the initial public offering and the planned private placements, we and MetLife Capital Trust I, a Delaware statutory business trust wholly-owned by us, are selling 20,000,000 % equity security units for a total gross offering of $1,000 million, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full. Each unit will initially consist of and represent: - a purchase contract under which the holder agrees to purchase, for $50, shares of our common stock on , 2003. The number of shares the holder will receive will be determined by the settlement rate described below, based on the average trading price of our common stock at that time; and - beneficial ownership of a capital security of MetLife Capital Trust I, with a stated liquidation amount of $50. The capital security will initially be pledged to secure the holder's obligations under the purchase contract. THE CAPITAL SECURITIES The capital securities, and the common securities issued to MetLife, Inc., represent undivided beneficial ownership interests in the assets of MetLife Capital Trust I. These assets consist solely of debentures issued by us to the trust. The debentures will have an interest rate and principal amount that are the same as the distribution rate and stated liquidation amount of the capital securities. Distributions on the capital securities will accrue from the date the capital securities are issued, and, subject to the distribution deferral provisions described below, they will be paid quarterly in arrears on each , , and , commencing , 2000. The initial annual distribution rate on the capital securities will be %. The interest rate on the debentures, and therefore the distribution rate on the capital securities, will be reset for the quarterly payments payable on and after , 2003 to the rate, determined by the reset agent, that will be sufficient to cause the then current aggregate market value of the capital securities to be equal to 100.5% of the remarketing value. If the reset rate cannot be established prior to , 2003, the distribution rate will not be reset and will continue to be the initial annual rate of % until a reset rate can be established on a later remarketing date. We can, on one or more occasions, defer the interest payments due on the debentures for up to five years, unless an event of default under the debentures has occurred and is continuing. However, we cannot defer interest payments beyond the maturity date of the debentures, which is , 2005. If we defer interest payments on the debentures, the trust will also defer distributions on the capital securities. During any deferral period, distributions will continue to accumulate quarterly at the initial annual rate of % of the stated liquidation amount of $50 per capital security through and including , 2003, and at the reset rate on the capital securities after that date. Also, the deferred distributions will themselves accumulate additional distributions at the deferred rate, to the extent permitted by law. During any period in which we defer interest payments on the debentures, in general we cannot: - declare or pay any dividend or distribution on our capital stock; - redeem, purchase, acquire or make a liquidation payment on any of our capital stock; - make any interest, principal or premium payment on, or repurchase or redeem, any of our debt securities that rank equally with or junior to the debentures; or 198 201 - make any payment on any guarantee of the debt securities of any of our subsidiaries if the guarantee ranks equal or junior to the debentures. REMARKETING Through a remarketing, the capital securities of holders of units, other than those electing not to participate in the remarketing, will be sold and the proceeds used to purchase treasury securities, which will be pledged to secure the unitholders' obligations under the purchase contracts. Cash payments received on the pledged treasury securities will be used to satisfy the unitholders' obligations to purchase our common stock on , 2003. Unless a holder elects not to participate in the remarketing by delivering treasury securities to secure its obligations under the purchase contract, the capital securities will be remarketed on the remarketing date, which is the third business day immediately preceding , 2003. SETTLEMENT The settlement rate is the number of newly issued shares of our common stock that we are obligated to sell and the holders are obligated to buy upon settlement of a purchase contract on , 2003. The settlement rate for each purchase contract will be as follows, subject to adjustment under specified circumstances: - if the applicable market value of our common stock is equal to or greater than $ , the settlement rate will be shares of our common stock per purchase contract; - if the applicable market value of our common stock is less than $ but greater than $ , the settlement rate will be equal to $50 divided by the applicable market value of our common stock per purchase contract; and - if the applicable market value of our common stock is less than or equal to $ , the settlement rate will be shares of our common stock per purchase contract. In addition to the remarketing, the holder's obligations under the purchase contract may be satisfied: - if the holder has elected not to participate in the remarketing by delivering treasury securities to secure its obligations under the purchase contract, and in certain other circumstances, through the application of the cash payments received on the treasury securities; - through the early delivery of cash to the purchase contract agent in the manner described in the purchase contracts; and - if we are involved in a merger or consolidation prior to the stock purchase date in which at least 30% of the consideration for our common stock consists of cash or cash equivalents, through an early settlement as described in the purchase contracts. In addition, the purchase contracts, our related rights and obligations and those of the holders of the units, including their obligations to purchase common stock, will automatically terminate upon the occurrence of particular events of our bankruptcy, insolvency or reorganization. Upon termination, the capital securities or treasury securities pledged to secure the holder's obligations under the purchase contract will be released and distributed to the holder. MATURITY The capital securities do not have a stated maturity. However, the debentures issued by us to the trust will mature on , 2005. Upon redemption of the debentures on that date, the trust will redeem the capital securities at their stated liquidation amounts plus any accrued and unpaid distributions. 199 202 We, as the holder of all the common securities of the trust, have the right at any time to dissolve the trust. If we dissolve the trust, holders of capital securities will receive, after satisfaction of liabilities of creditors of the trust, debentures having a principal amount equal to the stated liquidation amount of the capital securities they hold. In such event, the capital securities will no longer be outstanding, and a normal unit that had included capital securities would thereafter consist of a debenture with a principal amount equal to the stated amount of the normal unit and the related purchase contract. GUARANTEE MetLife, Inc. will irrevocably guarantee, on a senior and unsecured basis, the payment in full of the following: - distributions on the capital securities to the extent of available trust funds; and - the stated liquidation amount of the capital securities to the extent of available trust funds. The guarantee will be unsecured and will rank equally in right of payment to all of our other senior unsecured debt. LISTING The units have been approved for listing on the New York Stock Exchange under the symbol "MIU", subject to official notice of issuance. ACCOUNTING TREATMENT The financial statements of MetLife Capital Trust I will be consolidated in our financial statements, with the capital securities shown on our consolidated balance sheet under the caption "Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent". The proceeds from the units will be allocated to the underlying purchase contracts and capital securities based on their relative fair values at the offering date. The forward contracts will be reported in additional paid-in capital and subsequent changes in fair value will not be recognized. The notes to our consolidated financial statements will disclose that the sole asset of the trust will be the debentures. Distributions on the capital securities will be reported as a charge to minority interest in our consolidated statements of income, whether paid or accrued. The purchase contracts are forward transactions in our common stock. Upon settlement of a purchase contract, we will receive $50 on that purchase contract and will issue the requisite number of shares of MetLife, Inc. common stock. The $50 we receive will be credited to shareholders' equity and allocated between the common stock and additional paid-in-capital accounts. Before the issuance of shares of our common stock upon settlement of the purchase contracts, the equity security units will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating earnings per share for any period is deemed to be increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by us in the market, at the average market price during that period, using the proceeds receivable upon settlement. Consequently, we anticipate that there will be no dilutive effect on our earnings per share except during periods when the average market price of our common stock is above $ per share. 200 203 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of MetLife, Inc. consists of 3,000,000,000 shares of common stock and 200,000,000 shares of preferred stock. COMMON STOCK Holders of our common stock are entitled to receive such dividends as may from time to time be declared by our board of directors out of funds legally available therefor. See "Dividend Policy". Holders of our common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote and do not have any cumulative voting rights. Holders of our common stock have no preemptive, conversion, redemption or sinking fund rights. In the event of a liquidation, dissolution or winding up of MetLife, Inc., holders of our common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all liabilities of MetLife, Inc. and the liquidation preference of any outstanding class or series of preferred stock. The outstanding shares of our common stock are, and the shares of common stock issued by us in the demutualization, the initial public offering and the private placements and upon settlement of the purchase contracts comprising the equity security units, when issued, will be fully paid and nonassessable. The rights and privileges of holders of our common stock are subject to any series of preferred stock that we may issue in the future, as described below. PREFERRED STOCK Our board of directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series and the voting rights, designations, powers, preferences and qualifications, limitations and restrictions of the shares constituting any series, without any further vote or action by stockholders. The issuance of preferred stock by our board of directors could adversely affect the rights of holders of common stock. We have authorized 10,000,000 shares of Series A Junior Participating Preferred Stock for issuance in connection with our stockholder rights plan. See "-- Stockholder Rights Plan". CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS AND IN DELAWARE AND NEW YORK LAW A number of provisions of our certificate of incorporation and by-laws deal with matters of corporate governance and rights of stockholders. The following discussion is a general summary of selected provisions of our certificate of incorporation and by-laws and regulatory provisions that might be deemed to have a potential "anti-takeover" effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by our board of directors but which individual stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the incumbent board of directors or management more difficult. Some provisions of the Delaware General Corporation Law and the New York Insurance Law may also have an antitakeover effect. The following description of selected provisions of our certificate of incorporation and by-laws and selected provisions of the Delaware General Corporation Law and the New York Insurance Law is necessarily general and reference should be made in each case to our certificate of incorporation and by-laws, which are filed as exhibits to our registration statement of which this prospectus forms a part, and to the provisions of those laws. See "Additional Information" for information on where to obtain a copy of our certificate of incorporation and by-laws. 201 204 UNISSUED SHARES OF CAPITAL STOCK COMMON STOCK. Based upon the assumptions described under "Pro Forma Consolidated Financial Information", we currently plan to issue an estimated 179,000,000 shares of our authorized common stock in the initial public offering, 73,000,000 shares of our common stock in the planned private placements and 493,476,118 shares of common stock in the demutualization. This information does not include shares of our common stock issuable upon the settlement of the purchase contracts comprising equity security units offered concurrently with this offering. The remaining shares of authorized and unissued common stock will be available for future issuance without additional stockholder approval. While the authorized but unissued shares are not designed to deter or prevent a change of control, under some circumstances we could use the authorized but unissued shares to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control by, for example, issuing those shares in private placements to purchasers who might side with our board of directors in opposing a hostile takeover bid. PREFERRED STOCK. Our board of directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series and the designations, powers, preferences, limitations and relative rights, including dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by stockholders. The existence of authorized but unissued preferred stock could reduce our attractiveness as a target for an unsolicited takeover bid since we could, for example, issue shares of the preferred stock to parties who might oppose such a takeover bid or issue shares of the preferred stock containing terms the potential acquiror may find unattractive. This may have the effect of delaying or preventing a change of control, may discourage bids for our common stock at a premium over the market price of our common stock, and may adversely affect the market price of, and the voting and other rights of the holders of, our common stock. See "-- Stockholder Rights Plan" for a description of our Series A Junior Participating Preferred Stock. CLASSIFIED BOARD OF DIRECTORS AND REMOVAL OF DIRECTORS Pursuant to our certificate of incorporation, the directors are divided into three classes, as nearly equal in number as possible, with each class having a term of three years. The classes serve staggered terms, such that the term of one class of directors expires each year. Any effort to obtain control of our board of directors by causing the election of a majority of the board may require more time than would be required without a staggered election structure. Our certificate of incorporation also provides that, subject to the rights of the holders of any class of preferred stock, directors may be removed only for cause at a meeting of stockholders by a vote of a majority of the shares then entitled to vote. This provision may have the effect of slowing or impeding a change in membership of our board of directors that would effect a change of control. EXERCISE OF DUTIES BY BOARD OF DIRECTORS Our certificate of incorporation provides that while the MetLife Policyholder Trust is in existence, each MetLife, Inc. director is required, in exercising his or her duties as a director, to take the interests of the trust beneficiaries into account as if they were holders of the shares of common stock held in the trust, except to the extent that any such director determines, based on advice of counsel, that to do so would violate his or her duties as a director under Delaware law. 202 205 RESTRICTION ON MAXIMUM NUMBER OF DIRECTORS AND FILLING OF VACANCIES ON OUR BOARD OF DIRECTORS Pursuant to our by-laws and subject to the rights of the holders of any class of preferred stock, the number of directors may be fixed and increased or decreased from time to time by resolution of the board of directors, but the board of directors will at no time consist of fewer than three directors. Subject to the rights of the holders of any class of preferred stock, stockholders can only remove a director for cause by a vote of a majority of the shares entitled to vote, in which case the vacancy caused by such removal may be filled at such meeting by the stockholders entitled to vote for the election of the director so removed. Any vacancy on the board of directors, including a vacancy resulting from an increase in the number of directors or resulting from a removal for cause where the stockholders have not filled the vacancy, subject to the rights of the holders of any class of preferred stock, may be filled by a majority of the directors then in office, although less than a quorum. If the vacancy is not so filled, it will be filled by the stockholders at the next annual meeting of stockholders. The stockholders are not permitted to fill vacancies between annual meetings, except where the vacancy resulted from a removal for cause. These provisions give incumbent directors significant authority that may have the effect of limiting the ability of stockholders to effect a change in management. ADVANCE NOTICE REQUIREMENTS FOR NOMINATION OF DIRECTORS AND PRESENTATION OF NEW BUSINESS AT MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT Our by-laws provide for advance notice requirements for stockholder proposals and nominations for director. In addition, pursuant to the provisions of both the certificate of incorporation and the by-laws, action may not be taken by written consent of stockholders; rather, any action taken by the stockholders must be effected at a duly called meeting. Moreover, the stockholders do not have the power to call a special meeting. Only the chief executive officer or the secretary pursuant to a board resolution or, under some circumstances, the president or a director who also is an officer, may call a special meeting. These provisions make it more procedurally difficult for a stockholder to place a proposal or nomination on the meeting agenda and prohibit a stockholder from taking action without a meeting, and therefore may reduce the likelihood that a stockholder will seek to take independent action to replace directors or with respect to other matters that are not supported by management for stockholder vote. LIMITATIONS ON DIRECTOR LIABILITY Our certificate of incorporation contains a provision that is designed to limit the directors' liability to the extent permitted by the Delaware General Corporation Law and any amendments to that law. Specifically, directors will not be held liable to MetLife, Inc. or our stockholders for an act or omission in their capacity as a director, except for liability as a result of: - a breach of the duty of loyalty to MetLife, Inc. or our stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - payment of an improper dividend or improper repurchase of our stock under Section 174 of the Delaware General Corporation Law; or - actions or omissions pursuant to which the director received an improper personal benefit. The principal effect of the limitation on liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of MetLife, Inc. unless the stockholder can demonstrate one of the specified bases for liability. This provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. Our certificate of incorporation also does not eliminate the directors' duty of care. The inclusion of the limitation on liability provision in the certificate may, 203 206 however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited MetLife, Inc. and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. Our by-laws also provide that we indemnify our directors and officers to the fullest extent permitted by Delaware law. We are required to indemnify our directors and officers for all judgments, fines, settlements, legal fees and other expenses reasonably incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with us or another entity, including Metropolitan Life Insurance Company, that the director or officer serves at our request, subject to certain conditions, and to advance funds to our directors and officers to enable them to defend against such proceedings. To receive indemnification, the director or officer must succeed in the legal proceeding or act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of MetLife, Inc. and, with respect to any criminal action or proceeding, in a manner he or she reasonably believed to be lawful. SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS Some of the provisions of our certificate of incorporation, including those that authorize the board of directors to create stockholder rights plans, that set forth the duties, election and exculpation from liability of directors and that prohibit stockholders from actions by written consent, may not be amended, altered, changed or repealed unless the amendment is approved by the vote of holders of 75% of the then outstanding shares entitled to vote at an election of directors. This requirement exceeds the majority vote of the outstanding stock that would otherwise be required by the Delaware General Corporation Law for the repeal or amendment of such provisions of the certificate of incorporation. Our by-laws may be amended, altered or repealed by the board of directors or by the vote of holders of 75% of the then outstanding shares entitled to vote in the election of directors. These provisions make it more difficult for any person to remove or amend any provisions that have an antitakeover effect. BUSINESS COMBINATION STATUTE In addition, as a Delaware corporation, MetLife, Inc. is subject to Section 203 of the Delaware General Corporation Law, unless it elects in its certificate of incorporation not to be governed by the provisions of Section 203. We have not made that election. Section 203 can affect the ability of an "interested stockholder" of MetLife, Inc. to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares of MetLife, Inc., for a period of three years following the time that the stockholder becomes an "interested stockholder". An "interested stockholder" is defined to mean any person owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. The provisions of Section 203 are not applicable in some circumstances, including those in which (1) the business combination or transaction which results in the stockholder becoming an "interested stockholder" is approved by the corporation's board of directors prior to the time the stockholder becomes an "interested stockholder" or (2) the "interested stockholder", upon consummation of such transaction, owns at least 85% of the voting stock of the corporation outstanding prior to such transaction. RESTRICTIONS ON ACQUISITIONS OF SECURITIES Section 7312 of the New York Insurance Law provides that, for a period of five years after the distribution of consideration pursuant to the plan of reorganization is completed, no person may directly or indirectly offer to acquire or acquire in any manner the beneficial ownership 204 207 (defined as the power to vote or dispose of, or to direct the voting or disposition of, a security) of 5% or more of any class of voting security (which term includes our common stock) of MetLife, Inc. without the prior approval of the New York Superintendent of Insurance. Pursuant to Section 7312, voting securities acquired in excess of the 5% threshold without such prior approval will be deemed non-voting. The insurance laws and regulations of New York, the jurisdiction in which our principal insurance subsidiary, Metropolitan Life Insurance Company, is organized, may delay or impede a business combination involving us. In addition to the limitations described in the immediately preceding paragraph, the New York Insurance Law prohibits any person from acquiring control of MetLife, Inc., and thus indirect control of Metropolitan Life Insurance Company, without the prior approval of the New York Superintendent of Insurance. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock, unless the New York Superintendent, upon application, determines otherwise. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of MetLife, Inc.'s common stock may be deemed to have acquired such control, if the New York Superintendent determines that such persons, directly or indirectly, exercise a controlling influence over our management and policies. Therefore, any person seeking to acquire a controlling interest in MetLife, Inc. would face regulatory obstacles which may delay, deter or prevent an acquisition that stockholders might consider in their best interests. The insurance holding company law and other insurance laws of many states also regulate changes of control (generally presumed upon acquisitions of 10% or more of voting securities) of insurance holding companies, such as MetLife, Inc. STOCKHOLDER RIGHTS PLAN Our board of directors has adopted a stockholder rights plan under which each outstanding share of our common stock issued between the date on which MetLife, Inc. enters into the underwriting agreement for the initial public offering and the distribution date (as described below) will be coupled with a stockholder right. Initially, the stockholder rights will be attached to the certificates representing outstanding shares of common stock, and no separate rights certificates will be distributed. Each right will entitle the holder to purchase one one-hundredth of a share of our Series A Junior Participating Preferred Stock. Each one one-hundredth of a share of Series A Junior Participating Preferred Stock will have economic and voting terms equivalent to one share of MetLife, Inc.'s common stock. Until it is exercised, the right itself will not entitle the holder thereof to any rights as a stockholder, including the right to receive dividends or to vote at stockholder meetings. The description and terms of the rights are set forth in a rights agreement ("Rights Agreement") to be entered into between MetLife, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent. Although the material provisions of the Rights Agreement have been accurately summarized, the statements below concerning the Rights Agreement are not necessarily complete, and in each instance reference is made to the form of Rights Agreement itself, a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus forms a part. Each statement is qualified in its entirety by such reference. Stockholder rights are not exercisable until the distribution date, and will expire at the close of business on the tenth anniversary of the date on which the initial public offering price is determined, unless earlier redeemed or exchanged by us. A distribution date would occur upon the earlier of: - the tenth day after the first public announcement or communication to us that a person or group of affiliated or associated persons (referred to as an acquiring person) has 205 208 acquired beneficial ownership of 10% or more of our outstanding common stock (the date of such announcement or communication is referred to as the stock acquisition time); or - the tenth business day after the commencement or announcement of the intention to commence a tender offer or exchange offer that would result in a person or group becoming an acquiring person. If any person becomes an acquiring person, each holder of a stockholder right will be entitled to exercise the right and receive, instead of Series A Junior Participating Preferred Stock, common stock (or, in certain circumstances, cash, a reduction in purchase price, property or other securities of MetLife, Inc.) having a value equal to two times the purchase price of the stockholder right. All stockholder rights that are beneficially owned by an acquiring person or its transferee will become null and void. If at any time after a public announcement has been made or MetLife, Inc. has received notice that a person has become an acquiring person, (1) MetLife, Inc. is acquired in a merger or other business combination or (2) 50% or more of MetLife, Inc.'s assets, cash flow or earning power is sold or transferred, each holder of a stockholder right (except rights which previously have been voided as set forth above) will have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the purchase price of the right. The purchase price payable, the number of one one-hundredths of a share of Series A Junior Participating Preferred Stock or other securities or property issuable upon exercise of rights and the number of rights outstanding, are subject to adjustment from time to time to prevent dilution. With certain exceptions, no adjustment in the purchase price or the number of shares of Series A Junior Participating Preferred Stock issuable upon exercise of a stockholder right will be required until the cumulative adjustment would require an increase or decrease of at least one percent in the purchase price or number of shares for which a right is exercisable. At any time until the earlier of (1) the stock acquisition time or (2) the final expiration date of the Rights Agreement, we may redeem all the stockholder rights at a price of $0.01 per right. At any time after a person has become an acquiring person and prior to the acquisition by such person of 50% or more of the outstanding shares of our common stock, we may exchange the stockholder rights, in whole or in part, at an exchange ratio of one share of common stock, or one one-hundredth of a share of Series A Junior Participating Preferred Stock (or of a share of a class or series of preferred stock having equivalent rights, preferences and privileges), per right. The stockholder rights plan is designed to protect stockholders in the event of unsolicited offers to acquire MetLife, Inc. and other coercive takeover tactics which, in the opinion of its board of directors, could impair its ability to represent stockholder interests. The provisions of the stockholder rights plan may render an unsolicited takeover more difficult or less likely to occur or may prevent such a takeover, even though such takeover may offer our stockholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of our stockholders. METLIFE POLICYHOLDER TRUST Under the plan of reorganization, we will establish the MetLife Policyholder Trust to hold the shares of common stock allocated to eligible policyholders under the plan. 493,476,118 shares of common stock, or 66.2% of the total number of shares expected to be outstanding based upon an initial public offering price of $14.00 per share, will be issued to the trust on the effective date of the plan, to be held on behalf of approximately nine million eligible policyholders. Because of the number of shares held by the trust and the voting provisions of the trust, the trust may affect the outcome of matters brought to a stockholder vote. 206 209 The trustee will generally vote all of the shares of common stock held in the trust in accordance with the recommendations given by our board of directors to our stockholders or, if the board gives no such recommendation, as directed by the board, except on votes regarding certain fundamental corporate actions. As a result of the voting provisions of the trust, our board of directors will effectively be able to control votes on all matters submitted to a vote of stockholders, excluding those fundamental corporate actions described below, so long as the trust holds a substantial number of shares of our common stock. If the vote relates to fundamental corporate actions specified in the trust, the trustee will solicit instructions from the beneficiaries and vote all shares held in the trust in proportion to the instructions it receives, which would give disproportionate weight to the instructions actually given by trust beneficiaries. These actions include: - an election or removal of directors in which a stockholder has properly nominated one or more candidates in opposition to a nominee or nominees of our board of directors or a vote on a stockholder's proposal to oppose a board nominee for director, remove a director for cause or fill a vacancy caused by the removal of a director by stockholders, subject to certain conditions; - a merger or consolidation, a sale, lease or exchange of all or substantially all of the assets, or a recapitalization or dissolution of, MetLife, Inc., in each case requiring a vote of our stockholders under applicable Delaware law; - any transaction that would result in an exchange or conversion of shares of common stock held by the trust for cash, securities or other property; - issuances of common stock during the first year after the effective date of the plan at a price materially less than the then prevailing market price of our common stock, if a vote of stockholders is required to approve the issuance under Delaware law, other than issuances in an underwritten public offering or pursuant to an employee benefit plan; - for the first year after the effective date of the plan, any matter that requires a supermajority vote of stockholders under Delaware law or our certificate of incorporation or by-laws, and any amendment to our certificate of incorporation or by-laws that is submitted for approval to our stockholders; and - any proposal requiring our board of directors to amend or redeem the rights under our stockholder rights plan, other than a proposal with respect to which we have received advice of nationally-recognized legal counsel to the effect that the proposal is not a proper subject for stockholder action under Delaware law. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. 207 210 UNDERWRITING Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Banc of America Securities LLC, Donaldson, Lufkin and Jenrette Securities Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., Conning & Company, Fox-Pitt, Kelton Inc., J.P. Morgan Securities Inc., Santander Investment Securities Inc., Utendahl Capital Partners, L.P. and Warburg Dillon Read LLC are acting as representatives for the U.S. underwriters named below, with respect to the shares of common stock being offered in the U.S. offering.
U.S. UNDERWRITERS NUMBER OF SHARES - ----------------- ---------------- Credit Suisse First Boston Corporation...................... Goldman, Sachs & Co. ....................................... Banc of America Securities LLC.............................. Donaldson, Lufkin and Jenrette Securities Corporation....... Lehman Brothers Inc. ....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... Morgan Stanley & Co. Incorporated........................... Salomon Smith Barney Inc. .................................. Conning & Company........................................... Fox-Pitt, Kelton Inc. ...................................... J.P. Morgan Securities Inc. ................................ Santander Investment Securities Inc. ....................... Utendahl Capital Partners, L.P. ............................ Warburg Dillon Read LLC..................................... Total....................................................... 152,150,000
Credit Suisse First Boston (Europe) Limited, Goldman Sachs International, Bank of America International Limited, Donaldson, Lufkin and Jenrette International, Lehman Brothers International (Europe), Merrill Lynch International, Morgan Stanley & Co. International Limited, Salomon Brothers International Limited, BSCH Bolsa, Sociedad de Valores, S.A., Credit Lyonnais Securities, Fox-Pitt, Kelton N.V., J.P. Morgan Securities Ltd. and UBS AG, acting through its division Warburg Dillon Read are acting as representatives for the international underwriters named below, with respect to the shares being offered in the international offering.
INTERNATIONAL UNDERWRITERS NUMBER OF SHARES - -------------------------- ---------------- Credit Suisse First Boston (Europe) Limited................. Goldman Sachs International................................. Bank of America International Limited....................... Donaldson, Lufkin and Jenrette International................ Lehman Brothers International (Europe)...................... Merrill Lynch International................................. Morgan Stanley & Co. International Limited.................. Salomon Brothers International Limited...................... BSCH Bolsa, Sociedad de Valores, S.A. ...................... Credit Lyonnais Securities.................................. Fox-Pitt, Kelton N.V. ...................................... J.P. Morgan Securities Ltd. ................................ UBS AG, acting through its division, Warburg Dillon Read.... Total....................................................... 26,850,000
208 211 Each of the U.S. and international underwriters have agreed to purchase the number of shares of common stock set forth above opposite its name. Their obligations are subject to certain conditions to be contained in a U.S. underwriting agreement dated , 2000, and an international underwriting agreement dated , 2000. The terms and conditions of both the U.S. offering and the international offering are the same and the sale of shares of common stock in both offerings are conditioned on each other. Each of the offerings is conditioned on the consummation of the demutualization, the consummation of the offering of the equity security units and the consummation of the private placements. References in this prospectus to the "underwriters" refer to both the U.S. underwriters and the international underwriters. If the U.S. underwriters sell more shares than the total number set forth in the applicable table above, the U.S. underwriters have an option to buy up to an additional 22,822,500 shares of common stock from MetLife to cover such sales. They may exercise that option for 30 days following the date of this offering. If any shares are purchased pursuant to this option, the U.S. underwriters will severally purchase shares in approximately the same proportion as set forth in the applicable table above. We have granted the international underwriters a similar option to purchase up to an additional 4,027,500 shares of common stock. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting Discounts paid by us............................. $ $ $ $ Expenses payable by us........... $ $ $ $
Shares sold by the underwriters will be offered to the public at the initial public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial public offering, the representatives of the underwriters may change the offering price and the other selling terms. The underwriters for both of the offerings have entered into an agreement in which they agree to restrictions on where and to whom they and any dealer purchasing from them may offer shares of common stock as a part of the distribution of the shares. The underwriters also have agreed that they may sell shares of common stock among each of the underwriting groups. In this respect, each U.S. underwriter has agreed that, as part of its distribution of the common stock and subject to permitted exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of common stock or distribute any prospectus relating to the common stock to any person outside the United States and Canada or to any other dealer who does not so agree. Each international underwriter has agreed that, as part of its distribution of the common stock and subject to permitted exceptions, it has not offered, and will not offer or sell, directly or indirectly, any shares of common stock or distribute any prospectus relating to the common stock in the United States or Canada or to any other dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the U.S. and international underwriters. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, possessions and other areas subject to its jurisdiction, "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and an offer or sale shall be in the United States or Canada if it is made to (i) any individual resident in the United States or Canada or (ii) any corporation, partnership, pension, profit-sharing or other trust or entity (including any such entity 209 212 acting as an investment adviser with discretionary authority) whose office most directly involved with the purchase is located in the United States or Canada. We agreed that during the period beginning from , 2000 and continuing to and including the date 180 days after the date of this prospectus, we will not offer, sell, contract to sell or otherwise dispose of, except as provided under the U.S. and international underwriting agreements and except for the issuance of common stock pursuant to the private placements and to the MetLife Policyholder Trust pursuant to the plan of reorganization, any common stock or any of our securities that are substantially similar to our common stock, including but not limited to any securities that are convertible into or exchangeable for, or represent the right to receive, shares of our common stock or any such substantially similar securities (other than the equity security units to be offered and sold concurrently with the initial public offering and other than pursuant to employee stock option plans existing on the date of the U.S. and international underwriting agreements), without the prior written consent of Credit Suisse First Boston Corporation and Goldman, Sachs & Co. In addition, Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle with us that they will not, without our prior written consent, sell the shares of our common stock that they or their affiliates purchase in the private placements for at least one year after the initial public offering. Prior to the offerings, there has been no public market for our common stock. The initial public offering price will be negotiated among MetLife, Inc., Metropolitan Life Insurance Company and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price of our common stock, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. In addition, the final terms of the offering, including the initial public offering price, will be subject to the approval of the New York Superintendent of Insurance. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "MET", subject to official notice of issuance. In order to meet the requirements for listing our common stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934 (the "Exchange Act"). - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a stabilizing transaction or a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of our common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise, and if continued, may be discontinued at any time. 210 213 Each of the underwriters severally represents and agrees that: - It has not offered or sold and prior to the date six months after the date of issuance of the common stock will not offer or sell any common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; - It has complied, and will comply with, all applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom; and - It has only issued or passed on and will only issue and pass on in the United Kingdom any document received by it in connection with the issue of the common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom such document may otherwise lawfully be issued or passed on. The underwriters may not confirm sales to discretionary accounts without the prior written approval of the customer. A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information contained on any underwriter's website and any information contained on any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, have not been approved or endorsed by us or any underwriter in its capacity as an underwriter and should not be relied upon by investors. MetLife, Inc. and Metropolitan Life Insurance Company have agreed to indemnify the several underwriters against liabilities under the Securities Act of 1933, as amended, or to contribute to payments that the underwriters may be required to make in respect thereof. Certain of the underwriters or their affiliates have provided from time to time, and expect to provide in the future, investment banking, financial advisory and other related services to us and our affiliates, for which they have received and may continue to receive customary fees and commissions. We and the underwriters and our respective affiliates, also participate together from time to time in investing activities. The joint-lead managing underwriters, Credit Suisse First Boston Corporation and Goldman, Sachs & Co., are currently acting as financial advisors to us in connection with the demutualization. In addition, we have engaged Merrill Lynch & Co. to render a fairness opinion to our board of directors in connection with the demutualization. In this regard, we have agreed to indemnify each of them against certain liabilities, including liabilities under the Securities Act. In addition, Credit Suisse First Boston Corporation and Goldman, Sachs & Co. may, as principal or agent, assist in the sale of shares of our common stock on behalf of large trust beneficiaries who elect to sell shares (if certain volume limitations are exceeded) under the purchase and sale program established by the plan of reorganization. Other relationships we have with certain underwriters include the following: - Some of our directors are members of the boards of directors of certain of the underwriters or their affiliates. See "Management" for a description of these directorships. 211 214 - We own approximately 3% or less of the outstanding common stock of certain subsidiaries of Banco Santander Central Hispano, S.A. and Credit Suisse Group, certain of which are co-managers of the initial public offering or the offering of the equity security units. We operate in Spain and Portugal through joint venture arrangements with Banco Santander Central Hispano, S.A., the indirect parent of Santander Investment Securities Inc. and BSCH Bolsa, Sociedad de Valores, S.A., which are acting as co-managers in the initial public offering. One of our officers is a member of the investment committee of Credit Suisse First Boston International Equity Partners, L.P. We are a limited partner of certain limited partnerships affiliated with Credit Suisse First Boston Corporation. - Our subsidiary Conning & Company will act as a co-manager of the initial public offering. - Certain of the underwriters also maintain arrangements with us relating to the lease of office buildings. In addition to the foregoing, Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle that they or their respective affiliates will purchase from us in the aggregate not less than 14,900,000 shares, nor more than 73,000,000 shares, of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units. We will determine at the time of the pricing of the initial public offering whether to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. The investors would purchase these shares directly from us at the initial public offering price. We expect each of these purchasers to enter into an agreement with us that provides that any shares purchased by it will be restricted from sale or transfer for a period of one year after the initial public offering, except for sales to affiliates or pursuant to a tender or exchange offer recommended by our board of directors, and that it will not, without our consent, increase its ownership of voting securities above 4.9% of the outstanding shares, seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. In connection with this offering, Goldman, Sachs & Co. has agreed to act as a "qualified independent underwriter" under Rule 2720 of the NASD Conduct Rules and the initial public offering price will not be higher than the price recommended by Goldman, Sachs & Co. In its role as qualified independent underwriter, Goldman, Sachs & Co. has participated in due diligence investigations and in the preparation of this prospectus and the registration statement of which this prospectus forms a part. Rule 312(g) of the New York Stock Exchange effectively prohibits our subsidiary, Conning & Company, and its affiliates, following the initial public offering, from effecting any transaction (except on an unsolicited basis) for the account of any customer in, or making any recommendation with respect to, our common stock. 212 215 VALIDITY OF COMMON STOCK The validity of the shares of common stock offered hereby will be passed upon for MetLife, Inc. by Debevoise & Plimpton, and for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP. Helene L. Kaplan, a director of MetLife, Inc. and Metropolitan Life Insurance Company and the Chairman of the Nominating and Compensation Committee of Metropolitan Life Insurance Company in 1999, is of counsel to Skadden, Arps, Slate, Meagher & Flom LLP. Skadden, Arps, Slate, Meagher & Flom LLP has in the past performed, and continues to perform, legal services for Metropolitan Life Insurance Company and our affiliates. EXPERTS The consolidated financial statements of Metropolitan Life Insurance Company and its subsidiaries at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 and the balance sheet of MetLife, Inc. as of February 11, 2000 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. We have retained PricewaterhouseCoopers LLP to advise us in connection with actuarial matters involved in the development of the plan of reorganization and the establishment and operation of the closed block. The opinion of Kenneth Beck, a consulting actuary associated with PricewaterhouseCoopers LLP, dated November 16, 1999, which is subject to the limitations described within the opinion, is included as Annex A of this prospectus in reliance upon his authority as an expert in actuarial matters generally and in the application of actuarial concepts to insurance matters. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (together with all amendments, exhibits, schedules and supplements thereto, "Registration Statement"), under the Securities Act of 1933, as amended and the rules and regulations thereunder, for the registration of the common stock offered hereby. This prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted as permitted by rules and regulations of the Securities and Exchange Commission. For further information with respect to MetLife, Inc. and the common stock offered hereby, please see the Registration Statement. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to including, but not limited to, the certificate of incorporation and by-laws of MetLife, Inc., are not necessarily complete. With respect to statements made as to each such contract, agreement or other document filed as an exhibit to the Registration Statement, please refer to the exhibit for a more complete description of the matter involved, and each such statement will be deemed qualified in its entirety by such reference. The Registration Statement may be inspected and copied at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site, http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. 213 216 As a result of this initial public offering of common stock and the offering of equity security units, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the Securities and Exchange Commission. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by an independent public accounting firm. Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Upon such listing, copies of the Registration Statement, including all exhibits thereto, and periodic reports, proxy statements and other information will be available for inspection at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. 214 217 GLOSSARY The following Glossary includes definitions of certain insurance terms. Each term defined in this Glossary is printed in boldface type the first time it appears in this prospectus. ACCOUNT VALUE.............. The amount of money held under a contract in either a general account or separate account of an insurer to support policyholder liabilities. ADMITTED ASSETS............ Assets which are included in an insurer's statutory financial statements to measure POLICYHOLDER SURPLUS as determined in accordance with state insurance laws. ANNUAL STATEMENT........... The report filed annually with state insurance regulatory authorities that contains financial and other information on a calendar year basis and is prepared in accordance with statutory accounting practices. The form of the Annual Statement is prescribed by the NAIC. ANNUITY.................... A contract that pays or permits the election of a periodic income benefit for the life of a person, the lives of two or more persons for a specific period of time, or a combination thereof. CASH VALUE................. The amount of cash available to a policyholder on the surrender of or withdrawal from a life insurance policy or annuity contract. CATASTROPHE................ An event that produces pretax losses before reinsurance in excess of $25 million involving multiple first-party policyholders. Common catastrophe events include hurricanes, earthquakes, tornadoes, wind and hail storms, fires and explosions. CEDE, CEDED or CEDING...... The reinsurance of all or a portion of an insurer's risk with another insurer. COMBINED RATIO............. A property and casualty term, meaning the sum of the loss ratio and the expense ratio. A combined ratio below 100 generally indicates profitable underwriting. A combined ratio over 100 generally indicates unprofitable underwriting. DIVIDEND SCALES............ The actuarial formulas used by life insurers to determine amounts payable as dividends on participating policies based on experience factors relating to, among other things, investment results, mortality, lapse rates, expenses, premium taxes and policy loan interest and utilization rates. EXPENSE RATIO.............. The ratio of a property and casualty insurer's operating expenses to net premiums earned. FIRST-YEAR PREMIUMS AND DEPOSITS................. The amount of premiums on insurance policies sold plus the amount of deposits on variable and universal life policies sold or additional premiums or deposits from conversions received over the specified period. This figure does not reflect policies that lapse in their first year. GENERAL ACCOUNT............ The aggregate of a life insurer's assets, other than those allocated to separate accounts. GUARANTEED INTEREST CONTRACTS (GICS)......... Group annuity contracts that guarantee a return on principal and a stated interest rate for a specified period of time. IN FORCE................... A policy that is shown on records to be in force on a given date and that has not matured by death or otherwise or been surrendered or otherwise terminated. G-1 218 LOSS ADJUSTMENT EXPENSES (LAE).................... The expenses of settling property and casualty claims, including legal and other fees and general expenses. LOSS RATIO................. The ratio of incurred losses and LAE to earned premiums. MORBIDITY.................. Incidence rates and duration of disability used in pricing and computing liabilities for disability insurance. Morbidity varies by such parameters as age, gender and duration since disability. MORTALITY.................. Rates of death, varying by such parameters as age, gender and health, used in pricing and computing liabilities for future policyholder benefits for life and annuity products, which contain significant mortality risk. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)................... The National Association of Insurance Commissioners, a national association of state insurance regulators that sets guidelines for statutory policies, procedures and reporting for insurers. NET SALES CREDITS.......... An industry measure of agent productivity. Net sales credits are the annualized first-year commissions, which vary by product, paid to agents and other sales representatives. NON-ADMITTED ASSETS........ Certain assets or portions thereof which are not permitted to be reported as ADMITTED ASSETS in an insurer's Annual Statement. As a result, certain assets which normally would be accorded value in the financial statements of non-insurance corporations are accorded no value and thus reduce the reported statutory policyholder surplus of the insurer. PARTICIPATING POLICY....... Policies or annuity contracts under which the owner is eligible to share in the divisible surplus of the insurer through policyholder dividends, whether or not such dividends are currently payable. For purposes of the plan, participating policies also include policies or annuity contracts that are not by their terms non-participating and certain supplementary contracts. PERSISTENCY................ Measurement of the percentage of insurance policies remaining in force from year to year, as measured by premiums. POLICYHOLDER SURPLUS....... The excess of admitted assets over liabilities, in each case under statutory accounting practices. PREMIUMS................... Payments and considerations received on insurance policies issued or reinsured by an insurer. Under GAAP, premiums on universal life and other investment-type contracts are not accounted for as revenues. RISK-BASED CAPITAL (RBC)... Risk-based capital, which is the regulatory targeted surplus level based on the relationship of statutory capital and surplus, with certain adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures. REINSURANCE................ The acceptance by one or more insurers of a portion of risk underwritten by another insurer that has directly written the coverage in return for a portion of the premium related thereto. The legal rights of the insured generally are not affected by the reinsurance transaction, and the insurer issuing the insurance contract remains liable to the insured for payment of policy benefits. G-2 219 SEPARATE ACCOUNTS.......... Investment accounts maintained by an insurer to which funds have been allocated for certain policies under provisions of relevant state insurance laws. The investments in each separate account are maintained separately from those in other separate accounts and an insurer's general account and generally are not subject to the general liabilities of the insurer. The investment results of the separate account assets generally pass through to the separate account policyholders and contractholders, less management fees, so that an insurer bears limited or no investment risk on such assets. STATUTORY ACCOUNTING PRACTICES................ Those accounting practices prescribed or permitted by an insurer's domiciliary state insurance regulator for purposes of financial reporting to the insurance regulator. STATUTORY RESERVES......... Monetary amounts established by state insurance law that an insurer must have available to provide for future obligations with respect to all policies. Statutory reserves are liabilities on the balance sheet of financial statements prepared in conformity with statutory accounting practices. STATUTORY SURPLUS.......... The excess of admitted assets over statutory liabilities as shown on an insurer's statutory financial statements. SURRENDER CHARGE........... The fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value prior to the end of the surrender charge period. Such charge is intended to recover all or a portion of policy acquisition costs and act as a deterrent to early surrender. Surrender charges typically decrease over a set period of time as a percentage of the ACCOUNT VALUE. UNDERWRITING............... The process of examining, accepting or rejecting insurance risks, and classifying those accepted, in order to charge an appropriate premium for each accepted risk. G-3 220 INDEX TO FINANCIAL STATEMENTS
PAGE ---- METLIFE, INC. Independent Auditors' Report................................ F-2 Balance Sheet at February 11, 2000.......................... F-3 Notes to Balance Sheet...................................... F-4 METROPOLITAN LIFE INSURANCE COMPANY Independent Auditors' Report................................ F-7 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.......................... F-8 Consolidated Balance Sheets at December 31, 1999 and 1998... F-9 Consolidated Statements of Equity for the years ended December 31, 1999, 1998 and 1997.......................... F-10 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... F-11 Notes to Consolidated Financial Statements.................. F-12
F-1 221 INDEPENDENT AUDITORS' REPORT The Board of Directors of MetLife, Inc.: We have audited the accompanying balance sheet of MetLife, Inc. (the "Company") as of February 11, 2000. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of MetLife, Inc. at February 11, 2000 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 11, 2000 F-2 222 METLIFE, INC. BALANCE SHEET FEBRUARY 11, 2000 ASSETS Cash and cash equivalents................................. $100 ==== EQUITY Preferred stock, par value $.01 per share; 200,000,000 shares authorized; none issued......................... $ -- Series A Junior Participating Preferred Stock............. -- Common stock, par value $.01 per share; 3,000,000,000 shares authorized; 100 shares issued and outstanding... 1 Additional paid-in capital................................ 99 ---- $100 ====
See accompanying notes to balance sheet. F-3 223 METLIFE, INC. NOTES TO BALANCE SHEET 1. BUSINESS MetLife, Inc. was incorporated on August 10, 1999, under the laws of Delaware and is a wholly-owned subsidiary of Metropolitan Life Insurance Company ("Metropolitan Life") for the purpose of becoming the parent holding company of Metropolitan Life under a plan of reorganization, as amended (the "plan of demutualization"), whereby Metropolitan Life will convert from a mutual life insurance company to a stock life insurance company. MetLife, Inc. has had no operations since its formation. The only cash transaction has been the receipt of $100 in connection with the issuance of 100 shares of common stock to Metropolitan Life. 2. PLAN OF REORGANIZATION On September 28, 1999, the board of directors of Metropolitan Life adopted, pursuant to the New York Insurance Law, a plan of reorganization, and subsequently adopted amendments to the plan, pursuant to which Metropolitan Life proposes to convert from a mutual life insurance company to a stock life insurance company and become a wholly-owned subsidiary of MetLife, Inc. The plan was approved by Metropolitan Life's voting policyholders on February 7, 2000. The plan will become effective at such time as the New York Superintendent of Insurance ("Superintendent") approves it based on finding, among other things, that the plan is fair and equitable to policyholders. The plan requires an initial public offering of common stock and permits other capital raising transactions on the effective date of the plan. 3. DIVIDEND RESTRICTIONS Assuming the plan of demutualization becomes effective, MetLife, Inc.'s ability to meet its cash requirements and pay dividends depends on the receipt of dividends and other payments from Metropolitan Life. Metropolitan Life will be restricted as to the amounts it may pay as dividends to MetLife, Inc. Under the New York Insurance Law, the Superintendent has broad discretion to determine whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. The New York Insurance Department has established informal guidelines for the Superintendent's determination which focus upon, among other things, the overall financial condition and profitability of the insurer under statutory accounting practices. 4. STOCK INCENTIVE PLAN On October 20, 1999, MetLife, Inc. adopted the MetLife, Inc. 2000 stock incentive plan (the "plan"). Under the plan, options granted may be either non-qualified stock options or incentive stock options qualifying under the Internal Revenue Code of 1986, as amended. The maximum number of shares issuable under the plan is equal to 5% of the shares outstanding immediately after the effective date of the plan of reorganization, reduced by the shares issued pursuant to options granted under the MetLife, Inc. 2000 directors stock plan. The maximum number of shares which may be subject to awards under the plan may not exceed 60% of the shares available under the plan prior to the second anniversary of the effective date of the plan of reorganization or 80% of the shares available under the plan prior to the third anniversary of the effective date of the plan of reorganization. No participant in the plan may be granted, during any five-year period, options in respect of more than 5% of the shares available for issuance under the plan. The shares to be issued under the plan may be authorized, but unissued shares or treasury shares. The exercise price per share of common stock subject to either a non-qualified stock option or an incentive stock option will not be less than the fair market value of such F-4 224 METLIFE, INC. NOTES TO BALANCE SHEET -- (CONTINUED) shares on the date of grant. Upon the occurrence of certain events that affect the capitalization of MetLife, Inc., appropriate adjustments will be made in the number of shares that may be issued under the plan in the future and in the number of shares and the exercise price under outstanding grants made before the event. If any grant is for any reason canceled, terminated or otherwise settled without the issuance of some or all the shares of common stock subject to the grant, such shares will be available for future grants. At February 11, 2000, there were no options granted or outstanding relating to the plan. 5. DIRECTORS STOCK PLAN On October 20, 1999, MetLife, Inc. also adopted the MetLife, Inc. 2000 directors stock plan (the "director's plan"). Under the director's plan, up to one-half of an outside director's retainer and attendance fees can be paid in common stock. The director's plan also provides that, with board approval, outside directors can be granted non-qualified stock options to purchase shares of MetLife, Inc. common stock at a price no less than the fair market value of a share of common stock on the grant date of the stock option. Up to a maximum of 500,000 shares may be issued under the director's plan in lieu of fees and no more than .05% of the shares outstanding immediately after the effective date of the plan of reorganization may be issued with respect to stock options under the directors plan. Common stock paid in lieu of fees under the director's plan may not be sold prior to the second anniversary of the effective date of the plan of reorganization. Stock options granted under the director's plan will generally be exercisable on the date of grant, but in no event exercised before the second anniversary of the effective date of the plan of reorganization. Outside directors may elect to receive all or a portion of their retainer and attendance fees that would otherwise be paid in cash with respect to services rendered after the second anniversary of the effective date of the plan of reorganization in the form of common stock. In addition, an outside director may elect to defer receipt of any shares issuable under the terms of the directors plan in lieu of their retainer and attendance fees and any dividends payable on the shares, until he or she is no longer a director of MetLife, Inc. At February 11, 2000 there were no options granted or outstanding relating to this plan. 6. STOCKHOLDER RIGHTS PLAN On September 29, 1999, MetLife, Inc. also approved a stockholder rights plan (the "rights plan"). Under the rights plan, each outstanding share of common stock issued between the entry into the underwriting agreement for the initial public offering and the distribution date (as defined in the rights plan) will be coupled with a stockholder right. Each right will entitle the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock. Each one one-hundredth of a share of Series A Junior Participating Preferred Stock will have economic and voting terms equivalent to one share of common stock. Until it is exercised, the right itself will not entitle the holder thereof to any rights as a stockholder, including the right to receive dividends or to vote at stockholder meetings. Stockholder rights are not exercisable until the distribution date, and will expire at the close of business on the tenth anniversary of the date on which the initial public offering price is determined, unless earlier redeemed or exchanged by MetLife, Inc. 7. COMMITMENTS AND CONTINGENCIES The New York Superintendent held a public hearing relating to the plan of demutualization on January 24, 2000. At the public hearing, some policyholders and others raised objections to certain aspects of the plan. These objections alleged, among other things, that the plan was not fair and equitable to policyholders of Metropolitan Life. In addition, a civil complaint challenging F-5 225 METLIFE, INC. NOTES TO BALANCE SHEET -- (CONTINUED) the fairness of the plan and the adequacy and accuracy of the disclosures to policyholders regarding the plan has been filed in New York Supreme Court for Kings County on behalf of the alleged class consisting of the policyholders of Metropolitan Life who should have membership benefits in Metropolitan Life and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan and seeks other relief. The defendants named in the compliant are Metropolitan Life, the individual members of its board of directors, and MetLife, Inc. The management of Metropolitan Life and MetLife, Inc. believe that the allegations made in the compliant are wholly without merit, and intend to vigorously contest the complaint. F-6 226 INDEPENDENT AUDITORS' REPORT The Board of Directors and Policyholders of Metropolitan Life Insurance Company: We have audited the accompanying consolidated balance sheets of Metropolitan Life Insurance Company and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Metropolitan Life Insurance Company and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 7, 2000 F-7 227 METROPOLITAN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
1999 1998 1997 ---- ---- ---- REVENUES Premiums.................................................... $12,088 $11,503 $11,278 Universal life and investment-type product policy fees...... 1,438 1,360 1,418 Net investment income....................................... 9,816 10,228 9,491 Other revenues.............................................. 2,154 1,994 1,491 Net realized investment gains (losses) (net of amounts allocable to other accounts of $(67), $608 and $231, respectively)............................................. (70) 2,021 787 ------- ------- ------- 25,426 27,106 24,465 ------- ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net realized investment gains (losses) of $(21), $368 and $161, respectively)....................... 13,105 12,638 12,403 Interest credited to policyholder account balances.......... 2,441 2,711 2,878 Policyholder dividends...................................... 1,690 1,651 1,742 Other expenses (excludes amounts directly related to net realized investment gains (losses) of $(46), $240 and $70, respectively)............................................. 6,755 8,019 5,771 ------- ------- ------- 23,991 25,019 22,794 ------- ------- ------- Income before provision for income taxes and extraordinary item...................................................... 1,435 2,087 1,671 Provision for income taxes.................................. 593 740 468 ------- ------- ------- Income before extraordinary item............................ 842 1,347 1,203 Extraordinary item -- demutualization expense............... 225 4 -- ------- ------- ------- Net income.................................................. $ 617 $ 1,343 $ 1,203 ======= ======= =======
See accompanying notes to consolidated financial statements. F-8 228 METROPOLITAN LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (IN MILLIONS)
1999 1998 ---- ---- ASSETS Investments: Fixed maturities available-for-sale, at fair value........ $ 96,981 $100,767 Equity securities, at fair value.......................... 2,006 2,340 Mortgage loans on real estate............................. 19,739 16,827 Real estate and real estate joint ventures................ 5,649 6,287 Policy loans.............................................. 5,598 5,600 Other limited partnership interests....................... 1,331 1,047 Short-term investments.................................... 3,055 1,369 Other invested assets..................................... 1,501 1,484 -------- -------- 135,860 135,721 Cash and cash equivalents................................... 2,789 3,301 Accrued investment income................................... 1,725 1,994 Premiums and other receivables.............................. 6,681 5,972 Deferred policy acquisition costs........................... 8,492 6,538 Deferred income taxes....................................... 603 -- Other....................................................... 4,141 3,752 Separate account assets..................................... 64,941 58,068 -------- -------- $225,232 $215,346 ======== ======== LIABILITIES AND EQUITY Liabilities: Future policy benefits...................................... $ 73,582 $ 72,701 Policyholder account balances............................... 45,901 46,494 Other policyholder funds.................................... 4,498 4,061 Policyholder dividends payable.............................. 974 947 Short-term debt............................................. 4,208 3,585 Long-term debt.............................................. 2,514 2,903 Current income taxes payable................................ 548 403 Deferred income taxes payable............................... -- 545 Other....................................................... 14,376 10,772 Separate account liabilities................................ 64,941 58,068 -------- -------- 211,542 200,479 -------- -------- Commitments and contingencies (Note 9) Equity: Retained earnings........................................... 14,100 13,483 Accumulated other comprehensive income (loss)............... (410) 1,384 -------- -------- 13,690 14,867 -------- -------- $225,232 $215,346 ======== ========
See accompanying notes to consolidated financial statements. F-9 229 METROPOLITAN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ----------------------------------------- NET FOREIGN MINIMUM UNREALIZED CURRENCY PENSION COMPREHENSIVE RETAINED INVESTMENT TRANSLATION LIABILITY TOTAL INCOME (LOSS) EARNINGS GAINS (LOSSES) ADJUSTMENT ADJUSTMENT ----- ------------- -------- -------------- ----------- ---------- Balance at January 1, 1997....... $11,983 $10,937 $ 1,028 $ 18 $ -- Comprehensive income: Net income..................... 1,203 $ 1,203 1,203 ------- Other comprehensive income: Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes...................... 870 870 Foreign currency translation adjustments................ (49) (49) ------- Other comprehensive income... 821 821 ------- Comprehensive income........... $ 2,024 ======= ------- ------- ------- ----- ---- Balance at December 31, 1997..... 14,007 12,140 1,898 (31) -- Comprehensive income: Net income..................... 1,343 $ 1,343 1,343 ------- Other comprehensive loss: Unrealized investment losses, net of related offsets, reclassification adjustments and income taxes...................... (358) (358) Foreign currency translation adjustments................ (113) (113) Minimum pension liability adjustment................. (12) (12) ------- Other comprehensive loss..... (483) (483) ------- Comprehensive income........... $ 860 ======= ------- ------- ------- ----- ---- Balance at December 31, 1998..... 14,867 13,483 1,540 (144) (12) Comprehensive loss: Net income..................... 617 $ 617 617 ------- Other comprehensive loss: Unrealized investment losses, net of related offsets, reclassification adjustments and income taxes...................... (1,837) (1,837) Foreign currency translation adjustments................ 50 50 Minimum pension liability adjustment................. (7) (7) ------- Other comprehensive loss..... (1,794) (1,794) ------- Comprehensive loss............. $(1,177) ======= ------- ------- ------- ----- ---- Balance at December 31, 1999..... $13,690 $14,100 $ (297) $ (94) $(19) ======= ======= ======= ===== ====
See accompanying notes to consolidated financial statements. F-10 230 METROPOLITAN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 617 $ 1,343 $ 1,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expenses.................. 173 56 (36) (Gains) losses from sales of investments and businesses, net................................................... 137 (2,629) (1,018) Change in undistributed income of real estate joint ventures and other limited partnership interests...... (322) (91) 157 Interest credited to policyholder account balances...... 2,441 2,711 2,878 Universal life and investment-type product policy fees.................................................. (1,438) (1,360) (1,418) Change in accrued investment income..................... 269 (181) (215) Change in premiums and other receivables................ (619) (2,681) (792) Change in deferred policy acquisition costs, net........ (389) (188) (159) Change in insurance related liabilities................. 2,248 1,481 2,364 Change in income taxes payable.......................... 22 251 (99) Change in other liabilities............................. 857 2,390 (206) Other, net.............................................. (131) (260) 213 -------- -------- -------- Net cash provided by operating activities................... 3,865 842 2,872 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturities........................................ 73,120 57,857 75,346 Equity securities....................................... 760 3,085 1,821 Mortgage loans on real estate........................... 1,992 2,296 2,784 Real estate and real estate joint ventures.............. 1,062 1,122 2,046 Other limited partnership interests..................... 469 146 166 Purchases of: Fixed maturities........................................ (72,253) (67,543) (76,603) Equity securities....................................... (410) (854) (2,121) Mortgage loans on real estate........................... (4,395) (2,610) (4,119) Real estate and real estate joint ventures.............. (341) (423) (624) Other limited partnership interests..................... (465) (723) (338) Net change in short-term investments...................... (1,577) (761) 63 Net change in policy loans................................ 2 133 17 Purchase of businesses, net of cash received.............. (2,972) -- (430) Proceeds from sales of businesses......................... -- 7,372 135 Net change in investment collateral....................... 2,692 3,769 -- Other, net................................................ (73) (183) 191 -------- -------- -------- Net cash provided by (used in) investing activities......... (2,389) 2,683 (1,666) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits................................................ 18,428 19,361 16,061 Withdrawals............................................. (20,650) (21,706) (18,831) Short-term debt, net...................................... 623 (1,002) 1,265 Long-term debt issued..................................... 44 693 989 Long-term debt repaid..................................... (433) (481) (104) -------- -------- -------- Net cash used in financing activities....................... (1,988) (3,135) (620) -------- -------- -------- Change in cash and cash equivalents......................... (512) 390 586 Cash and cash equivalents, beginning of year................ 3,301 2,911 2,325 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,789 $ 3,301 $ 2,911 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.................................................. $ 388 $ 367 $ 422 ======== ======== ======== Income taxes.............................................. $ 587 $ 579 $ 589 ======== ======== ========
See accompanying notes to consolidated financial statements. F-11 231 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED.) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Metropolitan Life Insurance Company ("MetLife") and its subsidiaries (the "Company") is a leading provider of insurance and financial services to a broad section of institutional and individual customers. The Company offers life insurance, annuities and mutual funds to individuals and group insurance and retirement and savings products and services to corporations and other institutions. PLAN OF REORGANIZATION On September 28, 1999, the board of directors of MetLife adopted, pursuant to the New York Insurance Law, a plan of reorganization, and subsequently adopted amendments to the plan, pursuant to which MetLife proposes to convert from a mutual life insurance company to a stock life insurance company and become a wholly-owned subsidiary of MetLife, Inc. The plan was approved by MetLife's voting policyholders on February 7, 2000. The plan will become effective at such time as the New York Superintendent of Insurance ("Superintendent") approves it based on finding, among other things, that the plan is fair and equitable to policyholders. The plan requires an initial public offering of common stock and provides for other capital raising transactions on the effective date of the plan. On the date the plan of reorganization becomes effective, each policyholder's membership interest will be extinguished and each eligible policyholder will be entitled to receive, in exchange for that interest, trust interests representing shares of common stock of MetLife, Inc. to be held in a trust, cash or an adjustment to their policy values in the form of policy credits, as provided in the plan. In addition, when MetLife demutualizes, MetLife's Canadian branch will make cash payments to holders of certain policies transferred to Clarica Life Insurance Company ("Clarica Life") in connection with the sale of a substantial portion of MetLife's Canadian operations in 1998. See Note 9. The plan of reorganization requires that MetLife establish and operate a closed block for the benefit of holders of certain individual life insurance policies of MetLife. Assets will be allocated to the closed block in an amount that is expected to produce cash flows which, together with anticipated revenue from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of these policies included in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience relating to the closed block are, in the aggregate, more or less favorable than assumed in establishing the closed block, total dividends paid to the closed block policyholders in the future may be greater than or less than which would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. The closed block will continue in effect until the last policy in the closed block is no longer in force. F-12 232 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accounting principles to account for the participating policies included in the closed block will be those used prior to the date of the demutualization. However, a policyholder dividend obligation will be established for earnings that will be paid to policyholders as additional dividends in the amounts described below, unless these earnings are offset by future unfavorable experience in the closed block. Although all of the cash flows of the closed block are for the benefit of closed block policyholders, the excess of closed block liabilities over closed block assets at the effective date will represent the estimated maximum future contributions from the closed block expected to be reported in income as the contribution from the closed block after income taxes. The contribution from the closed block will be recognized in income over the period the policies and contracts in the closed block remain in force. Management believes that over time the actual cumulative contributions from the closed block will approximately equal the expected cumulative contributions, due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative contribution from the closed block is greater than the expected cumulative contribution from the closed block, the expected cumulative contribution will be recognized in income with the excess recorded as a policyholder dividend obligation, because the excess of the actual cumulative contribution from the closed block over the expected cumulative contribution will be paid to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block. If over such period, the actual cumulative contribution from the closed block is less than the expected cumulative contribution from the closed block, the actual contribution will be recognized in income. However, dividends in the future may be changed, which would be intended to increase future actual contribution until the actual contribution equal the expected cumulative contribution. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The New York State Insurance Department (the "Department") recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company for determining solvency under the New York Insurance Law. No consideration is given by the Department to financial statements prepared in accordance with GAAP in making such determination. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates include those used in determining deferred policy acquisition costs, investment allowances and the liability for future policyholder benefits. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of MetLife and its subsidiaries, partnerships and joint ventures in which MetLife has a majority voting interest or general partner interest with limited removal rights by limited partners. All material intercompany accounts and transactions have been eliminated. The Company accounts for its investments in real estate joint ventures and other limited partnership interests in which it does not have a controlling interest, but more than a minimal interest, under the equity method of accounting. Minority interest related to consolidated entities included in other liabilities was $245 and $274 at December 31, 1999 and 1998, respectively. F-13 233 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the 1999 presentation. INVESTMENTS The Company's fixed maturity and equity securities are classified as available-for-sale and are reported at their estimated fair value. Unrealized investment gains and losses on securities are recorded as a separate component of other comprehensive income (loss), net of policyholder related amounts and deferred income taxes. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary. These adjustments are recorded as realized losses on investments. Realized gains and losses on sales of securities are determined on a specific identification basis. All security transactions are recorded on a trade date basis. Mortgage loans on real estate are stated at amortized cost, net of valuation allowances. Valuation allowances are established for the excess carrying value of the mortgage loan over its estimated fair value when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Valuation allowances are based upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the collateral value if the loan is collateral dependent. Interest income earned on impaired loans is accrued on the net carrying value amount of the loan based on the loan's effective interest rate. Real estate, including related improvements, is stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 20 to 40 years). Cost is adjusted for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Impaired real estate is written down to estimated fair value with the impairment loss being included in realized losses on investments. Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate acquired in satisfaction of debt is recorded at estimated fair value at the date of foreclosure. Valuation allowances on real estate held-for-sale are computed using the lower of depreciated cost or estimated fair value, net of disposition costs. Policy loans are stated at unpaid principal balances. Short-term investments are stated at amortized cost, which approximates fair value. DERIVATIVE INSTRUMENTS The Company uses derivative instruments to manage market risk through one of four principal risk management strategies: the hedging of invested assets, liabilities, portfolios of assets or liabilities and anticipated transactions. The Company's derivative strategy employs a variety of instruments including financial futures, financial forwards, interest rate and foreign currency swaps, floors, foreign exchange contracts, caps and options. The Company's derivative program is monitored by senior management. The Company's risk of loss is typically limited to the fair value of its derivative instruments and not to the notional or contractual amounts of these derivatives. Risk arises from changes in the fair value of the underlying instruments and, with respect to over-the-counter transactions, from the possible inability of counterparties to meet the terms of the contracts. The Company has strict policies regarding the financial stability and credit standing of its major counterparties. F-14 234 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's derivative instruments are designated as hedges and are highly correlated to the underlying risk at contract inception. The Company monitors the effectiveness of its hedges throughout the contract term using an offset ratio of 80 to 125 percent as its minimum acceptable threshold for hedge effectiveness. Derivative instruments that lose their effectiveness are marked to market through net investment income. Gains or losses on financial futures contracts entered into in anticipation of investment transactions are deferred and, at the time of the ultimate investment purchase or disposition, recorded as an adjustment to the basis of the purchased assets or to the proceeds on disposition. Gains or losses on financial futures used in asset risk management are deferred and amortized into net investment income over the remaining term of the investment. Gains or losses on financial futures used in portfolio risk management are deferred and amortized into net investment income or policyholder benefits over the remaining life of the hedged sector of the underlying portfolio. Financial forward contracts that are entered into to purchase securities are marked to fair value through other comprehensive income (loss), similar to the accounting for the investment security. Such contracts are accounted for at settlement by recording the purchase of the specified securities at the contracted value. Gains or losses resulting from the termination of forward contracts are recognized immediately as a component of net investment income. Interest rate and certain foreign currency swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net receipts or payments are accrued and recognized over the term of the swap agreement as an adjustment to net investment income or other expense. Gains or losses resulting from swap terminations are amortized over the remaining term of the underlying asset or liability. Gains and losses on swaps and certain foreign forward exchange contracts entered into in anticipation of investment transactions are deferred and, at the time of the ultimate investment purchase or disposition, reflected as an adjustment to the basis of the purchased assets or to the proceeds of disposition. In the event the asset or liability underlying a swap is disposed of, the swap position is closed immediately and any gain or loss is recorded as an adjustment to the proceeds from disposition. The Company periodically enters into collars, which consist of purchased put and written call options, to lock in unrealized gains on equity securities. Collars are marked to market through other comprehensive income (loss), similar to the accounting for the underlying equity securities. Purchased interest rate caps and floors are used to offset the risk of interest rate changes related to insurance liabilities. Premiums paid on floors, caps and options are split into two components, time value and intrinsic value. Time value is amortized over the life of the applicable derivative instrument. The intrinsic value and any gains or losses relating to these derivative instruments adjust the basis of the underlying asset or liability and are recognized as a component of net investment income over the term of the underlying asset or liability being hedged as an adjustment to the yield. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-15 235 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using either the straight-line or sum-of-the-years-digits method over the estimated useful lives of the assets. Estimated lives range from 20 to 40 years for real estate and 5 to 15 years for all other property and equipment. Accumulated depreciation of property and equipment and accumulated amortization on leasehold improvements was $1,130 and $1,098 at December 31, 1999 and 1998, respectively. Related depreciation and amortization expense was $103, $116 and $103 for the years ended December 31, 1999, 1998 and 1997, respectively. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new insurance business that vary with, and are primarily related to, the production of new business are deferred. Such costs, which consist principally of commissions, agency and policy issue expenses, are amortized with interest over the expected life of the contract for participating traditional life, universal life and investment-type products. Generally, deferred policy acquisition costs are amortized in proportion to the present value of estimated gross margins or profits from investment, mortality, expense margins and surrender charges. Interest rates are based on rates in effect at the inception of the contracts. Actual gross margins or profits can vary from management's estimates resulting in increases or decreases in the rate of amortization. Management periodically updates these estimates and evaluates the recoverability of deferred policy acquisition costs. When appropriate, management revises its assumptions of the estimated gross margins or profits of these contracts, and the cumulative amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. Deferred policy acquisition costs for non-participating traditional life, non-medical health and annuity policies with life contingencies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are made at the date of policy issuance and are consistently applied during the lives of the contracts. Deviations from estimated experience are included in operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy. Deferred policy acquisition costs related to internally replaced contracts are expensed at date of replacement. Deferred policy acquisition costs for property and casualty insurance contracts, which are primarily comprised of commissions and certain underwriting expenses, are deferred and amortized on a pro rata basis over the applicable contract term or reinsurance treaty. On September 28, 1999, the Company's Board of Directors adopted a plan of reorganization. Consequently, in the fourth quarter of 1999, the Company was able to commit to state insurance regulatory authorities that it would establish investment sub-segments to further align investments with the traditional individual life business of the Individual segment. As a result, future dividends for the traditional individual life business will be determined based on the results of the new investment sub-segments. Additionally, estimated future gross margins used to determine amortization of deferred policy acquisition costs and the amount of unrealized investment gains and losses relating to these products are based on investments in the new sub-segments. Using the investments in the sub-segments to determine estimated gross margins and unrealized investment gains and losses increased 1999 amortization of deferred policy acquisition costs by $56 (net of income taxes of $32) and decreased other comprehensive loss in 1999 by $123 (net of income taxes of $70). F-16 236 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding deferred policy acquisition costs is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ---- ---- ---- Balance at January 1.................................. $ 6,538 $6,436 $7,227 Capitalized during the year........................... 1,160 1,025 1,000 ------- ------ ------ Total............................................ 7,698 7,461 8,227 ------- ------ ------ Amortization allocated to: Net realized investment gains (losses).............. (46) 240 70 Unrealized investment gains (losses)................ (1,628) (216) 727 Other expenses...................................... 862 587 771 ------- ------ ------ Total amortization............................... (812) 611 1,568 ------- ------ ------ Dispositions and other................................ (18) (312) (223) ------- ------ ------ Balance at December 31................................ $ 8,492 $6,538 $6,436 ======= ====== ======
Amortization of deferred policy acquisition costs is allocated to (1) realized investment gains and losses to provide consolidated statement of income information regarding the impact of such gains and losses on the amount of the amortization, (2) unrealized investment gains and losses to provide information regarding the amount of deferred policy acquisition costs that would have been amortized if such gains and losses had been realized and (3) other expenses to provide amounts related to the gross margins or profits originating from transactions other than investment gains and losses. Realized investment gains and losses related to certain products have a direct impact on the amortization of deferred policy acquisition costs. Presenting realized investment gains and losses net of related amortization of deferred policy acquisition costs provides information useful in evaluating the operating performance of the Company. This presentation may not be comparable to presentations made by other insurers. INTANGIBLE ASSETS The excess of cost over the fair value of net assets acquired ("goodwill") and other intangible assets, including the value of business acquired, are included in other assets. Goodwill is amortized on a straight-line basis over a period ranging from 10 to 30 years. The Company continually reviews goodwill to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in operating results if a permanent diminution in value is deemed to have occurred. Other intangible assets are amortized over the expected policy or contract duration in relation to the present value of estimated gross profits from such policies and contracts. F-17 237 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL OTHER INTANGIBLE ASSETS -------------------- -------------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- YEARS ENDED DECEMBER 31 Net Balance at January 1.............. $404 $359 $136 $1,006 $1,055 $ 767 Acquisitions.......................... 237 67 240 156 39 355 Amortization.......................... (30) (22) (17) (114) (88) (67) ---- ---- ---- ------ ------ ------ Net Balance at December 31............ $611 $404 $359 $1,048 $1,006 $1,055 ==== ==== ==== ====== ====== ====== DECEMBER 31 Accumulated amortization.............. $118 $ 88 $ 392 $ 278 ==== ==== ====== ======
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (a) net level premium reserves for death and endowment policy benefits (calculated based upon the nonforfeiture interest rate, ranging from 3% to 10%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts), (b) the liability for terminal dividends and (c) premium deficiency reserves, which are established when the liabilities for future policy benefits plus the present value of expected future gross premiums are insufficient to provide for expected future policy benefits and expenses after deferred policy acquisition costs are written off. Future policy benefit liabilities for traditional annuities are equal to accumulated contractholder fund balances during the accumulation period and the present value of expected future payments after annuitization. Interest rates used in establishing such liabilities range from 3% to 8%. Future policy benefit liabilities for non-medical health insurance are calculated using the net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rates used in establishing such liabilities range from 3% to 10%. 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. Interest rates used in establishing such liabilities range from 3% to 10%. Policyholder account balances for universal life and investment-type contracts are equal to the policy account values, which consist of an accumulation of gross premium payments plus credited interest, ranging from 2% to 17%, less expenses, mortality charges and withdrawals. The liability for unpaid claims and claim expenses for property and casualty insurance represents the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Liabilities for unpaid claims are estimated based upon the Company's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs. Revisions of these estimates are included in operations in the year such refinements are made. RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS Premiums related to traditional life and annuity policies with life contingencies are recognized as revenues when due. Benefits and expenses are provided against such revenues to recognize profits over the estimated lives of the policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into operations in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments. F-18 238 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Premiums related to non-medical health contracts are recognized on a pro rata basis over the applicable contract term. Premiums related to universal life and investment-type products are credited to policyholder account balances. Revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related policyholder account balances. Premiums related to property and casualty contracts are recognized as revenue on a pro rata basis over the applicable contract term. Unearned premiums are included in other liabilities. DIVIDENDS TO POLICYHOLDERS Dividends to policyholders are determined annually by the board of directors. The aggregate amount of policyholders' dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management's judgment as to the appropriate level of statutory surplus to be retained by MetLife and its insurance subsidiaries. DIVIDEND RESTRICTIONS MetLife, when it converts from a mutual life insurance company to a stock life insurance company, may be restricted as to the amounts it may pay as dividends to MetLife, Inc. Under the New York Insurance Law, the Superintendent has broad discretion to determine whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. The Department has established informal guidelines for the Superintendent's determinations which focus upon, among other things, the overall financial condition and profitability of the insurer under statutory accounting practices. PARTICIPATING BUSINESS Participating business represented approximately 19% and 21% of the Company's life insurance in-force, and 84% and 81% of the number of life insurance policies in-force, at December 31, 1999 and 1998, respectively. Participating policies represented approximately 42% and 44%, 39% and 40%, and 41% and 41% of gross and net life insurance premiums for the years ended December 31, 1999, 1998 and 1997, respectively. INCOME TAXES MetLife and its includable life insurance and non-life insurance subsidiaries file a consolidated U.S. federal income tax return in accordance with the provisions of the Internal Revenue Code, as amended (the "Code"). Under the Code, the amount of federal income tax expense incurred by mutual life insurance companies includes an equity tax calculated based upon a prescribed formula that incorporates a differential earnings rate between stock and mutual life insurance companies. MetLife will not be subject to the equity tax when it converts to a stock life insurance company. The future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities are measured at the balance sheet dates and are recorded as deferred income tax assets and liabilities. REINSURANCE The Company has reinsured certain of its life insurance and property and casualty insurance contracts with other insurance companies under various agreements. Amounts due from F-19 239 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reinsurers are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Policy and contract liabilities are reported gross of reinsurance credits. Deferred policy acquisition costs are reduced by amounts recovered under reinsurance contracts. Amounts received from reinsurers for policy administration are reported in other revenues. SEPARATE ACCOUNTS Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. Investments (stated at estimated fair value) and liabilities of the separate accounts are reported separately as assets and liabilities. Deposits to separate accounts, investment income and realized and unrealized gains and losses on the investments of the separate accounts accrue directly to contractholders and, accordingly, are not reflected in the Company's consolidated statements of income and cash flows. Mortality, policy administration and surrender charges to all separate accounts are included in revenues. See Note 6. FOREIGN CURRENCY TRANSLATION Balance sheet accounts of foreign operations are translated at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The local currencies of foreign operations are the functional currencies unless the local economy is highly inflationary. Translation adjustments are charged or credited directly to other comprehensive income (loss). Gains and losses from foreign currency transactions are reported in other expenses and were insignificant for all years presented. EXTRAORDINARY ITEM -- DEMUTUALIZATION EXPENSE The accompanying consolidated statements of income include extraordinary charges of $225 (net of income taxes of $35) and $4 (net of income taxes of $2) for the years ended December 31, 1999 and 1998, respectively, related to costs associated with the demutualization. APPLICATION OF ACCOUNTING PRONOUNCEMENTS Effective January 1, 1999, the Company adopted Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 broadly defines start-up activities. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Adoption of SOP 98-5 did not have a material effect on the Company's consolidated financial statements. Effective January 1, 1999, the Company adopted SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for determining when an entity should capitalize or expense external and internal costs of computer software developed or obtained for internal use. Adoption of the provisions of SOP 98-1 had the effect of increasing other assets by $82 at December 31, 1999. Effective January 1, 1999, the Company adopted SOP 97-3, Accounting for Insurance and Other Enterprises for Insurance Related Assessments ("SOP 97-3"). SOP 97-3 provides guidance on accounting by insurance and other enterprises for assessments related to insurance activities including recognition, measurement and disclosure of guaranty fund and other insurance related F-20 240 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assessments. Adoption of SOP 97-3 did not have a material effect on the Company's consolidated financial statements. In 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125") which were deferred by SFAS 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. The deferred provisions provide accounting and reporting standards related to repurchase agreements, dollar rolls, securities lending and similar transactions. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 at December 31, 1998 and increasing other revenues and other expenses by $266 for the year ended December 31, 1998. During 1997, the Company changed to the retrospective interest method of accounting for investment income on structured notes in accordance with Emerging Issues Task Force Consensus No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. This accounting change increased 1997 net investment income by $175, which included an immaterial amount related to prior years. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 defers the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") until January 1, 2001. SFAS 133 requires, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The Company is in the process of quantifying the impact of SFAS 133 on its consolidated financial statements. In October 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-7, Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk ("SOP 98-7"). SOP 98-7 provides guidance on the method of accounting for insurance and reinsurance contracts that do not transfer insurance risk, defined in the SOP as the deposit method. SOP 98-7 classifies insurance and reinsurance contracts for which the deposit method is appropriate into those that 1) transfer only significant timing risk, 2) transfer only significant underwriting risk, 3) transfer neither significant timing or underwriting risk and 4) have an indeterminate risk. The Company is required to adopt SOP 98-7 as of January 1, 2000. Adoption of SOP 98-7 is not expected to have a material effect on the Company's consolidated financial statements. F-21 241 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVESTMENTS The components of net investment income were as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Fixed maturities.................................... $ 6,766 $ 6,563 $ 6,445 Equity securities................................... 40 78 50 Mortgage loans on real estate....................... 1,479 1,572 1,684 Real estate and real estate joint ventures.......... 1,426 1,529 1,718 Policy loans........................................ 340 387 368 Other limited partnership interests................. 199 196 302 Cash, cash equivalents and short-term investments... 173 187 169 Other............................................... 501 841 368 ------- ------- ------- 10,924 11,353 11,104 Less: Investment expenses........................... 1,108 1,125 1,613 ------- ------- ------- $ 9,816 $10,228 $ 9,491 ======= ======= =======
Net realized investment gains (losses), including changes in valuation allowances, were as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ---- ---- ---- Fixed maturities........................................ $(538) $ 573 $ 118 Equity securities....................................... 99 994 224 Mortgage loans on real estate........................... 28 23 56 Real estate and real estate joint ventures.............. 265 424 446 Other limited partnership interests..................... 33 13 12 Sales of businesses..................................... -- 531 139 Other................................................... (24) 71 23 ----- ------ ------ (137) 2,629 1,018 Amounts allocable to: Future policy benefit loss recognition................ -- (272) (126) Deferred policy acquisition costs..................... 46 (240) (70) Participating contracts............................... 21 (96) (35) ----- ------ ------ $ (70) $2,021 $ 787 ===== ====== ======
Realized investment gains (losses) have been reduced by (1) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains, (2) deferred policy acquisition cost amortization to the extent that such amortization results from realized investment gains and losses, and (3) additions to participating contractholder accounts when amounts equal to such investment gains and losses are credited to the contractholders' accounts. This presentation may not be comparable to presentations made by other insurers. F-22 242 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net unrealized investment gains (losses), included in accumulated other comprehensive income (loss), were as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Fixed maturities.................................... $(1,828) $ 4,809 $ 4,766 Equity securities................................... 875 832 1,605 Other invested assets............................... 165 154 294 ------- ------- ------- (788) 5,795 6,665 ------- ------- ------- Amounts allocable to: Future policy benefit loss recognition............ (249) (2,248) (2,189) Deferred policy acquisition costs................. 697 (931) (1,147) Participating contracts........................... (118) (212) (312) Deferred income taxes............................... 161 (864) (1,119) ------- ------- ------- 491 (4,255) (4,767) ------- ------- ------- $ (297) $ 1,540 $ 1,898 ======= ======= =======
The changes in net unrealized investment gains (losses) were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ---- ---- ---- Balance at January 1.................................. $ 1,540 $1,898 $1,028 Unrealized investment gains (losses) during the year................................................ (6,583) (870) 3,402 Unrealized investment (gains) losses relating to: Future policy benefit loss recognition.............. 1,999 (59) (970) Deferred policy acquisition costs................... 1,628 216 (727) Participating contracts............................. 94 100 (303) Deferred income taxes................................. 1,025 255 (532) ------- ------ ------ Balance at December 31................................ $ (297) $1,540 $1,898 ======= ====== ====== Net change in unrealized investment gains (losses).... $(1,837) $ (358) $ 870 ======= ====== ======
F-23 243 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FIXED MATURITIES AND EQUITY SECURITIES Fixed maturities and equity securities at December 31, 1999 were as follows:
COST OR GROSS UNREALIZED AMORTIZED ---------------- ESTIMATED COST GAIN LOSS FAIR VALUE --------- ---- ---- ---------- Fixed Maturities: Bonds: U.S. Treasury securities and obligations of U.S. government corporations and agencies.......... $ 5,990 $ 456 $ 147 $ 6,299 States and political subdivisions.... 1,583 4 45 1,542 Foreign governments.................. 4,090 210 94 4,206 Corporate............................ 47,505 585 1,913 46,177 Mortgage and asset-backed securities......................... 27,396 112 847 26,661 Other................................ 12,235 313 462 12,086 ------- ------ ------ ------- 98,799 1,680 3,508 96,971 Redeemable preferred stocks............. 10 -- -- 10 ------- ------ ------ ------- $98,809 $1,680 $3,508 $96,981 ======= ====== ====== ======= Equity Securities: Common stocks........................... $ 980 $ 921 $ 35 $ 1,866 Nonredeemable preferred stocks.......... 151 -- 11 140 ------- ------ ------ ------- $ 1,131 $ 921 $ 46 $ 2,006 ======= ====== ====== =======
Fixed maturities and equity securities at December 31, 1998 were as follows:
COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED COST GAIN LOSS FAIR VALUE --------- ---- ---- ---------- Fixed Maturities: Bonds: U.S. Treasury securities and obligations of U.S. government corporations and agencies.......... $ 6,640 $1,117 $ 10 $ 7,747 States and political subdivisions.... 597 26 -- 623 Foreign governments.................. 3,435 254 88 3,601 Corporate............................ 46,377 2,471 260 48,588 Mortgage and asset-backed securities......................... 26,456 569 46 26,979 Other................................ 12,438 1,069 293 13,214 ------- ------ ---- -------- 95,943 5,506 697 100,752 Redeemable preferred stocks............. 15 -- -- 15 ------- ------ ---- -------- $95,958 $5,506 $697 $100,767 ======= ====== ==== ======== Equity Securities: Common stocks........................... $ 1,286 $ 923 $ 77 $ 2,132 Nonredeemable preferred stocks.......... 222 4 18 208 ------- ------ ---- -------- $ 1,508 $ 927 $ 95 $ 2,340 ======= ====== ==== ========
F-24 244 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company held foreign currency derivatives with notional amounts of $4,002 and $716 to hedge the exchange rate risk associated with foreign bonds at December 31, 1999 and 1998, respectively. The Company also held options with fair values of $(11) to hedge the market value of common stocks at December 31, 1998. At December 31, 1999, fixed maturities held by the Company that were below investment grade or not rated by an independent rating agency had an estimated fair value of $8,813. At December 31, 1999, non-income producing fixed maturities were insignificant. The amortized cost and estimated fair value of bonds at December 31, 1999, by contractual maturity date, are shown below:
AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- Due in one year or less............................... $ 3,180 $ 3,217 Due after one year through five years................. 18,152 18,061 Due after five years through ten years................ 23,755 23,114 Due after ten years................................... 26,316 25,918 ------- ------- 71,403 70,310 Mortgage and asset-backed securities.................. 27,396 26,661 ------- ------- $98,799 $96,971 ======= =======
Fixed maturities not due at a single maturity date have been included in the above table in the year of final maturity. Actual maturities may differ from contractual maturities due to the exercise of prepayment options. Sales of securities were as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Securities classified as available-for-sale: Proceeds.......................................... $59,852 $46,913 $69,275 Gross realized gains.............................. $ 605 $ 2,053 $ 965 Gross realized losses............................. $ 911 $ 486 $ 627 Fixed maturities classified as held-to-maturity: Proceeds.......................................... $ -- $ -- $ 352 Gross realized gains.............................. $ -- $ -- $ 5 Gross realized losses............................. $ -- $ -- $ 1
Gross realized losses above exclude writedowns recorded during 1999 for permanently impaired available-for-sale securities of $133. During 1997, fixed maturities with an amortized cost of $11,682 were transferred from held-to-maturity to available-for-sale. Other comprehensive income at the date of reclassification was increased by $198 excluding the effects of deferred income taxes and policyholder related amounts. Excluding investments in U.S. governments and agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturities portfolio. F-25 245 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SECURITIES LENDING PROGRAM The Company participates in securities lending programs whereby large blocks of securities, which are returnable to the Company on short notice and included in investments, are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $6,458 and $4,005 and estimated fair value of $6,391 and $4,552 were on loan under the program at December 31, 1999 and 1998, respectively. The Company was liable for cash collateral under its control of $6,461 and $3,769 at December 31, 1999 and 1998, respectively. This liability is included in other liabilities. Security collateral on deposit from securities borrowers is returnable to them on short notice and is not reflected in the consolidated financial statements. STATUTORY DEPOSITS The Company had investment assets on deposit with regulatory agencies of $476 and $466 at December 31, 1999 and 1998, respectively. MORTGAGE LOANS ON REAL ESTATE Mortgage loans were categorized as follows:
DECEMBER 31, ---------------------------------------- 1999 1998 ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- Commercial mortgage loans.................. $14,931 75% $12,503 74% Agricultural mortgage loans................ 4,816 24% 4,256 25% Residential mortgage loans................. 82 1% 241 1% ------- --- ------- --- 19,829 100% 17,000 100% === === Less: Valuation allowances................. 90 173 ------- ------- $19,739 $16,827 ======= =======
Mortgage loans on real estate are collateralized by properties primarily located throughout the United States. At December 31, 1999, approximately 16%, 8% and 8% of the properties were located in California, New York and Florida, respectively. Generally, the Company (as the lender) requires that a minimum of one-fourth of the purchase price of the underlying real estate be paid by the borrower. Certain of the Company's real estate joint ventures have mortgage loans with the Company. The carrying values of such mortgages were $547 and $606 at December 31, 1999 and 1998, respectively. F-26 246 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes in mortgage loan valuation allowances were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ---- ---- ---- Balance at January 1................................. $ 173 $ 289 $ 469 Additions............................................ 40 40 61 Deductions for writedowns and dispositions........... (123) (130) (241) Deductions for disposition of affiliates............. -- (26) -- ----- ----- ----- Balance at December 31............................... $ 90 $ 173 $ 289 ===== ===== =====
A portion of the Company's mortgage loans on real estate was impaired and consisted of the following:
DECEMBER 31, -------------- 1999 1998 ---- ---- Impaired mortgage loans with valuation allowances.......... $540 $ 823 Impaired mortgage loans without valuation allowances....... 437 375 ---- ------ 977 1,198 Less: Valuation allowances................................. 83 149 ---- ------ $894 $1,049 ==== ======
The average investment in impaired mortgage loans on real estate was $1,134, $1,282 and $1,680 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest income on impaired mortgages was $101, $109 and $110 for the years ended December 31, 1999, 1998 and 1997, respectively. The investment in restructured mortgage loans on real estate was $980 and $1,140 at December 31, 1999 and 1998, respectively. Interest income of $80, $74 and $91 was recognized on restructured loans for the years ended December 31, 1999, 1998 and 1997, respectively. Gross interest income that would have been recorded in accordance with the original terms of such loans amounted to $92, $87 and $116 for the years ended December 31, 1999, 1998 and 1997, respectively. Mortgage loans on real estate with scheduled payments of 60 days (90 days for agriculture mortgages) or more past due or in foreclosure had an amortized cost of $44 and $65 at December 31, 1999 and 1998, respectively. F-27 247 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REAL ESTATE AND REAL ESTATE JOINT VENTURES Real estate and real estate joint ventures consisted of the following:
DECEMBER 31, ---------------- 1999 1998 ---- ---- Real estate and real estate joint ventures held-for-investment....................................... $5,440 $6,301 Impairments................................................. (289) (408) ------ ------ 5,151 5,893 ------ ------ Real estate and real estate joint ventures held-for-sale.... 719 546 Impairments................................................. (187) (119) Valuation allowance......................................... (34) (33) ------ ------ 498 394 ------ ------ $5,649 $6,287 ====== ======
Accumulated depreciation on real estate was $2,235 and $2,065 at December 31, 1999 and 1998, respectively. Related depreciation expense was $247, $282 and $338 for the years ended December 31, 1999, 1998 and 1997, respectively. Real estate and real estate joint ventures were categorized as follows:
DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- Office........................................ $3,846 68% $4,265 68% Retail........................................ 587 10% 640 10% Apartments.................................... 474 8% 418 7% Land.......................................... 258 5% 313 5% Agriculture................................... 96 2% 195 3% Other......................................... 388 7% 456 7% ------ --- ------ --- $5,649 100% $6,287 100% ====== === ====== ===
The Company's real estate holdings are primarily located throughout the United States. At December 31, 1999, approximately 25%, 24% and 10% of the Company's real estate holdings were located in New York, California and Texas, respectively. Changes in real estate and real estate joint ventures held-for-sale valuation allowance were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Balance at January 1....................................... $ 33 $110 $ 661 Additions charged (credited) to operations................. 36 (5) (76) Deductions for writedowns and dispositions................. (35) (72) (475) ---- ---- ----- Balance at December 31..................................... $ 34 $ 33 $ 110 ==== ==== =====
Investment income related to impaired real estate and real estate joint ventures held-for-investment was $61, $105 and $28 for the years ended December 31, 1999, 1998 and 1997, respectively. Investment income related to real estate and real estate joint ventures held-for-sale F-28 248 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was $14, $3 and $11 for the years ended December 31, 1999, 1998 and 1997, respectively. The carrying value of non-income producing real estate and real estate joint ventures was $22 and $1 at December 31, 1999 and 1998, respectively. The Company owned real estate acquired in satisfaction of debt of $47 and $154 at December 31, 1999 and 1998, respectively. Real estate of $37, $69 and $151 was acquired in satisfaction of debt during the years ended December 31, 1999, 1998 and 1997, respectively. LEVERAGED LEASES Leveraged leases, included in other invested assets, consisted of the following:
DECEMBER 31, ---------------- 1999 1998 ---- ---- Investment............................................... $1,016 $1,067 Estimated residual values................................ 559 607 ------ ------ 1,575 1,674 Unearned income.......................................... (417) (471) ------ ------ $1,158 $1,203 ====== ======
The investment amounts set forth above are generally due in monthly installments. The payment periods generally range from four to 15 years, but in certain circumstances are as long as 30 years. Average yields range from 7% to 12%. These receivables are generally collateralized by the related property. 3. DERIVATIVE INSTRUMENTS The table below provides a summary of the carrying value, notional amount and current market or fair value of derivative financial instruments (other than equity options) held at December 31, 1999 and 1998:
1999 1998 ------------------------------------------ ------------------------------------------ CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE CARRYING NOTIONAL -------------------- CARRYING NOTIONAL -------------------- VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES -------- -------- ------ ----------- -------- -------- ------ ----------- Financial futures.................. $ 27 $ 3,140 $37 $ 10 $ 3 $ 2,190 $ 8 $ 6 Foreign exchange contracts......... -- -- -- -- -- 136 -- 2 Interest rate swaps................ (32) 1,316 11 40 (9) 1,621 17 50 Foreign currency swaps............. -- 4,002 26 103 (1) 580 3 62 Caps............................... 1 12,376 3 -- -- 8,391 -- -- ---- ------- --- ---- --- ------- --- ---- Total contractual commitments...... $ (4) $20,834 $77 $153 $(7) $12,918 $28 $120 ==== ======= === ==== === ======= === ====
F-29 249 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of the notional amounts by derivative type and strategy at December 31, 1999 and 1998:
DECEMBER 31, 1998 TERMINATIONS/ DECEMBER 31, 1999 NOTIONAL AMOUNT ADDITIONS MATURITIES NOTIONAL AMOUNT ----------------- --------- ------------- ----------------- BY DERIVATIVE TYPE Financial futures................... $ 2,190 $18,259 $17,309 $ 3,140 Foreign exchange contracts.......... 136 702 838 -- Interest rate swaps................. 1,621 429 734 1,316 Foreign currency swaps.............. 580 3,501 79 4,002 Caps................................ 8,391 5,860 1,875 12,376 ------- ------- ------- ------- Total contractual commitments....... $12,918 $28,751 $20,835 $20,834 ======= ======= ======= ======= BY STRATEGY Liability hedging................... $ 8,741 $ 5,865 $ 2,035 $12,571 Invested asset hedging.............. 864 4,288 937 4,215 Portfolio hedging................... 2,830 13,920 14,729 2,021 Anticipated transaction hedging..... 483 4,678 3,134 2,027 ------- ------- ------- ------- Total contractual commitments....... $12,918 $28,751 $20,835 $20,834 ======= ======= ======= =======
The following table presents the notional amounts of derivative financial instruments by maturity at December 31, 1999:
REMAINING LIFE ------------------------------------------------------------------- ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL -------- ------------------ ----------------- --------------- ----- Financial futures......... $3,140 $ -- $ -- $ -- $ 3,140 Interest rate swaps....... 833 483 -- -- 1,316 Foreign currency swaps.... 7 3,371 503 121 4,002 Caps...................... 3,426 8,930 20 -- 12,376 ------ ------- ---- ---- ------- Total contractual commitments............. $7,406 $12,784 $523 $121 $20,834 ====== ======= ==== ==== =======
In addition to the derivative instruments above, the Company uses equity option contracts as invested asset hedges. There were ninety-two thousand equity option contracts outstanding with a carrying value of $(11) and a market value of $(11) at December 31, 1998. 4. FAIR VALUE INFORMATION The estimated fair values of financial instruments have been determined by using available market information and the valuation methodologies described below. Considerable judgment is often required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not necessarily be indicative of amounts that could be realized in a current market exchange. The use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. F-30 250 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts related to the Company's financial instruments were as follows:
NOTIONAL CARRYING ESTIMATED DECEMBER 31, 1999 AMOUNT VALUE FAIR VALUE - ----------------- -------- -------- ---------- Assets: Fixed maturities.................................. $96,981 $96,981 Equity securities................................. 2,006 2,006 Mortgage loans on real estate..................... 19,739 19,452 Policy loans...................................... 5,598 5,618 Short-term investments............................ 3,055 3,055 Cash and cash equivalents......................... 2,789 2,789 Mortgage loan commitments......................... $465 -- (7) Liabilities: Policyholder account balances..................... 37,170 36,893 Short-term debt................................... 4,208 4,208 Long-term debt.................................... 2,514 2,466 Investment collateral............................. 6,451 6,451
NOTIONAL CARRYING ESTIMATED DECEMBER 31, 1998 AMOUNT VALUE FAIR VALUE - ----------------- -------- -------- ---------- Assets: Fixed maturities................................. $100,767 $100,767 Equity securities................................ 2,340 2,340 Mortgage loans on real estate.................... 16,827 17,793 Policy loans..................................... 5,600 6,143 Short-term investments........................... 1,369 1,369 Cash and cash equivalents........................ 3,301 3,301 Mortgage loan commitments........................ $472 -- 14 Liabilities: Policyholder account balances.................... 37,448 37,664 Short-term debt.................................. 3,585 3,585 Long-term debt................................... 2,903 3,006 Investment collateral............................ 3,769 3,769
The methods and assumptions used to estimate the fair values of financial instruments are summarized as follows: FIXED MATURITIES AND EQUITY SECURITIES The fair value of fixed maturities and equity securities are based upon quotations published by applicable stock exchanges or received from other reliable sources. For securities in which the market values were not readily available, fair values were estimated using quoted market prices of comparable investments. MORTGAGE LOANS ON REAL ESTATE AND MORTGAGE LOAN COMMITMENTS Fair values for mortgage loans on real estate are estimated by discounting expected future cash flows, using current interest rates for similar loans with similar credit risk. For mortgage loan commitments, the estimated fair value is the net premium or discount of the commitments. F-31 251 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POLICY LOANS Fair values for policy loans are estimated by discounting expected future cash flows using U.S. treasury rates to approximate interest rates and the Company's past experiences to project patterns of loan accrual and repayment characteristics. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying values for cash and cash equivalents and short-term investments approximated fair market values due to the short-term maturities of these instruments. POLICYHOLDER ACCOUNT BALANCES The fair value of policyholder account balances are estimated by discounting expected future cash flows, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the agreements being valued. SHORT-TERM AND LONG-TERM DEBT AND INVESTMENT COLLATERAL The fair values of short-term and long-term debt and investment collateral are determined by discounting expected future cash flows, using risk rates currently available for debt with similar terms and remaining maturities. DERIVATIVE INSTRUMENTS The fair value of derivative instruments, including financial futures, financial forwards, interest rate and foreign currency swaps, floors, foreign exchange contracts, caps and options are based upon quotations obtained from dealers or other reliable sources. See Note 3 for derivative fair value disclosures. 5. EMPLOYEE BENEFIT PLANS PENSION BENEFIT AND OTHER BENEFIT PLANS The Company is both the sponsor and administrator of defined benefit pension plans covering all eligible employees and sales representatives of MetLife and certain of its subsidiaries. Retirement benefits are based upon years of credited service and final average earnings history. The Company also provides certain postemployment benefits and certain postretirement health care and life insurance benefits for retired employees through insurance contracts. Substantially all of the Company's employees may, in accordance with the plans applicable to the F-32 252 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) postretirement benefits, become eligible for these benefits if they attain retirement age, with sufficient service, while working for the Company.
DECEMBER 31, ------------------------------------ PENSION BENEFITS OTHER BENEFITS ---------------- ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Change in projected benefit obligation: Projected benefit obligation at beginning of year.... $3,920 $3,573 $1,708 $1,763 Service cost....................................... 100 90 28 31 Interest cost...................................... 271 257 107 114 Actuarial (gains) losses........................... (260) 212 (281) (74) Divestitures, curtailments and terminations........ (22) 24 10 (13) Change in benefits................................. -- 12 -- -- Benefits paid........................................ (272) (248) (89) (113) ------ ------ ------ ------ Projected benefit obligation at end of year.......... 3,737 3,920 1,483 1,708 ------ ------ ------ ------ Change in plan assets: Contract value of plan assets at beginning of year... 4,403 4,056 1,123 1,004 Actuarial return on plan assets.................... 575 680 141 171 Employer contribution.............................. 20 15 24 61 Benefits paid...................................... (272) (248) (89) (113) Other payments..................................... -- (100) -- -- ------ ------ ------ ------ Contract value of plan assets at end of year......... 4,726 4,403 1,199 1,123 ------ ------ ------ ------ Over (under) funded.................................. 989 483 (284) (585) ------ ------ ------ ------ Unrecognized net asset at transition................. (66) (98) -- -- Unrecognized net actuarial gains..................... (564) (78) (487) (322) Unrecognized prior service cost...................... 127 145 (2) (2) ------ ------ ------ ------ Prepaid (accrued) benefit cost....................... $ 486 $ 452 $ (773) $ (909) ====== ====== ====== ====== Qualified plan prepaid pension cost.................. $ 632 $ 568 $ -- $ -- Non-qualified plan accrued pension cost.............. (146) (116) -- -- ------ ------ ------ ------ Prepaid benefit cost................................. $ 486 $ 452 $ -- $ -- ====== ====== ====== ======
The aggregate projected benefit obligation and aggregate contract value of plan assets for the pension plans were as follows:
NON-QUALIFIED QUALIFIED PLAN PLAN TOTAL ---------------- -------------- ---------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Aggregate projected benefit obligation...................... $3,482 $3,697 $ 255 $ 223 $3,737 $3,920 Aggregate contract value of plan assets (principally Company contracts)...................... 4,726 4,403 -- -- 4,726 4,403 ------ ------ ----- ----- ------ ------ Over (under) funded............... $1,244 $ 706 $(255) $(223) $ 989 $ 483 ====== ====== ===== ===== ====== ======
F-33 253 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assumptions used in determining the aggregate projected benefit obligation and aggregate contract value for the pension and other benefits were as follows:
PENSION BENEFITS OTHER BENEFITS ---------------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average assumptions at December 31, Discount rate....................... 6.25% - 7.75% 6.5% - 7.25% 6% - 7.75% 7% Expected rate of return on plan assets............................ 8% - 10.5% 8.5% - 10.5% 6% - 9% 7.25% - 9% Rate of compensation increase....... 4.5% - 8.5% 4.5% - 8.5% N/A N/A
The assumed health care cost trend rates used in measuring the accumulated nonpension postretirement benefit obligation were 6.5% for pre-Medicare eligible claims and 6% for Medicare eligible claims in both 1999 and 1998. Assumed health care cost trend rates may have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
ONE PERCENT ONE PERCENT INCREASE DECREASE ----------- ----------- Effect on total of service and interest cost components.... $ 14 $ 11 Effect of accumulated postretirement benefit obligation.... $134 $111
The components of periodic benefit costs were as follows:
PENSION BENEFITS OTHER BENEFITS --------------------- ------------------ 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Service cost............................... $ 100 $ 90 $ 74 $ 28 $ 31 $ 30 Interest cost.............................. 271 257 247 107 114 122 Expected return on plan assets............. (363) (337) (324) (89) (79) (66) Amortization of prior actuarial gains...... (6) (11) (5) (11) (13) (4) Curtailment (credit) cost.................. (17) (10) -- 10 4 -- ----- ----- ----- ---- ---- ---- Net periodic benefit cost (credit)......... $ (15) $ (11) $ (8) $ 45 $ 57 $ 82 ===== ===== ===== ==== ==== ====
SAVINGS AND INVESTMENT PLANS The Company sponsors savings and investment plans for substantially all employees under which the Company matches a portion of employee contributions. The Company contributed $45, $43 and $44 for the years ended December 31, 1999, 1998 and 1997, respectively. 6. SEPARATE ACCOUNTS Separate accounts reflect two categories of risk assumption: non-guaranteed separate accounts totaling $47,618 and $39,490 at December 31, 1999 and 1998, respectively, for which the policyholder assumes the investment risk, and guaranteed separate accounts totaling $17,323 and $18,578 at December 31, 1999 and 1998, respectively, for which MetLife contractually guarantees either a minimum return or account value to the policyholder. F-34 254 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company's revenues as universal life and investment-type product policy fees and totaled $485, $413 and $287 for the years ended December 31, 1999, 1998 and 1997, respectively. Guaranteed separate accounts consisted primarily of Met Managed Guaranteed Interest Contracts and participating close out contracts. The average interest rates credited on these contracts were 6.5% and 7% at December 31, 1999 and 1998, respectively. The assets that support these liabilities were comprised of $16,874 and $16,639 in fixed maturities at December 31, 1999 and 1998, respectively. The portfolios are segregated from other investments and are managed to minimize liquidity and interest rate risk. In order to minimize the risk of disintermediation associated with early withdrawals, these investment products carry a graded surrender charge as well as a market value adjustment. 7. DEBT Debt consisted of the following:
DECEMBER 31, ---------------- 1999 1998 ---- ---- MetLife: 6.300% surplus notes due 2003.......................... $ 397 $ 397 7.000% surplus notes due 2005.......................... 249 249 7.700% surplus notes due 2015.......................... 198 198 7.450% surplus notes due 2023.......................... 296 296 7.785% surplus notes due 2024.......................... 148 148 7.800% surplus notes due 2025.......................... 248 248 Other.................................................... 130 207 ------ ------ 1,666 1,743 ------ ------ Investment related: Floating rate debt, interest based on LIBOR............ -- 212 Exchangeable debt, interest rates ranging from 4.90% to 5.80%, due 2001 and 2002............................ 369 371 ------ ------ 369 583 ------ ------ Total MetLife............................................ 2,035 2,326 ------ ------ Nvest: 7.060% senior notes due 2003........................... 110 110 7.290% senior notes due 2007........................... 160 160 ------ ------ 270 270 ------ ------ Other Affiliated Companies: Fixed rate notes, interest rates ranging from 6.96% to 8.51%, maturity dates ranging from 2000 to 2008..... 170 179 Other.................................................. 39 128 ------ ------ 209 307 ------ ------ Total long-term debt..................................... 2,514 2,903 Total short-term debt.................................... 4,208 3,585 ------ ------ $6,722 $6,488 ====== ======
F-35 255 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Short-term debt consisted of commercial paper with a weighted average interest rate of 6.05% and 5.31% and a weighted average maturity of 74 and 44 days at December 31, 1999 and 1998, respectively. The Company maintains unsecured credit facilities aggregating $7,000 (five-year facility of $1,000 expiring in April 2003; 364-day facility of $1,000 expiring in April 2000; 364-day facility of $5,000 expiring in September 2000). Both $1,000 facilities bear interest at LIBOR plus 20 basis points. The $5,000 facility bears interest at various rates under specified borrowing scenarios. The facilities can be used for general corporate purposes and also provide backup for the Company's commercial paper program. At December 31, 1999, there were no outstanding borrowings under any of the facilities. Payments of interest and principal on the surplus notes, subordinated to all other indebtedness, may be made only with the prior approval of the Superintendent. Subject to the prior approval of the Superintendent, the 7.45% surplus notes may be redeemed, in whole or in part, at the election of the Company at any time on or after November 1, 2003. Each issue of investment related debt is payable in cash or by delivery of an underlying security owned by the Company. The amount payable at maturity of the debt is greater than the principal of the debt if the market value of the underlying security appreciates above certain levels at the date of debt repayment as compared to the market value of the underlying security at the date of debt issuance. The aggregate maturities of long-term debt are $93 in 2000, $194 in 2001, $210 in 2002, $415 in 2003, $126 in 2004 and $1,477 thereafter. Interest expense related to the Company's outstanding indebtedness was $358, $333 and $344 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. ACQUISITIONS AND DISPOSITIONS In 1999 and 1997, respectively, the Company acquired assets of $4,832 and $3,777 and assumed liabilities of $1,860 and $3,347 through the acquisition of certain insurance and non-insurance operations. The aggregate purchase prices were allocated to the assets and liabilities acquired based on their estimated fair values. During 1998, the Company sold MetLife Capital Holdings, Inc. (a commercial financing company) and a substantial portion of its Canadian and Mexican insurance operations, which resulted in a realized investment gain of $531. During 1997, the Company sold its United Kingdom insurance operations, which resulted in a realized investment gain of $139. Such sales caused a reduction in assets of $10,663 and $4,342 and liabilities of $3,691 and $4,207 in 1998 and 1997, respectively. See Note 16 for information regarding the Company's acquisition of GenAmerica Corporation. 9. COMMITMENTS AND CONTINGENCIES LITIGATION The Company is currently a defendant in approximately 500 lawsuits raising allegations of improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims". F-36 256 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 28, 1999, after a fairness hearing, the United States District Court for the Western District of Pennsylvania approved a class action settlement resolving a multidistrict litigation proceeding involving alleged sales practices claims. The settlement class includes most of the owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. This class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. In addition to dismissing the consolidated class actions, the District Court's order also bars sales practices claims by class members for sales by the defendant insurers during the class period, effectively resolving all pending class actions against these insurers. The defendants are in the process of having these claims dismissed. Under the terms of the order, only those class members who excluded themselves from the settlement may continue an existing, or start a new, sales practices lawsuit against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company for sales that occurred during the class period. Approximately 20,000 class members elected to exclude themselves from the settlement. Over 400 of the approximately 500 lawsuits noted above are brought by individuals who elected to exclude themselves from the settlement. The settlement provides three forms of relief. General relief, in the form of free death benefits, is provided automatically to class members who did not exclude themselves from the settlement or who did not elect the claim evaluation procedures set forth in the settlement. The claim evaluation procedures permit a class member to have a claim evaluated by a third party under procedures set forth in the settlement. Claim awards made under the claim evaluation procedures will be in the form of policy adjustments, free death benefits or, in some instances, cash payments. In addition, class members who have or had an ownership interest in specified policies will also automatically receive deferred acquisition cost tax relief in the form of free death benefits. The settlement fixes the aggregate amounts that are available under each form of relief. The Company expects that the total cost of the settlement will be approximately $957. This amount is equal to the amount of the increase in liabilities for the death benefits and policy adjustments and the present value of expected cash payments to be provided to included class members, as well as attorneys' fees and expenses and estimated other administrative costs, but does not include the cost of litigation with policyholders who are excluded from the settlement. The Company believes that the cost of the settlement will be substantially covered by available reinsurance and the provisions made in its consolidated financial statements, and thus will not have a material adverse effect on its business, results of operations or financial position. The Company has not yet made a claim under those reinsurance agreements and, although there is a risk that the carriers will refuse coverage for all or part of the claim, the Company believes this is very unlikely to occur. The Company believes it has made adequate provision in its consolidated financial statements for all probable losses for sales practices claims, including litigation costs involving policyholders who are excluded from the settlement. The class action settlement does not resolve nine purported or certified class actions currently pending against New England Mutual Life Insurance Company with which the Company merged in 1996. Eight of those actions have been consolidated as a multidistrict proceeding for pre-trial purposes in the United States District Court in Massachusetts. That Court certified a mandatory class as to those claims. Following an appeal of that certification, the United States F-37 257 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Court of Appeals remanded the case to the District Court for further consideration. The Company is negotiating a settlement with class counsel. The class action settlement also does not resolve three putative sales practices class action lawsuits which have been brought against General American Life Insurance Company. These lawsuits have been consolidated in a single proceeding in the United States District Court for the Eastern District of Missouri. General American Life Insurance Company and counsel for plaintiffs have negotiated a settlement in principle of this consolidated proceeding. General American Life Insurance Company has not reached agreement with plaintiffs' counsel on the attorneys' fees to be paid. However, negotiations are ongoing. In addition, the class action settlement does not resolve two putative class actions involving sales practices claims filed against Metropolitan Life Insurance Company in Canada. The class action settlement also does not resolve a certified class action with conditionally certified subclasses against Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company, Metropolitan Tower Life Insurance Company and various individual defendants alleging improper sales abroad. That lawsuit is pending in a New York federal court. In the past, the Company has resolved some individual sales practices claims through settlement, dispositive motion or, in a few instances, trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sales of individual life insurance may be commenced in the future. Regulatory authorities in a small number of states, including both insurance departments and one state attorney general, as well as the National Association of Securities Dealers, Inc., have ongoing investigations or inquiries relating to the Company's sales of individual life insurance policies or annuities, including investigations of alleged improper replacement transactions and alleged improper sales of insurance with inaccurate or inadequate disclosures as to the period for which premiums would be payable. Over the past several years, the Company has resolved a number of investigations by other regulatory authorities for monetary payments and certain other relief, and may continue to do so in the future. MetLife is also a defendant in numerous lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. MetLife has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. Rather, these lawsuits, currently numbering in the thousands, have principally been based upon allegations relating to certain research, publication and other activities of one or more of MetLife's employees during the period from the 1920s through approximately the 1950s and alleging that MetLife learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Legal theories asserted against MetLife have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. While MetLife believes it has meritorious defenses to these claims, and has not suffered any adverse judgments in respect of these claims, most of the cases have been resolved by settlements. MetLife intends to continue to exercise its best judgment regarding settlement or defense of such cases. The number of such cases that may be brought or the aggregate amount of any liability that MetLife may ultimately incur is uncertain. Significant portions of amounts paid in settlement of such cases have been funded with proceeds from a previously resolved dispute with MetLife's primary, umbrella and first level excess liability insurance carriers. MetLife is presently in litigation with several of its excess F-38 258 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) liability insurers regarding amounts payable under its policies with respect to coverage for these claims. The trial court has granted summary judgment to these insurers. MetLife has appealed. There can be no assurances regarding the outcome of this litigation or the amount and timing of recoveries, if any, from these excess liability insurers. MetLife's asbestos-related litigation with these insurers should have no effect on recoveries under the excess insurance policies described below. The Company has recorded, in other expenses, charges of $499 ($317 after-tax), $1,895 ($1,203 after-tax) and $300 ($190 after-tax) for the years ended December 31, 1999, 1998 and 1997, respectively, for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. The 1999 charge was principally related to the settlement of the multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The 1998 charge was comprised of $925 and $970 for sales practices claims and asbestos-related claims, respectively. The Company recorded the charges for sales practices claims based on preliminary settlement discussions and the settlement history of other insurers. Prior to the fourth quarter of 1998, the Company established a liability for asbestos-related claims based on settlement costs for claims that the Company had settled, estimates of settlement costs for claims pending against the Company and an estimate of settlement costs for unasserted claims. The amount for unasserted claims was based on management's estimate of unasserted claims that would be probable of assertion. A liability is not established for claims which management believes are only reasonably possible of assertion. Based on this process, the accrual for asbestos-related claims at December 31, 1997 was $386. Potential liabilities for asbestos-related claims are not easily quantified, due to the nature of the allegations against the Company, which are not related to the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products, adding to the uncertainty as to the number of claims that may be brought against the Company. During 1998, the Company decided to pursue the purchase of excess insurance to limit its exposure to asbestos-related claims. In connection with the negotiations with the casualty insurers to obtain this insurance, the Company obtained information that caused management to reassess the accruals for asbestos-related claims. This information included: - Information from the insurers regarding the asbestos-related claims experience of other insureds, which indicated that the number of claims that were probable of assertion against the Company in the future was significantly greater than it had assumed in its accruals. The number of claims brought against the Company is generally a reflection of the number of asbestos-related claims brought against asbestos defendants generally and the percentage of those claims in which the Company is included as a defendant. The information provided to the Company relating to other insureds indicated that the Company had been included as a defendant for a significant percentage of total asbestos-related claims and that it may be included in a larger percentage of claims in the future, because of greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers and because of the bankruptcy and reorganization or the exhaustion of insurance coverage of other asbestos defendants; and that, although volatile, there was an upward trend in the number of total claims brought against asbestos defendants. - Information derived from actuarial calculations the Company made in the fourth quarter of 1998 in connection with these negotiations, which helped to frame, define and quantify this liability. These calculations were made using, among other things, current information regarding the Company's claims and settlement experience (which reflected the F-39 259 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's decision to resolve an increased number of these claims by settlement), recent and historic claims and settlement experience of selected other companies and information obtained from the insurers. Based on this information, the Company concluded that certain claims that previously were considered as only reasonably possible of assertion were now probable of assertion, increasing the number of assumed claims to approximately three times the number assumed in prior periods. As a result of this reassessment, the Company increased its liability for asbestos-related claims to $1,278 at December 31, 1998. During 1998, the Company paid $1,407 of premiums for excess of loss reinsurance agreements and excess insurance policies, consisting of $529 for the excess of loss reinsurance agreements for sales practices claims and excess mortality losses and $878 for the excess insurance policies for asbestos-related claims. The Company obtained the excess of loss reinsurance agreements to provide reinsurance with respect to sales practices claims made on or prior to December 31, 1999 and for certain mortality losses in 1999. These reinsurance agreements have a maximum aggregate limit of $650, with a maximum sublimit of $550 for losses for sales practices claims. This coverage is in excess of an aggregate self-insured retention of $385 with respect to sales practices claims and $506, plus the Company's statutory policy reserves released upon the death of insureds, with respect to life mortality losses. At December 31, 1999, the subject losses under the reinsurance agreements due to sales practices claims and related counsel fees from the time the Company entered into the reinsurance agreements did not exceed that self-insured retention. The maximum sublimit of $550 for sales practices claims was within a range of losses that management believed were reasonably possible at December 31, 1998. Each excess of loss reinsurance agreement for sales practices claims and mortality losses contains an experience fund, which provides for payments to the Company at the commutation date if experience is favorable at such date. The Company accounts for the aggregate excess of loss reinsurance agreements as reinsurance; however, if deposit accounting were applied, the effect on the Company's consolidated financial statements in 1998, 1999 and 2000 would not be significant. Under reinsurance accounting, the excess of the liability recorded for sales practices losses recoverable under the agreements of $550 over the premium paid of $529 results in a deferred gain of $21 which is being amortized into income over the settlement period from January 1999 through April 2000. Under deposit accounting, the premium would be recorded as an other asset rather than as an expense, and the reinsurance loss recoverable and the deferred gain would not have been recorded. Because the agreements also contain an experience fund which increases with the passage of time, the increase in the experience fund in 1999 and 2000 under deposit accounting would be recognized as interest income in an amount approximately equal to the deferred gain that will be amortized into income under reinsurance accounting. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500, which is in excess of a $400 self-insured retention ($878 of which was recorded as a recoverable at December 31, 1999 and 1998). The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid in any given year that are recoverable under the policies will be reflected as a reduction in the Company's operating cash flows for that year, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to the Company at the commutation date if experience under the policy to such date has been favorable, or pro rata reductions from time to F-40 260 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) time in the loss reimbursements to the Company if the cumulative return on the reference fund is less than the return specified in the experience fund. A purported class action suit involving policyholders in 32 states has been filed in a Rhode Island state court against MetLife's subsidiary, Metropolitan Property and Casualty Insurance Company, with respect to claims by policyholders for the alleged diminished value of automobiles after accident-related repairs. A similar "diminished value" allegation was made recently in a Texas Deceptive Trade Practices Act letter and lawsuit which involve a Metropolitan Property and Casualty Company policyholder. A purported class action has been filed against Metropolitan Property and Casualty Insurance Company and its subsidiary, Metropolitan Casualty Insurance Company, in Florida by a policyholder alleging breach of contract and unfair trade practices with respect to Metropolitan Casualty Insurance Company allowing the use of parts not made by the original manufacturer to repair damaged automobiles. These suits are in the early stages of litigation and Metropolitan Property and Casualty Insurance Company and Metropolitan Casualty Insurance Company intend to vigorously defend themselves against these suits. Similar suits have been filed against several other personal lines property and casualty insurers. The United States, the Commonwealth of Puerto Rico and various hotels and individuals have sued MetLife Capital Corporation, a former subsidiary of the Company, seeking damages for clean up costs, natural resource damages, personal injuries and lost profits and taxes based upon, among other things, a release of oil from a barge which was being towed by the M/V Emily S. In connection with the sale of MetLife Capital, the Company acquired MetLife Capital's potential liability with respect to the M/V Emily S lawsuit. MetLife Capital had entered into a sale and leaseback financing arrangement with respect to the M/V Emily S. The plaintiffs have taken the position that MetLife Capital, as the owner of record of the M/V Emily S, is responsible for all damages caused by the barge, including the oil spill. The governments of the United States and Puerto Rico have claimed damages in excess of $150. At a mediation, the action brought by the United States and Puerto Rico was conditionally settled, provided that the governments have access to additional sums from a fund contributed to by oil companies to help remediate oil spills. The Company can provide no assurance that this action will be settled in this manner. Three putative class actions have been filed by Conning Corporation shareholders alleging that the Company's announced offer to purchase the publicly-held Conning shares is inadequate and constitutes a breach of fiduciary duty (see Note 16). The Company believes the actions are without merit, and expects that they will not materially affect its offer to purchase the shares. A civil complaint challenging the fairness of the plan of reorganization and the adequacy and accuracy of the disclosures to policyholders regarding the plan has been filed in New York Supreme Court for Kings County on behalf of an alleged class consisting of the policyholders of MetLife who should have membership benefits in MetLife and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan and seeks other relief. The defendants named in the complaint are MetLife and the individual members of its board of directors and MetLife, Inc. MetLife believes that the allegations made in the complaint are wholly without merit, and intends to vigorously contest the complaint. Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other Federal and state authorities regularly F-41 261 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. While it is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, it is the opinion of the Company's management that their outcomes, after consideration of available insurance and reinsurance and the provisions made in the Company's consolidated financial statements, are not likely to have a material adverse effect on the Company's consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's operating results or cash flows in particular quarterly or annual periods. TRANSFERRED CANADIAN POLICIES In July 1998, MetLife sold a substantial portion of its Canadian operations to Clarica Life. As part of that sale, a large block of policies in effect with MetLife in Canada were transferred to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of MetLife and, therefore, are not entitled to compensation under the plan of reorganization. However, as a result of a commitment made in connection with obtaining Canadian regulatory approval of that sale, if MetLife demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of those transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of MetLife. The amount of the payment is dependent upon the initial public offering price of common stock to be issued on the effective date of the plan of demutualization. YEAR 2000 The Year 2000 issue was the result of the widespread use of computer programs written using two digits (rather than four) to define the applicable year. Such programming was a common industry practice designed to avoid the significant costs associated with additional mainframe capacity necessary to accommodate a four-digit field. As a result, any of the Company's computer systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failures or miscalculations. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 issue and has implemented a plan to resolve the issue. There can be no assurances that the Year 2000 plan of the Company or that of its vendors or third parties have resolved all Year 2000 issues. Further, there can be no assurance that there will not be any future system failure or that such failure, if any, will not have a material impact on the operations of the Company. LEASES In accordance with industry practice, certain of the Company's income from lease agreements with retail tenants is contingent upon the level of the tenants' sales revenues. Additionally, the Company, as lessee, has entered into various lease and sublease agreements F-42 262 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for office space, data processing and other equipment. Future minimum rental and subrental income and minimum gross rental payments relating to these lease agreements were as follows:
GROSS RENTAL SUBLEASE RENTAL INCOME INCOME PAYMENTS ------ -------- -------- 2000......................................... $ 817 $13 $156 2001......................................... 740 12 135 2002......................................... 689 11 111 2003......................................... 612 9 90 2004......................................... 542 9 69 Thereafter................................... 2,032 27 299
10. INCOME TAXES The provision for income taxes was as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Current: Federal................................................... $643 $668 $370 State and local........................................... 24 60 10 Foreign................................................... 4 99 26 ---- ---- ---- 671 827 406 ---- ---- ---- Deferred: Federal................................................... (78) (25) 28 State and local........................................... 2 (8) 9 Foreign................................................... (2) (54) 25 ---- ---- ---- (78) (87) 62 ---- ---- ---- Provision for income taxes.................................. $593 $740 $468 ==== ==== ====
Reconciliations of the income tax provision at the U.S. statutory rate to the provision for income taxes as reported were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Tax provision at U.S. statutory rate........................ $502 $730 $585 Tax effect of: Tax exempt investment income.............................. (39) (40) (30) Surplus tax............................................... 125 18 (40) State and local income taxes.............................. 18 31 15 Tax credits............................................... (5) (25) (15) Prior year taxes.......................................... (31) 4 (2) Sale of businesses........................................ -- (19) (41) Other, net................................................ 23 41 (4) ---- ---- ---- Provision for income taxes.................................. $593 $740 $468 ==== ==== ====
F-43 263 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes represent the tax effect of the differences between the book and tax basis of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following:
DECEMBER 31, ---------------- 1999 1998 ---- ---- Deferred income tax assets: Policyholder liabilities and receivables............... $3,042 $3,108 Net operating losses................................... 72 22 Net unrealized investment losses....................... 161 -- Employee benefits...................................... 192 174 Litigation related..................................... 468 312 Other.................................................. 242 158 ------ ------ 4,177 3,774 Less: Valuation allowance.............................. 72 21 ------ ------ 4,105 3,753 ------ ------ Deferred income tax liabilities: Investments............................................ 1,472 1,529 Deferred policy acquisition costs...................... 1,967 1,887 Net unrealized investment gains........................ -- 864 Other.................................................. 63 18 ------ ------ 3,502 4,298 ------ ------ Net deferred income tax asset (liability)................ $ 603 $ (545) ====== ======
Foreign net operating loss carryforwards generated deferred income tax benefits of $72 and $21 at December 31, 1999 and 1998, respectively. The Company has recorded a valuation allowance related to these tax benefits. The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that the deferred income tax asset for foreign net operating loss carryforwards will not be realized. The benefit will be recognized when management believes that it is more likely than not that the portion of the deferred income tax asset is realizable. The Company has been audited by the Internal Revenue Service for the years through and including 1993. The Company is being audited for the years 1994, 1995 and 1996. The Company believes that any adjustments that might be required for open years will not have a material effect on the Company's consolidated financial statements. 11. REINSURANCE The Company assumes and cedes insurance with other insurance companies. The Company continually evaluates the financial condition of its reinsurers and monitors concentration of credit risk in an effort to minimize its exposure to significant losses from reinsurer insolvencies. The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements. The amounts in the consolidated statements of income are presented net of reinsurance ceded. The Company's life insurance operations participate in reinsurance in order to limit losses, minimize exposure to large risks and to provide additional capacity for future growth. During F-44 264 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1998, the Company began reinsuring, under yearly renewal term policies, 90 percent of the mortality risk on universal life policies issued after 1983. The Company also reinsures 90 percent of the mortality risk on term life insurance policies issued after 1995 under yearly renewal term policies and coinsures 100 percent of the mortality risk in excess of $25 and $35 on single and joint survivorship policies, respectively. During 1997, the Company obtained a 100 percent coinsurance policy to provide coverage for contractual payments generated by certain portions of the Company's non-life contingency long-term guaranteed interest contracts and structured settlement lump sum contracts issued during the periods 1991 through 1993. The policy was amended in 1998 to include structured settlement lump sum payments issued during the period 1983 through 1990, 1994 and 1995. Reinsurance recoverables under the contract, which has been accounted for as a financing transaction, were $1,372 and $1,374 at December 31, 1999 and 1998, respectively. See Note 9 for information regarding certain excess of loss reinsurance agreements providing coverage for risks associated primarily with sales practices claims. The Company has exposure to catastrophes, which are an inherent risk of the property and casualty insurance business and could contribute to material fluctuations in the Company's results of operations. The Company uses excess of loss and quota share reinsurance arrangements to limit its maximum loss, provide greater diversification of risk and minimize exposure to larger risks. The Company's reinsurance program is designed to limit a catastrophe loss to no more than 10% of the Auto & Home segment's statutory surplus. The effects of reinsurance were as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Direct premiums..................................... $13,249 $12,763 $12,728 Reinsurance assumed................................. 484 409 360 Reinsurance ceded................................... (1,645) (1,669) (1,810) ------- ------- ------- Net premiums........................................ $12,088 $11,503 $11,278 ======= ======= ======= Reinsurance recoveries netted against policyholder benefits.......................................... $ 1,626 $ 1,744 $ 1,648 ======= ======= =======
The effects of reinsurance with GenAmerica Corporation ("GenAmerica") were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Premiums ceded to GenAmerica.............................. $108 $113 $61 ==== ==== === Reinsurance recoveries from GenAmerica netted against policyholder benefits................................... $ 74 $ 28 $24 ==== ==== ===
Reinsurance recoverables, included in other receivables, were $2,898 and $3,134 at December 31, 1999 and 1998, respectively, of which $5 and $5, respectively, were recoverable from GenAmerica. Reinsurance and ceded commissions payables, included in other liabilities, were $148 and $105 at December 31, 1999 and 1998, respectively. F-45 265 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following provides an analysis of the activity in the liability for benefits relating to property and casualty and group accident and non-medical health policies and contracts:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Balance at January 1................................ $ 3,320 $ 3,655 $ 3,345 Reinsurance recoverables.......................... (233) (229) (215) ------- ------- ------- Net balance at January 1............................ 3,087 3,426 3,130 ------- ------- ------- Acquisition of business............................. 204 -- -- ------- ------- ------- Incurred related to: Current year...................................... 3,129 2,726 2,855 Prior years....................................... (16) (245) 88 ------- ------- ------- 3,113 2,481 2,943 ------- ------- ------- Paid related to: Current year...................................... (2,128) (1,967) (1,832) Prior years....................................... (759) (853) (815) ------- ------- ------- (2,887) (2,820) (2,647) ------- ------- ------- Balance at December 31.............................. 3,517 3,087 3,426 Add: Reinsurance recoverables..................... 272 233 229 ------- ------- ------- Balance at December 31.............................. $ 3,789 $ 3,320 $ 3,655 ======= ======= =======
12. OTHER EXPENSES Other expenses were comprised of the following:
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Compensation........................................ $ 2,590 $ 2,478 $ 2,078 Commissions......................................... 937 902 766 Interest and debt issue costs....................... 405 379 453 Amortization of policy acquisition costs (excludes amortization of $(46), $240 and $70, respectively, related to realized investment gains and (losses))......................................... 862 587 771 Capitalization of policy acquisition costs.......... (1,160) (1,025) (1,000) Rent, net of sublease income........................ 239 155 179 Minority interest................................... 55 67 56 Restructuring charge................................ -- 81 -- Other............................................... 2,827 4,395 2,468 ------- ------- ------- $ 6,755 $ 8,019 $ 5,771 ======= ======= =======
During 1998, the Company recorded charges of $81 to restructure headquarters operations and consolidate certain agencies and other operations. These costs have been fully paid at December 31, 1999. F-46 266 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. STATUTORY FINANCIAL INFORMATION The reconciliations of MetLife's statutory surplus and net change in statutory surplus, determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities, with equity and net income determined in conformity with generally accepted accounting principles were as follows:
DECEMBER 31, ------------------ 1999 1998 ---- ---- Statutory surplus........................................... $ 7,630 $ 7,388 GAAP adjustments for: Future policy benefits and policyholder account balances............................................... (4,167) (6,830) Deferred policy acquisition costs......................... 8,381 6,560 Deferred income taxes..................................... 886 (190) Valuation of investments.................................. (2,102) 3,981 Statutory asset valuation reserves........................ 3,189 3,381 Statutory interest maintenance reserves................... 1,114 1,486 Surplus notes............................................. (1,602) (1,595) Other, net................................................ 361 686 ------- ------- Equity...................................................... $13,690 $14,867 ======= =======
YEARS ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ---- ---- ---- Net change in statutory surplus......................... $ 242 $ 10 $ 227 GAAP adjustments for: Future policy benefits and policyholder account balances........................................... 556 127 (38) Deferred policy acquisition costs..................... 379 224 149 Deferred income taxes................................. 154 234 62 Valuation of investments.............................. 473 1,158 (387) Statutory asset valuation reserves.................... (226) (461) 1,136 Statutory interest maintenance reserves............... (368) 312 53 Other, net............................................ (593) (261) 1 ----- ------ ------ Net income.............................................. $ 617 $1,343 $1,203 ===== ====== ======
F-47 267 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. OTHER COMPREHENSIVE INCOME (LOSS) The following table sets forth the reclassification adjustments required for the years ended December 31, 1999, 1998 and 1997 to avoid double-counting in other comprehensive income (loss) items that are included as part of net income for the current year that have been reported as a part of other comprehensive income (loss) in the current or prior year:
1999 1998 1997 ---- ---- ---- Holding (losses) gains on investments arising during the year...................................................... $(6,314) $ 1,493 $ 4,257 Income tax effect of holding gains or losses................ 2,262 (617) (1,615) Transfer of securities from held-to-maturity to available-for-sale: Holding gains on investments.............................. -- -- 198 Income tax effect......................................... -- -- (75) Reclassification adjustments: Realized holding (gains) losses included in current year net income............................................. 38 (2,013) (844) Amortization of premium and discount on investments....... (307) (350) (209) Realized holding (losses) gains allocated to other policyholder amounts................................... (67) 608 231 Income tax effect......................................... 120 729 312 Allocation of holding losses (gains) on investments relating to other policyholder amounts............................. 3,788 (351) (2,231) Income tax effect of allocation of holding gains and losses to other policyholder amounts............................. (1,357) 143 846 ------- ------- ------- Net unrealized investment (losses) gains.................... (1,837) (358) 870 ------- ------- ------- Foreign currency translation adjustments arising during the year...................................................... 50 (115) (46) Reclassification adjustment for sale of investment in foreign operation......................................... -- 2 (3) ------- ------- ------- Foreign currency translation adjustment..................... 50 (113) (49) ------- ------- ------- Minimum pension liability adjustment........................ (7) (12) -- ------- ------- ------- Other comprehensive income (loss)........................... $(1,794) $ (483) $ 821 ======= ======= =======
15. BUSINESS SEGMENT INFORMATION The Company provides insurance and financial services to customers in the United States, Canada, Central America, South America, Europe and Asia. The Company's business is divided into six segments: Individual, Institutional, Auto & Home, International, Asset Management and Corporate. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. Individual offers a wide variety of individual insurance and investment products, including life insurance, annuities and mutual funds. Institutional offers a broad range of group insurance and retirement and savings products and services, including group life insurance, non-medical health insurance such as short and long-term disability, long-term care and dental insurance and other insurance products and services. Auto & Home provides insurance coverages including private passenger automobile, homeowners and personal excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement and savings F-48 268 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) products to both individuals and groups, and auto and homeowners coverage to individuals. Asset Management provides a broad variety of asset management products and services to individuals and institutions such as mutual funds for savings and retirement needs, commercial real estate advisory and management services, and institutional and retail investment management. Through its Corporate segment, the Company reports items that are not allocated to any of the business segments. Set forth in the tables below is certain financial information with respect to the Company's operating segments for the years ended December 31, 1999, 1998 and 1997. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, except for the method of capital allocation. The Company allocates capital to each segment based upon an internal capital allocation system that allows the Company to more effectively manage its capital. The Company has divested operations that did not meet targeted rates of return, including its commercial leasing business (Corporate segment) and substantial portions of its Canadian operations (International segment), and insurance operations in the United Kingdom (International segment). The Company evaluates the performance of each operating segment based upon income or loss from operations before provision for income taxes and non-recurring items (e.g. items of unusual or infrequent nature). The Company allocates non-recurring items (primarily consisting of sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products) and prior to its sale in 1998, the results of MetLife Capital Holdings, Inc. to the Corporate segment.
AUTO AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/ DECEMBER 31, 1999 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL - ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- ----- Premiums................ $ 4,289 $ 5,525 $1,751 $ 523 $ -- $ -- $ -- $ 12,088 Universal life and investment-type product policy fees... 888 502 -- 48 -- -- -- 1,438 Net investment income... 5,346 3,755 103 206 80 605 (279) 9,816 Other revenues.......... 558 629 21 12 803 59 72 2,154 Net realized investment gains (losses)........ (14) (31) 1 1 -- (41) 14 (70) Policyholder benefits and claims............ 4,625 6,712 1,301 463 -- -- 4 13,105 Interest credited to policyholder account balances.............. 1,359 1,030 -- 52 -- -- -- 2,441 Policyholder dividends............. 1,509 159 -- 22 -- -- -- 1,690 Other expenses.......... 2,719 1,589 514 248 795 1,031 (141) 6,755 Income (loss) before provision for income taxes and extraordinary item.... 855 890 61 5 88 (408) (56) 1,435 Income (loss) after provision for income taxes before extraordinary item.... 555 567 56 21 51 (358) (50) 842 Total assets............ 109,401 88,127 4,443 4,381 1,036 19,834 (1,990) 225,232 Deferred policy acquisition costs..... 8,049 106 93 244 -- -- -- 8,492 Separate account assets................ 28,828 35,236 -- 877 -- -- -- 64,941 Policyholder liabilities........... 72,956 47,781 2,318 2,187 -- 6 (293) 124,955 Separate account liabilities........... 28,828 35,236 -- 877 -- -- -- 64,941
F-49 269 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUTO AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/ DECEMBER 31, 1998 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL - ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- ----- Premiums................ $ 4,323 $ 5,159 $1,403 $ 618 $ -- $ -- $ -- $ 11,503 Universal life and investment-type product policy fees... 817 475 -- 68 -- -- -- 1,360 Net investment income... 5,480 3,885 81 343 75 682 (318) 10,228 Other revenues.......... 474 575 36 33 817 111 (52) 1,994 Net realized investment gains................. 659 557 122 117 -- 679 (113) 2,021 Policyholder benefits and claims............ 4,606 6,416 1,029 597 -- (10) -- 12,638 Interest credited to policyholder account balances.............. 1,423 1,199 -- 89 -- -- -- 2,711 Policyholder dividends............. 1,445 142 -- 64 -- -- -- 1,651 Other expenses.......... 2,577 1,613 386 352 799 2,601 (309) 8,019 Income (loss) before provision for income taxes and extraordinary item.... 1,702 1,281 227 77 93 (1,119) (174) 2,087 Income (loss) after provision for income taxes before extraordinary item.... 1,069 846 161 56 49 (691) (143) 1,347 Total assets............ 103,614 88,741 2,763 3,432 1,164 20,852 (5,220) 215,346 Deferred policy acquisition costs..... 6,194 82 57 205 -- -- -- 6,538 Separate account assets................ 23,013 35,029 -- 26 -- -- -- 58,068 Policyholder liabilities........... 71,571 49,406 1,477 2,043 -- 1 (295) 124,203 Separate account liabilities........... 23,013 35,029 -- 26 -- -- -- 58,068
AUTO AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/ DECEMBER 31, 1997 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL - ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- ----- Premiums................. $ 4,327 $ 4,689 $1,354 $ 908 $ -- $ -- $ -- $ 11,278 Universal life and investment-type product policy fees............ 855 426 -- 137 -- -- -- 1,418 Net investment income.... 4,754 3,754 71 504 78 700 (370) 9,491 Other revenues........... 338 357 25 54 682 19 16 1,491 Net realized investment gains.................. 356 45 9 142 -- 326 (91) 787 Policyholder benefits and claims................. 4,597 5,934 1,003 869 -- -- -- 12,403 Interest credited to policyholder account balances............... 1,422 1,319 -- 137 -- -- -- 2,878 Policyholder dividends... 1,340 305 -- 97 -- -- -- 1,742 Other expenses........... 2,394 1,178 351 497 679 966 (294) 5,771 Income before provision for income taxes....... 877 535 105 145 81 79 (151) 1,671 Income after provision for income taxes....... 599 339 74 126 45 163 (143) 1,203 Total assets............. 95,323 83,473 2,542 7,412 1,136 18,641 (5,745) 202,782 Deferred policy acquisition costs...... 5,912 40 56 428 -- -- -- 6,436 Separate account assets.. 17,345 30,473 -- 520 -- -- -- 48,338 Policyholder liabilities............ 70,686 49,547 1,509 5,615 -- 1 -- 127,358 Separate account liabilities............ 17,345 30,473 -- 520 -- -- -- 48,338
F-50 270 METROPOLITAN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Individual segment includes an equity ownership interest in Nvest Companies, L.P. ("Nvest") under the equity method of accounting. Nvest has been included within the Asset Management segment due to the types of products and strategies employed by the entity. The individual segment's equity in earnings of Nvest, which is included in net investment income, was $48, $49 and $45 for the years ended December 31, 1999, 1998 and 1997, respectively. The investment in Nvest was $196, $252 and $216 at December 31, 1999, 1998 and 1997, respectively. Net investment income and net realized investment gains are based upon the actual results of each segment's specifically identifiable asset portfolio. Other costs and operating costs were allocated to each of the segments based upon: (1) a review of the nature of such costs, (2) time studies analyzing the amount of employee compensation costs incurred by each segment, and (3) cost estimates included in the Company's product pricing. The consolidation/elimination column includes the elimination of all intersegment amounts and the Individual segment's ownership interest in Nvest. The principal component of the intersegment amounts related to intersegment loans, which bore interest at rates commensurate with related borrowings. Revenues derived from any customer did not exceed 10% of consolidated revenues. Revenues from U.S. operations were $24,637, $25,643 and $22,664 for the years ended December 31, 1999, 1998 and 1997, respectively, which represented 97%, 96% and 93%, respectively, of consolidated revenues. 16. SUBSEQUENT EVENTS On January 6, 2000, the Company acquired GenAmerica for $1.2 billion. In connection with this acquisition, the Company incurred $900 of short-term debt. GenAmerica is a holding company which includes General American Life Insurance Company, 48.3% of the outstanding shares of Reinsurance Group of America ("RGA") common stock, a provider of reinsurance, and 61.0% of the outstanding shares of Conning Corporation common stock, an asset manager. On January 18, 2000, the Company announced that it had proposed to acquire all of the outstanding shares of Conning common stock not already owned by it for $10.50 per share in cash, or approximately $55. At December 31, 1999, the Company owned 9.6% of the outstanding shares of RGA common stock which were acquired on November 24, 1999 for $125. Subsequent to the GenAmerica acquisition, the Company owned 57.9% of the outstanding shares of RGA common stock. Total assets, revenues and net loss of GenAmerica were $23,594, $3,916 and $(174), respectively, at or for the year ended December 31, 1999. As part of the acquisition agreement, in September 1999 the Company assumed $5,752 of General American Life funding agreements and received cash of $1,926 and investment assets with a market value of $3,826. In October 1999, as part of the assumption arrangement, the holders of General American Life funding agreements aggregating $5,136 elected to have the Company redeem the funding agreements for cash. General American Life agreed to pay the Company a fee of $120 in connection with the assumption of the funding agreements. The fee will be considered as part of the purchase price to be allocated to the fair value of assets and liabilities acquired. The Company also agreed to make a capital contribution of $120 to General American Life after the completion of the acquisition. At the date of the acquisition agreement, the Company and GenAmerica were parties to a number of reinsurance agreements. In addition, as part of the acquisition, the Company entered into agreements effective as of July 25, 1999, which coinsured new and certain existing business of General American Life and some of its affiliates. See Note 11. F-51 271 ANNEX A [PRICEWATERHOUSECOOPERS LOGO] PRICEWATERHOUSECOOPERS LLP 600 Lee Road Wayne PA 19087 Telephone (610) 993 3864 Direct Fax (610) 993 3900
November 16, 1999 The Board of Directors The Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010-3690 Re: Plan of Reorganization of the Metropolitan Life Insurance Company (MetLife), dated, September 28, 1999 as amended and restated on November 16, 1999 STATEMENT OF ACTUARIAL OPINION QUALIFICATIONS I, Kenneth M. Beck, a Principal with the firm of PricewaterhouseCoopers LLP (PwC) and a member of the American Academy of Actuaries, am qualified under the Academy's Qualification Standards to render the opinions set forth herein. This opinion is provided pursuant to the Engagement Letter between PwC and MetLife dated January 1, 1998. MetLife's Plan of Reorganization is carried out under Section 7312 of the New York Insurance Law. This opinion is not a legal opinion regarding the Plan, and does not address the overall fairness of the Plan. Rather, it reflects the application of actuarial concepts and standards of practice to the requirements set forth in Section 7312. RELIANCE I and other PwC staff acting under my direction received from MetLife extensive information concerning MetLife's past and present financial experience and the characteristics of its policies. In all cases, we were provided with the information we required. We relied on the accuracy and completeness of the data and assumptions supplied by MetLife and did not independently verify that information. Where possible, the information was reviewed for general reasonableness and in certain circumstances the data was reconfirmed with MetLife. Certain information was provided to me under the direction of MetLife's Executive Vice President and Chief Actuary, Judy Weiss, F.S.A., M.A.A.A. Information included: a) expected future cash flows from assets held by MetLife; and b) MetLife's experience underlying its 1999 dividend scales. I relied on the completeness and accuracy of the data provided by Ms. Weiss. My opinion depends upon the substantial accuracy of the information described above that was provided by MetLife (the "MetLife Data"). PROCESS In all cases, I and other PwC staff acting under my direction either derived the results on which my opinions rest or reviewed derivations carried out by MetLife employees. A-1 272 Board of Directors Page 2 MetLife Actuarial Opinion November 16, 1999 - -------------------------------------------------------------------------------- OPINION #1 In my opinion, the plan for allocation of consideration to Eligible Policyholders (as defined in the Plan) as set forth in Article VII of the Plan of Reorganization is fair and equitable to MetLife policyholders as required by Section 7312 of the New York Insurance Law. DISCUSSION The distribution described in Article VII of the Plan takes into account the ratio of the positive sum of the estimated past and future contributions to MetLife surplus, if any, of each participating Policy and Contract owned by each Eligible Policyholder to the total of all such positive sums. Most of the consideration to be distributed to policyholders is allocated on this basis. Under Section 7312 of the New York Insurance Law, there is no specific guidance given for the allocation of consideration in a "Method Four" reorganization, but policyholder contributions are specifically identified as an acceptable approach to allocation of consideration under other methods of reorganization within this section of the law. In addition, the contribution method is recognized in the actuarial literature as an appropriate method. I therefore find that the use of "actuarial contribution" as the principal basis underlying the allocation of consideration is fair and equitable. The distribution to policyholders also takes into account, to a lesser extent, the fact that policyholders have intangible membership rights that are independent of their actuarial contributions. Each Eligible Policyholder (participating or non-participating) is, under the Plan, allocated a fixed number of shares of common stock without regard to the contribution of that policyholder or of the class or classes in which policies held by the policyholder happen to reside. Under the Plan, the percentage of the total consideration that is allocated in this manner is significantly less than that allocated in proportion to positive contributions, which is appropriate as well as consistent with the approach used in previous demutualizations. OPINION #2 The Closed Block is described in Article VIII of the MetLife Plan of Reorganization (the "Plan"). In my opinion: 1. The objective of the Closed Block as being for the exclusive benefit of the policies included therein for policyholder dividend purposes only as set forth in Article VIII of the Plan is consistent with Section 7312 of the New York Insurance Law. 2. The operations of the Closed Block as set forth in Article VIII of the Plan and described in the Closed Block Memorandum, including the determination of the required initial funding and the manner in which cash flows are charged and credited to the Closed Block, are consistent with the objectives of the Closed Block. 3. MetLife's assets (Closed Block funding) set aside as of December 31, 1998 (including subsequent adjustments as provided for in the Closed Block Memorandum), to establish the Closed Block, as set forth in Article VIII of the Plan (including the Closed Block Memorandum), are adequate because they are expected to produce cash flows which, together with anticipated revenues from the Closed Block Business, is reasonably expected to be sufficient to support the Closed Block Business including, but not limited to, provisions for payment of claims and certain expenses and taxes, and to provide for continuation of dividend scales payable in 1999, if the experience underlying such scales continues. A-2 273 Board of Directors Page 3 MetLife Actuarial Opinion November 16, 1999 - -------------------------------------------------------------------------------- 4. The Plan is consistent with the objective of the Closed Block as it provides a vehicle for MetLife's management to make appropriate adjustments to future dividend scales, where necessary, if the underlying experience changes from the experience underlying such dividend scales. DISCUSSION As to (1) above, Section 7312 of the New York Insurance Law provides for a Mutual Life Insurance Company to convert to a Stock Life Insurance Company using one of four "methods" as outlined in the law. MetLife is converting to a stock company using Method Four. Method Four within Section 7312 does not contain specific language that addresses the establishment of a Closed Block. Methods One and Two of Section 7312 both contain language that address the establishment of a Closed Block. The establishment of a Closed Block by MetLife, as set forth in Article VIII of the Plan, is consistent with (a) the objectives and guidelines contained in Methods One and Two of Section 7312, (b) with prior demutualizations of mutual life insurance companies domiciled in New York and, (c) current Actuarial Standards of Practice. As to (2) above, my opinion is based on my findings that those matters are consistent with the objective of the Closed Block. I have specifically considered that the cash flow items to be charged against or credited to the Closed Block as set forth in Article VIII of the Plan (including the Closed Block Memorandum), have been incorporated on a consistent basis in the determination of the Closed Block funding amount. As to (3) above, the Closed Block was funded as of January 1, 1999 (including a planned final adjustment after the Effective Date of the conversion), based on a projection as of that date. The opinion above rests in part on that projection, which extends over the future life of all policies assigned to the Closed Block. That projection, which is based on the experience underlying the 1999 Dividend Scale and on the cash flows expected from assets allocable to the Closed Block, indicates that the assets, together with anticipated revenues from the Closed Block Business, are reasonably expected to be sufficient to provide for the continuation of that scale if the experience is unchanged. As to (4) above, the criteria set forth in Article VIII of the Plan for modifying the dividend scales if the experience changes (from that underlying the 1999 Dividend Scale) are such that, if followed, the Closed Block policyholders will be treated in a manner consistent with the contribution principle for dividend determination. The operation of the Closed Block as set forth in Article VIII is consistent with actuarial practices as described in Actuarial Standard of Practice #15. Sincerely, /s/ Kenneth M. Beck Kenneth M. Beck, F.S.A., M.A.A.A. Principal for PricewaterhouseCoopers LLP KMB/eam Sincerely, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP A-3 274 [MetLife Logo] 275 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [MetLife SNOOPY LOGO] ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS SUBJECT TO COMPLETION. DATED MARCH 29, 2000. 179,000,000 SHARES [METLIFE LOGO] COMMON STOCK ------------------------ This is an initial public offering of shares of common stock of MetLife, Inc. The offering is being made in connection with the reorganization of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process known as a demutualization. 26,850,000 shares of common stock are initially being offered outside the United States and Canada by the international underwriters and 152,150,000 shares are initially being concurrently offered in the United States and Canada by the U.S. underwriters. The offering price and underwriting discount for both offerings are identical. In addition to these shares, in connection with the demutualization we will issue 493,476,118 shares of our common stock to a trust for the benefit of policyholders of Metropolitan Life Insurance Company. In addition, we expect to issue concurrently with this offering up to 73,000,000 shares of our common stock to Banco Santander Central Hispano, S.A. and Credit Suisse Group or their respective affiliates in private placements at a price per share equal to the initial public offering price. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price per share will be between $13.00 and $15.00. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "MET", subject to official notice of issuance. Concurrently with this offering, we and a trust we own are offering 20,000,000 % equity security units for an aggregate offering of $1 billion, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full, by means of a separate prospectus. Each unit consists of (a) a contract to purchase shares of our common stock and (b) a % capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 19.
PER SHARE TOTAL --------- ----- Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to MetLife, Inc. ................ $ $
To the extent that the underwriters sell more than 179,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 26,850,000 shares from us at the initial public offering price less the underwriting discount. Delivery of the shares of common stock will be made on or about , 2000. None of the Securities and Exchange Commission, any state securities commission, the New York Superintendent of Insurance or any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Joint Bookrunners CREDIT SUISSE FIRST BOSTON GOLDMAN SACHS INTERNATIONAL BANK OF AMERICA INTERNATIONAL LIMITED DONALDSON, LUFKIN AND JENRETTE LEHMAN BROTHERS MERRILL LYNCH INTERNATIONAL MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY INTERNATIONAL CREDIT LYONNAIS SECURITIES FOX-PITT, KELTON J.P. MORGAN SECURITIES LTD. SANTANDER CENTRAL HISPANO INVESTMENT WARBURG DILLON READ
Prospectus dated , 2000. 276 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses expected to be incurred in connection with the issuance and distribution of common stock registered hereby, all of which expenses, except for the SEC registration fee, the New York Stock Exchange listing fee and the NASD filing fee, are estimates:
DESCRIPTION AMOUNT - ----------- ------ SEC registration fee........................................ $1,810,781 New York Stock Exchange listing fee and expenses............ * NASD filing fee............................................. 30,500 Blue Sky fees and expenses (including legal fees)........... 5,000 Printing and engraving expenses............................. 3,800,000 Legal fees and expenses (other than Blue Sky)............... * Accounting fees and expenses................................ 1,250,000 Transfer Agent and Registrar's fees......................... * Miscellaneous............................................... * ---------- TOTAL............................................. $ * ==========
- --------------- * To be furnished by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our directors and officers may be indemnified against liabilities, fines, penalties and claims imposed upon or asserted against them as provided in the Delaware General Corporation Law and our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws. Such indemnification covers all costs and expenses incurred by a director or officer in his capacity as such. The Board of Directors, by a majority vote of a quorum of disinterested directors or, under certain circumstances, independent counsel appointed by the Board of Directors, must determine that the director or officer seeking indemnification was not guilty of willful misconduct or a knowing violation of the criminal law. In addition, the Delaware General Corporation Law and our Amended and Restated Certificate of Incorporation may, under certain circumstances, eliminate the liability of directors and officers in a stockholder or derivative proceeding. If the person involved is not a director or officer of MetLife, Inc., the Board of Directors may cause MetLife, Inc. to indemnify, to the same extent allowed for our directors and officers, such person who was or is a party to a proceeding by reason of the fact that he is or was our employee or agent, or is or was serving at our request as director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. We have in force and effect policies insuring our directors and officers against losses which they or any of them will become legally obligated to pay by reason of any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the directors and officers in the discharge of their duties, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers. Such coverage is limited by the specific terms and provisions of the insurance policies. Pursuant to the underwriting agreements, in the forms filed as exhibits to this Registration Statement, the underwriters will agree to indemnify directors and officers of MetLife, Inc. and II-1 277 persons controlling MetLife, Inc., within the meaning of the Securities Act of 1933, as amended (the "Act"), against certain liabilities that might arise out of or are based upon certain information furnished to us by any such underwriter. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Upon the effective date of the plan of reorganization, MetLife, Inc. will distribute approximately 493,476,118 shares of common stock to the MetLife Policyholder Trust for the benefit of eligible policyholders in the demutualization. Exemption from registration under the Act for such distribution will be claimed under Section 3(a)(10) of the Act based on the New York Superintendent of Insurance's approval of the plan of reorganization. Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed in principle that they or their respective affiliates will purchase from us in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements exempt from the registration requirements under the Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. See Exhibit Index following the signature pages to this amendment to the Registration Statement. (b) Financial Statement Schedules.
PAGE ---- Independent Auditors' Report................................ II-3 Schedule I -- Summary of Investments -- Other Than Investments In Affiliates at December 31, 1999............ II-4 Schedule III -- Supplementary Insurance Information for the years ended December 31, 1999, 1998 and 1997.............. II-5 Schedule IV -- Reinsurance for the years ended December 31, 1999, 1998 and 1997....................................... II-6
II-2 278 INDEPENDENT AUDITORS' REPORT The Board of Directors and Policyholders of Metropolitan Life Insurance Company: We have audited the consolidated financial statements of Metropolitan Life Insurance Company and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, equity and cash flows for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 7, 2000; such consolidated financial statements and report are included in the Prospectus which is a part of this Registration Statement of MetLife, Inc. on Form S-1. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 16(b). These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP New York, New York February 7, 2000 II-3 279 METROPOLITAN LIFE INSURANCE COMPANY SCHEDULE I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN AFFILIATES AT DECEMBER 31, 1999 (IN MILLIONS)
AMOUNT AT ESTIMATED WHICH SHOWN ON TYPE OF INVESTMENT COST (A) FAIR VALUE BALANCE SHEET - ------------------ -------- ---------- -------------- Fixed maturities: Bonds: United States Government and government agencies and authorities............................... $ 5,990 $6,299 $ 6,299 States, municipalities and political subdivisions.................................. 1,583 1,542 1,542 Foreign governments............................. 4,090 4,206 4,206 Public utilities................................ 6,798 6,602 6,602 Convertibles and bonds with warrants attached... -- -- -- All other corporate bonds....................... 40,707 39,575 39,575 Mortgage and asset-backed securities............... 27,396 26,661 26,661 International...................................... 12,235 12,086 12,086 Redeemable preferred stocks........................ 10 10 10 -------- ------ -------- Total fixed maturities.......................... 98,809 96,981 96,981 Equity securities: Common stocks: Public utilities................................ 7 13 13 Banks, trust and insurance companies............ 132 331 331 Industrial, miscellaneous and all other......... 841 1,522 1,522 Nonredeemable preferred stocks..................... 151 140 140 -------- ------ -------- Total equity securities......................... 1,131 2,006 2,006 Mortgage loans on real estate........................ 19,829 19,452 19,739 Policy loans......................................... 5,598 5,618 5,598 Real estate and real estate joint ventures........... 5,602 -- 5,602 Real estate acquired in satisfaction of debt......... 47 -- 47 Limited partnership interests........................ 1,331 -- 1,331 Short-term investments............................... 3,055 3,055 3,055 Other invested assets................................ 1,501 -- 1,501 -------- ------ -------- TOTAL INVESTMENTS............................... $136,903 $135,860 ======== ====== ========
- --------------- (A) Cost for fixed maturities and mortgage loans on real estate represents original cost, reduced by repayments and writedowns and adjusted for amortization of premiums or accretion of discount; for equity securities, cost represents original cost; for real estate, cost represents original cost reduced by writedowns and adjusted for depreciation; for real estate joint ventures and limited partnership interests, cost represents original cost adjusted for equity in earnings and distributions and reduced for writedowns. II-4 280 METROPOLITAN LIFE INSURANCE COMPANY SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
DEFERRED POLICY FUTURE POLICY POLICYHOLDER POLICYHOLDER ACQUISITION BENEFITS AND OTHER ACCOUNT DIVIDENDS UNEARNED SEGMENT COSTS POLICYHOLDER FUNDS BALANCES PAYABLE REVENUE - ------- --------------- --------------------- ----------------- ------------------- --------- 1999 Individual................. $8,049 $44,962 $27,280 $714 $799 Institutional.............. 106 29,895 17,627 259 6 Auto & Home................ 93 2,318 -- -- -- International.............. 244 1,192 994 1 15 Asset Management........... -- -- -- -- -- Corporate.................. -- 6 -- -- -- Consolidation/Elimination... -- (293) -- -- -- ------ ------- ------- ---- ---- $8,492 $78,080 $45,901 $974 $820 ====== ======= ======= ==== ==== 1998 Individual................. $6,194 $43,775 $27,109 $687 $749 Institutional.............. 82 30,905 18,253 248 5 Auto & Home................ 57 1,477 -- -- -- International.............. 205 899 1,132 12 8 Asset Management........... -- -- -- -- -- Corporate.................. -- 1 -- -- -- Consolidation/Elimination... -- (295) -- -- -- ------ ------- ------- ---- ---- $6,538 $76,762 $46,494 $947 $762 ====== ======= ======= ==== ==== 1997 Individual................. $5,912 $42,836 $27,222 $628 $562 Institutional.............. 40 30,039 19,167 341 4 Auto & Home................ 56 1,509 -- -- -- International.............. 428 3,461 2,154 -- 3 Asset Management........... -- -- -- -- -- Corporate.................. -- 1 -- -- -- Consolidation/Elimination... -- -- -- -- -- ------ ------- ------- ---- ---- $6,436 $77,846 $48,543 $969 $569 ====== ======= ======= ==== ==== PREMIUM REVENUE SEGMENT AND POLICY CHARGES - ------- ------------------ 1999 Individual................. $ 5,177 Institutional.............. 6,027 Auto & Home................ 1,751 International.............. 571 Asset Management........... -- Corporate.................. -- Consolidation/Elimination.. -- ------- $13,526 ======= 1998 Individual................. $ 5,140 Institutional.............. 5,634 Auto & Home................ 1,403 International.............. 686 Asset Management........... -- Corporate.................. -- Consolidation/Elimination.. -- ------- $12,863 ======= 1997 Individual................. $ 5,182 Institutional.............. 5,115 Auto & Home................ 1,354 International.............. 1,045 Asset Management........... -- Corporate.................. -- Consolidation/Elimination.. -- ------- $12,696 =======
AMORTIZATION OF AMORTIZATION OF DEFERRED POLICY DEFERRED POLICY ACQUISITION COSTS ACQUISITION COSTS CHARGED AGAINST NET OTHER INVESTMENT POLICYHOLDER BENEFITS CHARGED TO REALIZED INVESTMENT OPERATING SEGMENT INCOME, NET AND INTEREST CREDITED OTHER EXPENSES GAINS (LOSSES) EXPENSES - ------- --------------- --------------------- ----------------- ------------------- --------- 1999 Individual................. $ 5,346 $ 5,984 $613 $ (46) $3,616 Institutional.............. 3,755 7,742 17 -- 1,730 Auto & Home................ 103 1,301 213 -- 301 International.............. 206 515 19 -- 251 Asset Management........... 80 -- -- -- 795 Corporate.................. 605 -- -- -- 1,031 Consolidation/Elimination... (279) 4 -- -- (141) ------- ------- ---- ----- ------ $ 9,816 $15,546 $862 $ (46) $7,583 ======= ======= ==== ===== ====== 1998 Individual................. $ 5,480 $ 6,029 $364 $ 240 $3,657 Institutional.............. 3,885 7,615 9 -- 1,747 Auto & Home................ 81 1,029 166 -- 220 International.............. 343 686 48 -- 368 Asset Management........... 75 -- -- -- 799 Corporate.................. 682 (10) -- -- 2,601 Consolidation/Elimination... (318) -- -- -- (309) ------- ------- ---- ----- ------ $10,228 $15,349 $587 $ 240 $9,083 ======= ======= ==== ===== ====== 1997 Individual................. $ 4,754 $ 6,019 $546 $ 61 $3,166 Institutional.............. 3,754 7,253 3 -- 1,502 Auto & Home................ 71 1,003 166 -- 185 International.............. 504 1,006 56 9 538 Asset Management........... 78 -- -- -- 679 Corporate.................. 700 -- -- -- 966 Consolidation/Elimination... (370) -- -- -- (294) ------- ------- ---- ----- ------ $ 9,491 $15,281 $771 $ 70 $6,742 ======= ======= ==== ===== ====== PREMIUMS WRITTEN SEGMENT (EXCLUDING LIFE) - ------- ------------------ 1999 Individual................. $ N/A Institutional.............. N/A Auto & Home................ 2,109 International.............. 64 Asset Management........... N/A Corporate.................. N/A Consolidation/Elimination.. N/A ------ $2,173 ====== 1998 Individual................. $ N/A Institutional.............. N/A Auto & Home................ 1,422 International.............. 44 Asset Management........... N/A Corporate.................. N/A Consolidation/Elimination.. N/A ------ $1,466 ====== 1997 Individual................. $ N/A Institutional.............. N/A Auto & Home................ 1,359 International.............. 12 Asset Management........... N/A Corporate.................. N/A Consolidation/Elimination.. N/A ------ $1,371 ======
II-5 281 METROPOLITAN LIFE INSURANCE COMPANY SCHEDULE IV REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ---------- --------- ---------- ---------- ---------- FOR THE YEAR ENDED DECEMBER 31, 1999 Life insurance in force..................... $1,743,945 $217,358 $12,168 $1,538,755 0.8% ========== ======== ======= ========== ==== INSURANCE PREMIUMS Life insurance.......................... $ 9,503 $ 1,269 $ 217 $ 8,451 2.6% Accident and health insurance........... 2,102 323 48 1,827 2.6% Property and casualty insurance......... 1,644 53 219 1,810 12.1% ---------- -------- ------- ---------- ---- TOTAL INSURANCE PREMIUMS............. $ 13,249 $ 1,645 $ 484 $ 12,088 4.0% ========== ======== ======= ========== ==== FOR THE YEAR ENDED DECEMBER 31, 1998 Life insurance in force..................... $1,652,179 $167,941 $11,435 $1,495,673 0.8% ========== ======== ======= ========== ==== INSURANCE PREMIUMS Life insurance.......................... $ 9,572 $ 1,281 $ 313 $ 8,604 3.6% Accident and health insurance........... 1,718 301 53 1,470 3.6% Property and casualty insurance......... 1,473 87 43 1,429 3.0% ---------- -------- ------- ---------- ---- TOTAL INSURANCE PREMIUMS............. $ 12,763 $ 1,669 $ 409 $ 11,503 3.6% ========== ======== ======= ========== ==== FOR THE YEAR ENDED DECEMBER 31, 1997 Life insurance in force..................... $1,699,690 $ 49,452 $17,748 $1,667,986 1.1% ========== ======== ======= ========== ==== INSURANCE PREMIUMS Life insurance.......................... $ 9,556 $ 1,210 $ 227 $ 8,573 2.6% Accident and health insurance........... 1,753 497 83 1,339 6.2% Property and casualty insurance......... 1,419 103 50 1,366 3.7% ---------- -------- ------- ---------- ---- TOTAL INSURANCE PREMIUMS............. $ 12,728 $ 1,810 $ 360 $ 11,278 3.2% ========== ======== ======= ========== ====
II-6 282 All schedules, other than those listed above, are omitted because the information is not required or because the information is included in the Consolidated Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (a) To provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended ("Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (d) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 283 SIGNATURES Pursuant to the requirements of the Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on March 29, 2000. MetLife, Inc. By: /s/ ROBERT H. BENMOSCHE ------------------------------------ Name: Robert H. Benmosche Title: Chairman, President and Chief Executive Officer II-8 284 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, this amendment to the registration statement of MetLife, Inc. has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman, President, Chief Executive March 29 2000 - --------------------------------------------- Officer and Director Robert H. Benmosche * Director March 29, 2000 - --------------------------------------------- Curtis H. Barnette * Vice-Chairman, Chief Investment March 29, 2000 - --------------------------------------------- Officer and Director Gerald Clark * Director March 29, 2000 - --------------------------------------------- Joan Ganz Cooney * Director March 29, 2000 - --------------------------------------------- Burton A. Dole, Jr. * Director March 29, 2000 - --------------------------------------------- James R. Houghton * Director March 29, 2000 - --------------------------------------------- Harry P. Kamen * Director March 29, 2000 - --------------------------------------------- Helene L. Kaplan * Director March 29, 2000 - --------------------------------------------- Charles M. Leighton * Director March 29, 2000 - --------------------------------------------- Allen E. Murray * Vice-Chairman, Chief Financial Officer March 29, 2000 - --------------------------------------------- and Director Stewart G. Nagler * Director March 29, 2000 - --------------------------------------------- John J. Phelan, Jr.
II-9 285
SIGNATURE TITLE DATE --------- ----- ---- * Director March 29, 2000 - --------------------------------------------- Hugh B. Price * Director March 29, 2000 - --------------------------------------------- Robert G. Schwartz * Director March 29, 2000 - --------------------------------------------- Ruth J. Simmons * Director March 29, 2000 - --------------------------------------------- William C. Steere, Jr. By /s/ ROBERT H. BENMOSCHE - -------------------------------------------- Attorney-in-fact
II-10 286 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Form of Underwriting Agreement* 2.1 Plan of Reorganization+ 2.2 Amendment to Plan of Reorganization dated as of March 9, 2000 3.1 Form of Amended and Restated Certificate of Incorporation of MetLife, Inc.+ 3.2 Form of Amended and Restated By-Laws of MetLife, Inc.+ 4.1 Form of Certificate for Common Stock, par value $0.01 per share+ 5.1 Opinion of Debevoise & Plimpton+ 10.1 MetLife Deferred Compensation Plan 2000 for Senior Officers+ 10.2 MetLife Deferred Compensation Plan 2000 for Officers+ 10.3 Form of Employment Continuation Agreement with Messrs. Benmosche, Nagler and Clark+ 10.4 Form of Employment Continuation Agreement with Mr. Henrikson and other executive officers+ 10.5 Employment Continuation Agreement with Mr. Benson 10.6 Form of Stockholder Rights Agreement+ 10.7 MetLife, Inc. 2000 Stock Incentive Plan as amended and restated March 28, 2000 10.8 MetLife, Inc. 2000 Directors Stock Plan as amended and restated March 28, 2000 10.9 Amended and Restated Employment Continuation Agreement with Ms. Rein 10.10 Employment Continuation Agreement between Ms. Rein and Metropolitan Property and Casualty Insurance Company, dated March 3, 2000+ 10.11 Employment Agreement between New England Life Insurance Company and James M. Benson, dated June 16, 1997+ 10.12 Policyholder Trust Agreement+ 10.13 Restatement of the Excess Asbestos Indemnity Insurance Policy, dated as of December 31, 1998, between Stockwood Reinsurance Company, Ltd. and Metropolitan Life Insurance Company+ 10.14 Restatement of the Excess Asbestos Indemnity Insurance Policy, dated as of December 31, 1998, between European Reinsurance Corporation of America and Metropolitan Life Insurance Company+ 10.15 Restatement of the Aggregate Excess of Loss Reinsurance Agreement, dated as of December 31, 1998, between Stockwood Reinsurance Company, Ltd. and Metropolitan Life Insurance Company+ 10.16 Restatement of the Excess Asbestos Indemnity Insurance Policy, dated as of December 31, 1998, between Granite State Insurance Company and Metropolitan Life Insurance Company+ 10.17 Restatement of the Aggregate Excess of Loss Reinsurance Agreement, dated as of December 31, 1998, between American International Life Assurance Company of New York and Metropolitan Life Insurance Company+ 10.18 Five-Year Credit Agreement, dated as of April 27, 1998, and as amended as of April 26, 1999, among Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto+ 10.19 364-Day Credit Agreement, dated as of April 27, 1998, as amended and restated as of April 26, 1999, among Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto+ 10.20 364-Day Credit Agreement, dated as of September 29, 1999, among Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto+ 10.21 Stipulation of Settlement, as amended, relating to Metropolitan Life Insurance Company Sales Practices Litigation*
287
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.22 Consulting Agreement with Harry P. Kamen, effective July 1, 1999+ 10.23 Consulting Agreement with Harry P. Kamen, effective July 1, 1998+ 10.24 Metropolitan Life Insurance Company Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 2000)+ 10.25 Metropolitan Life Insurance Company Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 1999)+ 10.26 Metropolitan Life Insurance Company Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 1998)+ 10.27 Metropolitan Life Insurance Company Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 1997)+ 10.28 Metropolitan Life Insurance Company Annual Variable Incentive Plan (for performance periods starting on or after January 1, 2000)+ 10.29 The New Metropolitan Life Auxiliary Retirement Benefits Plan, as amended and restated, effective January 1, 1996+ 10.30 The New Metropolitan Life Supplemental Auxiliary Retirement Benefits Plan, effective January 1, 1996, and Amendment thereto+ 10.31 Metropolitan Life Auxiliary Savings and Investment Plan, restated effective through August 15, 1998+ 10.32 Metropolitan Life Supplemental Auxiliary Savings and Investment Plan (as amended and restated as of September 1, 1998) and Amendment thereto+ 10.33 Supplemental Auxiliary Savings and Investment Plan of Participating Metropolitan Affiliates, effective January 1, 1996+ 10.34 Metropolitan Life Supplemental Retirement Benefits Plan and Amendment thereto, effective January 1, 1995+ 10.35 New England Financial Annual Variable Incentive Plan (for performance periods starting on or after January 1, 2000)+ 10.36 New England Financial Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 2000)+ 10.37 New England Life Insurance Company Select Employees Supplemental 401(k) Plan, as amended and restated effective January 1, 2000 10.38 New England Life Insurance Company Supplemental Retirement Plan, as amended and restated effective January 1, 2000+ 10.39 The New England Life Insurance Company Select Employees Supplemental Retirement Plan, as amended and restated effective January 1, 2000+ 10.40 The New England Life Insurance Company Senior Executive Nonqualified Elective Deferral Plan, effective January 1, 1998+ 10.41 New England Financial Long Term Performance Compensation Plan (for each of the three-year performance periods commencing on January 1, 1997, 1998 and 1999, respectively)+ 10.42 The New England Short-Term Incentive Plan (for performance periods starting on or after January 1, 1999) 10.43 Metropolitan Life Insurance Company Annual Variable Incentive Plan (for performance periods starting on or after January 1, 1999) 10.44 Form of Capital Note 10.45 1993 Fiscal Agency Agreement between Metropolitan Life Insurance Company and The Chase Manhattan Bank, N.A. dated as of November 1, 1993 10.46 1995 Fiscal Agency Agreement between Metropolitan Life Insurance Company and The Chase Manhattan Bank, N.A. dated as of November 13, 1995 10.47 Fiscal Agency Agreement between New England Mutual Life Insurance Company and The First National Bank of Boston dated as of February 10, 1994* 10.48 Fiscal Agency Agreement between General American Life Insurance Company and The Bank of New York dated as of January 24, 1994
288
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.49 Amended and Restated Trust Agreement among GenAmerica Corporation and Wilmington Trust Company, David L. Herzog, John W. Hayden and Christopher A. Martin dated as of June 6, 1997 10.50 Employment Continuation Agreement with Ms. Weber 21.1 Subsidiaries of the Registrant+ 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of PricewaterhouseCoopers LLP+ 23.3 Consent of Debevoise & Plimpton (included in Exhibit 5.1)+ 24.1 Powers of Attorney+ 27.1 Financial Data Schedule+
- --------------- * To be filed by amendment. + Previously filed. EX-2.2 2 AMENDMENT TO PLAN OF REORGANIZATION 1 Exhibit 2.2 AMENDMENT TO PLAN OF REORGANIZATION OF METROPOLITAN LIFE INSURANCE COMPANY Under Section 7312 of the New York Insurance Law The following amendments are made to the Plan of Reorganization of Metropolitan Life Insurance Company, adopted by its Board of Directors on September 28, 1999 pursuant to Section 7312 of the New York Insurance Law, and as amended and restated on November 3, 1999 and November 16, 1999 (the "Plan"). 1. Capitalized terms used without definition are used as defined in the Plan. 2. Article II of the Plan is hereby amended to insert the following definition immediately following the definition of "Policyholders' Membership Interests": ""Private Placements" means private placements of Common Stock to one or both of Credit Suisse Group, or an affiliate, and Banco Santander Central Hispano, S.A., or an affiliate (each, a "Private Placement Purchaser"), which are completed by the Holding Company on the Plan Effective Date. A Private Placement shall have the following terms and conditions: (i) Each Private Placement Purchaser shall purchase not less than 1.0%, nor more than 4.9%, of the total number of shares of Common Stock outstanding immediately after the IPO. The exact number of shares to be sold to and purchased by each Private Placement Purchaser will, subject to such minimum and maximum numbers of shares, be determined by the Holding Company at its discretion, based on the advice of Goldman Sachs & Co. or such other investment bank that is approved by the New York Superintendent of Insurance. In exercising its discretion, the Holding Company will take into consideration the number of orders for the shares of Common Stock in the IPO, the level of oversubscription, if any, in the IPO, 2 the aggregate demand for the shares in the IPO, the Holding Company's judgment as to the quality of that demand and market conditions generally. (ii) The shares shall be purchased at the IPO Price. (iii) The purchase of the shares by each Private Placement Purchaser shall close simultaneously with the closing of the IPO. The purchase agreement for a Private Placement may contain such other terms and provisions as are acceptable to the Superintendent." 3. Section 3.1(e) of the Plan is hereby amended to read as follows: "(e) subject to the provisions hereof, the Holding Company may conduct one or more Private Placements and Other Capital Raising Transactions;" 4. Sections 5.2(b) and (c) of the Plan are hereby amended to read as follows: "(b) The Plan Effective Date shall be the date on which the closing of the IPO and one or more Private Placements and Other Capital Raising Transactions, if any, occurs. The Plan Effective Date shall not be later than the first anniversary of the date this Plan is approved by the Superintendent pursuant to Section 7312(j), provided that such one-year period may be extended upon approval of the Superintendent for one or more additional periods if requested by the Board. This Plan shall be deemed to have become effective at the Effective Time." "(c) The Holding Company shall make an initial public offering of its Common Stock in the IPO and may also raise capital through one or more Private Placements and Other Capital Raising Transactions. The material features of any proposed Other Capital Raising Transactions, including the approximate size and the expected range of offering price, interest or dividend rate, conversion or redemption price and other relevant terms, as of the date of the notice, will be provided to the Superintendent for the Superintendent's review not less than 15 business days prior to the earlier of the distribution of any preliminary prospectus or preliminary offering memorandum, or commencement of the roadshow, relating to any Other Capital Raising Transaction. The proceeds raised in all such Other Capital Raising Transactions shall not in the aggregate exceed one-third of the total proceeds raised in such Other Capital Raising Transactions, the IPO and such Private Placements. The Holding Company shall not proceed with any offering relating to any Other Capital Raising Transaction without the approval of the Superintendent. The proceeds from the IPO, any Private Placements and any Other Capital Raising Transactions, net of underwriting and placement 3 commissions and related expenses, shall be equal to or greater than the sum of (i) amounts required by the Holding Company to pay, or to fund the paying or crediting by the Company of, (x) cash and Policy Credits to Eligible Policyholders pursuant to Section 7.3 (subject to the third sentence of Section 7.3(d)), and (y) fees and expenses incurred in connection with the Reorganization, to the extent required by the undertakings delivered by the Company and the Holding Company under Section 7312(p), and (ii) an amount equal to the amount required to reimburse the Company for cash payments to be made by the Canadian branch of the Company to holders of policies included in the Canadian business sold to Clarica Life." 5. Section 5.2(e)(vi) of the Plan is hereby amended to read as follows: "(vi) the Holding Company shall complete the closings, and receive the proceeds, of the sale of shares of Common Stock in the IPO and any Private Placements and the sale of securities in any Other Capital Raising Transactions." 6. Section 5.2(g) of the Plan is hereby amended to read as follows: "(g) The Company and the Holding Company shall use their best efforts to ensure that the managing underwriters for the IPO and any Other Capital Raising Transactions conduct the offering process in a manner that is generally consistent with customary practices for similar offerings. The Company and the Holding Company shall allow the Superintendent and his financial advisors reasonable access to permit them to observe the offering process. Special pricing committees of the boards of directors of the Company and the Holding Company shall determine the price of Common Stock offered in the IPO and any Private Placement and any securities offered in any Other Capital Raising Transaction, which must be ratified by the boards of directors of the Company and the Holding Company on or prior to the Plan Effective Date. A majority of each of these board committees shall consist of directors who are not officers or employees of the Company or the Holding Company, and no employees, officers or directors of or legal counsel to any of the underwriters for the IPO or any Other Capital Raising Transaction, or any Private Placement Purchaser shall serve on such committees. Neither the Company nor the Holding Company will enter into an underwriting agreement for the IPO or any Other Capital Raising Transaction if it is notified that the Superintendent has not received confirmation from its financial advisors to the effect that the Company, the Holding Company and the underwriters for the offerings have complied in all material respects with the requirements of this Section 5.2(g). In addition, the Holding Company shall not enter into the purchase agreement for any Private Placement without the approval of the Superintendent, unless the agreement states that completion of the Private Placement is subject to the Superintendent's approval. The underwriting agreements and purchase agreements, and any amendments thereto, shall contain 4 terms and provisions that are acceptable to the Superintendent. The Company shall provide the Superintendent with a letter, dated the date of the signing of the underwriting agreement for the IPO, representing that as of that date it has complied with the foregoing requirements as to the conduct of the IPO, any Private Placement and any Other Capital Raising Transaction and that it will continue to do so. On the Plan Effective Date, the Company will provide the Superintendent with a letter confirming these representations as of that date. The final terms of the IPO, any Private Placement and any Other Capital Raising Transaction shall be subject to the Superintendent's approval." 7. Section 5.2(h) of the Plan is hereby amended to read as follows: "(h) Proceeds of the IPO, any Private Placements and any Other Capital Raising Transactions, net of underwriting and placement commissions and related expenses, shall be used as follows: (i) the Holding Company shall contribute to the Company an amount equal to the sum of (x) the amount required to be paid by the Company to fund the paying of cash and crediting of Policy Credits pursuant to Section 7.3 (subject to the third sentence of Section 7.3(d)) and (y) an amount equal to an amount required to reimburse the Company for the cash payments to be made by the Canadian branch of the Company to the holders of policies included in the Canadian business sold to Clarica Life; and (ii) the Holding Company shall contribute to the Company an amount equal to the amount of the fees and expenses incurred by the Company in connection with the Reorganization, to the extent required by the undertaking delivered by the Company and the Holding Company to the Superintendent in accordance with Section 7312(p). If any additional proceeds are raised in the IPO, any Private Placements and any Other Capital Raising Transactions, net of underwriting and placement commissions and related expenses, they shall be used as follows: (A) the Holding Company shall retain an amount not exceeding $240 million, or such greater amount as the Superintendent may approve, for working capital, payment of dividends on the Common Stock and other general corporate purposes; (B) the Holding Company shall retain an amount not exceeding $100 million, or such greater amount as the Superintendent may approve, to pay the fees and reimburse the expenses of the Trustee and Custodian; and 5 (C) to the extent that such net proceeds exceed the aggregate amounts identified in clauses (A) and (B), and to the extent of any amounts retained by the Holding Company pursuant to clause (A) and (B) that are not used for the purpose stated in each such clause, the Holding Company shall promptly contribute to the Company any remaining proceeds for the general corporate purposes of the Company and to repay debt incurred in connection with the acquisition of GenAmerica." 8. Section 5.8(c) is hereby amended to read as follows: "(c) Copies of the opinions described in Sections 5.8(a) and (b) that are rendered in writing to the Board on the Adoption Date and thereafter to and including the Plan Effective Date relating to this Plan, the Trust, the IPO, any Private Placement and any Other Capital Raising Transaction shall be delivered on or prior to the Plan Effective Date to the Superintendent." IN WITNESS WHEREOF, Metropolitan Life Insurance Company, by authority of its Board, has caused this Amendment to the Plan of Reorganization to be signed by its Senior Executive Vice President and General Counsel and its corporate seal to be affixed hereto attested by its Vice-President and Secretary on March 9, 2000. METROPOLITAN LIFE INSURANCE COMPANY [SEAL] By /s/ Gary A. Beller -------------------------------- Gary A. Beller Senior Executive Vice President and General Counsel ATTEST: /s/ Gwenn L. Carr - ----------------------------- Gwenn L. Carr Vice President and Secretary EX-10.5 3 EMPLOYMENT CONTINUATION AGREEMENT 1 Exhibit 10.5 ================================================================================ James M. Benson EMPLOYMENT CONTINUATION AGREEMENT March 10, 2000 Metropolitan Life Insurance Company ================================================================================ 2 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (the "Company"), and James M. Benson (the "Executive"), dated as of the ___ day of March, 2000. W I T N E S S E T H : WHEREAS, an Affiliate (as defined below) of the Company has employed the Executive in a senior officer position; WHEREAS, Executive has also become employed in a critical officer position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of its policyholders, and if, at the relevant time, it is a stock company, its shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executive's services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as each such term is defined in Section 2 hereof); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 3 1. Operation of Agreement. (a) Term. The initial term of this Agreement shall commence on the date hereof and continue until the third anniversary of the date hereof. Thereafter, this Agreement will automatically renew for successive and consecutive additional three year periods following the end of its initial term and any extended term, unless the Company or the Executive gives the other party written notice at least 180 days prior to the date the term hereof would otherwise renew that it or he does not want the term to be so extended; provided, however, that, the Company may not deliver a notice of nonrenewal after (i) a Potential Change of Control (as is defined in Section 2(b) hereof) unless the Board of Directors has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). Notwithstanding anything to the contrary in this Agreement, the term of this Agreement shall in all events expire (regardless of when the term would otherwise have expired) on the second anniversary of a Change of Control. (b) Effective Date. Notwithstanding the provisions of Section 1(a) hereof, this Agreement shall govern the terms and conditions of the Executive's employment and the benefits and compensation to be provided to the Executive commencing on the date on which a Potential Change of Control or a Change of Control occurs (the "Effective Date") and ending on the date the term of this Agreement otherwise expires, provided that if the Executive is not employed by the Company or an Affiliate on the Effective Date, this Agreement shall be void and without effect. If then still in effect, the Employment Agreement between New England Life Insurance Company ("New England Life") and the Executive dated as of June 16, 1997, as the same may hereafter be amended, restated or extended at any time or from time to time or any successor agreement thereto (the "Basic Agreement"), shall be superseded and replaced by this Agreement effective on the Effective Date, except as otherwise expressly provided herein. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person (within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)), acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power (as defined below) of the Company's securities; (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Company (the 2 4 "Board") or the board of directors of any successor to the Company provided, however, that any director elected to the Board, or nominated for election, by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause 2(a)(ii); (iii) the policyholders of the Company, if at the time in question the Company is a mutual life insurance company, approve a merger, consolidation, division, sale or other disposition of all or substantially all of the assets of the Company (a "Mutual Event"); provided, however, that a Mutual Event shall not be treated as a Change of Control for purposes of this Agreement if (x) the Company is the surviving company in any such merger or other transaction and (y) pursuant to the terms of the agreement governing the transaction constituting the Mutual Event, the persons who were directors of the Company immediately prior to such Mutual Event constitute at least 75% of the members of the Board immediately following the consummation of such Mutual Event; or (iv) the stockholders of the Company, if at the time in question the Company is a stock company, approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event; or (v) any other event occurs which the Board declares to be a Change of Control. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred merely as a result of (i) the conversion of the Company from a mutual life insurance company to a stock company whose shareholders are either (x) primarily persons who were policyholders of the Company immediately prior to such transaction and/or a trust holding the shares of the Company for the benefit of such policyholders or (y) another corporation the shares of which are held primarily by the persons and/or trust described in subclause (x); (ii) the Company becoming a direct or indirect subsidiary of a mutual holding company whose members are primarily persons who were policyholders of the Company immediately prior to such transaction or (iii) an underwritten offering of the 3 5 equity securities of the Company where no Person (including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)) acquires more than 25% of the beneficial ownership interests in such securities. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer, with adequate financing, which, if consummated, would result in such Person being the "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 10% or more of the combined Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) any person (including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)) other than the Company attempts, directly or indirectly, to replace more than 25% of the directors of the Company; provided, however, that any action taken in support of a nominee approved by a majority of the members of the Board then in office shall not be given any effect in determining whether a Potential Change of Control has occurred; (iv) certification, pursuant to New York Insurance Law Section 4210(h)(1)(B) (or any successor provision thereto) of an independent nomination of candidates to replace more than 25% of the members of the Board; or (v) any other event occurs which the Board declares to be a Potential Change of Control. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on 4 6 which another Potential Change of Control or any actual Change of Control occurs, in which case the Basic Agreement (if still in effect immediately prior to the occurrence of a Potential Change of Control as to which a Nullification has been declared by the Board) shall be reinstated upon such Nullification and thereafter continue in effect in accordance with its terms unless and until another Potential Change of Control or any actual Change of Control occurs. (c) Voting Power. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. (d) Affiliate. An "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Company. 3. Employment Period. Subject to Section 6 hereof, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the expiration of the term of this Agreement. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned at the Company and its Affiliates immediately prior to the Effective Date (including, without limitation, the duties and responsibilities for New England Life that are described in the Basic Agreement, if the Basic Agreement is in effect immediately prior to the Effective Date). It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) hereof. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or at any other office or location not more than 35 miles from such pre-Effective Date location. (b) Business Time. During the Employment Period, the Executive agrees to devote his full attention during normal business hours to the business and affairs of the Company and its Affiliates and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial 5 7 and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company and its Affiliates. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company or any Affiliate immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as the "Base Salary". Neither the Base Salary nor any increase in the Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, the Executive shall be afforded the opportunity to receive an annual bonus (the "Annual Bonus Opportunity") in an amount which provides the Executive with the same bonus opportunity as other executives of the Company and its Affiliates of comparable rank; provided that, if the Basic Agreement is in effect immediately prior to the Effective Date, the bonus opportunity provided to the Executive hereunder shall not be less than the bonus opportunity, if any, afforded to him under the Basic Agreement. If any fiscal year commences but does not end during the Employment Period, Executive shall receive a pro-rated amount in respect of the Annual Bonus Opportunity for the portion of the fiscal year occurring during the Employment Period. Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or any prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the level made available to other executives of the Company and its Affiliates of comparable rank; provided that, if the Basic Agreement is in effect immediately prior to the Effective Date, the long term incentive compensation opportunity provided to the Executive hereunder 6 8 shall not be less than the long-term compensation opportunity, if any, afforded to him under the Basic Agreement. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and any Affiliate at the level made available from time to time to other similarly situated officers. Without limiting the generality of the foregoing, the Executive shall also be entitled to the individual retirement arrangement set forth in section 4(d)(ii) of the Basic Agreement, the terms of which, as they are in effect on the date hereof or as they may be amended from time to time with the consent of the parties prior to the Effective Date, shall be and hereby are incorporated herein by reference and expressly made a part hereof. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect from time to time with respect to expenses incurred by other similarly situated officers. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available from time to time to other similarly situated officers. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, on the same terms and conditions applicable from time to time with respect to the indemnification of its other senior officers of comparable rank. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, "Disability" shall mean the Executive's inability to perform 7 9 the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date; provided, however, that the Executive's employment may not be terminated for Disability hereunder unless the Executive has requested that he be considered for, and has qualified to receive, long-term disability benefits under such plan. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), upon not less than 60 days' written notice to the Company, provided that any termination by the Executive pursuant to Section 6(d) hereof on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act of dishonesty or gross misconduct on the Executive's part which results or is intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 hereof, which violations are demonstrably willful and deliberate on the Executive's part. (d) Good Reason. After the Effective Date, the Executive may terminate his employment at any time for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the Effective Date: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4(a) hereof, or (B) any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 hereof, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) requiring the Executive to be based at any office or location more than 35 miles from the location at which the Executive performed his duties immediately prior to the Effective Date, except for travel reasonably required in the performance of the Executive's responsibilities; or 8 10 (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b) hereof. In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e) hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice given, (i) in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination or (ii) in the case of a termination for Good Reason, within 120 days of the Executive's having actual knowledge of the events giving rise to such termination. Any such Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specify the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate), at the times determined below (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under or in accordance with the terms and conditions of the otherwise applicable employee benefit plans and programs maintained by the Company or any Affiliate, including, without 9 11 limitation, any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company, any vested amounts payable in respect of the individual retirement arrangement described in Section 4(d)(ii) of the Basic Agreement and incorporated herein by reference and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the plans, policies or programs maintained by the Company or any Affiliate, including, without limitation, any benefits that are provided to the Executive or any of his dependents under the terms of the Basic Agreement, if such Basic Agreement is in effect on the Effective Date (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 30 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Lump Sum Payments. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period or (y) the Executive terminates his employment at any time during the Employment Period for Good Reason, the Company shall pay to the Executive, at the times determined below, the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual rate of Base Salary as then in effect; 10 12 (2) the average of the annual bonuses payable to the Executive under the Annual Variable Incentive Plan (or any successor plan thereto) or any other annual incentive compensation plan maintained by an Affiliate in which the Executive participated for the each of the three fiscal years of the Company or, if applicable, such Affiliate (or, if less, the number of prior fiscal years during which Executive was an employee of the Company or each Affiliate) ended immediately prior to the Effective Date for which an annual bonus amount had been determined by the Board (or any committee thereof) prior to the Effective Date. If the Executive was employed by the Company for only a portion of any fiscal year included in the period for which the average referred to in the immediately preceding sentence is determined and the bonus payable for such fiscal year took into account such partial period of employment, such bonus for such fiscal year shall be annualized for purposes of calculating such average; and (3) the average of the long-term incentive compensation amounts payable to the Executive by the Company or any Affiliate with respect to each of the last three performance periods (or, if the Executive participated in the long-term compensation program in respect to a lesser number of such performance periods, such lesser number) ended prior to the Effective Date for which the amount payable had been determined by the Board or any committee thereof (or, if applicable, the administrator of any plan maintained by such Affiliate) prior to the Effective Date; provided, however, that, the amount determined under this subclause (3) shall be reduced (but not below zero) by the "Determined Value" (as defined below) of any vested stock options, restricted stock or similar equity-based award relating to the Company's common equity on the earlier to occur of the Executive's Date of Termination or the date on which a Change of Control occurs. For purposes of this Agreement, Determined Value shall mean the excess of the "Equity Value" over the price, if any, payable by the Executive in respect of such stock option or other award and Equity Value shall be determined to be (x) in the case of a Change of Control occurring by reason of a merger, recapitalization 11 13 or similar transaction or as a result of a tender offer, the value received by the Company's equity holders in such transaction or the price paid in such tender offer (with the value of any non-cash consideration to be determined in good faith by the Compensation Committee of the Board as constituted immediately prior to the Effective Date) and (y) in the case of any other Change of Control or where the date as of which such Determined Value is measured is the Executive's Date of Termination, the average of the high and low reported sales prices of such equity on the principal securities market on which such equity is traded on the relevant date; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. The Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the third anniversary of the Date of Termination (the "End Date"), to continue participation in all of the employee and executive plan providing medical, dental and long-term disability benefits maintained by the Company or an Affiliate (collectively, the "Continuing Benefit Plans"); provided, however, that the participation by the Executive (and, to the extent applicable, his dependents) in any Continuing Benefit Plan shall cease on the date, if any, prior to the End Date on which the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer ("Prior Date"). The Executive's participation in the Continuing Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date or the Prior Date. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. (iii) Termination of Employment Within Three Years of Normal Retirement Date. Notwithstanding anything else to the contrary contained in this Section 7(c), if the Executive's employment with the Company terminates at any 12 14 time during the three year period ending on the Executive's normal retirement date, as determined in accordance with the Company's policies then in effect for the Company's senior executives (the "Normal Retirement Date"), and the Executive would be entitled to receive severance benefits under this Section 7(c), then (i) the multiplier in Section 7(c)(i) shall not be three, but shall be a number equal to three times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d) hereof, the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e) hereof) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Affiliates. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Affiliates. (e) Limit on Payments by the Company. (i) Application of Section 7(e) Hereof. In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any Affiliate (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Promptly after delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. 13 15 (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company or an Affiliate exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments "within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount allocable to such Covered Payments," or such "parachute payments" are other wise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established 14 16 pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlements under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company's obligation to indemnify the Executive pursuant to Section 5(g) hereof. (g) Basic Agreement Minimum. Notwithstanding anything in this Section 7 to the contrary, this Agreement is intended to provide the Executive with termination benefits which are at least as good or better than the comparable benefits that 15 17 would have been provided to the Executive under the Basic Agreement. Accordingly, if in any circumstance and for any reason, the Basic Agreement would have provided the Executive with greater benefits upon any termination of employment than are provided hereunder upon such termination of employment, the amount that would have been payable to the Executive under the Basic Agreement shall be payable under this Agreement (subject only to the limitation set forth in Section 7(e) hereof) as though the relevant provisions of the Basic Agreement had been incorporated herein by reference. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any Affiliate and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any Affiliate, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be diminished or otherwise affected by any circumstances, including, but not limited to, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, but not limited to, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to at least one material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Company Property. The Agreement to Protect Corporate Property previously executed by the Executive is incorporated herein and made a part hereof. The Executive hereby reaffirms his commitments under such agreement, and again agrees to be 16 18 bound by each of the covenants contained therein for the benefit of the Company in consideration of the benefits made available to him hereby. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. Without limiting the generality of the foregoing, if prior to the occurrence of a Change of Control, the Company is a party to a merger, recapitalization, demutualization, restructuring, reorganization or similar transaction, as a result of which the Company becomes a subsidiary of any entity that was a subsidiary of the Company immediately prior to such transaction, from and after the date of such transaction the term Company as used in the definition of Change of Control and Potential Change of Control (but not as used in any other Section hereof, unless required to effect the intent that a Potential Change of Control or a Change of Control in respect of such entity shall cause the Effective Date of this Agreement to occur) shall refer to both the Company and such entity. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c) hereof, any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in New York City and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. 17 19 (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Metropolitan Life Insurance Company One Madison Avenue New York, New York 10010 Att.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any 18 20 other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Lisa M. Weber 3/10/00 _________________________ Title: Executive Vice President 3/10/00 WITNESSED: /s/ Traci Bigler ______________________ JAMES M. BENSON /s/ James M. Benson __________________________ WITNESSED: _______________________ 19 EX-10.7 4 2000 STOCK INCENTIVE PLAN 1 Exhibit 10.7 METLIFE, INC. 2000 STOCK INCENTIVE PLAN ARTICLE I. PURPOSE The purpose of the "METLIFE, INC. 2000 STOCK INCENTIVE PLAN" as it may be amended from time to time (the "Plan") is to foster and promote the long-term financial success of the Company and materially increase shareholder value by (a) motivating superior performance by means of performance-related incentives, (b) encouraging and providing for the acquisition of an ownership interest in the Company by the Company's and its Subsidiaries' employees and Agents, and (c) enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent. ARTICLE II. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Agent" means an "insurance agent" as defined in Section 2101 of the New York Insurance Law. (c) "Approved Retirement" means termination of a Participant's employment (i) on or after the normal retirement date or (ii) with the Committee's approval, on or after any early retirement date established under any retirement plan maintained by the Company or a Subsidiary and in which the Participant participates; provided that in each case, the Committee may require, as a condition to a Participant's retirement being an "Approved Retirement" for purpose of the Plan, that the Participant enter 2 into a general release of claims, non-solicitation and/or non-competition agreement in form and substance satisfactory to the Company. (d) "Board" means the Board of Directors of the Company. (e) "Cause" means (i) the willful failure by the Participant to perform substantially his duties as an Employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) the Participant's engaging in serious misconduct that is injurious to the Company or any Subsidiary in any way, including, but not limited to, by way of damage to their respective reputations or standings in their respective industries, (iii) the Participant's having been convicted of, or having entered a plea of nolo contendere to, a crime that constitutes a felony or (iv) the breach by the Participant of any written covenant or agreement with the Company or any Subsidiary not to disclose or misuse any information pertaining to, or misuse any property of, the Company or any Subsidiary or not to compete or interfere with the Company or any Subsidiary. (f) "Change of Control" shall be deemed to have occurred if: (i) any person (within the meaning of Section 3(a)(9) of the Act), including any group (within the meaning of Rule 13d-5(b) under the Act), but excluding the MetLife Policyholder Trust (and any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by such Trust) and any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary thereof, acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power (as defined below) of the Company's securities; or (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or the board of directors of any successor to the Company; provided, however, that any director elected to the Board, or nominated for election, by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause (ii); or (iii) upon the consummation of a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the 2 3 Company which has been approved by the shareholders of the Company (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event; or (iv) any other event occurs which the Board declares to be a Change of Control. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred merely as a result of (i) the conversion of the Company from a mutual life insurance company to a stock company whose shareholders are either (x) primarily persons who were policyholders of the Company immediately prior to such transaction and/or a trust holding the shares of the Company for the benefit of such policyholders or (y) another corporation the shares of which are held primarily by the persons and/or trust described in subclause (x); (ii) the Company becoming a direct or indirect subsidiary of a mutual holding company whose members are primarily persons who were policyholders of the Company immediately prior to such transaction, (iii) an underwritten offering of the equity securities of the Company (including, without limitation, any offering of any class of convertible preferred securities) effected in connection with the Demutualization or (iv) any other transaction that would constitute an "Other Capital Raising Transaction" within the meaning of the plan of reorganization adopted by Metropolitan Life Insurance Company in connection with the Demutualization. (g) "Change of Control Price" means the highest price per share of Common Stock offered in conjunction with any transaction resulting in a Change of Control (as determined in good faith by the Committee if any part of the offered price is payable other than in cash) or, in the case of a Change of Control occurring solely by reason of a change in the composition of the Board, the highest Fair Market Value of the Common Stock on any of the 30 trading days immediately preceding the date on which a Change of Control occurs. (h) "Code" means the Internal Revenue Code of 1986, as amended. 3 4 (i) "Committee" means the Compensation Committee of the Board or such other committee of the Board as the Board shall designate from time to time, which committee shall consist of two or more members, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 (or any successor rule thereto), as promulgated under the Act, and an "outside director" within the meaning of section 162(m) of the Code and the Treasury Regulations promulgated thereunder. (j) "Common Stock" means the common stock of the Company, par value $0.01 per share. (k) "Company" means MetLife, Inc., a Delaware corporation, and any successor thereto. (l) "Demutualization" means the demutualization of Metropolitan Life Insurance Company pursuant to a plan of reorganization approved by the New York State Superintendent of Insurance under Section 7312 of the New York Insurance Law. (m) "Directors Plan" means the Company's 2000 Directors Stock Plan, as the same may be amended from time to time. (n) "Disability" has the meaning given in the Company's long-term disability insurance policy or program as in effect from time to time. (o) "Employee" means any officer or other employee of the Company, Metropolitan Life Insurance Company or any Subsidiary (as determined by the Committee in its sole discretion); provided, however, that with respect to Incentive Stock Options, "Employee" means any person who is considered an employee of the Company or any Subsidiary for purposes of Treasury Regulation Section 1.421-7(h). (p) "Fair Market Value" means, on any date, the closing prices of the Common Stock as reported in the principal consolidated transaction reporting system for the New York Stock Exchange (or on such other recognized quotation system on which the trading prices of the Common Stock are quoted at the relevant time) on such date. In the event that there are no Common Stock transactions reported on such tape (or such other system) on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Stock transactions were so reported. 4 5 (q) "Family Member" means, as to a Participant, any (i) child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships), of such Participant, (ii) trust for the exclusive benefit of such persons and (iii) other entity owned solely by such persons. (r) "Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, an Option may be either (i) an "Incentive Stock Option" (ISO) within the meaning of Section 422 of the Code or (ii) an option which is not an Incentive Stock Option (a "Nonstatutory Stock Option" (NSO)). (s) "Participant" means any Employee or Agent designated by the Committee to participate in the Plan. (t) "Plan Effective Date" means the "Plan Effective Date" determined under Section 5.2(b) of the Plan of Reorganization, dated September 28, 1999, of Metropolitan Life Insurance Company, as amended. (u) "Subsidiary" means any corporation or partnership in which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation or of the capital interest or profits interest of such partnership. 2.2 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE III. ELIGIBILITY AND PARTICIPATION Participants in the Plan shall be those Employees or Agents selected by the Committee to be granted Options pursuant to Article VI. ARTICLE IV. POWERS OF THE COMMITTEE 4.1 Power to Grant. The Committee shall determine the Participants to whom Options shall be granted and the terms and conditions of any and all such Options. The 5 6 Committee may establish different terms and conditions for different Participants and for the same Participant for each Option such Participant may receive, whether or not granted at different times. Notwithstanding any other contrary provision in the Plan, Options shall not be granted prior to the first anniversary of the Plan Effective Date. 4.2 Certain Rules Relating to Grants. (a) Maximum Individual Grants. During any consecutive five year period, no individual Participant may be granted Options to acquire more than 5% of the total shares available under the Plan. (b) Cumulative Grant Limits. The maximum number of Options (expressed as a percentage of the total number of shares available under the Plan as set forth in Section 5.1) that may be awarded, on a cumulative basis (but excluding any forfeited, canceled or expired Options), shall be as follows: -------------------------------------------------- prior to the second anniversary of the Plan Effective Date 60% -------------------------------------------------- prior to the third anniversary of the Plan Effective Date 80% -------------------------------------------------- prior to the fourth anniversary of the Plan Effective Date 100% -------------------------------------------------- (c) Repricing or Substitution of Options. The Committee shall not have the right to reprice outstanding Options or to grant new Options under the Plan in substitution for or upon the cancellation of Options previously granted. 4.3 Administration. (a) Rules, Interpretations and Determinations. The Plan shall be administered by the Committee. The Committee shall have full authority to interpret and administer the Plan, to establish, amend, and rescind rules and regulations relating to the Plan, to provide for conditions deemed necessary or advisable to protect the interests of the Company, to construe the respective option agreements and to make all other determinations it determines necessary or advisable for the administration and interpretation of the Plan in order to carry out its provisions and purposes. Determinations, interpretations, or other actions made or taken by the Committee shall be final, binding, and conclusive for all purposes and upon all persons. 6 7 (b) Agents and Expenses. The Committee may appoint agents (who may be officers or employees of the Company) to assist in the administration of the Plan and may grant authority to such persons to execute agreements or other documents on its behalf. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. All expenses incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. 4.4 Delegation of Authority. The Committee may delegate its duties, powers and authorities under the Plan to the Company's Chief Executive Officer with respect to individuals who are below the position of Senior Vice President (or analogous title), pursuant to such conditions or limitations as the Committee may establish; provided that only the Committee or the Board may select, and grant Options to, Participants who are subject to Section 16 of the Act. Notwithstanding the foregoing, in no event shall the Chief Executive Officer grant (i) Options which, in the aggregate, represent more than 1.5% of the total number of shares authorized for issuance under the Plan or (ii) to any single Participant in any twelve month period more than 5% of the total number of shares that the Chief Executive Officer is authorized to grant. The Chief Executive Officer shall report periodically to the Committee regarding the nature and scope of the Options granted pursuant to the authority granted to him under this Section 4.4. ARTICLE V. STOCK SUBJECT TO PLAN 5.1 Number. Subject to the provisions of Section 5.3, the number of shares of Common Stock issuable under the Plan shall not exceed 5% of the total number of shares of Common Stock outstanding immediately after the Plan Effective Date; provided that the number of shares issuable under the Plan shall be reduced by the number of shares issuable pursuant to any "Options" granted pursuant to the Directors Plan (as such term is defined in the Directors Plan). The shares to be delivered under the Plan may consist, in whole or in part, of treasury Common Stock or authorized but unissued Common Stock, not reserved for any other purpose. 5.2 Canceled, Terminated, or Forfeited Options. Any shares of Common Stock subject to an Option which for any reason is canceled, terminated or otherwise settled without the issuance of any Common Stock (including, but not limited to, shares 7 8 tendered to exercise outstanding Options or shares tendered or withheld for taxes) shall again be available for Options under the Plan. 5.3 Adjustment in Capitalization. In the event of any Common Stock dividend or Common Stock split, recapitalization (including, but not limited, to the payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to stockholders (other than ordinary cash dividends), exchange of shares, or other similar corporate change, the aggregate number of shares of Common Stock available for Options under Section 5.1 or subject to outstanding Options and the respective exercise prices applicable to outstanding Options shall be appropriately adjusted by the Committee and the Committee's determination shall be conclusive; provided, however, that no adjustment shall occur by reason of the issuance of Common Stock in accordance with the Demutualization and that any fractional shares resulting from any such adjustment shall be disregarded. ARTICLE VI. STOCK OPTIONS 6.1 Grant of Options. Subject to the provisions of Section 4.1, Options may be granted to Participants at such time or times as shall be determined by the Committee. Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonstatutory Stock Options. Except as otherwise provided herein, the Committee shall have complete discretion in determining the number of Options, if any, to be granted to a Participant. Each Option shall be evidenced by an Option agreement that shall specify the type of Option granted, the exercise price, the duration of the Option, the number of shares of Common Stock to which the Option pertains, and such other terms and conditions as the Committee shall determine which are not inconsistent with the provisions of the Plan. Notwithstanding the foregoing, any Options granted to a Participant who is an Agent shall comply with the provisions of Section 4228 of the New York Insurance Law and any regulations thereunder. 6.2 Option Price. Nonstatutory Stock Options and Incentive Stock Options granted pursuant to the Plan shall have an exercise price no less than the Fair Market Value of a share of Common Stock on the date the Option is granted. 6.3 Exercise of Options. One-third of each Nonstatutory Stock Option or Incentive Stock Option granted pursuant to the Plan shall become exercisable on each of the first three anniversaries of the date such Option is granted; provided that in no event shall any Option be or become exercisable hereunder prior to the second anniversary of 8 9 the Plan Effective Date and, if and to the extent this proviso limits the exercisability of any Option, the portion so limited shall become exercisable on such second anniversary; provided, further, that the Committee may at the time of grant establish longer periods of service for Options to become exercisable and may establish performance-based criteria for exercisability. Subject to the provisions of Article VII, once any portion of any Option has become exercisable it shall remain exercisable for its full term. The Committee shall determine the term of each Nonstatutory Stock Option or Incentive Stock Option granted, but in no event shall any such Option be exercisable for more than 10 years after the date on which it is granted. 6.4 Payment. The Committee shall establish procedures governing the exercise of Options. No shares shall be delivered pursuant to any exercise of an Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefor. Without limiting the generality of the foregoing, payment of the option price may be made (i) in cash or its equivalent, (ii) by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), (iii) through an arrangement with a broker approved by the Company whereby payment of the exercise price is accomplished with the proceeds of the sale of Common Stock or (iv) by any combination of the foregoing; provided that the combined value of all cash and cash equivalents paid and the Fair Market Value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. The Company may not make a loan to a Participant to facilitate such Participant's exercise of any of his or her Options. 6.5 Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, no Option that is intended to be an Incentive Stock Option may be granted after the tenth anniversary of the effective date of the Plan and no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of any Participant affected thereby, to disqualify any Incentive Stock Option under such Section 422. ARTICLE VII. TERMINATION OF EMPLOYMENT 7.1 Termination of Employment Due to Death. In the event a Participant's employment terminates by reason of death, any Options granted to such Participant shall become immediately exercisable in full and may be exercised by the Participant's 9 10 designated beneficiary, and if none is named, in accordance with Section 10.2, at any time prior to the expiration of the term of the Options or within three (3) years (or such shorter period as the Committee shall determine at the time of grant) following the Participant's death, whichever period is shorter. 7.2 Termination of Employment Due to Disability or Approved Retirement. In the event a Participant's employment terminates by reason of Disability or Approved Retirement, any Options granted to such Participant which are then outstanding shall continue to become exercisable in accordance with Section 6.3 notwithstanding such termination of employment and may be exercised by the Participant or the Participant's designated beneficiary, and if none is named, in accordance with Section 10.2, at any time prior to the expiration date of the term of the Options or within three (3) years (or such shorter period as the Committee shall determine at the time of grant) following the Participant's termination of employment, whichever period is shorter. 7.3 Certain Divestitures, etc. In the event that a Participant's employment is terminated in connection with a sale, divestiture, spin-off or other similar transaction involving a Subsidiary, division or business segment or unit, the Committee may provide at the time of grant or otherwise that all or any portion of any Options granted to such Participant which are then outstanding shall continue to become exercisable in accordance with Section 6.3 notwithstanding such termination of employment and may be exercised by the Participant or the Participant's designated beneficiary, and if none is named, in accordance with Section 10.2, at any time prior to the expiration date of the term of the Options or within three (3) years (or such shorter period as the Committee shall determine at or following the time of grant) following the Participant's termination of employment, whichever period is shorter. 7.4 Termination of Employment for Cause. In the event a Participant's employment is terminated for Cause, any Options granted to such Participant that are then not yet exercised shall be forfeited. 7.5 Termination of Employment for Any Other Reason. Unless otherwise determined by the Committee at or following the time of grant, in the event the employment of the Participant shall terminate for any reason other than one described in Section 7.1, 7.2, 7.3 or 7.4, any Options granted to such Participant which are exercisable at the date of the Participant's termination of employment may be exercised at any time prior to the expiration of the term of the Options or the thirtieth day following the Participant's termination of employment, whichever period is shorter, and any Options that are not exercisable at the time of termination of employment shall be forfeited. 10 11 ARTICLE VIII. CHANGE OF CONTROL 8.1 Accelerated Vesting and Payment. Subject to the provisions of Section 8.2, in the event of a Change of Control each Option shall be fully exercisable regardless of the exercise schedule otherwise applicable to such Option and, in connection with such a Change of Control, the Committee may, in its discretion, provide that each Option shall, upon the occurrence of such Change of Control, be canceled in exchange for a payment in an amount equal to the excess, if any, of the Change of Control Price over the exercise price for such Option. 8.2 Alternative Awards. Notwithstanding Section 8.1, no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Option if the Committee reasonably determines in good faith prior to the occurrence of a Change of Control that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award"), by a Participant's employer (or the parent or an affiliate of such employer) immediately following the Change of Control; provided that any such Alternative Award must: (i) be based on stock which is traded on an established securities market, or that the Committee reasonably believes will be so traded within 60 days after the Change of Control; (ii) provide such Participant with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Option, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Option (determined at the time of the Change of Control); and (iv) have terms and conditions which provide that in the event that the Participant's employment is involuntarily terminated or constructively terminated, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination of employment by a Participant following a material reduction in the Participant's base salary or a Participant's 11 12 incentive compensation opportunity or a material reduction in the Participant's responsibilities, in either case without the Participant's written consent. ARTICLE IX. AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN The Board at any time may terminate the Plan, and from time to time may amend or modify the Plan; provided, however, that any amendment which would (i) increase the number of shares available for issuance under the Plan, (ii) lower the minimum exercise price at which an Option may be granted or (iii) extend the maximum term for Options granted hereunder shall be subject to the approval of the Company's shareholders and no amendment made prior to the fifth anniversary of the Plan Effective Date shall be or become effective without the consent of the New York Superintendent of Insurance. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant. SECTION X. MISCELLANEOUS PROVISIONS 10.1 Transferability of Options. No Options granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; provided that the Committee may, in the Option agreement or otherwise, permit transfers of Nonstatutory Stock Options by gift or a domestic relations order to Family Members. 10.2 Beneficiary Designation. Each Participant under the Plan may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid or by whom any right under the Plan is to be exercised in case of his death. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when received by the Committee in writing during his lifetime. In the absence of any such effective designation, benefits remaining unpaid at the Participant's death shall be paid to or exercised by the Participant's surviving spouse, if any, or otherwise to or by his estate. 10.3 Deferral of Payment. The Committee may, in the Option agreement or otherwise, permit a Participant to elect, upon such terms and conditions as the Committee 12 13 may establish, to defer receipt of shares of Common Stock that would otherwise be issued upon exercise of a Nonstatutory Stock Option. 10.4 No Guarantee of Employment or Participation. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment or service at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary or any other affiliate of the Company. No Employee shall have a right to be selected as a Participant, or, having been so selected, to receive any future Options. 10.5 Tax Withholding. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local withholding tax requirements on any Option under the Plan, and the Company may defer issuance of Common Stock until such requirements are satisfied. The Committee may, in its discretion, permit a Participant to elect, subject to such conditions as the Committee shall impose, (i) to have shares of Common Stock otherwise issuable under the Plan withheld by the Company or (ii) to deliver to the Company previously acquired shares of Common Stock having a Fair Market Value sufficient to satisfy such withholding tax obligation associated with the transaction. 10.6 Indemnification. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan (in the absence of bad faith) and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him; provided that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such person may be entitled under the Company's Certificate of Incorporation or By-Laws, by contract, as a matter of law, or otherwise. 10.7 No Limitation on Compensation. Nothing in the Plan shall be construed to limit the right of the Company to establish other plans, provided that the Company shall not be permitted to establish any other stock option or stock incentive plans prior to the fifth anniversary of the Plan Effective Date without the advance approval of the New York Superintendent of Insurance. Nothing in this Section 10.7 shall be construed to limit the 13 14 ability of the Company to use stock in connection with any compensation arrangement, approved by the New York Superintendent of Insurance pursuant to Section 10.1 and Schedule 3(c) of the Plan of Reorganization. 10.8 Requirements of Law. The granting of Options and the issuance of shares of Common Stock shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 10.9 Term of Plan. The Plan shall be effective upon its adoption by the Board and approval by Metropolitan Life Insurance Company, the sole shareholder of the Company and by the New York Superintendent of Insurance pursuant to Section 7312(w) of the New York Insurance Law. The Plan shall continue in effect, unless sooner terminated pursuant to Article IX, until no more shares are available for issuance under the Plan. 10.10 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to principles of conflict of laws. 10.11 No Impact on Benefits. Except as may otherwise be specifically stated under any employee benefit plan, policy or program, Options shall not be treated as compensation for purposes of calculating an Employee's right under any such plan, policy or program. 10.12 No Constraint on Corporate Action. Nothing in this Plan shall be construed (i) to limit, impair or otherwise affect the Company's right or power to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets or (ii) except as provided in Article IX, to limit the right or power of the Company or any of its Subsidiaries to take any action which such entity deems to be necessary or appropriate. 14 EX-10.8 5 2000 DIRECTORS STOCK PLAN 1 Exhibit 10.8 METLIFE, INC. 2000 DIRECTORS STOCK PLAN ARTICLE I. PURPOSE The purposes of the "METLIFE, INC. 2000 DIRECTORS STOCK PLAN" (the "Plan") are to enable the Company to attract, retain and motivate the best qualified non-employee directors and to enhance a long-term mutuality of interests between the non-employee directors and stockholders of the Company by granting stock and stock options as provided herein. ARTICLE II. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Award" means any Option or Share Award. (b) "Board" means the Board of Directors of the Company. (c) "Cash Fees" means the amount of any fees that would, absent an election to receive an Elective Share Award pursuant to the terms of the Plan, be payable by the Company in cash to a Participant for any services to be performed by the Participant. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means the Nominating and Corporate Governance Committee of the Board or such other committee of the Board as the Board shall designate from time to time, which committee shall consist of at least two members, each of whom shall qualify as a Non-Employee Director within the meaning of Rule 16b-3 (or any successor rule thereto), as promulgated under the Securities Exchange Act of 1934, as amended. 2 (f) "Common Stock" means the common stock of the Company, par value $0.01 per share. (g) "Company" means MetLife, Inc., a Delaware corporation, and any successor thereto. (h) "Deferred Share" means a contractual right to receive one Share on a deferred basis in accordance with the terms of the Plan. (i) "Elective Share Award" means any award of Shares made by reason of the election of a Participant to receive Shares in lieu of Cash Fees; provided that in no event shall any Elective Share Awards be issued prior to the second anniversary of the Plan Effective Date. (j) "Fair Market Value" means, on any date, the closing price of a Share as reported in the principal consolidated transaction reporting system for the New York Stock Exchange (or on such other recognized quotation system on which the trading prices of the Common Stock are quoted at the relevant time on such date). In the event that there are no Common Stock transactions reported on such tape (or other system) on such date, Fair Market Value means the closing price on the immediately preceding date on which Common Stock transactions were so reported. (k) "Family Member" means, as to a Participant, any (i) child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships), of such Participant, (ii) trust for the exclusive benefit of such persons and (iii) other entity owned solely by such persons. (l) "Fee Share Award" means any award of Shares made at the direction of the Committee in lieu of Cash Fees. (m) "Option" means the right to purchase one Share at a stated purchase price on the terms specified in Article V of the Plan. The Options are nonstatutory stock options not intended to qualify under Section 422 of the Code. (n) "Participant" means a member of the Board who is not an officer or employee of the Company or any entity controlling, controlled by, or under common control with the Company, and is not the beneficial owner of a controlling interest in the voting stock of the Company or of any entity that holds a controlling interest in the Company's voting stock. 2 3 (o) "Plan" means the MetLife, Inc. 2000 Directors Stock Plan, as set forth herein and as amended from time to time. (p) "Plan Effective Date" means the "Plan Effective Date" determined under Section 5.2(b) of the Plan of Reorganization, dated September 28, 1999, of Metropolitan Life Insurance Company, as amended. (q) "Share" means a share of Common Stock. (r) "Share Award" means any Elective Share Award or Fee Share Award. (s) "Stock Account" means a memorandum account established to record the deferral of certain compensation otherwise payable to a Participant which shall be deemed invested in Deferred Shares. (t) "Stock Incentive Plan" means the MetLife, Inc. 2000 Stock Incentive Plan, as the same may be amended from time to time. 2.2 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE III. ADMINISTRATION 3.1 Rules, Interpretation and Determinations. The Plan shall be administered by the Committee. The Committee shall have full authority to interpret and administer the Plan, to establish, amend and rescind rules for carrying out the Plan, to construe the respective option agreements and to make all other determinations and to take all other actions that it deems necessary or advisable for administering the Plan. Each determination, interpretation or other action made or taken by the Committee shall be final and binding for all purposes and upon all persons. 3.2 Agents and Expenses. The Committee may appoint agents (who may be officers or employees of the Company) to assist in the administration of the Plan and may grant authority to such persons to execute agreements or other documents on its behalf. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. All expenses incurred in the administration of the Plan, including, 3 4 without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. ARTICLE IV. SHARES; ADJUSTMENT UPON CERTAIN EVENTS 4.1 Source of Shares. Shares to be issued under the Plan may consist, in whole or in part, of treasury shares or authorized but unissued Shares not reserved for any other purpose. 4.2 Number of Share Awards. Subject to the provisions of Section 4.5 hereof, the aggregate number of Shares that may be issued under the Plan as Share Awards under Article VI shall not exceed 500,000 Shares. 4.3 Number of Options. Subject to the provisions of Section 4.5 hereof, the aggregate number of Shares issuable under the Plan pursuant to Options shall not exceed 0.05% of the total number of Shares outstanding immediately after the Plan Effective Date. In addition, Shares issuable pursuant to Options granted under the Plan shall reduce the number of Shares issuable under the Stock Incentive Plan. 4.4 Canceled, Terminated, or Forfeited Options. In the event Options are for any reason canceled, terminated or otherwise settled without the issuance of any Common Stock (including, but not limited to, shares tendered to exercise outstanding Options or shares tendered or withheld for taxes), the Shares subject to such Options shall again be available for the granting of Options under the Plan and the Stock Incentive Plan. 4.5 Adjustment in Capitalization. In the event of any Share dividend or Share split, recapitalization, merger, consolidation, combination, spin-off, distribution of assets to stockholders (other than ordinary cash dividends), exchange of shares, or other similar corporate change, the aggregate number of Shares available for Awards pursuant to either Section 4.2 or Section 4.3, distributable in respect of Deferred Shares or subject to outstanding Options, and the respective exercise prices applicable to outstanding Options shall be appropriately adjusted by the Committee and the Committee's determination shall be conclusive; provided that any fractional shares resulting from any such adjustment shall be disregarded. 4 5 ARTICLE V. AWARDS AND TERMS OF OPTIONS 5.1 Grant. The Committee shall, subject to the approval of the Board, determine the Participants to whom Options shall be granted and, subject to Section 5.2, the terms and conditions of any and all Options granted to Participants. In making such determination, the Committee shall give due consideration to such factors as it deems appropriate, including, but not limited to, the performance of the Company. Any Options granted hereunder prior to the fifth anniversary of the Plan Effective Date shall be granted in substitution for a portion of the fees that would otherwise have been payable in cash to the Participant for services as a director and not subject to a Share Award, in such manner and on such basis as the Committee shall reasonably determine (including, without limitation, by application of the Black-Scholes option valuation methodology). Notwithstanding any other contrary provision in the Plan, no Options shall be granted prior to the first anniversary of the Plan Effective Date. 5.2 Option Agreement. Options shall be evidenced by a written option agreement embodying the following terms: (a) Exercise Price. The exercise price per Share of an Option shall be not less than the Fair Market Value on the date such Option is granted. (b) Period of Exercisability. Each Option granted hereunder shall be immediately exercisable; provided that, in no event shall any Option be or become exercisable hereunder prior to the second anniversary of the Plan Effective Date and, if and to the extent this proviso limits the exercisability of any Option, the portion so limited shall become exercisable on such second anniversary. Each Option shall, if not previously exercised in accordance with the terms of the Plan, in all events expire upon the tenth (10th) anniversary of the date of the grant thereof. If a Participant shall cease to provide services to the Company, such Participant or, in the case of death, the Participant's estate or beneficiary, may exercise any Option held by the Participant at the date his or her service terminates until the earlier of (A) three (3) years from the date the Participant ceased to provide services to the Company and (B) the tenth (10th) anniversary of the date the Option was granted; provided, however, that if the Participant's service as a member of the Board terminates prior to the second anniversary of the Plan Effective Date, the Option may not be exercised prior to such second anniversary. (c) Procedure for Exercise. A Participant electing to exercise one or more Options shall give written notice to the Secretary of the Company of such election and of the number of Shares he has elected to purchase. No shares shall be 5 6 delivered pursuant to any exercise of an Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefor. Without limiting the generality of the foregoing, payment of the option price may be made (i) in cash or its equivalent, (ii) by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), (iii) through an arrangement with a broker approved by the Company whereby payment of the exercise price is accomplished with the proceeds of the sale of Common Stock or (iv) by any combination of the foregoing; provided that the combined value of all cash and cash equivalents paid and the Fair Market Value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. The Company may not make a loan to a Participant to facilitate such Participant's exercise of any of his or her Options. ARTICLE VI. SHARE AWARDS 6.1 Fee Share Awards. Commencing with respect to fees payable for services rendered after the first anniversary of the Plan Effective Date, the Committee may require that up to one-half of the Cash Fees otherwise payable to a Participant be payable in Shares, issuable as of the first day of the calendar quarter (or, with respect to the first Fee Share Award, the first day of the first calendar month after the twelve month anniversary of the Plan Effective Date) with respect to which the Cash Fees would otherwise have been payable to the Participant in cash (the "Date of Issuance"). Notwithstanding the foregoing, if the Date of Issuance determined in the preceding sentence is not a business day, the grant of Shares shall be made on the next following business day. The number of Shares to be issued as a Fee Share Award as of each Date of Issuance shall equal the greatest number of whole Shares derived from the quotient of (i) the dollar amount of the Cash Fees the Committee has determined to pay in Shares and (ii) the Fair Market Value on the Date of Issuance. If, after the application of the preceding formula as of any Date of Issuance, there is a cash remainder, the Company shall pay the Participant the amount of such cash remainder as soon as practicable following such Date of Issuance. In no event shall any Shares acquired pursuant to any Fee Share Award be sold by a Participant prior to the second anniversary of the Plan Effective Date. 6.2 Elective Share Awards. Commencing with respect to Cash Fees payable for services rendered after the second anniversary of the Plan Effective Date, a Participant may elect to have any portion of the fees that would otherwise have been payable to the Participant in cash for services as a director (less any amounts paid as Fee Share Awards or, until the fifth anniversary of the Plan Effective Date, granted as Options) 6 7 paid in Shares. The Date of Issuance in respect of any Cash Fees which are part of the Participant's annual retainer fees shall be the first day of the calendar quarter with respect to which the related Cash Fees would otherwise have been payable to the Participant, and in respect of any other Cash Fees, as of the first day of the calendar quarter following the quarter with respect to which such Cash Fees would otherwise have been payable to the Participant. Notwithstanding the foregoing, if the Date of Issuance determined in the preceding sentence is not a business day, the grant of Shares shall be made on the next following business day. The number of Shares to be issued as an Elective Share Award as of each Date of Issuance shall equal the greatest number of whole Shares derived from the quotient of (i) the dollar amount of the Cash Fees elected to be paid in Shares at such Date of Issuance in accordance with the second preceding sentence and (ii) the Fair Market Value on the Date of Issuance. If, after the application of the preceding formula as of any Date of Issuance, there is a cash remainder, the Company shall pay the Participant the amount of such cash remainder as soon as practicable following such Date of Issuance. ARTICLE VII. RECEIPT OF SHARE AWARDS 7.1 Election. A Participant may elect to defer receipt of all or any part of the Shares issuable to the Participant in respect of any Share Award. Any such election shall be made (i) as to which the Date of Issuance is in the same calendar year in which the Plan becomes effective, within thirty days of the date this Plan is adopted and (ii) with respect to any other Fee Share Award or Elective Share Award, by December 31 of the calendar year prior to the year in which the Date of Issuance would otherwise occur. Notwithstanding the immediately preceding sentence, any person who becomes a Participant after the adoption of the Plan may elect, not later than the end of the calendar month in which the Participant becomes a member of the Board, to defer delivery of all or any part of the Shares deliverable in respect of any Share Award to be made following such election. 7.2 Form and Duration of Election. An election to defer receipt shall be made by written notice filed with the Secretary of the Company. Such election shall continue in effect (including with respect to Share Awards for subsequent calendar years) unless and until the Participant revokes or modifies such election by written notice filed with the Secretary of the Company. Any such revocation or modification of a deferral election shall become effective as of the end of the calendar year in which such notice is given and only with respect to Share Awards to be made in subsequent calendar years. Amounts credited to the Participant's Stock Account prior to the effective date of any such revocation or modification of a deferral election shall not be affected by such revocation or modification and shall be distributed only in accordance with the otherwise 7 8 applicable terms of the Plan. A Participant who has revoked an election to participate in the Plan may file a new election to defer Share Awards with respect to Shares to be granted in the calendar year following the year in which such election is filed. 7.3 Stock Account. Any Share Award as to which a Participant has elected to defer delivery of the Shares shall be credited to the Participant's Stock Account and shall be deemed to be invested in a number of Deferred Shares equal to the number of Shares that would otherwise have been delivered to the Participant. Whenever a dividend other than a dividend payable in the form of Shares is declared with respect to the Shares, the number of Deferred Shares in the Participant's Stock Account shall be increased by the number of Deferred Shares determined by dividing (i) the product of (A) the number of Deferred Shares in the Participant's Stock Account on the related dividend record date and (B) the amount of any cash dividend declared by the Company on a Share (or, in the case of any dividend distributable in property other than Shares, the per share value of such dividend, as determined by the Company for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on Shares which is payable in Shares, the Participant's Stock Account shall be increased by the number of Deferred Shares equal to the product of (i) the number of Deferred Shares credited to the Participant's Stock Account on the related dividend record date and (ii) the number of Shares (including any fraction thereof) distributable as a dividend on a Share. In the event of any change in the number or kind of outstanding Shares by reason of any recapitalization, reorganization, merger, consolidation, stock split or any similar change affecting the Shares, other than a stock dividend as provided above, the Committee shall make an appropriate adjustment in the number of Deferred Shares credited to the Participant's Stock Account. 7.4 Distribution from Accounts Upon Termination of Service as a Director. All distributions from the Participant's Stock Account shall be made in Shares. At the time a Participant makes a deferral election pursuant to Section 7.1, the Participant shall also file with the Secretary of the Company a written election with respect to whether such distribution (i) shall commence immediately following the date the Participant ceases to be a Participant or on the first business day of any calendar year following the calendar year in which the Participant ceases to be a Participant and (ii) shall be in one lump-sum or in such number of annual installments (not to exceed ten) as the Participant may designate. If installments are elected, the number of Shares distributable with respect to each installment shall be equal to the number of Deferred Shares then credited to the Stock Account times a fraction, the numerator of which is one (1) and the denominator of which is the number of installments (including the current installment) remaining to be paid. A Participant may at any time, and from time to time, change any distribution election applicable to the Participant's Stock Account; provided that no election to change the timing of any such distribution shall be effective unless it is made in writing and received 8 9 by the Secretary of the Company at least one full calendar year prior to the time at which the Participant ceases to provide services to the Company. If a Participant fails to specify a commencement date for a distribution in accordance with this Section 7.4, such distribution shall commence on the first business day of the calendar year immediately following the year in which the Participant ceases to be a Participant. If a Participant fails to specify whether distribution shall be made in a lump-sum or in a number of installments, such distribution shall be made in a lump-sum. In the case of any distribution being made in annual installments, each installment after the first installment shall be paid on the first business day of each subsequent calendar year until the entire amount subject to such installments shall have been paid. ARTICLE VIII. TRANSFERABILITY OF AWARDS No Award shall be transferable by the Participant otherwise than by will or under the applicable laws of descent and distribution; provided that the Committee may, in the Option agreement or otherwise, permit transfers of Options by gift or a domestic relations order to Family Members. In addition, no Award shall be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and no Award shall be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate any Award, or in the event of any levy upon any Award by reason of any attachment or similar process contrary to the provisions hereof, such Award shall immediately become null and void. ARTICLE IX. TERMINATION, MODIFICATION AND AMENDMENT The Board at any time may terminate the Plan, and from time to time may amend or modify the Plan; provided, however, that any amendment which would (i) increase the number of shares available for issuance under the Plan, (ii) lower the minimum exercise price at which an Option may be granted or (iii) extend the maximum term for Options granted hereunder shall be subject to the approval of the Company's shareholders and no amendment made prior to the fifth anniversary of the Plan Effective Date shall be or become effective without the consent of the New York Superintendent of Insurance. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant. 9 10 ARTICLE X. GENERAL PROVISIONS 10.1 No Right to Remain as a Director. The Plan shall not impose any obligations on the Company to retain any Participant as a director nor shall it impose any obligation on the part of any Participant to remain in service to the Company. 10.2 Investment Representation; Registration. If the Committee determines that the law so requires, the holder of an Option granted hereunder or the recipient of Shares in respect of any Share Award shall execute and deliver to the Company a written statement, in form satisfactory to the Company, representing and warranting that he is purchasing or accepting the Shares then acquired for his own account and not with a view to the resale or distribution thereof, that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (i) a registration statement on an appropriate form under the Securities Act of 1933, as amended, which Registration Statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (ii) a specific exemption from the registration requirements of the Securities Act, and that in claiming such exemption the holder will, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel approved by the Company as to the availability of such exemption. If at any time the Board shall determine in its discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the sale of Shares under the Plan, no Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Company. 10.3 No Right to Specific Assets. Nothing contained in the Plan and no action taken pursuant to the Plan (including, without limitation, the grant of any Award hereunder) shall create or be construed to create a trust of any kind or any fiduciary relationship between the Company and any Participant, the executor, administrator or other personal representative or designated beneficiary of such Participant, or any other persons. To the extent that any Participant or his executor, administrator, or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. 10 11 10.4 Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to any Shares covered by his Option or related to Deferred Shares until he shall have become the holder of record of such Shares. 10.5 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 10.6 Controlling Law. The Plan shall be construed and enforced according to the laws of the State of Delaware without regard to conflict of laws. 10.7 Indemnification. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan (in the absence of bad faith) and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him; provided that he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such person may be entitled under the Company's Certificate of Incorporation or By-Laws, by contract, as a matter of law, or otherwise. 10.8 Term of Plan. The Plan shall be effective upon its adoption by the Board and approval by Metropolitan Life Insurance Company, the sole shareholder of the Company and by the New York Superintendent of Insurance. The Plan shall continue in effect, unless sooner terminated pursuant to Article IX, until no more shares are available for issuance under the Plan. 11 EX-10.9 6 AMENDED & RESTATED EMPLOYMENT CONTINUATION AGRMNT 1 Exhibit 10.9 ================================================================================ Catherine A. Rein EMPLOYMENT CONTINUATION AGREEMENT December 15, 1998 As Amended and Restated March 3, 2000 Metropolitan Life Insurance Company ================================================================================ 2 AMENDED AND RESTATED EMPLOYMENT CONTINUATION AGREEMENT THIS AMENDED AND RESTATED AGREEMENT between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (the "Company"), and Catherine A. Rein (the "Executive"), dated as of this 15th day of December, 1998, and amended and restated as of March __, 2000. W I T N E S S E T H : WHEREAS, the Company has employed the Executive in an officer position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of its policyholders, and if, at the relevant time, it is a stock company, its shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to her financial and job security; WHEREAS, in order to assure itself of the Executive's services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of her position without undue distraction and to exercise her judgment without bias due to her personal circumstances, the Company and the Executive entered into this Agreement to provide the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as each such term is defined in Section 2 hereof); WHEREAS, the Company has decided to transfer the Executive's employment to one of its subsidiaries, and the Executive has agreed to accept such transfer; WHEREAS, in connection with her employment with such subsidiary, the Executive and such subsidiary will enter into a comparable agreement whereby the 3 subsidiary will undertake to provide the Executive with comparable benefits and protection in the event of a Change of Control or Potential Change of Control; WHEREAS, the Company and the Executive are in agreement that the benefits provided hereunder shall be suspended while the Executive is appropriately protected under such subsidiary agreement. NOW, THEREFORE, this Agreement is amended and restated in its entirety, to read as follows: 1. Operation of Agreement. (a) Term. The initial term of this Agreement shall commence on December 15, 1998 and continue until December 15, 2001. Thereafter, this Agreement will automatically renew for successive and consecutive additional three year periods following the end of its initial term and any extended term, unless the Company or the Executive gives the other party written notice at least 180 days prior to the date the term hereof would otherwise renew that it or she does not want the term to be so extended; provided, however, that, the Company may not deliver a notice of nonrenewal after (i) a Potential Change of Control (as is defined in Section 2(b) hereof) unless the Board of Directors has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). Notwithstanding anything to the contrary in this Agreement, the term of this Agreement shall in all events expire (regardless of when the term would otherwise have expired) on the second anniversary of a Change of Control. (b) Effective Date. Notwithstanding the provisions of Section 1(a) hereof, this Agreement shall govern the terms and conditions of the Executive's employment and the benefits and compensation to be provided to the Executive commencing on the date on which a Potential Change of Control or a Change of Control occurs (the "Effective Date") and ending on the date the term of this Agreement otherwise expires, provided that if the Executive is not employed by the Company or any Affiliate on the Effective Date, this Agreement shall be void and without effect. Notwithstanding the foregoing, if on the Effective Date the Executive is employed by an Affiliate of the Company and the Executive and the Affiliate are parties to an agreement providing the Executive with similar employment protection in the event of a Change of Control, the Company's hereunder, including any obligation to make any payment under this Agreement in connection with the termination of the Executive's employment, shall be suspended until the earlier to occur, if any, of (i) the date the Executive becomes re-employed by the Company and (ii) the date the Executive is employed by another Affiliate which does not provide the Executive with similar employment protection in the event of a Change of Control. 2 4 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person (within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)), acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power (as defined below) of the Company's securities; (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Company (the "Board") or the board of directors of any successor to the Company provided, however, that any director elected to the Board, or nominated for election, by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause 2(a)(ii); (iii) the policyholders of the Company, if at the time in question the Company is a mutual life insurance company, approve a merger, consolidation, division, sale or other disposition of all or substantially all of the assets of the Company (a "Mutual Event"); provided, however, that a Mutual Event shall not be treated as a Change of Control for purposes of this Agreement if (x) the Company is the surviving company in any such merger or other transaction and (y) pursuant to the terms of the agreement governing the transaction constituting the Mutual Event, the persons who were directors of the Company immediately prior to such Mutual Event constitute at least 75% of the members of the Board immediately following the consummation of such Mutual Event; or (iv) the stockholders of the Company, if at the time in question the Company is a stock company, approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event; or 3 5 (v) any other event occurs which the Board declares to be a Change of Control. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred merely as a result of (i) the conversion of the Company from a mutual life insurance company to a stock company whose shareholders are either (x) primarily persons who were policyholders of the Company immediately prior to such transaction and/or a trust holding the shares of the Company for the benefit of such policyholders or (y) another corporation the shares of which are held primarily by the persons and/or trust described in subclause (x); (ii) the Company becoming a direct or indirect subsidiary of a mutual holding company whose members are primarily persons who were policyholders of the Company immediately prior to such transaction or (iii) an underwritten offering of the equity securities of the Company where no Person (including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)) acquires more than 25% of the beneficial ownership interests in such securities. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer, with adequate financing, which, if consummated, would result in such Person being the "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 10% or more of the combined Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) any person (including any group (within the meaning of Rule 13d- 5(b) under the Exchange Act)) other than the Company attempts, directly or indirectly, to replace more than 25% of the directors of the Company; provided, however, that any action taken in support of a nominee approved by a majority of the members of the Board then in office shall not be given any effect in determining whether a Potential Change of Control has occurred; (iv) certification, pursuant to New York Insurance Law Section 4210(h)(1)(B) (or any successor provision thereto) of an independent nomination of candidates to replace more than 25% of the members of the Board; or (v) any other event occurs which the Board declares to be a Potential Change of Control. 4 6 Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. (c) Voting Power. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. (d) Affiliate. An "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Company. 3. Employment Period. Subject to Section 6 hereof, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the expiration of the term of this Agreement. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities with the Company and each of its Affiliates to whom the Executive provides services shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date; provided, however, that if the Executive is employed by an Affiliate on the Effective Date, and subsequently becomes reemployed by the Company, the Executive's duties, authority and responsibilities under this Section 4 shall be at least commensurate to those she last held as an officer of the Company and the Executive's title shall be at least comparable to the title held at such time by officers of the Company performing duties and responsibilities of a comparable level. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contem- 5 7 plated by Section 12(b) hereof. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or at any other office or location not more than 35 miles from such pre-Effective Date location. (b) Business Time. During the Employment Period, the Executive agrees to devote her full attention during normal business hours to the business and affairs of the Company or its Affiliates and to use her best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing her personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which she is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which she is serving or with which she is otherwise associated in mediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company or its Affiliates. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company or any Affiliate immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as the "Base Salary". Neither the Base Salary nor any increase in the Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, the Executive shall be afforded the opportunity to receive an annual bonus (the "Annual Bonus Opportunity") in an amount which provides the Executive with the same bonus opportunity as other executives of the Company and its Affiliates of comparable rank. If any fiscal year commences but does not end during the Employment Period, Executive shall receive a pro-rated amount in respect of the Annual Bonus Opportunity for the portion of the fiscal year occurring during the Employment Period. Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or any prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. 6 8 (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at the Company (or, if the Executive is then providing services principally to an Affiliate, at such Affiliate) at a level that is commensurate with the level made available from time to time to executives of the Company (or, if applicable, an Affiliate) of comparable rank. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and any Affiliate at the level made available from time to time to other similarly situated officers. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company or its Affiliates, as applicable and as in effect from time to time, with respect to expenses incurred by other similarly situated officers. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available from time to time to other similarly situated officers of the Company or, if applicable, its Affiliates. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, on the same terms and conditions applicable from time to time with respect to the indemnification of its other senior officers of comparable rank. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the retirement plans of the Company or its Affiliates as in effect from time to time. For purposes of this Agreement, "Disability" shall mean the 7 9 Executive's inability to perform the duties of her position, as determined in accordance with the policies and procedures applicable with respect to the long-term disability plan of the Company or its Affiliates in which the Executive was a participant immediately prior to the Effective Date; provided, however, that the Executive's employment may not be terminated for Disability hereunder unless the Executive has requested that she be considered for, and has qualified to receive, long-term disability benefits under such plan. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may voluntarily terminate employment for any reason (including early retirement under the terms of any of the retirement plans of the Company or its Affiliates as in effect from time to time), upon not less than 60 days' written notice to the Company, provided that any termination by the Executive pursuant to Section 6(d) hereof on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act of dishonesty or gross misconduct on the Executive's part which results or is intended to result in material damage to the Company's or an Affiliate's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 hereof, which violations are demonstrably willful and deliberate on the Executive's part. (d) Good Reason. After the Effective Date, the Executive may terminate her employment at any time for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the Effective Date: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4(a) hereof, or (B) any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 hereof, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) requiring the Executive to be based at any office or location more than 35 miles from the location at which the Executive performed her duties immediately prior to the Effective Date, except for travel reasonably required in the performance of the Executive's responsibilities; or 8 10 (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b) hereof. In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e) hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice given, (i) in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination or (ii) in the case of a termination for Good Reason, within 120 days of the Executive's having actual knowledge of the events giving rise to such termination. Any such Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specify the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing her rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or her beneficiary or estate), at the times determined below (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under or in accordance with the terms and conditions of the otherwise applicable employee benefit plans and programs of the Company and its Affiliates, including any compensation 9 11 previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company or an Affiliate (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the plans, policies or programs of the Company and its Affiliates (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 30 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Lump Sum Payments. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period or (y) the Executive terminates her employment at any time during the Employment Period for Good Reason, the Company shall pay to the Executive, at the times determined below, the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual rate of Base Salary as then in effect; (2) the average of the annual bonuses payable to the Executive under the Annual Variable Incentive Plan (or any successor plan thereto) or any other annual incentive plan maintained by an Affiliate in which the Executive participated for each of the three fiscal years of the Company or, if applicable, such Affiliate (or, if less, the number of prior fiscal years 10 12 during which Executive was an employee of the Company or an Affiliate) ended immediately prior to the Effective Date for which an annual bonus amount had been determined by the Board (or, if applicable, the administrator of any plan maintained by such Affiliate) prior to the Effective Date. If the Executive was employed with the Company, an Affiliate or the Company and one or more Affiliates for only a portion of any fiscal year included in the period for which the average referred to in the immediately preceding sentence is determined and the aggregate annual bonus payable by all such entities for such fiscal year took into account such partial period of employment, such bonus for such fiscal year shall be annualized for purposes of calculating such average; and (3) the average of the long-term incentive compensation amounts payable to the Executive by the Company or any Affiliate with respect to each of the last three performance periods (or, if the Executive participated in the long-term compensation program in respect to a lesser number of such performance periods, such lesser number) ended prior to the Effective Date for which the amount payable had been determined by the Board or any committee thereof (or, if applicable, the administrator of any plan maintained by such Affiliate) prior to the Effective Date; provided, however, that, the amount determined under this subclause (3) shall be reduced (but not below zero) by the "Determined Value" (as defined below) of any vested stock options, restricted stock or similar equity-based award relating to the Company's common equity on the earlier to occur of the Executive's Date of Termination or the date on which a Change of Control occurs. For purposes of this Agreement, Determined Value shall mean the excess of the "Equity Value" over the price, if any, payable by the Executive in respect of such stock option or other award and Equity Value shall be determined to be (x) in the case of a Change of Control occurring by reason of a merger, recapitalization or similar transaction or as a result of a tender offer, the value received by the Company's equity holders in such transaction or the price paid in such tender offer (with the value of any non-cash consideration to be determined in 11 13 good faith by the Compensation Committee of the Board as constituted immediately prior to the Effective Date) and (y) in the case of any other Change of Control or where the date as of which such Determined Value is measured is the Executive's Date of Termination, the average of the high and low reported sales prices of such equity on the principal securities market on which such equity is traded on the relevant date; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. The Executive (and, to the extent applicable, her dependents) shall be entitled, after the Date of Termination until the third anniversary of the Date of Termination (the "End Date"), to continue participation in all of the employee and executive plan providing medical, dental and long-term disability benefits maintained by the Company or an Affiliate in which the Executive had been participating prior to her Date of Termination (collectively, the "Continuing Benefit Plans"); provided, however, that the participation by the Executive (and, to the extent applicable, his dependents) in any Continuing Benefit Plan shall cease on the date, if any, prior to the End Date on which the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer ("Prior Date"). The Executive's participation in the Continuing Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date or the Prior Date. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. (iii) Termination of Employment Within Three Years of Normal Retirement Date. Notwithstanding anything else to the contrary contained in this Section 7(c), if the Executive's employment with the Company terminates at any time during the three year period ending on the Executive's normal retirement date, as determined in accordance with the Company's policies then in effect for the Company's senior executives (the "Normal Retirement Date"), and the Executive 12 14 would be entitled to receive severance benefits under this Section 7(c), then (i) the multiplier in Section 7(c)(i) shall not be three, but shall be a number equal to three times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d) hereof, the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e) hereof) following termination of her employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims she may have in respect of her employment by the Company or any of its Affiliates. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Affiliates. (e) Limit on Payments by the Company. (i) Application of Section 7(e) Hereof. In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any Affiliate (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Promptly after delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which she would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under 13 15 this Agreement and any other plan, agreement or arrangement with the Company or an Affiliate exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount allocable to such Covered Payments," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the 14 16 Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for her benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlements under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting her payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company's obligation to indemnify the Executive pursuant to Section 5(g) hereof 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any Affiliate and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other 15 17 agreements with the Company or any Affiliate, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be diminished or otherwise affected by any circumstances, including, but not limited to, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, but not limited to, her reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to at least one material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Company Property. The Agreement to Protect Corporate Property previously executed by the Executive is incorporated herein and made a part hereof. The Executive hereby reaffirms her commitments under such agreement, and again agrees to be bound by each of the covenants contained therein for the benefit of the Company in consideration of the benefits made available to her hereby. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 16 18 Without limiting the generality of the foregoing, if prior to the occurrence of a Change of Control, the Company is a party to a merger, recapitalization, demutualization, restructuring, reorganization or similar transaction, as a result of which the Company becomes a subsidiary of any entity that was a subsidiary of the Company immediately prior to such transaction, from and after the date of such transaction the term Company as used in the definition of Change of Control and Potential Change of Control (but not as used in any other Section hereof, unless required to effect the intent that a Potential Change of Control or a Change of Control in respect of such entity shall cause the Effective Date of this Agreement to occur) shall refer to both the Company and such entity. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c) hereof, any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in New York City and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that she is entering into this Agreement of her own free will and accord, and with no duress, that she has read this Agreement and that she understands it and its legal consequences. 17 19 (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Metropolitan Life Insurance Company One Madison Avenue New York, New York 10010 Att.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or her rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set her hand and the Company has caused this Amended and Restated Agreement to be executed in its 18 20 name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of March __, 2000. METROPOLITAN LIFE INSURANCE COMPANY /s/ Lisa M. Weber ------------------------------- By: ___________________________ Title: Executive Vice President WITNESSED: /s/ Traci Bigles - -------------------- EXECUTIVE: /s/ Catherine A. Rein ------------------------- WITNESSED: /s/ Carol A. Christy - -------------------- EX-10.37 7 SELECT EMPLOYEES SUPPLEMENTAL 401(K) PLAN 1 EXHIBIT 10.37 NEW ENGLAND LIFE INSURANCE COMPANY SELECT EMPLOYEES SUPPLEMENTAL 401k PLAN As amended and restated effective January 1, 2000. 2 TABLE OF CONTENTS I. PURPOSE...................................................................1 1.01 Purpose..............................................................1 1.02 Prior Documents......................................................1 II. DEFINITIONS...............................................................1 2.01 Defined Terms........................................................1 III. ELIGIBILITY...............................................................2 3.01 Eligibility..........................................................2 IV. CONTRIBUTION CREDIT.......................................................2 4.01 Contribution Credit Amount...........................................2 4.02 Accumulation of Credit...............................................2 4.03 Vesting..............................................................3 4.04 Time and Form of Payment.............................................3 4.05 Nonalienation of Participant's Benefits..............................4 V. ADMINISTRATION............................................................4 5.01 Power and Authority..................................................4 5.02 Indemnification......................................................4 5.03 Facility of Payment..................................................4 VI. AMENDMENT AND TERMINATION.................................................5 Section 6.01 Amendment....................................................5 Section 6.02 Termination..................................................5 VII. MISCELLANEOUS.............................................................5 7.01 Unfunded Plan........................................................5 7.02 No Right. Title or Interest in the Company's Assets..................5 7.03 No Right to Continued Employment or Award............................5 7.04 Governing Law........................................................6 3 I. PURPOSE 1.01 PURPOSE. The New England Life Insurance Company Select Employees Supplemental 401k Plan ("Plan"), adopted as of February 15, 1989, is intended to constitute an unfunded employer plan for the purpose of supplementing The New England Life Insurance Company("Company") contributions to The New England 401k Plan and Trust ("401k Plan"). This Plan shall be an unfunded plan maintained by the Company solely for the purpose of providing deferred compensation to a select group of management or highly-compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act. 1.02 PRIOR DOCUMENTS. This Plan is the restatement with amendments of The New England Mutual Life Insurance Company Select Employees Supplemental Progress Sharing Plan, The New England Select Employees Supplemental Progress Sharing Plan, The New England Select Employees Supplemental Profit Sharing Plan. The New England Select Employees Supplemental 401k Plan and the New England Life Insurance Company Select Employees Supplemental 401k Plan. II. DEFINITIONS 2.01 DEFINED TERMS. Terms used herein and not specifically defined below shall have the same meaning as they have in the Company's 401k Plan. Unless the context indicates otherwise, the following additional terms used herein shall have the following meanings: "Compensation" shall mean Compensation as defined under the New England 401k Plan and Trust determined without regard to the Compensation Limit, and including Employer contributions to the Employee's nonqualified deferred compensation plan for Participant-elective deferral of Compensation. "Compensation Limit" shall mean, with respect to a plan year, the limitation in effect on the first day of such Plan Year as provided in Internal Revenue Code ("IRC") Section 401(a)(17), as such limit is amended from time to time by the Secretary of the Treasury pursuant to IRC Section 415(d). "Plan Year" shall mean, with respect to this Plan shall be the same year as the plan year defined under the Company's 401k Plan. 1 4 "Participant" shall mean an employee who is eligible pursuant to Section 3.01 hereof with respect to a Plan Year or who is credited with any Contribution Credit which remains undistributed from this Plan. III. ELIGIBILITY 3.01 ELIGIBILITY. An employee of the Company who is a Senior Officer, or whose base compensation exceeds $125,000, or whose Compensation exceeds $160,000, shall be eligible pursuant to this Supplemental Plan with respect to a Plan Year for which she/he is entitled to any contribution credit under Section 4.01. IV. CONTRIBUTION CREDIT 4.01 CONTRIBUTION CREDIT AMOUNT. For a plan year in which an employee is eligible to participate in this Supplemental Plan, and for which such employee is entitled to an allocation of the discretionary employer contribution under the Company's 401k Plan, such employee shall be credited hereunder with an amount equal to the sum of (a) plus (b) plus (c) plus (d) where: (a) equals the Company's discretionary contribution under Section 3.02(c) of the 401k Plan, expressed as a percentage of such Participant's Compensation as defined under the 401k Plan, multiplied by the excess of such Participant's Compensation as defined under this Plan, over the Compensation Limit, and (b) equals the percentage described in Subsection 4.01(a) hereof multiplied by such Participant's Compensation not in excess of the Compensation Limit, but only to the extent that such product cannot be contributed under the 401k Plan in any Plan Year as the result of the limitation of IRC Section 415(c)(1)(A), as adjusted for such Plan Year pursuant to IRC Section 415(d), (c) equals the Employer Qualified Non-elective Contribution percentage under Section 3.02(a) of the 401k Plan, multiplied by the sum of (i) the amount of such Participant's elective deferrals under the Company's nonqualified elective deferral plan, plus (ii) the amount of such Participant's Compensation as defined under this Plan in excess of the Compensation Limit, and (d) equals the Matching Contribution percentage of two percent (2%) under the 401k Plan multiplied by such Participant's eligible non-qualified elective deferral amount. 4.02 ACCUMULATION OF CREDIT. A Participant shall be credited with the amount defined in Section 4.01 above at the same time as the Company's contribution is allocated to such Participant's employer contribution 401k account. Credits hereunder shall be deemed to be invested at the Participant's election in one or more Investment Funds offered under the Plan, but such election shall not be binding upon the Committee (or the Trustee if a Rabbi Trust is established) with respect to any actual investments. The terms, conditions and procedures under which a Participant may elect to hypothetically invest 2 5 his Accounts hereunder shall be specified by the Committee, in its sole discretion, from time to time. Investment income or losses credited to such accounts as of any Valuation Date shall reflect the actual experience (plus or minus .25% as determined by the Committee) of the funds which correspond to those in which the Participant's Accounts are deemed to be invested. The Committee will set rules governing Participant's elections with respect to the various Investment Funds including, but not limited to, the timing of deemed transfers between and among funds, the frequency of fund exchange privileges and liquidation procedures required for Plan distributions. The Company, in its sole discretion, shall decide whether or not to underwrite its obligations under the Plan by actually investing pay deferrals. If the Company decides to invest pay deferrals made under the Plan, Participants and Beneficiaries shall have no interest, (other than that of an unsecured general creditor), in such actual investments even if they correspond to Investment Funds. Any investment the Company makes in connection with the Plan shall at all times remain part of the general assets of the Company whether or not held in a Rabbi Trust. 4.03 VESTING Each Participant whose employment shall cease by virtue of her/his retirement (including disability or death, shall be fully vested in any accumulated amounts credited under this Plan. Each Participant whose employment shall cease for any reason except as described above shall be fully vested in any accumulated amounts credited under Sections 4.01(b) and (c) of this Plan, but she/he shall forfeit any and all accumulated amounts credited to her/him under Section 4.01(a) of this Plan unless such termination occurs on or after the January 1 following the completion of five years of service. 4.04 TIME AND FORM OF PAYMENT. Payment on behalf of a Participant shall be made or shall commence within 30 days following the twelve/12 month period beginning on the later of termination (including disability or death) or final credit with respect to such Participant as follows: (a) In the event of such Participant's actual retirement; disability, or death without a named beneficiary, in a lump sum if such Participant's vested accumulated credit hereunder is not greater than $25,000; or if greater than $25,000, in ten annual installments unless such Participant elects another form of payment with consent of the Committee at least one year prior to commencement of payments; (b) In the event of such Participant's termination of employment other than as provided in Subsection 4.03(a) above, in a lump sum except that if such Participant's vested accumulated credit exceeds $25,000, then such Participant may elect with consent of the Committee, another form of distribution or further deferral of payment. Such election must be made at least one year prior to the date payments would otherwise commence. (c) In the event of the death of a Participant without a named beneficiary, or the death of a Participant's beneficiary who is entitled to payments under this Plan, payment of the balance of accumulated credit hereunder shall be paid in a lump sum. 3 6 4.05 NONALIENATION OF PARTICIPANT'S BENEFITS. No amount payable during the life of the Participant under this Plan shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, or encumbrance of any kind nor in any manner be subject to the debts or liabilities of any person, and any attempt to so alienate or subject any such amounts whether presently or thereafter payable, shall be void. If any person shall attempt to, or shall, alienate, sell, transfer, assign, pledge, attach, charge, or otherwise encumber any amount payable under this Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any such time, such amount would be made subject to her/his debts or liabilities or would otherwise not be enjoyed by her/him, then the Committee, if it so elects, may direct that such amount be withheld and that the same or any part thereof be paid or applied to or for the benefit of such person, her/his spouse, children or other dependents, or any of them, in such manner and proportion as the Committee may deem proper. V. ADMINISTRATION 5.01 POWER AND AUTHORITY. The Committee shall have full power and authority to construe, interpret and administer this Plan. All decisions, actions, or interpretations of the Committee shall be final, conclusive, and binding upon all parties. If any person objects to any such interpretation or action, formally or informally, the expenses of the Committee and its agents and counsel in connection with such objections shall be chargeable against any amounts otherwise payable under the Plan to or on account of the Participant. 5.02 INDEMNIFICATION. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by her/him or on her/his behalf in her/his capacity as a member of the Committee nor for any mistake of judgment made, and the Company shall indemnify and hold harmless each member of the committee and each other officer, employee, or director of the Company to whom any duty or power relating to the administration or interpretation of the plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board) arising out of any act or omission to act in connection with Plan unless arising out of such person's own fraud or bad faith. 5.03 FACILITY OF PAYMENT. If the Committee shall find that any person to whom any amount is payable under the plan is unable to care for her/his affairs because of illness or accident, or is a minor, or has died, then any payment due her/his or her/his estate (unless a prior claim therefore has been made by a duly appointed legal representative), may, if the Committee so directs the Company, be paid to her/his spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefore. 4 7 VI. AMENDMENT AND TERMINATION SECTION 6.01 AMENDMENT The Company reserves the right at any time, and from time to time, to amend the Plan by action of its Board of Directors. Further, the Company may amend this Plan at any time by means of a written instrument executed by the President of the Company, except that any such amendment or group of amendments adopted on the same date with respect to the same plan shall not increase or decrease the annual cost of contributions to the Company for active plan participants and former plan participants by more than two million dollars (exclusive of employee voluntary contributions under a qualified plan or employee elective deferrals under a nonqualified plan). No such amendment shall: (a) decrease any interest of any Participant or Beneficiary existing immediately prior to such amendment, or (b) reduce the non-forfeitable portion of a Participant's Accrued Benefit existing immediately prior to such amendment. SECTION 6.02 TERMINATION. The Company reserves the right at any time to terminate the Plan, and each other Employer which adopts this Plan reserves the right to discontinue its participation in the Plan at any time. VII. MISCELLANEOUS 7.01 UNFUNDED PLAN. This Plan is an unfunded deferred compensation arrangement for a select group of management or highly compensated personnel. 7.02 NO RIGHT, TITLE OR INTEREST IN THE COMPANY'S ASSETS. The participant shall have no right, title, or interest whatsoever in or to any investments which the company may make to aid it in meeting its obligations under this Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any eligible employee or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts. 7.03 NO RIGHT TO CONTINUED EMPLOYMENT OR AWARD. Nothing contained in this Plan shall give any employee the right to be retained in the employ of the Company or affect the right of the Company to dismiss any employee. No eligible employee shall receive any right to be granted an award hereunder nor shall any such award be considered as compensation under any employee benefit plan of the Company, except as otherwise determined by the Company. 5 8 7.04 GOVERNING LAW. All rights under this plan shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, THIS AMENDMENT AND RESTATEMENT OF THE NEW ENGLAND LIFE INSURANCE COMPANY SELECT EMPLOYEES SUPPLEMENTAL 401k PLAN is executed on behalf of the Company, this 7th day of February 2000. NEW ENGLAND LIFE INSURANCE COMPANY By: ---------------------------------------------- Attest: ------------------------------------------ 6 EX-10.42 8 NEW ENGLAND SHORT-TERM INCENTIVE PLAN 1 EX. 10.42 THE NEW ENGLAND SHORT-TERM INCENTIVE PLAN (For performance periods starting on or after January 1, 1999) I. Executive Incentive Plan II. Business Unit Management Incentive Plan 2 I. EXECUTIVE INCENTIVE PLAN A. PURPOSE To provide a substantial portion of top management's total cash compensation potential on a variable basis depending upon business unit, corporate, and personal performance as measured by criteria approved by the Personnel Committee of the Board. B. OBJECTIVES 1) To offer participants total cash compensation opportunity above market for significantly superior performance; 2) to offer pay opportunity less than market for below standard performance; 3) to measure performance by criteria including: a) financial b) growth c) non-financial d) individual appraisal e) judgment of the Personnel Committee C. PLAN DESIGN 1) Individual participants' performance will be measured by a formula based on a weighted average of the appropriate Business Unit and Individual Appraisal Factors. 2) Business Unit Factors will consist of weighted averages of various criteria. 3) The target incentive potential is set at the median of incentive targets for similar jobs at comparator companies. An individual participant's calculated award may range between a minimum of 0% and a maximum of 200% of target in any year, at the discretion of the Personnel Committee. Executive Incentive Plan awards shall be reported to the Board. D. ELIGIBILITY 1) Business Unit Presidents, Executive Vice Presidents and Senior Executive Officers, including the CEO are eligible to participate. 3 E. PERFORMANCE MEASURES AND EVALUATION Funding for participant's awards will be determined by computing weighted averages of the appropriate Business Unit and Individual Appraisal factors. Weighted criteria for each business unit factor consists of Financial, Growth, and Non-Financial measures. (See Incentive Summaries for weights and measures for the current plan year). Awards are calculated by evaluating results against benchmarked business plan goals for each measure according to the following performance scale:
FINANCIAL/GROWTH % OF STI TARGET ---------------- --------------- Better Than Plan: 110 - 200% Achievement of Plan (Target): 90 -110% On Balance Substantial Achievement of Plan: 70 - 90% Below Plan: 0 - 70% NON-FINANCIAL/APPRAISAL ----------------------- Exceptional Performance: 170 - 200% Exceeds Requirements: 120 - 170% Fully Meets Requirements: 80 - 120% Some Requirements Not Met: 0 - 80%
F. MAXIMUM AND TARGET PAYOUTS Payouts to Executive Vice Presidents/OBU Heads and selected others will be recommended by the Chairman with approval by the Board. As a general rule, incentive compensation for this group should not exceed 200% of a participant's targeted payout. (See addendum for incentive targets expressed as a percentage of base salary for current plan year). 4 EXECUTIVE INCENTIVE PLAN ADDENDUM
TITLE 1999 STI TARGET % ----- ----------------- CEO 90 % Executive VP 50 % Business Unit President 45 %
5 EXECUTIVE INCENTIVE PROGRAM PLAN PROVISIONS 1. PLAN TYPE - The plan is a discretionary incentive plan, with payouts based on the Personnel Committee's assessment of actual performance compared to pre-established quantitative and qualitative goals, and management's recommendation regarding individual performance evaluations. This plan is not a contract to pay any specific amount, and is not an employment agreement. 2. PLAN PERIOD - Calendar year, with annual renewal, revision or termination at management discretion. 3. ELIGIBILITY - Executive Vice Presidents and Senior Executive Officers are eligible to participate. 4. TIMING OF PAYMENTS - Payment is made on or before April 1 following the end of the performance year. 5. BENEFIT COVERAGE - Incentive award payments under this plan are includible in for benefit calculation purposes. 6. ADMINISTRATION - All incentive plans are to be fully documented and reviewed annually. Human Resource Services is to provide ongoing administrative and program development support for these plans. 7. METHOD OF PAYMENT - Participants may elect prior to the payment year to receive payments in cash or they may elect to defer. 8. TERMINATION - To receive payment, participants must be actively at work at the time payments are actually made except in the event of death, disability, and early or normal retirement (i.e., eligible to receive pension benefits immediately). 9. DEATH, DISABILITY, AND EARLY OR NORMAL RETIREMENT - Payments will be prorated based upon last day actively at work. 10. POWER AND AUTHORITY - The Personnel Committee of the Board shall have full power and authority to construe, interpret, and administer this Plan. All decisions, actions, or interpretations of the Committee shall be final, conclusive, and binding upon all parties. 11. RIGHT TO AMEND, SUSPEND, OR TERMINATE THIS PLAN - The Board reserves the right at any time to amend, suspend, or terminate this Plan in whole or in part, for any reason and without the consent of any Eligible Employee or Beneficiary, without regard to whether such amendment, suspension, or termination shall adversely affect the interest of any Eligible Employee or Beneficiary. 12. RETROACTIVE AMENDMENT - Any amendment, modification, suspension, or termination of any provisions of this Plan may be retroactive. EX-10.43 9 MET LIFE ANNUAL VARIABLE INCENTIVE PLAN 1 EXHIBIT 10.43 Attachment METROPOLITAN LIFE INSURANCE COMPANY ANNUAL VARIABLE INCENTIVE PLAN (For performance periods starting on or after January 1, 1999) I. PURPOSE OF THE PLAN - Align total annual pay with the Company's annual financial business results. - Provide competitive levels of pay for competitive levels of Company performance. - Make a competitive portion of total compensation variable based on Company, business unit and individual performance. II. PARTICIPATION All associates in salary grade 29 and above who have signed the "Agreement to Protect Corporate Property", other than those participating in incentive plans which are alternatives to, and not supplementary to, the Annual Variable Incentive Plan. In addition, the Officers may impose such other reasonable conditions for participation in the Annual Variable Incentive Plan as they deem necessary or appropriate. III. DETERMINATION OF THE INCENTIVE POOL FOR DISTRIBUTION The Board determines at the beginning of the performance year financial objectives consistent with the Company's Annual Business Plan that will provide the basis for determining the maximum aggregate incentive pool for distribution. The pool will be determined using a formula approved by the Board, which will be expressed in terms of percentages of operating earnings and return on equity ("ROE"). The formula will be reviewed each year by the Board to determine its appropriateness in connection with the Company's Business Plan, and may be revised by the Board as a result of such review. The maximum pool may also be increased by the Nominating and Compensation Committee ("Committee") based on the recommendation of the Chief Executive Officer ("CEO"). 2 Annual Variable Incentive Plan Page 2 of 4 For purposes of this Plan: (a) "Operating earnings" means earnings net of all taxes (other than the surplus tax), and excludes the impact of demutualization costs; and (b) "Return on Equity" means operating earnings divided by GAAP equity, where GAAP equity excludes unrealized investment gains. A portion of the aggregate incentive pool resulting from the formula will be allocated by the CEO among the various business units based on their performance relative to certain agreed upon objectives set at the beginning of the performance year by the CEO. Following the performance year, business unit performance will be evaluated by the CEO. All or a portion of the aggregate incentive pool allocated to a particular business unit may be distributed to Plan participants in that business unit, depending on the performance of that business unit. A portion of the pool will be applied to the Company's Performance Incentive Plan, as determined by the CEO. IV. CALCULATION OF TARGET INCENTIVE OPPORTUNITIES A. Incentive opportunity percentages for various position levels are determined based on competitive total compensation market factors and take into account incentive compensation opportunities for comparable positions at our comparator companies, including major insurance companies, banks and diversified financial services companies. B. The schedule of the incentive opportunity percentages for the various categories of participants is:
INCENTIVE POSITION LEVEL OPPORTUNITY PERCENTAGE -------------- ---------------------- #1 (Chief Executive Officer) 150% #2 (President) 90% #3 (Senior Executive Vice-President) 80% #4 (Executive Vice-President) 70% #5 (Senior Vice-President) 50% #6 (Vice-President) 40% #7 (Assistant Vice-President) 25% #8 (Non-Officer Participant) (Grade 31) 15% (Grade 30) 10% (Grade 29) 5%
3 Annual Variable Incentive Plan Page 3 of 4 Participants' actual base earnings (excluding payments under any incentive compensation plan) during the performance year are used as the base to calculate individual incentive opportunities. In general, target incentive opportunities are calculated by multiplying the participant's actual annual base earnings by the applicable incentive opportunity percentage. Where an individual becomes eligible to participate in the Plan during the performance year, or where a Plan participant's status changes during the performance year, the participant's target incentive opportunity will be prorated accordingly. V. CALCULATION OF INDIVIDUAL AWARDS In considering individual award recommendations, significant weight is given to business unit and individual performance. Relative contributions among plan participants is also considered. It is anticipated that there will be significant differentiation of annual incentive awards based on individual performance. Where performance indicates, individuals may receive no award at all. The total of all individual awards under the Plan may not exceed the maximum aggregate incentive pool. VI. ADMINISTRATION OF AWARDS A. Incentive awards for any performance year shall be made as soon as possible during the following calendar year in the form of lump sum payments. B. Participants terminating employment after the performance year, but before the payout, are eligible to receive an award, at the Company's discretion. C. Participants terminating employment during the performance year due to death, disability, retirement, or staffing adjustment programs adopted by the Company, may be eligible to receive awards on a pro-rata basis, at the Company's discretion. Participants terminating employment for reasons other than death, disability, retirement, or such staffing adjustment programs during a performance year are not eligible for an award. D. Participants terminating employment "for cause" at any time before payment of awards are not eligible for an award. E. Incentive awards paid prior to retirement or discontinuance of employment will be taken into account for purposes of determining the level of Insurance 4 Page 4 of 4 Annual Variable Incentive Plan and Retirement benefits and contributions to the Savings and Investment Plan, subject to any regulatory limitations or approvals. Incentive awards paid subsequent to retirement or discontinuance of employment will not be taken into account for purposes of determining the level of Insurance and Retirement benefits or contributions to the Savings and Investment Plan, except as may be provided otherwise in any other Company plan or program. VII. ROLE OF THE NOMINATING AND COMPENSATION COMMITTEE _________________________________________________ The Committee exercises overall responsibility and has broad discretion in the administration of the Plan. With respect to corporate performance, inasmuch as other unforeseen matters have an impact on overall performance during the year, the Committee, at its discretion, may adjust performance either positively or negatively. The Committee may use its discretion to adjust for unusual events that are beyond the control of management and obviously influence performance results unduly, such as material changes in accounting policy, tax and other government regulations, and the acquisition or sale of a business. With respect to individual awards, the Committee will report its recommendations for individual incentive awards for Officers of the rank of Executive Vice-President and above to the Board following the performance year. Following the determination of awards, the Committee will receive a summary report of all incentive award payments. In addition, an annual report listing individual awards paid to participants in the Long Term Performance Compensation Plan will be submitted to the Committee. -0- EX-10.44 10 FORM OF CAPITAL NOTE 1 EXHIBIT 10.44 FORM OF CAPITAL NOTE THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE ISSUER MAY ONLY MAKE PAYMENTS OF THE INTEREST ON AND THE PRINCIPAL OF THIS NOTE, IF NONE OF THE PAYMENT RESTRICTIONS (AS DEFINED ON THE REVERSE HEREOF) THEN EXISTS. 2 METROPOLITAN LIFE INSURANCE COMPANY ____% Mandatorily Convertible Capital Note, due __________, 2005 No. A-1 $___________ METROPOLITAN LIFE INSURANCE COMPANY ("Issuer"), a stock life insurance company organized and existing under the laws of the State of New York, for value received, hereby promises to pay, subject to the Payment Restrictions (as set forth in paragraph 4 on the reverse hereof, to METLIFE, INC., or the registered assigns thereof, the principal sum of _____ United States dollars ($) on __________, 2005 ("Maturity Date"), through the conversion of such amount into shares of Common Stock, par value $.01 per share ("Common Capital Stock") of the Issuer, and to pay interest thereon from the date hereof quarterly in arrears on ________, ________, ________ and ________ in each year, commencing ________, 2000 (each such date a "Payment Date"), initially at the rate of __% per annum through and including ________ __, 2003, and at the Reset Rate (as defined below) thereafter, until the principal hereof is paid in full or duly provided for. The Maturity Date will also occur on the date on which any state or federal authority or agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer. The Issuer shall pay the interest due on each Payment Date to the person ("Registered Holder") in whose name this Note is registered on the Register (as defined on the reverse hereof) at the close of business on the ________, ________, ________ or ________ (each a "Regular Record Date") (whether or not a Business Day (as defined on the reverse hereof)), as the case may be, next preceding such Payment Date. The Issuer shall calculate such interest on the basis of a 360-day year of twelve 30-day months. Subject to the Payment Restrictions, the Issuer shall pay the principal of this Note on the Maturity Date, but only against surrender of this Note to the Issuer. The unpaid principal amount of this Note will, without any further action by the Issuer or the Registered Holder, be converted into 500 shares of Common Capital Stock, at each of -, 2004 and the Maturity Date. So long as no Event of Default has occurred and is continuing, the Issuer shall have the right at any time, and from time to time, during the term of this Note, to defer payments of interest for up to 5 consecutive years by extending the interest payment period of such Note for a period not extending, in the aggregate, beyond the Maturity Date (the "Deferral Period"), during which Deferral Period no interest shall be due and payable. To the extent permitted by applicable law, interest, the payment of which has A-2 3 been deferred because of the extension of the interest payment period pursuant to the provisions of this Note, will bear interest thereon at the rate of -% through and including __________ __, 2003, and at the Reset Rate thereafter, compounded quarterly for each quarter of the Deferral Period ("Compounded Interest"). At the end of the Deferral Period, the Issuer shall pay all interest accrued and unpaid on this Note and Compounded Interest (together, "Deferred Interest") that shall be payable to the Registered Holder. Prior to the termination of any Deferral Period, the Issuer may further extend such period, provided that such period together with all such previous and further extensions thereof shall not extend beyond the Maturity Date. Upon the termination of any Deferral Period and the payment of all Deferred Interest then due, the Issuer may commence a new Deferral Period, subject to the foregoing requirements. No interest shall be due and payable during an Deferral Period, except at the end thereof, but the Issuer, at its option, may prepay on any Payment Date all or any portion of the interest accrued during the then elapsed portion of a Deferral Period. The Issuer shall give notice of the Issuer's election to begin a Deferral Period to the Registered Holder in writing at least five business days prior to the commencement of the Deferral Period. The interest rate on this Note may be reset for the Payment Date falling on the Maturity Date to the rate (the "Reset Rate") determined by the Issuer. Any interest on this Note not so punctually paid or duly provided for shall forthwith cease to be payable to the Registered Holder on the affected Payment Date. Thereafter, the Issuer shall pay such interest to the Registered Holder at the close of business on a special record date ("Special Record Date") for the payment of such interest. Subject to the requirement that any Deferral Period end on a Payment Date or the Maturity Date, the Issuer shall establish the Special Record Date and a special payment date ("Special Payment Date") for the payment of such interest, and shall give notice of such Special Record Date and such Special Payment Date to the Registered Holder not less than 15 days prior to such Special Payment Date. The Issuer shall pay the interest on this Note, in accordance with the foregoing and subject to applicable laws and regulations, by check mailed on or before each Payment Date or Special Payment Date to the Registered Holder at such Registered Holder's address appearing on the Register or by wire transfer to a United States dollar account maintained by such Registered Holder with a bank, if such Registered Holder so elects by giving notice to the Issuer not less than 15 days (or such fewer days as the Issuer may accept at its discretion) prior to the applicable Payment Date or Special Payment Date, of such election and of the account to which payments are to be made. Unless such A-3 4 Registered Holder revokes such designation, each such designation shall remain in effect with respect to all future payments as to such Notes. The Issuer hereby refers to the provisions of this Note set forth on the reverse hereof. Such provisions shall have the same effect as if set forth at this place. The Issuer may execute this Note by manual or facsimile signatures. IN WITNESS WHEREOF, the Issuer has duly executed this Note. Dated: METROPOLITAN LIFE INSURANCE COMPANY By_______________________________ Name Title A-4 5 FORM OF REVERSE 1. This Note is designated as the ___% Mandatorily Convertible Capital Note of the Issuer due on ________, 2005, in a principal amount of $_____________. This Note is a direct and unsecured obligation of the Issuer, and, subject to the Payment Restrictions contained in paragraph 4 hereof, will mature on the Maturity Date. This Note is a liability of the Issuer. 2. This Note is issuable only in fully registered form without coupons. 3. The Issuer shall act as a registrar of this Note, and shall cause to be kept at its office a register ("Register") in which, subject to such reasonable regulations as the Issuer may prescribe, the Issuer shall provide for the registration of this Note and registration of transfers and exchanges of this Note. 4. This Note shall not be assignable or otherwise transferable by the Registered Holder without the written consent of the Issuer and any attempt to so assign or transfer this Note without such consent shall be void and of no effect. 5. (a) As required by Section 1323 ("Section 1323") of the insurance law ("Insurance Law") of the State of New York, the Issuer may not make any payment of the interest on or the principal of this Note if (based on the Issuer's Annual Statement for the immediately preceding calendar year ("Preceding Annual Statement") filed with the Superintendent of Insurance (together with each successor thereto from time to time, "Superintendent") of the Insurance Department of the State of New York (together with each successor thereto from time to time, "N.Y. Department")) (1) the Issuer's total adjusted capital ("TAC") is less than (i) 250% of the Issuer's authorized control level risk-based capital ("ACLRBC") if a Negative Trend (as defined below) exists or (ii) the Issuer's company action level risk-based capital ("CALRBC") (the limitations set forth in clauses (i) and (ii) collectively, "RBC Payment Thresholds"), or (2) the aggregate amount of all payments of the interest on or the principal of this Note made during the current calendar year would, if made immediately prior to the end of the immediately preceding calendar year, have caused the Issuer's TAC to be less than either of the RBC Payment Thresholds, computed as of the end of such calendar year (the restrictions on payment set forth in clauses (1) and (2) of this sentence collectively, "Automatic Payment Restrictions"). In addition, if at the end of any calendar year, the Issuer's TAC, including all Outstanding Notes (as hereinafter defined), is less than 300% of the then outstanding aggregate principal amount of the Issuer's capital notes and surplus notes and other advances or borrowings issued, made or incurred pursuant to Section 1307 or 1323 of the Insurance Law (all such capital notes, surplus notes, advances and borrowings collectively, A-5 6 "Outstanding Notes"), the Superintendent may notify the Issuer that the financial condition of the Issuer does not warrant the making, in whole or in part, of any payment of the interest on or the principal of this Note, thereby automatically deferring such payment until such time as the Superintendent finds that the Issuer's financial condition warrants such payment. The limitation set forth in the preceding sentence is hereinafter referred to as the "Conditional Payment Restriction," and the Conditional Payment Restriction and the Automatic Payment Restrictions are herein referred to collectively as "Payment Restrictions." For purposes of this Note, "Negative Trend" means a negative trend over a period of time, as determined in accordance with the "trend test calculation" included in the RBC Instructions, and "RBC Instructions" means the RBC report including risk-based capital instructions, which in addition to any other matter which may be required to be stated therein, either by law or by the Superintendent pursuant to law, shall conform substantially to the form of the report and instructions adopted from time to time for such purpose by, or by the authority of, the National Association of Insurance Commissioners, together with such additions, omissions or modifications, similarly adopted from time to time, as may be approved by the Superintendent. (b) If any Payment Restriction exists, the Issuer may not make any of the affected payments of interest or principal until such time as (a) none of the Payment Restrictions exists or (b) the Superintendent has concluded that the Issuer's financial condition warrants the making of such payments, and has waived all existing Payment Restrictions as permitted by Section 1323 and has so notified the Issuer. The Issuer will make each payment so prevented or suspended on the first Business Day (as defined below) on which (and, if the Issuer may make only a part of such payment, to the extent that) none of the Payment Restrictions exists or the Superintendent has waived all existing Payment Restrictions. Until paid, interest will continue to accrue, at the rate of % through and including _______ __, 2003, and at the Reset Rate thereafter, on the unpaid principal amount of this Note whose payment is so prevented or suspended. However, interest will not accrue on any interest payment which has been so prevented or suspended, during the period of such prevention or suspension. "Business Day" means any day that is not a Saturday, Sunday or day on which banking institutions and trust companies in The City of New York or at a place of payment are authorized or required by law, regulation or executive order to close. (c) Even if either of the Automatic Payment Restrictions prevents the Issuer from making any payment of the interest on or the principal of Note, Section 1323(c) of the Insurance Law nevertheless permits, upon the Issuer's request, the Superintendent to approve, in whole or in part, the making of any such payment, if and at such time or times as, in the Superintendent's judgment, the financial condition of the Issuer warrants the A-6 7 making of such payment. Even if as a result of the existence of the Conditional Payment Restriction the Superintendent has suspended the making of any payment of the interest on or the principal of this Note by notifying the Issuer that its financial condition does not warrant the making of any such payment, under Section 1323(d) of the Insurance Law the Superintendent may approve, in whole or in part, the making of any such payment, if and at such time or times as, in the Superintendent's judgment, the financial condition of the Issuer warrants the making of such payment. The Issuer will use its best efforts to obtain promptly all approvals from the Superintendent, in accordance with Section 1323(c) or (d), which may hereafter become necessary, if any, in order to permit the Issuer to make each payment of the interest on and the principal of this Note on its stated due date. (d) Any payment ("Unpaid Amount") of the interest on or the principal of this Note as to which (i) the approval of the Superintendent has been obtained, if necessary, and (ii) payment is not restricted by any Subordination Provision (as defined below) and which is not punctually paid or duly provided for on, or within 15 days after, the related Payment Date or on the Maturity Date, as set forth herein, will forthwith cease to be payable to the Registered Holder on the Regular Record Date therefor, and the Issuer will pay such Unpaid Amount to the Registered Holder on a subsequent Special Record Date. Subject to the requirement that any Deferral Period end on a Payment Date or the Maturity Date, the Issuer shall fix the Special Record Date and the date ("Special Payment Date") for the payment of such Unpaid Amount. At least 15 days before the Special Payment Date, the Issuer shall mail to the Registered Holder a notice that states the Special Record Date, the Special Payment Date and all amounts of the interest on or the principal of this Note which the Issuer intends to pay on the Special Payment Date. On such Special Payment Date, subject to compliance by the Issuer with the provisions of paragraph 5 (a) hereof, the Issuer shall pay the amount of interest or principal to be so paid to the Registered Holder. 6. (a) If, on any Payment Date or on the Maturity Date or on any Special Payment Date, MetLife may make, under Section 1323, the payment or payments then due on this Note and the Superintendent has not acted, under Section 1323, to suspend such payment or payments, the Issuer will make all payments in respect of the interest on or the principal of this Note due on such Payment Date, Maturity Date or Special Payment Date, as the case may be. The Issuer will make, on such Payment Date or Special Payment Date, each such payment to the person which was the Registered Holder of this Note on the ________, ________, ________ or ________ immediately preceding such Payment Date or Maturity Date (or on the related Special Record Date, if any), by United States dollar check drawn on the Issuer or by wire transfer to a United States dollar account maintained by such Registered Holder with a bank, if such Registered Holder so elects by giving notice to the Issuer not less than 15 days (or such fewer days as the Issuer may accept at its discretion) prior to the applicable Payment Date, Maturity Date or Special A-7 8 Payment Date, of such election and of the account to which payments are to be made. Unless such Registered Holder revokes such designation, each such designation shall remain in effect with respect to all future payments as to such Notes. The Issuer shall pay all reasonable administrative costs in connection with making all such payments. (b) In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. 7. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision or taxing authority of or in the United States of America with respect to the initial issuance of this Note. Except as otherwise specifically provided in this Note, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or governmental entity or any political subdivision or taxing authority thereof or therein. 8. So long as any this Note remains outstanding or any amount remains unpaid on this Note, as required by Section 1323(e), the Issuer will deduct one-fifth of the aggregate original principal amount of this Note from its TAC in each calendar year starting with 2005. As required by the RBC Instructions, (a) the Issuer may not, at any given time, have over 33-1/3% of its TAC comprised of the aggregate outstanding principal amount of its capital notes and surplus notes, and, if such amount exceeds 33-1/3% of its TAC, the Issuer must reduce the amount of its capital notes included in its TAC then shown on its Annual Statement by such excess amount, (b) so long as any capital notes issued by the Issuer are outstanding, the Issuer will file a statement with the Superintendent at the same time as the Issuer files its Annual Statement and at such other times as the Superintendent determines necessary, showing, in a manner approved by the Superintendent, the calculation of the Issuer's ACLRBC, CALRBC and TAC, which statement shall specifically identify any of the Issuer's financial results which would cause any of the Payment Restrictions to exist, and (c) the Issuer will notify the Superintendent, for informational purposes, of each payment (whether of interest or principal) due on this Note, not less than 10 nor more than 30 Business Days prior to the due date for such payment. 9. (a) The Issuer and the Registered Holder by accepting this Note agree that the payment of all interest on, all principal of and all other claims as to this Note is expressly subordinate in right of payment, to the extent and in the manner set forth in the A-8 9 provisions ("Subordination Provisions") of this paragraph 8, to the prior payment in full of all Indebtedness, Policy Claims and Other Creditor Claims (each as defined below) of the Issuer, subject to and in accordance with Section 7435 ("Section 7435") of the Insurance Law. This Note will rank pari passu with all Existing Surplus Notes (as defined below) and all capital notes, surplus notes or similar obligations of the Issuer hereafter issued, made or incurred. (b) If the Issuer is subject to any rehabilitation, liquidation, conservation or dissolution proceeding, holders of Indebtedness, Policy Claims and Other Creditor Claims will, under Section 7435, have the right to be paid in full before the Registered Holder may receive any payment as to this Note. In a proceeding commenced under Article 74 of the Insurance Law, all claims for the interest on or the principal of this Note constitute Class 7 claims under Section 7435. (c) If any distribution is made to the Registered Holder that, because of this paragraph, should not have been made to the Registered Holder, the Registered Holder who receives the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Other Creditor Claims, and pay it over to them, as their interests may appear. (d) This paragraph defines the relative rights of the Registered Holder, on the one hand, and holders of Indebtedness, Policy Claims and Other Creditor Claims, in accordance with Section 7435, on the other hand. Nothing in this Note shall (i) impair, as between the Issuer and the Registered Holder, the obligation of the Issuer which is, subject to the Payment Restrictions and to the Subordination Provisions, absolute and unconditional to pay the interest on and the principal of this Note in accordance with their terms; (ii) affect the relative rights of the Registered Holder and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Other Creditor Claims; or (iii) prevent the Registered Holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the Payment Restrictions and to the rights of holders of Indebtedness, Policy Claims or Other Creditor Claims to receive distributions otherwise payable to the Registered Holder. (e) No right of any holder of Indebtedness, Policy Claims or Other Creditor Claims to enforce the subordination of the indebtedness evidenced by this Note shall be impaired by any act or failure to act by the Issuer. As used herein, "Indebtedness" of the Issuer shall mean all existing or future (i) indebtedness of the Issuer for borrowed money, (ii) indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) obligations of the Issuer pursuant to any agreement obligating the Issuer to cause another person to maintain A-9 10 a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) expenses, claims or amounts, to the extent that payment of the interest on or the principal of this Note is required by law to be subordinated to the prior payment thereof. However, any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, this Note shall not constitute Indebtedness. Under current law, the Issuer cannot issue any indebtedness which by its terms is subordinate to this Note. "Indebtedness" shall not include this Note, the Issuer's presently outstanding surplus notes ("Existing Surplus Notes") which are designated as (A) 6.30% Surplus Notes scheduled to mature on November 1, 2003, (B) 7.45% Surplus Notes scheduled to mature on November 1, 2023, (C) 7% Surplus Notes scheduled to mature on November 1, 2005, (D) 7.70% Surplus Notes scheduled to mature on November 1, 2015, (E) 7.80% Surplus Notes scheduled to mature on November 1, 2025 and (F) 7.875% Surplus Notes due 2024 (previously issued by New England Mutual Life Insurance Company which was merged into the Issuer effective on August 30, 1996), or any future capital notes, surplus notes or similar obligations of the Issuer which will rank pari passu with this Note. As used herein, "Other Creditor Claims" shall mean all existing or future other claims against the Issuer which, under Section 7435, have priority over claims with respect to this Note. Under Section 7435 such other claims include (i) claims with respect to the actual and necessary costs and expenses of administration incurred by a liquidator, conservator, rehabilitator or ancillary rehabilitator under Section 7435; (ii) claims with respect to the actual and necessary costs and expenses of administration incurred by The Life Insurance Guaranty Corporation or The Life Insurance Company Guaranty Corporation of New York ("LICGC"); (iii) claims of LICGC for certain funds loaned to the Superintendent under Section 7713(d) of the Insurance Law; (iv) debts up to $1,200 due to employees for services performed within one year before the commencement of rehabilitation, liquidation, conservation or dissolution proceedings; (v) claims for payment for goods furnished or services rendered in the ordinary course of business within 90 days prior to the declaration of the impairment or insolvency of the Issuer; (vi) claims of the federal or any state or local government (except in the case of claims for a penalty or forfeiture which are included only to the extent of pecuniary loss and reasonable costs occasioned by the act giving rise to the forfeiture or penalty); and (vii) claims of general creditors and all other claims having priority under Section 7435. As used herein, "Policy Claims" shall mean all existing or future claims of policyholders or beneficiaries, as the case may be, pursuant to any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts and funding agreements, issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims pursuant to separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and A-10 11 all claims of LICGC or any other guaranty corporation or association of the State of New York or another jurisdiction against the Issuer, other than claims described in clause (i) of the definition of "Other Creditor Claims" and claims for interest. 10. In case this Note shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and deliver a new Note, having a number not contemporaneously outstanding, of like tenor and for the same aggregate principal amount as the then unpaid principal amount of this Note, registered in the same manner, dated the date of its issuance and bearing interest from the date to which interest has been paid on this Note, in exchange and substitution for this Note (upon surrender and cancellation hereof) or in lieu of and substitution for this Note. If this Note is destroyed, lost or stolen, the applicant for a substituted Note shall furnish to the Issuer such security or indemnity as may be required by either of them to save each of them harmless from all claims related to the issuance of such substituted Note, and, in every case of destruction, loss or theft of this Note, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Note and of the ownership thereof. However, if the Registered Holder hereof is, in the judgment of the Issuer, an institution of recognized responsibility, such Registered Holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Note in lieu of and substitution for this Note. Upon the issuance of any substituted Note, the Issuer may require the payment by the Registered Holder thereof of a sum sufficient to all cover fees and expenses connected therewith. If this Note has matured or is about to mature and shall become mutilated or defaced or shall be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions and to the Subordination Provisions, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except if this Note is mutilated or defaced) upon compliance by the Registered Holder with the provisions of this paragraph 9. 11. With the written consent of the Registered Holder of this Note, the Issuer may, with the prior approval of the Superintendent, modify, amend or supplement the terms of this Note, or may give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall conclusively bind the Registered Holder. The Issuer may, with the prior approval of the Superintendent but without the consent of the Registered Holder of this Note, modify or amend this Note for the purpose of (a) adding to the covenants of the Issuer for the benefit of the Registered Holder of this Note, (b) surrendering any right or power conferred upon the Issuer, (c) securing this Note, (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer in this Note as permitted by this Note, (e) modifying the restrictions on, and procedures for, resales and other transfers of this Note to the extent permitted or required by any change in applicable law or regulation (or the interpretation A-11 12 thereof) or in the practices relating to the resale or transfer of restricted securities generally, (f) curing any ambiguity or correcting or supplementing any defective provision contained in this Note in a manner which does not adversely affect the interest of the Registered Holder of this Note in any material respect, (g) providing for events of default in addition to those specified in paragraph 12, or (h) effecting any amendment which the Issuer may determine is necessary or desirable and which shall not adversely affect the interest of the Registered Holder of this Note. The Registered Holder, by acceptance hereof, consents to each modification or amendment made pursuant to the preceding sentence. 12. The Registered Holder of this Note may enforce this Note only in the manner set forth below. (a) If any Event of Default with respect to this Note, other than an Event of Default specified in clause (d) of paragraph 12, occurs and is continuing, the Registered Holder may declare the principal of, and any accrued interest on, this Note due and payable immediately. Upon any such declaration this Note shall automatically convert, without any further action by the Issuer or the Registered Holder, into 1,000 shares of Common Stock. If an Event of Default specified in clause (d) of paragraph 12 occurs, the principal of, and any accrued interest on, this Note shall ipso facto convert, without any further action by the Issuer or the Registered Holder, into 1,000 shares of Common Stock. (b) If an Event of Default occurs and is continuing, the Registered Holder may institute, pursue and prosecute any proceeding, including but not limited to, any action at law or suit in equity or other judicial or administrative proceeding to collect the payment of principal or interest on this Note that is in default, to enforce the performance of any provision of this Note or to obtain any other available remedy. 13. "Event of Default," wherever used herein with respect to this Note, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment, when due, of interest on this Note and the default continues for a period of 30 days; provided that during any Deferral Period for this Note, failure to pay interest on this Note shall not constitute an Event of Default hereunder; (b) default in the payment of the principal of this Note when it becomes due, whether at maturity, by declaration of acceleration of maturity or otherwise; or A-12 13 (c) default in the performance or breach of any covenant or agreement of the Issuer in this Note, and continuance of such breach or default for a period of 90 days after receipt by the Issuer of written notice thereof; or (d) any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer. A default under clause (c) above is not an Event of Default until (i) the Registered Holder provides written notice thereof to the Issuer and (ii) the Issuer does not cure such default within the time specified in clause (c) above after receipt of such notice. Any such notice must specify the default, demand that it be remedied and state that such notice is a notice of default. If an Event of Default has occurred and is continuing, the Registered Holder, by written notice to the Issuer, may waive an Event of Default and its consequences hereunder. When an Event of Default is waived, it is deemed cured and shall cease to exist, but no such waiver shall extend to any subsequent or other Event of Default or impair any consequent right. 14. The Issuer may not merge with or into or consolidate with, or sell, assign, transfer, lease or convey all or substantially all of its properties and assets to, any entity, other than a wholly-owned subsidiary of the Issuer, and no entity, other than a wholly-owned subsidiary of the Issuer, shall merge with or into or consolidate with the Issuer, or sell, assign, transfer, lease or convey all or substantially all of its properties and assets to the Issuer, unless: (a) the Issuer is the surviving corporation or the entity formed by or surviving such merger or consolidation or to which such sale, assignment, transfer, lease or conveyance shall have been made (the "Successor") if other than the Issuer (i) is organized and existing under the laws of the United States of America or any state thereof or the District of Columbia, and (ii) shall expressly assume, in form satisfactory to the Registered Holder, all the obligations of the Issuer under this Note; and (b) immediately after giving effect to such transaction, no Event of Default shall have occurred and be continuing. The Successor will be the successor to the Issuer, and will be substituted for, and may exercise every right and power and become the obligor on this Note with the same effect as if the Successor had been named as the Issuer herein but, in the case of a sale, assignment, transfer, lease or conveyance of all or substantially all of the properties and A-13 14 assets of the Issuer, the predecessor Issuer will not be released from its obligation to pay the principal of and premium, if any, and interest on this Note. 15. (a) The unpaid principal amount of this Note will, without any further action by the Issuer or the Registered Holder, at -, 2004 and at the Maturity Date (each a "Conversion Date") be converted into 500 shares of common stock, par value $.01 per share, of the Issuer at each such date ("Conversion Shares"). (b) In order to be converted, this Note must be surrendered to the Issuer by the Registered Holder at the location then provided for the payment of this Note. (c) A conversion shall be deemed to have been effected on a Conversion Date (or such earlier date as this Note may become due and payable following an Event of Default in accordance with paragraph 11), and at such time the Registered Holder in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record thereof. (d) Promptly upon, and in any case within seven days after, the conversion of this Note, the Issuer shall pay to the Registered Holder converting this Note all interest accrued and unpaid on the principal amount of this Note to and including the date of conversion, without any adjustment of such interest in respect of any dividend or other distribution payable on the Common Stock issued upon such conversion. (e) As soon as practicable after the conversion of this Note, and in any event within 21 days thereafter, the Issuer at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Registered Holder of this Note, a certificate or certificates for the Common Shares. 16. No provision of this Note shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions and to the Subordination Provisions, to pay the interest on and the principal of this Note at the times, place and rate, and in the coin or currency, herein prescribed. 17. THIS NOTE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS. A-14 EX-10.45 11 1993 FISCAL AGENCY AGREEMENT 1 Exhibit 10.45 - -------------------------------------------------------------------------------- FISCAL AGENCY AGREEMENT between METROPOLITAN LIFE INSURANCE COMPANY, Issuer and THE CHASE MANHATTAN BANK, N. A., Fiscal Agent ---------------------------- Dated as of November 1, 1993 ---------------------------- 6.30% Surplus Notes scheduled to mature on November 1, 2003 7.45% Surplus Notes scheduled to mature on November 1, 2023 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page 1. The Securities ............................................ 1 (a) General .............................................. 1 (b) Forms of Securities .................................. 2 (c) Book-Entry Provisions ................................ 4 (d) Denominations ........................................ 5 2. Fiscal Agent; Other Agents ................................ 5 3. Authentication ............................................ 7 4. Payment and Cancellation .................................. 8 (a) Payment ............................................. 8 (b) Cancellation ........................................ 9 5. Global Securities ......................................... 9 6. Registration, Transfer, and Exchange of Securities ........ 11 7. Delivery of Certain Information ........................... 18 (a) Rule 144A Information ............................... 18 (b) Periodic Reports .................................... 18 8. Conditions of Fiscal Agent's Obligations .................. 19 (a) Compensation and Indemnity .......................... 19 (b) Agency .............................................. 19 (c) Advice of Counsel ................................... 20 (d) Reliance ............................................ 20 (e) Interest in Securities, etc. ........................ 20 (f) Non-Liability for Interest........................... 20 (g) Certifications ...................................... 20 (h) No Implied Obligations .............................. 21 9. Resignation and Appointment of Successor .................. 21 (a) Fiscal Agent and Paying Agent ........................ 21 (b) Resignation .......................................... 21 (C) Successors ........................................... 22 (d) Acknowledgement ...................................... 23 (e) Merger, Consolidation, etc. .......................... 23 10. Meetings and Amendments ................................... 23 (a) Calling of Meeting, Notice and Quorum ................ 23 (b) Approval ............................................. 25 (c) Binding Nature of Amendments, Notices, Notations, etc. 27 (d) "Outstanding" Defined ................................ 28 -i- 3 11. Governing Law ................................................. 28 12. Notices ....................................................... 28 13. Separability .................................................. 29 14. Headings ...................................................... 29 15. Counterparts .................................................. 29 EXHIBIT A FORM OF DEFINITIVE SECURITY ..................... A-1 EXHIBIT B FORM OF GLOBAL SECURITY ......................... B-1 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY ............................ C-1 EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM RESTRICTED GLOBAL SECURITY TO REGULATION S GLOBAL SECURITY ................................ D-l EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM RESTRICTED GLOBAL SECURITY TO UNRESTRICTED GLOBAL SECURITY ................................ E-1 EXHIBIT F FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM REGULATION S GLOBAL SECURITY TO RESTRICTED GLOBAL SECURITY ................................ F-1 EXHIBIT G-1 FORM OF OWNER SECURITIES CERTIFICATION .................................. G-1 EXHIBIT G-2 FORM OF DEPOSITARY SECURITIES CERTIFICATION .................................. G-2 -ii- 4 FISCAL AGENCY AGREEMENT, dated as of November 1, 1993, between METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance corporation organized under the laws of the State of New York (the "Issuer"), having its principal office at One Madison Avenue, New York, New York, and THE CHASE MANHATTAN BANK, N.A., a banking organization organized under the laws of the United States, as Fiscal Agent (together with any successor as Fiscal Agent hereunder, the "Fiscal Agent"). The Exhibits attached hereto shall be deemed to be a part of this Agreement. 1. The Securities. (a) General. This Agreement is made in respect of $700,000,000 aggregate principal amount of Surplus Notes of the Issuer, consisting of $400,000,000 principal amount of 6.30% Surplus Notes scheduled to mature on November 1, 2003 (the "Notes scheduled to mature 2003") and $300,000,000 principal amount of 7.45% Surplus Notes scheduled to mature on November 1, 2023 (the "Notes scheduled to mature 2023"). The Notes scheduled to mature 2003 and the Notes scheduled to mature 2023 are sometimes referred to herein collectively as the "Securities" or the "Notes", and each separately as a "Series" of Securities or Notes. Claims based upon the Securities will rank below all Indebtedness, Policy Claims - and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). The payment by the Issuer of principal and interest on the Securities shall be conditioned upon the payment restrictions set forth in paragraphs 4 and 10 of the Securities (the "Payment Restrictions"). The Notes scheduled to mature 2003 are scheduled to mature on November 1, 2003, and the Notes scheduled to mature 2023 are scheduled to mature on November 1, 2023 (each such date, with respect to its respective series, the "Scheduled Maturity Date"). Any reference herein to the term "principal" or the principal amount of the Notes scheduled to mature 2023 shall include the amount of premium, if any, payable upon redemption thereof in accordance with paragraph 15 thereof. Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include (i) the date, if any, fixed for redemption in accordance with paragraph 15 thereof and (ii) the date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer. (b) Forms of Securities. The Securities are being offered and sold by the Issuer pursuant to a Purchase 5 Agreement, dated October 28, 1993 (the "Purchase Agreement"), between the Issuer and the Purchasers named therein (the "Purchasers"). (i) Securities (other than global Securities, as hereinafter defined) offered and sold pursuant to the Purchase Agreement to "accredited investors", within the meaning of Rule 501(a) of the Securities Act of 1933, as amended (the "Act"), shall be issued in definitive, fully registered form without interest coupons, substantially in the form of Security attached as Exhibit A hereto, with such applicable legends as are provided for in Exhibit A ("definitive Securities"). Upon transfer of any definitive Security, registration of such transfer shall be effected in accordance with Section 6 hereof. (ii) Securities offered and sold in reliance on Rule 144A ("Rule 144A") under the Act pursuant to the Purchase Agreement shall be issued in the form of global Securities (the "Restricted Global Securities") in definitive, fully registered form without interest coupons, substantially in the form of Security attached as Exhibit B hereto, with such applicable legends as are provided for in Exhibit B. Each such global Security shall be registered in the name of a nominee of The Depository Trust Company (the "U.S. Depositary") and deposited with the Fiscal Agent, at its New York office, as custodian for the U.S. Depositary, duly executed by the Issuer and authenticated by the Fiscal Agent as hereinafter provided. The aggregate principal amount of each Restricted Global Security may from time to time be increased or decreased by adjustments made on the records of the Fiscal Agent, as custodian for the U.S. Depositary, as hereinafter provided. (iii) (A) Securities offered and sold in reliance on Regulation S ("Regulation S") under the Act pursuant to the Purchase Agreement shall be initially issued in the form of temporary global Securities in definitive, fully registered form without interest coupons, substantially in the form of Security attached as Exhibit B hereto, with such applicable legends as are provided for in Exhibit B. Each such global Security shall be registered in the name of a nominee of the U.S. Depositary and deposited with the Fiscal Agent, at its New York office, as custodian for the U.S. Depositary, duly executed by the Issuer and authenticated by the Fiscal Agent as hereinafter provided, for credit to the respective accounts of beneficial owners of the Securities (or to such other accounts as they may direct) at Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear") or Centrale de Livraison de Valeurs Mobilieres S.A. ("CEDEL"). Until -2- 6 such time as the Restricted Period (as defined below) shall have terminated, each such global Security shall be referred to herein as a "Regulation S Global Security". After such time as the Restricted Period shall have terminated and the certifications referred to in (B) below shall have been provided, interests in each such global Security shall be exchanged for interests in a like global Security, referred to herein as an "Unrestricted Global Security". The aggregate principal amount of each Regulation S Global Security and each Unrestricted Global Security may from time to time be increased or decreased by adjustments made on the records of the Fiscal Agent, as custodian for the U.S. Depositary, as hereinafter provided. As used herein, the term "Restricted Period" means the period of 40 consecutive days beginning on and including the later of (i) the day that Goldman, Sachs & Co., on behalf of the Purchasers, advises the Issuer and the Fiscal Agent' is the day on which the Securities are first offered to persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (ii) the day on which the closing for the offering of the Securities occurs. (B) On or after the termination of the Restricted Period, interests in a Regulation S Global Security may be exchanged for interests in an Unrestricted Global Security only after delivery by a beneficial owner of an interest therein to Euroclear or CEDEL of a written certification (an "Owner Securities Certification") substantially in the form of Exhibit G-1 hereto, and upon delivery by Euroclear or CEDEL to the Fiscal Agent of a certificate or certificates substantially in the form attached hereto as Exhibit G-2. Upon receipt of such certificates, the Fiscal Agent will exchange the portion of the Regulation S Global Security covered by such certification for interests in an Unrestricted Global Security. All Securities shall be issued substantially in the form of Security attached hereto as either Exhibit A or B and shall be executed manually or in facsimile on behalf of the Issuer by any two of its Chairman of the Board, President, Chief Financial Officer, Executive Vice Presidents, Senior Vice Presidents or Secretary (the "Authorized Officers"), notwithstanding that such officers, or any of them, shall have ceased, for any reason, to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of any such Security. The Securities (i) may also have such additional provisions, omissions, variations or substitutions as are not inconsistent with the provisions of this Agreement, and (ii) may have such letters, numbers or other marks of identification and such legends or endorsements -3- 7 placed thereon as may be required to comply with this Agreement, any law or with any rules made pursuant thereto or with the rules of any securities exchange, insurance regulatory or other governmental agency or depositary thereof or as may, consistently herewith, be determined by the Authorized Officers executing such Securities, in each case (i) and (ii) as conclusively evidenced by their proper execution of such Securities. All Securities shall be otherwise substantially identical except as to maturity, interest rate, denomination and as otherwise provided herein. (c) Book-Entry Provisions. This Section 1(c) shall apply to all Securities evidencing all or part of the Securities that are registered in the name of the U.S. Depositary or a nominee thereof ("global Securities"). The Issuer shall execute and the Fiscal Agent shall, in accordance with this Section 1(c), authenticate and deliver one or more global Securities as required to be issued pursuant to Section 1(b) hereof, which (A) shall be registered in the name of the U.S. Depositary or its nominee, (B) shall be delivered by the Fiscal Agent to the U.S. Depositary or pursuant to the U.S. Depositary's instructions and (C) shall bear legends substantially to the following effect: "Unless this Security is presented by an authorized representative of [insert name of U.S. Depositary] to the Issuer or its agent for registration of transfer, exchange or payment, and any Security issued in exchange for this Security or any portion hereof is registered in the name of [insert name of nominee of U.S. Depositary] or in such other name as is requested by an authorized representative of [insert name of U.S. Depositary] (and any payment is made to [insert name of nominee of U.S. Depositary] or to such other entity as is requested by an authorized representative of [insert name of U.S. Depositary]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [insert name of U.S. Depositary] OR A NOMINEE THEREOF IS WRONGFUL inasmuch as the registered owner hereof, [insert name of nominee of U.S. Depositary], has an interest herein." "This Security is a global Security within the meaning of the Fiscal Agency Agreement referred to hereinafter. This global Security may not be exchanged, in whole or in part, for a Security -4- 8 registered in the name of any person other than [insert name of U.S. Depositary] or a nominee thereof, except in the limited circumstances set forth in Section 5 of the Fiscal Agency Agreement, and may not be transferred, in whole or in part, except in accordance with the restrictions set forth in Section 6(c) of the Fiscal Agency Agreement. Beneficial interests in this global Security may not be transferred except in accordance with Section 6(c) of the Fiscal Agency Agreement." Neither any members of, or participants in, the U.S. Depositary ("Agent Members") nor any other persons on whose behalf Agent Members may act (including Euroclear and CEDEL and account holders and participants therein) shall have any rights under this Fiscal Agency Agreement with respect to any global Security registered in the name of the U.S. Depositary or any nominee thereof, or under any such global Security, and the U.S. Depositary or such nominee, as the case may be, may be treated by the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent as the absolute owner and holder of such global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Fiscal Agent or any agent of the Issuer or the Fiscal Agent from giving effect to any written certification, proxy or other authorization furnished by the U.S. Depositary or such nominee, as the case may be, or impair, as between the U.S. Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such persons governing the exercise of the rights of a holder of any Security. (d) Denominations. The Securities and beneficial interests in global Securities shall be issuable in minimum denominations of (i) $250,000, in the case of Securities offered and sold, or subsequently transferred, in reliance on Rule 144A, (ii) $500,000 in the case of Securities offered and sold, or subsequently transferred, in reliance on Regulation S or (iii) $500,000, in the case of Securities offered and sold, or subsequently transferred to Accredited Investors, and, in each case, any amount in excess thereof that is an integral multiple of $1,000. 2. Fiscal Agrent: Other Agrents. The Issuer hereby appoints The Chase Manhattan Bank, N.A., acting through its corporate trust office at 4 Chase MetroTech Center, Brooklyn, New York 11245 and payment office at 1 Chase Manhattan Plaza, Level lB, -5- 9 Institutional Trust Window, New York, New York 10081 (for payments, exchanges and transfers) in the Borough of Manhattan, The City of New York (together, the "Corporate Trust Office"), as fiscal agent of the Issuer in respect of the Securities upon the terms and subject to the conditions herein set forth, and The Chase Manhattan Bank, N.A. hereby accepts such appointment. The Chase Manhattan Bank, N.A., and any successor or successors as such fiscal agent qualified and appointed in accordance with Section 9 hereof, are herein called the "Fiscal Agent". The Fiscal Agent shall have the powers and authority granted to and conferred upon it in the Securities and hereby and such further powers and authority to act on behalf of the Issuer as may be mutually agreed upon by the Issuer and the Fiscal Agent. The Fiscal Agent shall keep a copy of this Agreement available for inspection during normal business hours at its Corporate Trust Office. The Fiscal Agent or any Paying Agent (as defined below) shall also act as Transfer Agent (as defined below). All of the terms and provisions with respect to such powers and authority contained in the Securities are subject to and governed by the terms and provisions hereof. The Issuer may, at its discretion, appoint one or more agents (a "Paying Agent" or "Paying Agents") for the payment, to the extent permitted under the Payment Restrictions, of the principal of and any interest on the Securities, and one or more agents (a "Transfer Agent" or "Transfer Agents") for the transfer and exchange of Securities, at such place or places as the Issuer may determine; provided, however, that the Issuer shall at all times maintain a Paying Agent and Transfer Agent in the Borough of Manhattan, The City of New York (which Paying Agent and Transfer Agent may be the Fiscal Agent) and in Europe (which, so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, shall include an office or agency in Luxembourg). The Issuer hereby initially appoints the Fiscal Agent at its Corporate Trust Office as principal Paying Agent, Transfer Agent, authenticating agent and securities registrar, and the Fiscal Agent hereby accepts such appointment. The Issuer also hereby initially appoints Chase Manhattan Bank Luxembourg, S.A. at its office at 5 Rue Plaetis L-2338, Luxembourg as Paying Agent and Transfer Agent, and Chase Manhattan Bank Luxembourg, S.A. hereby accepts such appointment. Each Transfer Agent shall act as a security registrar and there shall be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as the Issuer may prescribe, the Issuer shall provide for the registration of Securities and the registration of transfers of Securities. The Issuer -6- 10 shall promptly notify the Fiscal Agent of the name and address of any other Paying Agent or Transfer Agent appointed by it and of the country or countries in which a Paying Agent or Transfer Agent may act in that capacity, and will notify the Fiscal Agent of the resignation or termination of any such Paying Agent or Transfer Agent. Subject to the provisions of Section 9(c) hereof, the Issuer may vary or terminate the appointment of any such Paying Agent or Transfer Agent at any time and from time to time upon giving not less than 90 days' notice to such Paying Agent or Transfer Agent, as the case may be, and to the Fiscal Agent. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent will act to be provided to holders of Securities. 3. Authentication. The Fiscal Agent is authorized, upon receipt of Securities duly executed on behalf of the Issuer for the purposes of the original issuance of Securities, (i) to authenticate said Securities in an aggregate principal amount not in excess of $400,000,000 in the case of the Notes scheduled to mature 2003 and $300,000,000 in the case of the Notes scheduled to mature 2023, and to deliver said Securities in accordance with the written order or orders of the Issuer signed on its behalf by an Authorized Officer and (ii) thereafter to authenticate and deliver Securities in accordance with the provisions therein and hereinafter set forth. The Fiscal Agent may, with the consent of the Issuer, appoint by an instrument or instruments in writing one or more agents (which may include itself) for the authentication of the Securities and, with such consent, vary or terminate any such appointment upon written notice and approve any change in the office through which any authenticating agent acts. The Issuer (by written notice to the Fiscal Agent and the authenticating agent whose appointment is to be terminated) may also terminate any such appointment at any time. The Fiscal Agent hereby agrees to solicit written acceptances from the entities concerned (in form and substance satisfactory to the Issuer) of such appointments. In its acceptance of such appointment, each such authenticating agent shall agree to act as an authenticating agent pursuant to the terms and conditions of this Agreement. -7- 11 4. Payment and Cancellation. (a) Payment. For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer, subject to the Payment Restrictions, shall provide to the Fiscal Agent, in immediately available funds on or prior to 10:00 a.m., New York time, on each date on which a payment of principal of or any interest on the Securities shall be scheduled, as set forth in the text of the Securities, such amount, in U.S. dollars, as is necessary to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on the Securities in the manner, at the times and for the purposes set forth herein and in the text of said Securities; provided that (1) any permitted payment of interest on the Securities may be made by check mailed to the persons (the "registered owners") in whose names such Securities are registered on the register maintained pursuant to Section 6 hereof at the close of business on the record dates designated in the text of the Securities and (2) the Issuer will not provide any such funds to the Fiscal Agent prior to such time as the relevant payment of principal or interest is approved by the Superintendent of Insurance of the State of New York (the "Superintendent"). Permitted payments of principal of or any interest on the Securities may be made, in the case of a registered owner of at least $5,000,000 aggregate principal amount of Securities, by wire transfer to an account maintained by the payee with a bank as specified in the text of the Securities if such registered owner so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payment is to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 hereof for the payment, subject to the Payment Restrictions, from funds so paid by the Issuer of the principal of and any interest on the Securities in the manner, at the times and for the purposes set forth herein and in the text of said Securities. Notwithstanding the foregoing, the Issuer may provide directly to a Paying Agent funds for the payment, subject to the Payment Restrictions, of the principal thereof and interest payable -8- 12 thereon under an agreement with respect to such funds containing substantially the same terms and conditions set forth in this Section 4(a) and in Section 8(b) hereof; and the Fiscal Agent shall have no responsibility with respect to any funds so provided by the Issuer to any such Paying Agent. Payments of principal of and interest on the Securities shall be made in the manner set forth in the Securities, including the Payment Restrictions set forth therein. (b) Cancellation. All Securities delivered to the Fiscal Agent (or any other Agent appointed by the Issuer pursuant to Section 2 hereof) for payment, redemption or registration of transfer or exchange as provided herein or in the Securities shall be marked "cancelled" and, in the case of any other such Agent, forwarded to the Fiscal Agent. All such Securities shall be destroyed by the Fiscal Agent or such other person as may be jointly designated by the Issuer and the Fiscal Agent, which shall thereupon furnish certificates of such destruction to the Issuer. 5. Global Securities. (a) Notwithstanding any other provisions of this Agreement or the Securities, a global Security shall not be exchanged in whole or in part for a Security registered in the name of any person other than the U.S. Depositary or one or more nominees thereof, provided that a global Security may also be exchanged for Securities registered in the names of any person designated by the U.S. Depositary in the event that (i) the U.S. Depositary has notified the Issuer that it is unwilling or unable to continue as U.S. Depositary for such global Security or such U.S. Depositary has ceased to be a "clearing agency" registered under the Securities Exchange Act of 1934 (as may be hereafter amended from time to time, the "Exchange Act"), (ii) an event described in paragraph 14(a) or the first sentence of paragraph 14(b) of the Securities has occurred and is continuing with respect to the Securities, (iii) a request for certificates has been made upon 60 days' prior written notice given to the Fiscal Agent in accordance with the U.S. Depositary's customary procedures and a copy of such notice has been received by the Issuer from the Fiscal Agent, or (iv) the holder of an interest (other than the initial purchaser thereof) in such global Security has notified the Fiscal Agent and registrar in writing that it is transferring such beneficial interest to an Accredited Investor who is not a "qualified institutional buyer" within the meaning of Rule 144A, who is required to hold its beneficial interest in the Securities -9- 13 in the form of a definitive Security; provided, that no exchange may be made pursuant to clause (iii) or (iv) in respect of any interest in the Regulation S Global Security unless and until the certifications required by Section 1(b) (iii) (B) above have been provided in respect of such interest. Any global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part and any global Security exchanged pursuant to clause (ii), (iii) or (iv) above may be exchanged in whole or from time to time in part as directed by the U.S. Depositary. Any Security issued in exchange for a global Security or any portion thereof shall be a global Security, provided that any such Security so issued that is registered in the name of a person other than the U.S. Depositary or a nominee thereof shall not be a global Security. (b) Securities issued in exchange for a global Security or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the U.S. Depositary shall designate and shall bear the applicable legends provided for herein. Any global Security to be exchanged in whole shall be surrendered by the U.S. Depositary to the Transfer Agent located in the Borough of Manhattan, The City of New York, to be so exchanged. With regard to any global Security to be exchanged in part, either such global Security shall be so surrendered for exchange or, if the Fiscal Agent is acting as custodian for the U.S. Depositary or its nominee with respect to such global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Fiscal Agent. Upon any such surrender or adjustment, the Fiscal Agent shall authenticate and deliver the Security issuable on such exchange to or upon the order of the U.S. Depositary or an authorized representative thereof. Any Security delivered in exchange for the Restricted Global Security or any portion thereof shall, except as otherwise provided by clause (iii) of Section 6(c), bear the legend regarding transfer restrictions applicable to the Restricted Global Security set forth on the form of Security attached as Exhibit B hereto. (c) Subject to the provisions of Section 1(c) above, the registered holder may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any -10- 14 action which a holder is entitled to take under this Fiscal Agency Agreement or the Securities. In the event of the occurrence of any of the events specified in paragraph (a) of this Section 5, the Issuer will promptly make available to the Fiscal Agent a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. 6. Registration, Transfer and Exchange of Securities. (a) General. The Fiscal Agent, as agent of the Issuer for this purpose, shall maintain at its Corporate Trust Office in the Borough of Manhattan, The City of New York, a register of Securities for the registration of Securities and the transfers and exchanges thereof. Subject to the provisions of this Section 6, upon presentation for transfer or exchange of any Security at the office of any Transfer Agent accompanied by a written instrument of transfer or exchange in the form approved by the Issuer (it being understood that, until notice to the contrary is given to holders of Securities, the Issuer shall be deemed to have approved the form of instrument of transfer or exchange, if any, printed on any Security), executed by the registered holder, in person or by such holder's attorney thereunto duly authorized in writing, such Security shall be transferred upon the register for the Securities, and a new Security shall be authenticated and issued in the name of the transferee. (b) Transfers of Restricted Definitive Securities. If a holder of definitive, certificated Securities of any Series that bear or are required to bear the legends set forth in the form of Security attached as Exhibit A hereto ("Restricted Definitive Securities") wishes at any time to transfer such Restricted Definitive Securities or to exchange such Restricted Definitive Securities, such exchange or transfer may be effected only in accordance with the provisions of this Section 6 (b). Upon the receipt by the Fiscal Agent, as Transfer Agent, at its office in The City of New York of (i) a Restricted Definitive Security accompanied by a written and executed instrument of transfer or exchange as provided in Section 6(a) and (ii) the following additional information and documents, as applicable: (l) if such Restricted Definitive Security is owned by the holder thereof and is being exchanged, without transfer, or if such Restricted Definitive Security is being transferred pursuant to an exemption -11- 15 from registration in accordance with Regulation S under the Act, a certification from such holder to that effect, substantially in the form of Exhibit C hereto; or (2) if the Restricted Definitive Security being transferred or exchanged contains a restrictive legend, certification to the effect that such transfer or exchange is in accordance with the restrictions contained in such legend, if required by the Fiscal Agent, the Fiscal Agent shall register the transfer of such Restricted Definitive Security or exchange such Restricted Definitive Security for an equal principal amount of Restricted Definitive Securities of other authorized denominations. To permit registrations of transfers and exchanges, the Issuer shall execute and the Fiscal Agent (or an authenticating agent appointed pursuant to Section 2) shall authenticate and deliver definitive Securities at the Fiscal Agent's or any Transfer Agent's request. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any transfer tax or other governmental charge payable in connection with any registration of transfer or exchange. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, subject to the Payment Restrictions, evidencing the same debt, and the applicable provisions of this Fiscal Agency Agreement shall apply equally thereto, as the Securities surrendered upon such registration of transfer or exchange. (c) Transfer of Global Securities and Interests Therein. Notwithstanding any other provision of this Agreement or the Securities, transfers of a global Security, in whole or in part, and transfer of interests therein of the kind described in clauses (ii), (iii) or (iv) below, shall be made only in accordance with this Section 6(c), and all transfers of an interest in the Regulation S Global Security shall comply with Section 6(c) (iv) or (v) below. (i) General. A global Security may not be transferred, in whole or in part, to any person other than the U.S. Depositary or a nominee thereof, and no such transfer to any such other person may be registered; provided that this clause (i) shall not -12- 16 prohibit any transfer of a Security that is issued in exchange for a global Security but is not itself a global Security. No transfer of a Security to any person shall be effective under this Agreement or the Securities unless and until such Security has been registered in the name of such person. Nothing in this Section 6(c)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a global Security effected in accordance with the other provisions of this Section 6(c). (ii) Restricted Global Security to Regulation S Global Security. If the holder of a beneficial interest in the Restricted Global Security wishes at any time to transfer such interest to a person who wishes to take delivery thereof in the form of a beneficial interest in the Regulation S Global Security, such transfer may be effected, subject to the rules and procedures of the U.S. Depositary, Euroclear and CEDEL, in each case to the extent applicable (the "Applicable Procedures"), only in accordance with the provisions of this Section 6(c)(ii). Upon receipt by the Fiscal Agent, as Transfer Agent, at its office in The City of New York of (l) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Fiscal Agent to credit or cause to be credited to a specified Agent Member's account a beneficial interest in the Regulation S Global Security in a principal amount equal to that of the beneficial interest in the Restricted Global Security to be so transferred, (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member (and the Euroclear or CEDEL account, as the case may be) to be credited with, and the account of the Agent Member to be debited for, such beneficial interest and (3) a certificate in substantially the form of Exhibit D attached hereto given by the holder of such beneficial interest, the Fiscal Agent, as Transfer Agent, shall instruct the U.S. Depositary to reduce the principal amount of the Restricted Global Security, and to increase the principal amount of the Regulation S Global Security, by the principal amount of the beneficial interest in the Restricted Global Security to be so transferred, and to credit or cause to be credited to the account of the person specified in such instructions (which shall be the Agent Member for Euroclear or CEDEL or both, as the case may be) a beneficial interest in the Regulation S Global Security having a principal amount equal to the amount by which -13- 17 the principal amount of the Restricted Global Security was reduced upon such transfer. (iii) Restricted Global Security to Unrestricted Global Security. If the holder of a beneficial interest in the Restricted Global Security wishes at any time to transfer such interest to a person who wishes to take delivery thereof in the form of a beneficial interest in the Unrestricted Global Security, such transfer may be effected, subject to the Applicable Procedures only in accordance with this Section 6(c)(iii). Upon receipt by the Fiscal Agent, as Transfer Agent, at its office in The City of New York of (l) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Fiscal Agent to credit or cause to be credited to a specified Agent Member's account a beneficial interest in the Unrestricted Global Security in a principal amount equal to that of the beneficial interest in the Restricted Global Security to be so transferred, (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member and, in the case of any such transfer pursuant to Regulation S, the Euroclear or CEDEL account for which such Agent Member's account is held) to be credited with, and the account of the Agent Member to be debited for, such beneficial interest and (3) a certificate in substantially the form of Exhibit E attached hereto given by the holder of such beneficial interest, the Fiscal Agent, as Transfer Agent, shall instruct the U.S. Depositary to reduce the principal amount of the Restricted Global Security, and to increase the principal amount of the Unrestricted Global Security, by the principal amount of the beneficial interest in the Restricted Global Security to be so transferred, and to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Unrestricted Global Security having a principal amount equal to the amount by which the principal amount of the Restricted Global Security was reduced upon such transfer. (iv) Regulation S Global Security or Unrestricted Global Security to Restricted Global Security. If the holder of a beneficial interest in the Regulation S Global Security or the Unrestricted Global Security wishes at any time to transfer such interest to a person who wishes to take delivery thereof in the form of a beneficial interest in the Restricted Global Security, such transfer may be effected, subject to the -14- 18 Applicable Procedures and only in accordance with this Section 6(c)(iv). Upon receipt by the Fiscal Agent, as Transfer Agent, at its office in The City of New York of (1) written instructions given in accordance with the Applicable Procedures from an Agent Member, directing the Fiscal Agent, as Transfer Agent, to credit or cause to be credited to a specified Agent Member's account a beneficial interest in the Restricted Global Security equal to that of the beneficial interest in the Regulation S Global Security or the Unrestricted Global Security to be so transferred and (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member to be credited with, and the account of the Agent Member (or, if such account is held for Euroclear or CEDEL, the Euroclear or CEDEL account, as the case may be) to be debited for, such beneficial interest, and (3) with respect to a transfer of a beneficial interest in the Regulation S Global Security (but not the Unrestricted Global Security), a certificate substantially in the form of Exhibit F hereto given by the holder of such beneficial interest, the Fiscal Agent, as Transfer Agent, shall instruct the U.S. Depositary to reduce the principal amount of the Regulation S Global Security or the Unrestricted Global Security as the case may be and increase the principal amount of the Restricted Global Security, by the principal amount of the beneficial interest in the Regulation S Global Security or the Unrestricted Global Security to be so transferred, and to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Restricted Global Security having a principal amount equal to the amount by which the principal amount of the Regulation S Global Security or the Unrestricted Global Security was reduced upon such transfer. (v) Interests in Recrulation S Global Security to be Held Through Euroclear or CEDEL. Until the later of the termination of the Restricted Period and the provision of the certifications required by Section 1(b)(iii)(B) hereof in respect of any interest in the Regulation S Global Security, such interests may be held only through Agent Members acting for and on behalf of Euroclear and CEDEL, and any purchaser of Securities in a sale made in reliance on Regulation S may not sell or offer to sell such Securities within the United States or to a U.S. person or for the account or benefit of a U.S. person within the meaning of Regulation S, provided, that this clause (v) shall -15- 19 not prohibit any transfer in accordance with Section 6(c) (iv) hereof. (vi) Other Exchanges. In the event that a global Security or any portion thereof is exchanged for Securities other than global Securities, such other Securities may in turn be exchanged (on transfer or otherwise) for Securities that are not global Securities or for beneficial interests in a global Security (if any is then outstanding) only in accordance with such procedures, which shall be substantially consistent with the provisions of clauses (i) through (v) above (including the certification requirements intended to insure that transfers of beneficial interests in a global Security comply with Rule 144A, Rule 144 or Regulation S under the Act, as the case may be) and any Applicable Procedures, as may be from time to time adopted by the Issuer and the Fiscal Agent; provided that any beneficial interest in the Regulation S Global Security shall not be exchangeable for a definitive Security until the expiration of the Restricted Period and unless and until the certifications required by Section 1(b)(iii)(B) have been provided in respect of such interest. (d) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Security register. No service charge shall be made for any registration of transfer or exchange of the Securities, but the Fiscal Agent may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith and any other amounts required to be paid by the provisions of the Securities. (e) Any Transfer Agent appointed pursuant to Section 2 hereof shall provide to the Fiscal Agent such information as the Fiscal Agent may reasonably require in connection with the delivery by such Transfer Agent of Securities upon transfer or exchange of Securities. (f) No Transfer Agent shall be required to make registrations of transfer or exchange of Securities during any periods designated in the text of the Securities as periods during which such registration of transfer and exchanges need not be made. (g) If Securities are issued upon the transfer, exchange or replacement of Securities not bearing the legends required, as applicable, by the form of Security attached as Exhibit A or Exhibit B hereto (collectively, the -16- 20 "Legend"), the Securities so issued shall not bear the Legend. If Securities are issued upon the transfer, exchange or replacement of Securities bearing the Legend, or if a request is made to remove the Legend on a Security, the Securities so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Issuer such satisfactory evidence, which may include an opinion of independent counsel licensed to practice law in the State of New York, as may be reasonably required by the Issuer that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Act or that such Securities are not "restricted securities" within the meaning of Rule 144 under the Act. Upon provision of such satisfactory evidence, the Fiscal Agent, at the direction of the Issuer, shall authenticate and deliver a Security that does not bear the Legend. The Issuer agrees to indemnify the Fiscal Agent for, and to hold it harmless against, any loss, liability or expense, including the fees and expenses of counsel, reasonably incurred, arising out of or in connection with actions taken or omitted by the Fiscal Agent in reliance upon such legal opinion and the delivery of a Security that does not bear a Legend. (h) With the prior approval of the Superintendent, the Issuer and any person that constitutes an affiliate of the Issuer within the meaning of the Act may at any time purchase Securities in the open market or otherwise at any price, for its own account or the account of others. Any Security so purchased by the Issuer or any such affiliate for its own account shall be promptly surrendered to the Fiscal Agent for cancellation and shall not thereafter be re-issued or resold. (i) The Notes scheduled to mature 2003, may not be redeemed at the option of the Issuer or any holder of such Notes. Subject to the Payment Restrictions, including the approval of the Superintendent pursuant to Section 1307, the Notes scheduled to mature 2023 may be redeemed at the election of the Issuer, in whole or in part. In the case of any redemption of Notes scheduled to mature 2023, not less than 45 days (unless shorter notice is acceptable to the Fiscal Agent) before the date designated for redemption, the Issuer shall give notice to the Fiscal Agent of its election to redeem the Notes scheduled to mature 2023 on the date specified in such notice, stating the aggregate principal amount of such Securities to be redeemed on such date. The Fiscal Agent shall cause notice of redemption to be given in the name of and at the expense of the Issuer in the manner provided in such Securities. If less than all the Notes -17- 21 scheduled to mature 2023 are to be redeemed, the particular Securities to be redeemed shall be selected, subject to the restrictions set forth in Section 1(d) hereof, not less than 30 days prior to the date such Securities are to be redeemed by the Fiscal Agent from the Outstanding Notes scheduled to mature 2023 not previously called for redemption, by such method as the Fiscal Agent shall deem fair and appropriate, which may provide for the selection for redemption of portions (equal to $250,000 or any integral multiple thereof) of the principal amount of the Notes scheduled to mature 2023 of a denomination larger than $500,000. Upon any partial redemption, subject to the restrictions set forth in Section 1(d) hereof, the Issuer will issue and the Fiscal Agent shall authenticate and deliver in exchange thereof or one or more registered Securities, of any authorized denomination as requested by the holder, in aggregate principal amount equal to the unredeemed portion of the principal of such Security. The Notes may not be redeemed at the option of a holder thereof. 7. Delivery of Certain Information. (a) Rule 144A Information. At any time when the Issuer is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a holder of a Security or beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished "Rule 144A Information" (as defined below to such holder, or to a prospective purchaser of such Security or interest designated by such holder, in order to permit compliance by such holder with Rule 144A under the Act in connection with the resale of such Security by such holder. "Rule l44A Information" shall be such information as is specified pursuant to paragraph (d)(4) of Rule 144A (or any successor provision thereto), as such provisions (or successor provision) may be amended from time to time. (b) Periodic Reports. The Issuer shall deliver (or shall cause the Fiscal Agent to deliver) to each holder of a Security, promptly after such items are available, one copy of each annual report to policyholders of the Issuer. In addition, upon the written request of a holder of a Security or beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished to such holder one copy of the annual and quarterly statutory basis financial statements of the Issuer as filed by the Issuer with the New York Department of Insurance. -18- 22 8. Conditions of Fiscal Agent's Obligations. The Fiscal Agent accepts its obligations herein set forth upon the terms and conditions hereof, including the following, to all of which the Issuer agrees and all of which are applicable to the Securities and the holders from time to time thereof: (a) Compensation and Indemnity. The Fiscal Agent shall be entitled to reasonable compensation as agreed with the Issuer for all services rendered by it, and the Issuer agrees promptly to pay such compensation and to reimburse the Fiscal Agent for the reasonable out-of-pocket expenses (including reasonable counsel fees and expenses) incurred by it in connection with or arising out of its services hereunder, or the issuance of the Securities and their offering and sale. The Issuer also agrees to indemnify the Fiscal Agent for, and to hold it harmless against, any loss, damages, claim, liability or expense, incurred without negligence or bad faith, arising out of or in connection with its acting as Fiscal Agent hereunder, as well as the reasonable costs and expenses of defending against any claim of liability in the premises. The obligations of the Issuer under this Section 8(a) shall survive payment of all the Securities or the resignation or removal of the Fiscal Agent. (b) Agency. In acting under this Agreement and in connection with the Securities, the Fiscal Agent is acting solely as agent of the Issuer and does not assume any responsibility for the correctness of the recitals in the Securities (except for the correctness of the statement in its certificate of authentication thereon) or any obligation or relationship of agency or trust, for or with any of the owners or holders of the Securities, except that all funds held by the Fiscal Agent for the payment of principal of and any interest on the Securities, to the extent permitted under the Payment Restrictions, shall be held in trust for such owners or holders, as the case may be, as set forth herein and in the Securities; provided, however, that monies held in respect of the Securities remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor or shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer. Upon such repayment, the aforesaid trust with respect to the Securities shall terminate and all liability of the Fiscal Agent and Paying Agents with respect to such funds shall thereupon cease. -19- 23 (c) Advice of Counsel. The Fiscal Agent and any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof may consult with their respective counsel or other independent counsel satisfactory to them, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by them hereunder in good faith and without negligence and in accordance with such opinion. (d) Reliance. The Fiscal Agent and any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof each shall be protected and shall incur no liability for or in respect of any action taken or thing suffered by it in reliance upon any Security, notice, direction, consent, certificate, affidavit, statement, or other paper or document believed by it, in good faith and without negligence, to be genuine and to have been passed upon or signed by the proper parties. (e) Interest in Securities, etc. The Fiscal Agent, any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof and their respective officers, directors and employees may become the owners of, or acquire any interest in, any Securities, with the same rights that they would have if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person, and may engage or be interested in any financial or other transaction with the Issuer, and may act on, or as depositary, trustee or agent for, any committee or body of holders of Securities or other obligations of the Issuer, as freely as if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person. (f) Non-Liability for Interest. Subject to any agreement between the Issuer and the Fiscal Agent to the contrary, the Fiscal Agent shall not be under any liability for interest on monies at any time received by it pursuant to any of the provisions of this Agreement or the Securities. (g) Certifications. Whenever in the administration of this Agreement the Fiscal Agent shall deem it desirable that a matter of fact be proved or established prior to taking, suffering or omitting any action hereunder, the Fiscal Agent (unless other evidence be herein specifically prescribed) may, in the absence of bad faith or negligence on its part, rely upon a certificate signed by an Authorized Officer and delivered to the Fiscal Agent as to such matter of fact. -20- 24 (h) No Implied Obligations. The duties and obligations of the Fiscal Agent and the Issuer with respect to matters governed by this Agreement shall be determined solely by the express provisions hereof, and neither the Fiscal Agent nor the Issuer shall be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement and the Securities, as applicable, and no implied covenants or obligations shall be read into this Agreement or the Securities against either the Fiscal Agent or the Issuer. Nothing in this Agreement shall be construed to require the Fiscal Agent to advance or expend its own funds. 9. Resignation and Appointment of Successor. (a) Fiscal Agent and Paying Agent. The Issuer agrees, for the benefit of the holders from time to time of the Securities, that there shall at all times be a Fiscal Agent hereunder which shall be a bank or trust company organized and doing business under the laws of the United States of America or the State of New York, in good standing and having an established place of business in the Borough of Manhattan, The City of New York, and authorized under such laws to exercise corporate trust powers, until all the Securities authenticated and delivered hereunder (i) shall have been delivered to the Fiscal Agent for cancellation or (ii) have become payable, with the approval of the Superintendent, and monies sufficient to pay the full principal of and any interest remaining unpaid on the Securities shall have been made available for payment and either paid or returned to the Issuer as provided herein and in such Securities. (b) Resignation. The Fiscal Agent may at any time resign by giving written notice to the Issuer of such intention on its part, specifying the date on which its desired resignation shall become effective, provided that such date shall not be less than 60 days from the date on which such notice is given, unless the Issuer agrees to accept shorter notice. The Fiscal Agent hereunder may be removed at any time by the filing with it of an instrument in writing signed on behalf of the Issuer and specifying such removal and the date when it shall become effective. Notwithstanding the dates of effectiveness of resignation or removal, as the case may be, to be specified in accordance with the preceding sentences, such resignation or removal shall take effect only upon the appointment by the Issuer, as hereinafter provided, of a successor Fiscal Agent (which, to qualify as such, shall for all purposes hereunder be a bank or trust company organized and doing business under the laws of the United States of America or of the State of -21- 25 New York, in good standing and having and acting through an established place of business in the Borough of Manhattan, The City of New York, authorized under such laws to exercise corporate trust powers and having a combined capital and surplus in excess of $50,000,000) and the acceptance of such appointment by such successor Fiscal Agent. Upon its resignation or removal, the Fiscal Agent shall be entitled to payment by the Issuer pursuant to Section 8 hereof of compensation for services rendered and to reimbursement of reasonable out-of-pocket expenses incurred hereunder. (c) Successors. In case at any time the Fiscal Agent (or any Paying Agent if such Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent) shall resign, or shall be removed, or shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or shall file a voluntary petition in bankruptcy or make an assignment for the benefit of its creditors or consent to the appointment of a receiver of all or any substantial part of its property, or shall admit in writing its inability to pay or meet its debts as they severally mature, or if a receiver of it or of all or any substantial part of its property shall be appointed, or if an order of any court shall be entered approving any petition filed by or against it under the provisions of applicable receivership, bankruptcy, insolvency or other similar legislation, or if any public officer shall take charge or control of it or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor Fiscal Agent or Paying Agent, as the case may be, qualified as aforesaid, shall be appointed by the Issuer by an instrument in writing, filed with the successor Fiscal Agent or Paying Agent, as the case may be, and the predecessor Fiscal Agent or Paying Agent, as the case may be. Upon the appointment as aforesaid of a successor Fiscal Agent or Paying Agent, as the case may be, and acceptance by such successor of such appointment, the Fiscal Agent or Paying Agent, as the case may be, so succeeded shall cease to be Fiscal Agent or Paying Agent, as the case may be, hereunder. If no successor Fiscal Agent or other Paying Agent, as the case may be, shall have been so appointed by the Issuer and shall have accepted appointment as hereinafter provided, and, in the case of such other Paying Agent, if such other Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent, then any holder of a Security who has been a bona fide holder of a Security for at least six months (which Security, in the case of such other Paying Agent, is referred to in this sentence), on behalf of himself and all others similarly -22- 26 situated, or the Fiscal Agent, may petition any court of competent jurisdiction for the appointment of a successor fiscal or paying agent, as the case may be. The Issuer shall give prompt written notice to each other Paying Agent of the appointment of a successor Fiscal Agent. (d) Acknowledgement. Any successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to the Issuer an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as Fiscal Agent hereunder and all provisions hereof shall be binding on such successor Fiscal Agent, and such predecessor, upon payment of its compensation and reimbursement of its disbursements then unpaid, shall thereupon become obligated to transfer, deliver and pay over, and such successor Fiscal Agent shall be entitled to receive, all monies, securities, books, records or other property on deposit with or held by such predecessor as Fiscal Agent hereunder. (e) Merger. Consolidation. etc. Any bank or trust company into which the Fiscal Agent hereunder may be merged, or resulting from any merger or consolidation to which the Fiscal Agent shall be a party, or to which the Fiscal Agent shall sell or otherwise transfer all or substantially all the assets and business of the Fiscal Agent, provided that it shall be qualified as aforesaid, shall be the successor Fiscal Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. 10. Meetings and Amendments. (a) Calling of Meeting, Notice and Quorum. A meeting of holders of Securities of a Series may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Securities of such Series to be made, given or taken by holders of Securities of such Series or to modify, amend or supplement the terms of the Securities of such Series or this Agreement as hereinafter provided, and subject to the requirement hereinafter set forth that the Issuer and the Fiscal Agent may, only with the prior approval of the Superintendent, modify, amend or supplement this Fiscal Agency Agreement or the terms of the Securities or give consents or waivers or take other actions with respect thereto. The Fiscal Agent may at any time call a meeting of -23- 27 holders of Securities of such Series for any such purpose to be held at such time and at such place in the Borough of Manhattan, The City of New York as the Fiscal Agent shall determine. Notice of every meeting of holders of Securities of a Series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given as provided in the terms of the Securities of such Series, not less than 30 nor more than 60 days prior to the date fixed for the meeting (provided that, in the case of any meeting to be reconvened after adjournment for lack of a quorum, such notice shall be so given not less then 15 nor more than 60 days prior to the date fixed for such meeting). In case at any time the Issuer or the holders of at least 10% in aggregate principal amount of the Outstanding Securities (as defined in subsection (d) of this Section) of a Series shall have requested the Fiscal Agent to call a meeting of the holders of Securities of such Series for any such purpose, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, the Fiscal Agent shall call such meeting for such purposes by giving notice thereof. To be entitled to vote at any meeting of holders of Securities of a Series, a person shall be a holder of Outstanding Securities of such Series or a person duly appointed by an instrument in writing as proxy for such a holder. The persons entitled to vote a majority in principal amount of the Outstanding Securities of a Series shall constitute a quorum. At the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the Outstanding Securities of a Series shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. The Fiscal Agent may make such reasonable and customary regulations consistent herewith as it shall deem advisable for any meeting of holders of Securities of a Series with respect to the proof of the appointment of proxies in respect of holders of Securities of such Series, the record date for determining the registered owners of Securities of such Series who are entitled to vote at such meeting (which date shall be designated by the Fiscal Agent and set forth in the notice calling such meeting hereinabove referred to and which shall be not less than 15 nor more than 60 days prior to such meeting, provided that nothing in this paragraph shall be construed to render ineffective any action taken by holders of the requisite principal amount of Outstanding Securities of a Series on the date such action is taken), the adjournment and chairmanship of such meeting, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other -24- 28 evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. (b) Approval. (i) At any meeting of holders of Securities of a Series duly called and held as specified above, upon the affirmative vote, in person or by proxy thereunto duly authorized in writing, of the holders of not less than a majority in aggregate principal amount of the Securities of the Series then Outstanding meeting, or (ii) with the written consent of the holders of not less than a majority in aggregate principal amount of the Securities of such Series then Outstanding, in each case (i) or (ii) the Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, modify, amend or supplement the terms of the Securities of such Series or this Agreement in any way, and the holders of Securities of such Series may make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of future compliance or past failure to perform) or other action provided by this Agreement or the Securities of such Series to be made, given or taken by holders of Securities of such Series; provided, however, that any such action, modification, amendment or supplement to be effected pursuant to clause (i) of this subsection (b) shall be approved by the holders of not less than 25% of the aggregate principal amount of Securities of such Series then Outstanding; and provided, further, that no such action, modification, amendment or supplement, however effected, may, without the consent of the holder of each Security of such Series affected thereby, (A) change the Scheduled Interest Payment Date or Scheduled Maturity Date (in each case, as defined in the Securities of such Series) of the principal of or any installment of interest on any Security of such Series, (B) reduce the principal amount of any Security of such Series or the interest rate thereon, or, if applicable, the premium payable, if any, with respect to a redemption thereof, (C) change the currency in which, or the required place at which, payment with respect to interest or principal in respect of the Securities of such Series is payable, (D) change the Issuer's obligations under Section 7(a) hereof in any manner adverse to the interests of the holder of a Security of such Series, (E) impair the right of a holder of a Security of such Series to institute suit for the enforcement of any payment, if such payment is permitted under the Payment Restrictions, on or with respect to any Security of such Series, (F) reduce the above-stated percentage of the principal amount of Outstanding Securities of such Series the vote or consent of the holders of which is necessary to modify, amend or supplement this Agreement or the terms and conditions of the Securities of such Series -25- 29 or to make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of any future compliance or past failure to perform) or other action provided hereby or thereby to be made, taken or given, (G) reduce the percentage in aggregate principal amount of Outstanding Securities of such Series that constitutes the quorum required at any meeting of holders of Securities of such Series at which a resolution is adopted, (H) change the restrictions on payment set forth in the Securities in a manner adverse to such holder, or (I) change the provisions of Paragraph 10 of the Securities in a manner adverse to such holder. The Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, without the vote or consent of any holder of Securities, amend this Agreement or the Securities of a Series for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities of such Series, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities of such Series or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Securities of such Series as permitted by this Agreement and the Securities of such Series, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities of such Series to the extent required by any change in applicable law or regulation, or the interpretation thereof, or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Securities of such Series in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder. It shall not be necessary for the vote or consent of the holders of Securities to approve the particular form of any proposed modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action, but it shall be sufficient if such vote or consent shall approve the substance thereof. -26- 30 The Fiscal Agent may request an opinion of counsel in connection with any amendment or supplement entered into hereunder. (c) Binding Nature of Amendments, Notices, Notations, etc. Any instrument given by or on behalf of any holder of a Security of a Series in connection with any consent to or vote for any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action shall be irrevocable once given and shall be conclusive and binding on all subsequent holders of such Security or any Security issued directly or indirectly in exchange or substitution thereof or in lieu thereof. Any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10 (b) hereof shall be conclusive and binding on all holders of Securities of a Series, whether or not they have given such consent or cast such vote or were present at any meeting, and whether or not notation of such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action is made upon the Securities of such Series. Notice of any modification or amendment of, supplement to, or request, demand, authorization, direction, notice, consent, waiver or other action with respect to the Securities of a Series or this Agreement (other than for purposes of curing any ambiguity or of curing, correcting or supplementing any defective provision hereof or thereof) shall be given to each holder of Securities affected thereby, in all cases as provided in the Securities of such Series. Securities of a Series authenticated and delivered after the effectiveness of any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action may bear a notation in the form approved by the Fiscal Agent and the Issuer as to any matter provided for in such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action. New Securities of such Series modified to conform, in the opinion of the Fiscal Agent and the Issuer, to any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10(b) hereof may be prepared by the Issuer, authenticated by the Fiscal Agent and delivered in exchange for Outstanding Securities of such Series. -27- 31 (d) "Outstanding" Defined. For purposes of the provisions of this Agreement and the Securities, any Security authenticated and delivered pursuant to this Agreement shall, as of any date of determination, be deemed to be "Outstanding", except: (i) Securities theretofore cancelled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation; (ii) Securities which have been called for redemption in accordance with their terms or which have become payable, to the extent permitted under the Payment Restrictions, at the Scheduled Maturity Date or otherwise, and with respect to which, in each case, monies sufficient to pay the principal thereof and any interest thereon shall have been paid; and (iii) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to this Agreement; provided, however, that in determining whether the holders of the requisite principal amount of Outstanding Securities of a Series are present at a meeting of holders of Securities of such Series for quorum purposes or have consented to or voted in favor of any request, demand, authorization, direction, notice, consent, waiver, amendment, modification or supplement hereunder, Securities of such Series owned directly or indirectly by the Issuer, or any affiliate of the Issuer, shall be disregarded and deemed not to be Outstanding. 11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. 12. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing, shall specify this Agreement by name and date and shall identify the Securities, and if sent to the Fiscal Agent shall be delivered, transmitted by facsimile or telegraphed to it at The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, 3rd Floor, Brooklyn, New York 11245, Attention: James D. Heaney, Corporate Trust Administration, telephone: (718) 242-7276, fax: (718) 242-5885, and if sent to the Issuer shall be delivered, transmitted by facsimile or -28- 32 telegraphed to it at Metropolitan Life Insurance Company, One Madison Avenue, New York, New York 10010, Attention: Senior Vice President and Treasurer, telephone: (212) 578-5705, fax: (212) 578-3910. The foregoing addresses for notices or communications may be changed by written notice given by the addressee to each party hereto, and the addressee's address shall be deemed changed for all purposes from and after the giving of such notice. If the Fiscal Agent shall receive any notice or demand addressed to the Issuer by the holder of a Security, the Fiscal Agent shall promptly forward such notice or demand to the Issuer. 13. Separability. In case any provision in this Agreement or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 14. Headings. The section headings herein are for convenience of reference only and shall not affect the construction hereof. 15. Counterparts. This Agreement may be executed in one or more counterparts, and by each party separately on a separate counterpart, and each such counterpart when executed and -29- 33 delivered shall be deemed to be an original. Such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Fiscal Agency Agreement as of the date first above written. METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Stewart G. Nagler ------------------------------------ Name: Stewart G. Nagler Title: Senior Vice-President and Chief Financial Officer THE CHASE MANHATTAN BANK, N.A. By: /s/ J. D. Heaney ------------------------------------ Name: J. D. Heaney Title: Vice President Attest: /s/ Josephine Mannino ------------------------- Josephine Mannino Assistant Secretary -30- 34 EXHIBIT A FORM OF DEFINITIVE SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM AND IN ACCORDANCE WITH THE FISCAL AGENCY AGREEMENT, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE FISCAL AGENT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM SUCH REGISTRATION PROVIDED BY RULE 144A UNDER THE ACT (TOGETHER WITH ANY SUCCESSOR PROVISION AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "RULE 144A"). [INCLUDE IF SECURITY IS A RESTRICTED DEFINITIVE SECURITY OR SECURITY ISSUED IN EXCHANGE THEREFOR (UELESS, PURSUANT TO SECTION 6(G) OF THE FISCAL AGENCY AGREEMENT, THE ISSUER DETERMINES THAT THE LEGEND MAY BE REMOVED)] - - THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF METROPOLITAN LIFE INSURANCE COMPANY ("METLIFE") THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A, IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "REGULATION S") UNDER THE ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 TO AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501(a) UNDER THE ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF METLIFE THAT, IF THE HOLDER PROPOSES TO SELL OR TRANSFER THIS SECURITY TO ANY EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF A- 1 35 1974, AS AMENDED), THE HOLDER WILL COMPLY WITH THE RESTRICTIONS SET FORTH IN PARAGRAPH 9 HEREOF. PAYMENTS OF PRINCIPAL (INCLUDING ANY PREMIUM WITH RESPECT TO ANY REDEMPTION) AND INTEREST ON THIS SECURITY MAY ONLY BE MADE OUT OF METLIFE'S FREE AND DIVISIBLE SURPLUS AND WITH THE PRIOR APPROVAL OF THE SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK (THE "SUPERINTENDENT"), IN ACCORDANCE WITH SECTION 1307 OF THE NEW YORK INSURANCE LAW (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "SECTION 1307"). THERE ARE NO GUIDELINES OR INTERPRETATIONS AS TO THE EXTENT OF THE SUPERINTENDENT'S DISCRETION UNDER SECTION 1307 IN DETERMINING WHETHER THE FINANCIAL CONDITION OF METLIFE WARRANTS THE MAKING OF SUCH PAYMENTS. A-2 36 METROPOLITAN LIFE INSURANCE COMPANY % Surplus Note scheduled to mature on _________________ No. R-________ $_________ METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the State of New York (herein called the "Issuer"), for value received, hereby promises to pay, subject to the approval of the Superintendent pursuant to Section 1307, to _________ or registered assigns, the principal sum of ______________ United States dollars ($_________) on November 1, ___ (the "Scheduled Maturity Date"), and to pay interest thereon, subject to the approval of the Superintendent pursuant to Section 1307, from November 1, 1993 or from the most recent Scheduled Interest Payment Date to which interest has been paid or duly provided for, semiannually in arrears on May 1 and November 1 in each year, commencing May 1, 1994 (each a "Scheduled Interest Payment Date"), at the rate of ___% per annum, until the principal hereof is paid or duly provided for. [Any reference herein to the term "principal" or to the principal amount of the Notes shall include the amount of premium, if any, payable upon redemption thereof in accordance with paragraph 15. Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date, if any, fixed for redemption thereof in accordance with paragraph 15.] The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall also be deemed to be the scheduled maturity date. As specified on the reverse hereof, all payments of principal of or interest on this Security may be made only out of the Issuer's free and divisible surplus and only with the prior approval of the Superintendent. The interest so payable, and punctually paid or duly provided for, on any Scheduled Interest Payment Date shall be paid, in accordance with the terms of the Fiscal Agency Agreement hereinafter referred to, to the person (the "registered holder") in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the April 15 or the October 15 (whether or not a business day), as the case may be (each a "Regular Record Date"), next preceding such Scheduled Interest Payment Date. Interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered holder on such Regular Record Date and shall be paid to the person in whose name this Security (or one or A-3 37 more predecessor Securities) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Issuer, notice whereof shall be given to registered holders of the Securities not less than 15 days prior to such special record date. Principal of this Security shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent hereinafter referred to and at the offices of such other Paying Agents as the Issuer shall have appointed pursuant to the Fiscal Agency Agreement. Payments of principal of the Securities shall be made only against surrender of the Securities. Payments of interest on this Security may be made, in accordance with the foregoing and subject to applicable laws and regulations, by check mailed on or before the scheduled payment date of such payment to the person entitled thereto at such person's address appearing on the aforementioned register. In the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, payments of principal or interest may be made by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the applicable scheduled payment date or scheduled maturity date hereof, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer agrees that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the full principal of and interest remaining unpaid on this Security have been made available for payment and either paid or returned to the Issuer as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York and in Europe (including, for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in Luxembourg) for the payment of the principal of and interest on the Securities as herein provided. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security may be executed by the Issuer by manual or facsimile signatures, and such signatures may be executed on separate counterparts. A-4 38 Unless the certificate of authentication hereon has been executed by the Fiscal Agent by manual signature, this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: METROPOLITAN LIFE INSURANCE COMPANY By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. THE CHASE MANHATTAN BANK, N.A. as Fiscal Agent By: --------------------------------- Authorized Officer A-5 39 FORM OF REVERSE 1. This Security is one of a duly authorized issue of ___% Surplus Notes scheduled to mature on November 1, ____ of the Issuer (herein called the "Securities" or "Notes"), limited in aggregate principal amount to $[___,000,000]. The Issuer and The Chase Manhattan Bank, N.A. (as "Fiscal Agent") have entered into a Fiscal Agency Agreement, dated as of November 1, 1993 (such instrument, as it may be duly amended from time to time, is herein called the "Fiscal Agency Agreement"), which provides for the mechanism for issuing the Securities and, inter alia, sets forth certain duties of the Fiscal Agent in connection therewith. As used herein, the term "Fiscal Agent" includes any successor fiscal agent under the Fiscal Agency Agreement. Copies of the Fiscal Agency Agreement are on file and available for inspection at the corporate trust office of the Fiscal Agent in the Borough of Manhattan, The City of New York. Holders of Securities are referred to the Fiscal Agency Agreement for a statement of the terms thereof, including those relating to transfer, payment, exchanges and certain other matters. The Fiscal Agent or any Paying Agent shall also act as Transfer Agent and Securities registrar. Terms used herein which are defined in the Fiscal Agency Agreement but not otherwise defined herein shall have the meanings assigned to such terms in the Fiscal Agency Agreement. The Securities are direct and unsecured obligations of the Issuer and, subject to the payment restrictions contained in paragraphs 4 and 10 hereof (the "Payment Restrictions"), are scheduled to mature on November 1, ____. Section 1307 provides that the Securities are not part of the legal liabilities of the Issuer and are not a basis of any set-off against the Issuer. [Any reference herein to the term "principal" or to the principal amount of the Notes shall include the amount of premium, if any, payable upon redemption thereof in accordance with paragraph 15. Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date, if any, fixed for redemption thereof in accordance with paragraph 15.] The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall be deemed to be the scheduled maturity date. A-6 40 2. The Securities are issuable only in fully registered form without coupons. Securities are issuable in minimum denominations of $[250,000] [$500,000] and integral multiples of $1,000 above that amount. 3. The Issuer shall maintain, in each of the Borough of Manhattan, The City of New York and a city in Europe (including, for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in Luxembourg), Transfer Agents where Securities may be registered or surrendered for registration of transfer or exchange. The Issuer has initially appointed the corporate trust office of the Fiscal Agent as its Transfer Agent in the Borough of Manhattan, The City of New York, and Chase Manhattan Bank Luxembourg, S.A. as its Transfer Agent in Luxembourg. The Issuer shall cause each Transfer Agent to act as a Securities registrar and shall cause to be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Securities and registration of transfers of Securities. The Issuer reserves the right to vary or terminate the appointment of any Transfer Agent or to appoint additional or other Transfer Agents or to approve any change in the office through which any Transfer Agent acts, provided that there shall at all times be a Transfer Agent in the Borough of Manhattan, The City of New York and in Europe (including, for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in Luxembourg). The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent shall act to be provided to holders of Securities. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, the transfer of a Security is registrable on the aforementioned register upon surrender of such Security at any Transfer Agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the registered holder thereof or his attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, at the option of the regis- A-7 41 tered holder upon request confirmed in writing, Securities may be exchanged for Securities of any authorized denominations and aggregate principal amount upon surrender of the Securities to be exchanged at the office of any Transfer Agent. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, the Securities which the registered holder making the exchange is entitled to receive. Any registration of transfer or exchange shall be effected upon the Issuer being satisfied with the documents of title and identity of the person making the request and subject to the restrictions set forth in the immediately following paragraph and such reasonable regulations as the Issuer may from time to time agree with the Fiscal Agent. Securities may be redeemed by the Issuer, in whole or in part, but only to the extent permitted by the Payment Restrictions, including the prior approval of the Superintendent, and in accordance with Paragraph 15 hereof. In the event of a partial redemption, the Issuer shall not be required (i) to register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the date notice is given identifying the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security, or portion thereof, called for redemption. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, other than an exchange in connection with the partial redemption of a Security not involving any registration of a transfer. Prior to due presentment of this Security for registration of transfer, the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent may treat the person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer nor the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 4. (a) Notwithstanding anything to the contrary set forth herein or in the Fiscal Agency Agreement, any payment of principal of, interest on or any monies owing A-8 42 with respect to this Security, whether at the scheduled payment date or scheduled maturity date specified herein or otherwise, may be made only (i) out of the free and divisible surplus of the Issuer which the Superintendent determines to be available for such payments under Section 1307 and (ii) with the prior approval of the Superintendent whenever, in his judgment, the financial condition of the Issuer warrants such payment, in accordance with Section 1307. If the Superintendent does not approve the making of any payment of principal of or interest on this Security on the scheduled payment date or scheduled maturity date thereof, as specified herein, the scheduled payment date or scheduled maturity date, as the case may be, shall be extended and such payment shall be made by the Issuer on the next following Business Day on which the Issuer shall have the approval of the Superintendent to make such payment. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the rate of interest stated on the face hereof. Interest will not accrue on interest with respect to which the scheduled payment date has been extended, during the period of such extension. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (b) Any payment of principal of or interest on any Security as to which the approval of the Superintendent has been obtained and which is not punctually paid or duly provided for on the scheduled payment date or scheduled maturity date thereof, as set forth herein (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of this Security on the relevant record date designated herein, and such Unpaid Amount will instead be payable to the registered owner of this Security on a subsequent special record date. The Issuer shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Issuer shall mail to each holder of the Securities and the Fiscal agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each holder of the Securities in the manner set forth in Section 4(a) of the Fiscal Agency Agreement. 5. (a) For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer shall provide, A-9 43 subject to the Payment Restrictions, to the Fiscal Agent in immediately available funds on or prior to 10:00 a.m., New York time, of each date on which a payment of principal of or any interest on this Security is payable, as set forth herein, such amounts as are necessary (with any amounts then held by the Fiscal Agent and available for the purpose) to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on this Security as set forth herein and in the Fiscal Agency Agreement. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 principal amount of Securities, by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 of the Fiscal Agency Agreement for the payment from funds so paid by the Issuer of the principal of and any interest on this Security. Any monies held in respect of this Security remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient thereof or shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer upon written request and upon such repayment all liability of the Fiscal Agent with respect thereto shall cease, without, however, limiting in any way any obligation the Issuer may have to pay the principal of and interest on this Security, subject to the Payment Restrictions. (b) In any case where the scheduled payment date or scheduled maturity date of any Security shall be at any place of payment a day on which banking institutions are not carrying out transactions in U.S. dollars or are authorized or obligated by law or executive order to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding A-10 44 day at such place which is not a day on which banking institutions in the applicable jurisdiction are generally authorized or obligated by law or executive order to close (a "Business Day"), with the same force and effect as if made on the scheduled payment date or scheduled maturity date thereof, and no interest shall accrue for the period after such date. 6. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision thereof or taxing authority of or in the foregoing with respect to the Fiscal Agency Agreement or the initial issuance of this Security. Except as otherwise specifically provided in this Security, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or any political subdivision or taxing authority thereof or therein. 7. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, (a) Except with respect to transactions covered by Paragraph 8 hereof, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights (charter and statutory) and franchise; provided, however, that the Issuer shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the Issuer has used its best efforts to not disadvantage in any material respect the holders of the Securities, or that not preserving such right or franchise is in the best interest of the policyholders of the Issuer having considered the interests of the holders of the Securities. (b) The Issuer will not be or become an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), if such action would cause the Issuer to be in violation of the Investment Company Act at any time prior to payment in full of the Securities. (c) The Issuer shall use its best efforts to obtain the approval of the Superintendent in accordance with Section 1307 for the payment by the Issuer of interest on A-11 45 and principal of the Securities on the scheduled payment dates or scheduled maturity dates thereof, and, in the event any such approval has not been obtained for any such payment at or prior to the scheduled payment date or scheduled maturity date thereof, as the case may be, to continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to the scheduled payment date or scheduled maturity date thereof (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer), the Issuer will seek the approval of the Superintendent to make each payment of interest on and principal of the Securities. In addition, the Issuer shall notify or cause to be notified each holder and the Fiscal Agent no later than 5 Business Days (as defined herein) prior to the scheduled payment date for interest on or the scheduled maturity date for principal of any Security (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer) in the event that the Superintendent has not then approved the making of any such payment on such scheduled payment date or such scheduled maturity date, and thereafter shall promptly notify each holder and the Fiscal Agent in the event that the Issuer shall have failed to make any such payment on any such scheduled payment date or such scheduled maturity date. 8. For so long as any of the Securities remain Outstanding or any amounts remain unpaid on any of the Securities, the Issuer may convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other corporation or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any person, firm or corporation, if (i) (A) in the case of a merger or consolidation, the Issuer is the surviving corporation or (B) in the case of a merger or consolidation where the Issuer is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor corporation is a corporation organized and existing under the laws of the United States or a State thereof and such corporation expressly assumes by supplemental fiscal agency agreement all the obligations of the Issuer under the Securities and the Fiscal Agency Agreement, (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer or other disposition, the Issuer shall not have failed to make payment of interest on or principal of the Securities after having received the Superintendent's prior approval to A-12 46 make such payment and (iii) the Issuer has delivered to the Fiscal Agent an Officer's Certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this paragraph and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Issuer as provided in clause (i)(B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Issuer hereunder and under the Fiscal Agency Agreement and all such obligations of the Issuer shall terminate. 9. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as to which the Issuer is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Security, unless the acquisition of the Security is exempt under one or more of Prohibited Transaction exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Security shall constitute a representation by such Person to the Issuer and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, and may acquire this Security under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Securities set forth in this Paragraph 9 are in addition to those otherwise set forth in Section 6 of the Fiscal Agency Agreement and under applicable law. 10. (a) The Issuer agrees, and each Security holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Paragraph, to the prior payment in full of all Indebtedness, Policy Claims and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). (b) Upon any distribution to creditors of the Issuer in any rehabilitation, liquidation, conservation, dissolution or reorganization proceeding relating to the Issuer or its property, the priority of claims of Security holders shall be determined in accordance with Section 7435. In a proceeding commenced under Article 74 of the New York A-13 47 Insurance Law, claims for principal of or interest on the Securities constitute Class 7 claims under Section 7435, as currently in effect. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (c) If a distribution is made to Security holders that, because of this Paragraph, should not have been made to them, the Security holders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Other Creditor Claims and pay it over to them as their interests may appear. (d) The Issuer shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Issuer that would cause a payment of principal of or interest on the Securities to violate this Paragraph. (e) This Paragraph defines the relative rights of Security holders, on the one hand, and holders of any other claims, in accordance with Section 7435, on the other hand. Nothing in this Security or the Fiscal Agency Agreement shall (i) impair, as between the Issuer and Security holders, the obligation of the Issuer which is, subject to the Payment Restrictions, absolute and unconditional to pay principal of and interest on the Securities in accordance with their terms; (ii) affect the relative rights of Security holders and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Other Creditor Claims; or (iii) prevent the Fiscal Agent or any Security holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Other Creditor Claims to receive distributions otherwise payable to Security holders. (f) No right of any holder of Policy Claims, Indebtedness or Other Creditor Claims to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Issuer or by its failure to comply with the terms of this Fiscal Agency Agreement. (g) Each holder of Securities, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this A-14 48 Paragraph and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. As used herein, "Indebtedness" of the Issuer shall mean (i) all existing or future indebtedness of the Issuer for borrowed money, (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) all existing or future obligations of the Issuer under any agreement obligating the Issuer to cause another person to maintain a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) any expense or any claim or amount, to the extent that payment of principal of and interest on the Securities is required by law to be subordinated to the prior payment thereof. Any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, the Securities shall not constitute Indebtedness. However, under current law the Issuer cannot issue any indebtedness which by its terms is subordinate to the Securities. In addition, any other surplus notes or similar obligations of the Issuer shall not constitute Indebtedness and will rank pari passu with the Securities. As used herein, "Policy Claims" shall mean all existing or future claims of policyholders or beneficiaries, as the case may be, under any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts, and funding agreements issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and all claims of The Life Insurance Company Guaranty Corporation of New York or any other guaranty corporation or association of New York or any other jurisdiction, other than claims described in clause (i) of the definition of "Other Creditor Claims" below and claims for interest. As used herein, "Other Creditor Claims" shall mean all other claims which, pursuant to Section 7435, have priority over claims with respect to the Securities. Under Section 7435 as currently in effect, such other claims include (i) claims with respect to the actual and necessary costs and expenses of administration incurred by a liquidator, conservator, rehabilitator or ancillary rehabilitator under Section 7435; (ii) claims with respect to the actual and necessary costs and expenses of administration incurred by The Life Insurance Guaranty Corporation or The Life Insurance Company Guaranty A-15 49 Corporation of New York; (iii) claims of The Life Insurance Company Guaranty Corporation for certain funds loaned to the Superintendent under Section 7713(d) of the New York Insurance Law; (iv) debts up to $1,200 due to employees for services performed within one year of the commencement of rehabilitation, liquidation, conservation, dissolution or reorganization proceedings; (v) claims for payment for goods furnished or services rendered in the ordinary course of business within 90 days of the declaration of the impairment or insolvency of the Issuer; (vi) claims of the federal or any state or local government (except in the case of claims for a penalty or forfeiture which are included only to the extent of pecuniary loss and reasonable costs occasioned by the act giving rise to the forfeiture or penalty); and (vii) claims of general creditors and all other claims having priority under Section 7435. 11. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, the Issuer shall, in accordance with Rule 144A, comply with the terms of the agreements set forth in Section 7 of the Fiscal Agency Agreement. The provisions of Sections 7 and 8 of the Fiscal Agency Agreement are hereby incorporated mutatis mutandis herein. 12. In case this Security shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and upon the Issuer's request the Fiscal Agent shall authenticate and deliver a new Security, having a number not contemporaneously outstanding, of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on this Security, in exchange and substitution for this Security (upon surrender and cancellation thereof) or in lieu of and substitution for this Security. In the case where this Security is destroyed, lost or stolen, the applicant for a substituted Security shall furnish to the Issuer such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of this Security, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Security and of the ownership thereof, provided, however, that if the registered holder hereof is, in the judgment of the Issuer, an institution of recognized responsibility, such holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Security in lieu of and substitution for this Security. The Fiscal Agent shall authenticate any such substituted Security and deliver the same only upon written request or authorization of the A-16 50 Issuer. Upon the issuance of any substituted Security, the Issuer may require the payment by the registered holder thereof of a sum sufficient to cover fees and expenses connected therewith. In case this Security has matured or is about to mature and shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except if this Security is mutilated or defaced) upon compliance by the registered holder with the provisions of this Paragraph 12 as hereinabove set forth. 13. Section 10 of the Fiscal Agency Agreement, which Section is hereby incorporated mutatis mutandis by reference herein, provides that, with certain exceptions as therein provided and with the consent of the holders of a majority of the principal amount of the Outstanding Securities of this series present at a meeting duly called pursuant thereto or by written consent of such percentage of the principal amount of all Outstanding Securities, the Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, modify, amend or supplement the Fiscal Agency Agreement or the terms of the Securities of this series or may give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall be conclusive and binding on the holder of this Security and on all future holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation thereof is made upon this Security. The Fiscal Agency Agreement and the terms of the Securities may, with the prior approval of the Superintendent, be modified or amended by the Issuer and the Fiscal Agent, without the consent of any holders of Securities, for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities pursuant to the requirements hereof, thereof or otherwise, or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Fiscal Agency Agreement as permitted by the Securities and the Fiscal Agency Agreement, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto A- 17 51 which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Fiscal Agency Agreement in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder, to all of which each holder of any Security, by acceptance thereof, consents. 14. Holders of Securities may enforce the Fiscal Agency Agreement or the Securities only in the manner set forth below. (a) In the event that any state or federal agency shall obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer, the Securities of all Series will upon the obtaining of such an order or the granting of such approval immediately mature in full without any action on the part of the Fiscal Agent or any holder of the Securities, with payment thereon being subject to the Payment Restrictions, and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, in no event shall the Fiscal Agent or any holder of the Securities be entitled to declare the Securities to immediately mature or otherwise be immediately payable. (b) In the event that the Superintendent approves in whole or in part a payment of any interest on or principal of any Securities and the Issuer fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any holder of Securities. In the event that the Issuer fails to perform any of its other obligations hereunder or under the Fiscal Agency Agreement, each holder of the Securities may pursue any available remedy to enforce the performance of any provision of such Securities or the Fiscal Agency Agreement, provided, however, that such remedy shall in no event include the right to declare the Securities immediately payable, and shall in no circumstances be inconsistent with the provisions of Section 1307. A delay or omission by any Security holder in exercising any right or remedy accruing as a result of the Issuer's failure to perform its obligations hereunder or under the Fiscal Agency Agreement and the continuation thereof shall not impair such right or A-18 52 remedy or constitute a waiver of or acquiescence in such non-performance by the Issuer. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. (c) Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, the right of any holder of Securities to receive payment of the principal of and interest on such holder's Securities on or after the respective scheduled payment or scheduled maturity dates expressed in such Securities, or to bring suit for the enforcement of any such payment on or after such respective scheduled payment or scheduled maturity dates, in each case subject to such payment on such dates having received the approval of the Superintendent pursuant to the Payment Restrictions, including the approval of the Superintendent pursuant to Section 1307, is absolute and unconditional and shall not be impaired or affected without the consent of the holder. [15. (a) Subject to the approval of the Superintendent pursuant to Section 1307, the Notes are subject to redemption at any time on or after November 1, 2003, as a whole or in part, at the election of the Issuer at the following redemption prices (expressed as percentages of principal amount) during the 12-month period beginning November 1, of the years indicated, Redemption Redemption Year Price Year Price ---- --------- --- ---------- 2003 103.529% 2008 101.764% 2004 103.176% 2009 101.411% 2005 102.823% 2010 101.059% 2006 102.470% 2011 100.706% 2007 102.117% 2012 100.353% and thereafter at a redemption price equal to 100% of the principal amount, together in each case with accrued interest (except where the date of such redemption is a Scheduled Interest Payment Date) to the date of such redemption (subject to the prior approval of the Superintendent pursuant to Section 1307), but interest installments the payment of which have been approved by the Superintendent and which are payable on or prior to such date of redemption will be payable to the holders of record of such Securities at the close of business on the relevant Record Dates set forth herein. Partial redemption's must be in an amount not less than $1,000,000 aggregate principal amount of Securities. A-19 53 (b) In the case of any partial redemption of Securities, the Securities to be redeemed shall be selected by the Fiscal Agent not less than 30 days prior to the date of such redemption, from the Outstanding Securities not previously called for redemption, by such method as the Fiscal Agent shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $250,000 or any integral multiple thereof) of the principal amount of registered Securities of a denomination larger than $500,000. (c) Notices to redeem Securities shall be given to holders of Securities in writing mailed, first-class postage prepaid, to each holder of registered Securities, or portions thereof, so to be redeemed, at his address as it appears in the Security Register. Such notice will be given once not more than 60 days nor less than 30 days prior to the date fixed for redemption. If by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impracticable to give notice to the holders of Securities in the manner prescribed herein, then such notification in lieu thereof as shall be made by the Issuer or by the Fiscal Agent on behalf of and at the instruction of the Issuer shall constitute sufficient provision of such notice, if such notification shall, so far as may be practicable, approximate the terms and conditions of the mailed notice in lieu of which it is given. Neither the failure to give notice nor any defect in any notice given to any particular holder of a Security shall affect the sufficiency of any notice with respect to other Securities. Notices to redeem Securities shall specify the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Securities to be redeemed (or portion thereof in the case of a partial redemption), that interest accrued to the date fixed for redemption (unless the date of redemption is a Scheduled Interest Payment Date) will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue if the Notes scheduled to mature on November 1, 2023 are so redeemed. In addition, in the case of a partial redemption, the Redemption Notice shall specify the Securities called for redemption and the aggregate principal amount of the Securities to remain Outstanding after the redemption. (d) If notice of redemption has been given in the manner set forth in Paragraph 15(c) hereof, the Securities so to be redeemed shall be payable in full on the date specified in such notice and upon presentation and surrender A-20 54 of the Securities at the place or places specified in such notice, the Securities shall be paid and redeemed by the Issuer at the places and in the manner and currency herein specified and at the redemption price together with accrued interest (unless the redemption date is a Scheduled Interest Payment Date) to the redemption date. From and after the redemption date, if monies for the redemption of Securities called for redemption shall have been made available at the Principal Office of the Fiscal Agent for redemption on the redemption date, the Securities called for redemption shall cease to bear interest, and the only right of the holders with respect to such Securities or portion thereof being redeemed shall be to receive payment of the redemption price together with accrued interest (unless the redemption date is an Interest Payment Date) to the redemption date as aforesaid. If monies for the redemption of the Securities are not made available for payment until after the redemption date, the Securities called for redemption shall not cease to bear interest until such monies have been so made available. (e) Any Security which is to be redeemed only in part shall be surrendered with, if the Issuer or the Fiscal Agent so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Fiscal Agent duly executed by, the holder thereof or his attorney duly authorized in writing, and the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver to the holder of such Security without service charge, a new registered Security or Securities, of any authorized denomination as requested by such holder, and as permitted by Section 1(d) of the Agreement, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.] 16. No reference herein to the Fiscal Agency Agreement and no provision of this Security or of the Fiscal Agency Agreement shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. A-21 55 EXHIBIT B FORM OF GLOBAL SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM AND IN ACCORDANCE WITH THE FISCAL AGENCY AGREEMENT, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE FISCAL AGENT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM SUCH REGISTRATION PROVIDED BY RULE 144A UNDER THE ACT (TOGETHER WITH ANY SUCCESSOR PROVISION AND AS SUCH MAY BE HEREAFTER AMENDED FROM TIME TO TIME), "RULE 144A"). UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF U.S. DEPOSITARY] TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IN EXCHANGE FOR THIS SECURITY OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF U.S. DEPOSITARY] OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF U.S. DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF U.S. DEPOSITARY] OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF U.S. DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [INSERT NAME OF U.S. DEPOSITARY] OR A NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF U.S. DEPOSITARY], HAS AN INTEREST HEREIN. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER. THIS GLOBAL SECURITY MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A SECURITY REGISTERED IN THE NAME OF ANY PERSON OTHER THAN [INSERT NAME OF U.S. DEPOSITARY] OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES SET FORTH IN SECTION 5 OF THE FISCAL AGENCY AGREEMENT, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 6(C) OF THE FISCAL AGENCY AGREEMENT. BENEFICIAL INTERESTS IN THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SECTION 6(C) OF THE FISCAL AGENCY AGREEMENT. [INCLUDE IF SECURITY IS A REGULATION S GLOBAL SECURITY - - THIS SECURITY IS A REGULATION S (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS SUCH MAY BE HEREAFTER B-1 56 AMENDED FROM TIME TO TIME, "REGULATION S") GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER. INTERESTS IN THIS REGULATION S GLOBAL SECURITY MAY NOT BE OFFERED OR SOLD TO A U.S. PERSON OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON PRIOR TO THE EXPIRATION OF THE 40-DAY RESTRICTED PERIOD REFERRED TO IN SECTION 1(B) (III) OF THE FISCAL AGENCY AGREEMENT, AND NO TRANSFER OR EXCHANGE OF AN INTEREST IN THIS REGULATION S GLOBAL SECURITY MAY BE MADE FOR AN INTEREST IN THE RESTRICTED GLOBAL SECURITY OR IN THE UNRESTRICTED GLOBAL SECURITY EXCEPT AFTER THE LATER OF THE DATE OF TERMINATION OF THE RESTRICTED PERIOD AND THE DATE ON WHICH THE OWNER SECURITIES CERTIFICATE AND THE DEPOSITARY SECURITIES CERTIFICATION RELATING TO SUCH INTEREST HAVE BEEN PROVIDED IN ACCORDANCE WITH THE TERMS OF THE FISCAL AGENCY AGREEMENT, TO THE EFFECT THAT THE BENEFICIAL OWNER OR OWNER OF SUCH INTEREST ARE NOT U.S. PERSONS.] ALL PAYMENTS OF PRINCIPAL (INCLUDING ANY PREMIUM WITH RESPECT TO ANY REDEMPTION) AND INTEREST ON THIS SECURITY MAY ONLY BE MADE OUT OF METLIFE'S FREE AND DIVISIBLE SURPLUS AND WITH THE PRIOR APPROVAL OF THE SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, IN ACCORDANCE WITH SECTION 1307 OF THE NEW YORK INSURANCE LAW. [INCLUDE IF SECURITY IS A RESTRICTED GLOBAL SECURITY OR SECURITY ISSUED IN EXCHANGE THEREFOR (UNLESS, PURSUANT TO SECTION 6(G) OF THE FISCAL AGENCY AGREEMENT, THE ISSUER DETERMINES THAT THE LEGEND MAY BE REMOVED)] - - THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF METROPOLITAN LIFE INSURANCE COMPANY ("METLIFE") THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME), OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT PURCHASERS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $500,000 TO AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501(a) UNDER THE ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) B-2 57 THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF METLIFE THAT, IF THE HOLDER PROPOSES TO SELL OR TRANSFER THIS SECURITY TO ANY EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED), THE HOLDER WILL COMPLY WITH THE RESTRICTIONS SET FORTH IN PARAGRAPH 9 HEREOF. PAYMENTS OF PRINCIPAL (AND PREMIUM, IF ANY) AND INTEREST ON THIS SECURITY MAY ONLY BE MADE OUT OF METLIFE'S FREE AND DIVISIBLE SURPLUS AND WITH THE PRIOR APPROVAL OF THE SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, IN ACCORDANCE WITH SECTION 1307 OF THE NEW YORK INSURANCE LAW (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "SECTION 1307"). THERE ARE NO GUIDELINES OR INTERPRETATIONS AS TO THE EXTENT OF THE SUPERINTENDENT'S DISCRETION UNDER SECTION 1307 IN DETERMINING WHETHER THE FINANCIAL CONDITION OF METLIFE WARRANTS THE MAKING OF SUCH PAYMENTS. B-3 58 METROPOLITAN LIFE INSURANCE COMPANY ____% Surplus Note scheduled to mature on __________ CUSIP NO.:_________ ISIN NO.:_________ COMMON CODE:_________ No. R-_______ $_________ METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the State of New York (herein called the "Issuer"), for value received, hereby promises to pay, subject to the approval of the Superintendent pursuant to Section 1307, to ______ or registered assigns, the principal sum of ______________ United States dollars ($_________), or such other amount (not to exceed [ ] million dollars ($[ ,000,000]) when taken together with all of the Issuer's __% Surplus Notes scheduled to mature on November 1, ____ issued and outstanding in definitive certificated form or in the form of another Global Security) as may from time to time represent the principal amount of the Issuer's __% Surplus Notes scheduled to mature on November 1, ____ in respect of which beneficial interest, are held through the U.S. Depositary in the form of a[n] [Restricted] [Unrestricted] [Regulation 5] Global Security, on November 1, ___ (the "Scheduled Maturity Date"), and to pay interest thereon, subject to the approval of the Superintendent pursuant to Section 1307, from November 1, 1993 or from the most recent Scheduled Interest Payment Date to which interest has been paid or duly provided for, semiannually in arrears on May 1 and November 1 in each year, commencing May 1, 1994 (each a "Scheduled Interest Payment Date"), at the rate of ___% per annum, until the principal hereof is paid or duly provided for. [Any reference herein to the term "principal" or to the principal amount of the Notes shall include the amount of premium, if any, payable upon redemption thereof in accordance with paragraph 15. Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date, if any, fixed for redemption thereof in accordance with paragraph 15.] The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall also be deemed to be the scheduled maturity date. As specified on the reverse hereof, all payments of principal of (and premium, if any, on) or interest on this Security may be made only out of the Issuer's free and divisible surplus and only with the prior approval of the Superintendent. The interest so payable, and punctually paid or duly provided for, on any Scheduled B-4 59 Interest Payment Date shall be paid, in accordance with the terms of the Fiscal Agency Agreement hereinafter referred to, to the person (the "registered holder") in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the April 15 or the October 15 (whether or not a business day), as the case may be (each a "Regular Record Date"), next preceding such Scheduled Interest Payment Date. Interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered holder on such Regular Record Date and shall be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Issuer, notice whereof shall be given to registered holders of the Securities not less than 15 days prior to such special record date. Principal of this Security shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent hereinafter referred to and at the offices of such other Paying Agents as the Issuer shall have appointed pursuant to the Fiscal Agency Agreement. Payments of principal of the Securities shall be made only against surrender of the Securities. Payments of interest on this Security may be made, in accordance with the foregoing and subject to applicable laws and regulations, by check mailed on or before the scheduled payment date of such payment to the person entitled thereto at such person's address appearing on the aforementioned register. In the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, payments of principal or interest may be made by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the applicable scheduled payment date or scheduled maturity date hereof, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer agrees that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the full principal of and interest remaining unpaid on this Security have been made available for payment and either paid or returned to the Issuer as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York and in Europe (including, B-5 60 for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, an office or agency in Luxembourg) for the payment of the principal of and interest on the Securities as herein provided. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security may be executed by the Issuer by manual or facsimile signatures, and such signatures may be executed on separate counterparts. Unless the certificate of authentication hereon has been executed by the Fiscal Agent by manual signature, this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: METROPOLITAN LIFE INSURANCE COMPANY By:_______________________ Name: Title: By:__________________________ Name: Title: B-6 61 This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. THE CHASE MANHATTAN BANK, N.A. as Fiscal Agent By:__________________________ Authorized Officer B-7 62 FORM OF REVERSE 1. This Security is one of a duly authorized issue of ___% Surplus Notes scheduled to mature on November 1, ____ of the Issuer (herein called the "Securities" or "Notes"), limited in aggregate principal amount to $[___,000,000]. The Issuer and The Chase Manhattan Bank, N.A. (as "Fiscal Agent") have entered into a Fiscal Agency Agreement, dated as of November 1, 1993 (such instrument, as it may be duly amended from time to time, is herein called the "Fiscal Agency Agreement"), which provides for the mechanism for issuing the Securities and, inter alia, sets forth certain duties of the Fiscal Agent in connection therewith. As used herein, the term "Fiscal Agent" includes any successor fiscal agent under the Fiscal Agency Agreement. Copies of the Fiscal Agency Agreement are on file and available for inspection at the corporate trust office of the Fiscal Agent in the Borough of Manhattan, The City of New York. Holders of Securities are referred to the Fiscal Agency Agreement for a statement of the terms thereof, including those relating to transfer, payment, exchanges and certain other matters. The Fiscal Agent or any Paying Agent shall also act as Transfer Agent and Securities registrar. Terms used herein which are defined in the Fiscal Agency Agreement but not otherwise defined herein shall have the meanings assigned to such terms in the Fiscal Agency Agreement. The Securities are direct and unsecured obligations of the Issuer and, subject to the payment restrictions contained in paragraphs 4 and 10 hereof (the "Payment Restrictions"), are scheduled to mature on November 1, ____. Section 1307 provides that the Securities are not part of the legal liabilities of the Issuer and are not a basis of any set-off against the Issuer. [Any reference herein to the term "principal" or to the principal amount of the Notes shall include the amount of premium, if any, payable upon redemption thereof in accordance with paragraph 15. Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date, if any, fixed for redemption thereof in accordance with paragraph 15.] The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall be deemed to be the scheduled maturity date. B-8 63 2. The Securities are issuable only in fully registered form without coupons. Securities are issuable in minimum denominations of $[250,000] [$500,000] and integral multiples of $1,000 above that amount. 3. The Issuer shall maintain, in each of the Borough of Manhattan, The City of New York and a city in Europe (including, for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in Luxembourg), Transfer Agents where Securities may be registered or surrendered for registration of transfer or exchange. The Issuer has initially appointed the corporate trust office of the Fiscal Agent as its Transfer Agent in the Borough of Manhattan, The City of New York, and Chase Manhattan Bank Luxembourg, S.A. as its Transfer Agent in Luxembourg. The Issuer shall cause each Transfer Agent to act as a Securities registrar and shall cause to be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Securities and registration of transfers of Securities. The Issuer reserves the right to vary or terminate the appointment of any Transfer Agent or to appoint additional or other Transfer Agents or to approve any change in the office through which any Transfer Agent acts, provided that there shall at all times be a Transfer Agent in the Borough of Manhattan, The City of New York and in Europe (including, for so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in Luxembourg). The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent shall act to be provided to holders of Securities. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, the transfer of a Security is registrable on the aforementioned register upon surrender of such Security at any Transfer Agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the registered holder thereof or his attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, at the option of the regis- B-9 64 tered holder upon request confirmed in writing, Securities may be exchanged for Securities of any authorized denominations and aggregate principal amount upon surrender of the Securities to be exchanged at the office of any Transfer Agent. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, the Securities which the registered holder making the exchange is entitled to receive. Any registration of transfer or exchange shall be effected upon the Issuer being satisfied with the documents of title and identity of the person making the request and subject to the restrictions set forth in the immediately following paragraph and such reasonable regulations as the Issuer may from time to time agree with the Fiscal Agent. Securities may be redeemed by the Issuer, in whole or in part, but only to the extent permitted by the Payment Restrictions, including the prior approval of the Superintendent, and in accordance with Paragraph 15 hereof. In the event of a partial redemption, the Issuer shall not be required (i) to register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the date notice is given identifying the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security, or portion thereof, called for redemption. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, other than an exchange in connection with the partial redemption of a Security not involving any registration of a transfer. Prior to due presentment of this Security for registration of transfer, the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent may treat the person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer nor the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 4. (a) Notwithstanding anything to the contrary set forth herein or in the Fiscal Agency Agreement, any payment of principal of, interest on or any monies owing B-10 65 with respect to this Security, whether at the scheduled payment date or scheduled maturity date specified herein or otherwise, may be made only (i) out of the free and divisible surplus of the Issuer which the Superintendent determines to be available for such payments under Section 1307 and (ii) with the prior approval of the Superintendent whenever, in his judgment, the financial condition of the Issuer warrants such payment, in accordance with Section 1307. If the Superintendent does not approve the making of any payment of principal of or interest on this Security on the scheduled payment date or scheduled maturity date thereof, as specified herein, the scheduled payment date or scheduled maturity date, as the case may be, shall be extended and such payment shall be made by the Issuer on the next following Business Day on which the Issuer shall have the approval of the Superintendent to make such payment. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the rate of interest stated on the face hereof. Interest will not accrue on interest with respect to which the scheduled payment date has been extended, during the period of such extension. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (b) Any payment of principal of or interest on any Security as to which the approval of the Superintendent has been obtained and which is not punctually paid or duly provided for on the scheduled payment date or scheduled maturity date thereof, as set forth herein (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of this Security on the relevant record date designated herein, and such Unpaid Amount will instead be payable to the registered owner of this Security on a subsequent special record date. The Issuer shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Issuer shall mail to each holder of the Securities and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each holder of the Securities in the manner set forth in Section 4(a) of the Fiscal Agency Agreement. 5. (a) For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer shall provide, B-1l 66 subject to the Payment Restrictions, to the Fiscal Agent in immediately available funds on or prior to 10:00 a.m., New York time, of each date on which a payment of principal of or any interest on this Security is payable, as set forth herein, such amounts as are necessary (with any amounts then held by the Fiscal Agent and available for the purpose) to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on this Security as set forth herein and in the Fiscal Agency Agreement. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 principal amount of Securities, by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 of the Fiscal Agency Agreement for the payment from funds so paid by the Issuer of the principal of and any interest on this Security. Any monies held in respect of this Security remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient thereof or shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer upon written request and upon such repayment all liability of the Fiscal Agent with respect thereto shall cease, without, however, limiting in any way any obligation the Issuer may have to pay the principal of and interest on this Security, subject to the Payment Restrictions. (b) In any case where the scheduled payment date or scheduled maturity date of any Security shall be at any place of payment a day on which banking institutions are not carrying out transactions in U.S. dollars or are authorized or obligated by law or executive order to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding B-12 67 day at such place which is not a day on which banking institutions in the applicable jurisdiction are generally authorized or obligated by law or executive order to close (a "Business Day"), with the same force and effect as if made on the scheduled payment date or scheduled maturity date thereof, and no interest shall accrue for the period after such date. 6. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision thereof or taxing authority of or in the foregoing with respect to the Fiscal Agency Agreement or the initial issuance of this Security. Except as otherwise specifically provided in this Security, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or any political subdivision or taxing authority thereof or therein. 7. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, (a) Except with respect to transactions covered by Paragraph 8 hereof, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights (charter and statutory) and franchise; provided, however, that the Issuer shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the Issuer has used its best efforts to not disadvantage in any material respect the holders of the Securities, or that not preserving such right or franchise is in the best interest of the policyholders of the Issuer having considered the interests of the holders of the Securities. (b) The Issuer will not be or become an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), if such action would cause the Issuer to be in violation of the Investment Company Act at any time prior to payment in full of the Securities. (c) The Issuer shall use its best efforts to obtain the approval of the Superintendent in accordance with Section 1307 for the payment by the Issuer of interest on B-13 68 and principal of the Securities on the scheduled payment dates or scheduled maturity dates thereof, and, in the event any such approval has not been obtained for any such payment at or prior to the scheduled payment date or scheduled maturity date thereof, as the case may be, to continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to the scheduled payment date or scheduled maturity date thereof (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer), the Issuer will seek the approval of the Superintendent to make each payment of interest on and principal of the Securities. In addition, the Issuer shall notify or cause to be notified each holder and the Fiscal Agent no later than 5 Business Days (as defined herein) prior to the scheduled payment date for interest on or the scheduled maturity date for principal of any Security (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer) in the event that the Superintendent has not then approved the making of any such payment on such scheduled payment date or such scheduled maturity date, and thereafter shall promptly notify each holder and the Fiscal Agent in the event that the Issuer shall have failed to make any such payment on any such scheduled payment date or such scheduled maturity date. 8. For so long as any of the Securities remain Outstanding or any amounts remain unpaid on any of the Securities, the Issuer may convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other corporation or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any person, firm or corporation, if (i) (A) in the case of a merger or consolidation, the Issuer is the surviving corporation or (B) in the case of a merger or consolidation where the Issuer is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor corporation is a corporation organized and existing under the laws of the United States or a State thereof and such corporation expressly assumes by supplemental fiscal agency agreement all the obligations of the Issuer under the Securities and the Fiscal Agency Agreement, (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer or other disposition, the Issuer shall not have failed to make payment of interest on or principal of the Securities after having received the Superintendent's prior approval to B-14 69 make such payment and (iii) the Issuer has delivered to the Fiscal Agent an Officer's Certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this paragraph and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Issuer as provided in clause (i)(B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Issuer hereunder and under the Fiscal Agency Agreement and all such obligations of the Issuer shall terminate. 9. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as to which the Issuer is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Security, unless the acquisition of the Security is exempt under one or more of Prohibited Transaction exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Security shall constitute a representation by such Person to the Issuer and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, and may acquire this Security under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Securities set forth in this Paragraph 9 are in addition to those otherwise set forth in Section 6 of the Fiscal Agency Agreement and under applicable law. 10. (a) The Issuer agrees, and each Security holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Paragraph, to the prior payment in full of all Indebtedness, Policy Claims and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). (b) Upon any distribution to creditors of the Issuer in any rehabilitation, liquidation, conservation, dissolution or reorganization proceeding relating to the Issuer or its property, the priority of claims of Security holders shall be determined in accordance with Section 7435. In a proceeding commenced under Article 74 of the New York B-15 70 Insurance Law, claims for principal of or interest on the Securities constitute Class 7 claims under Section 7435, as currently in effect. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (c) If a distribution is made to Security holders that, because of this Paragraph, should not have been made to them, the Security holders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Other Creditor Claims and pay it over to them as their interests may appear. (d) The Issuer shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Issuer that would cause a payment of principal of or interest on the Securities to violate this Paragraph. (e) This Paragraph defines the relative rights of Security holders, on the one hand, and holders of any other claims, in accordance with Section 7435, on the other hand. Nothing in this Security or the Fiscal Agency Agreement shall (i) impair, as between the Issuer and Security holders, the obligation of the Issuer which is, subject to the Payment Restrictions, absolute and unconditional to pay principal of and interest on the Securities in accordance with their terms; (ii) affect the relative rights of Security holders and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Other Creditor Claims; or (iii) prevent the Fiscal Agent or any Security holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Other Creditor Claims to receive distributions otherwise payable to Security holders. (f) No right of any holder of Policy Claims, Indebtedness or Other Creditor Claims to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Issuer or by its failure to comply with the terms of this Fiscal Agency Agreement. (g) Each holder of Securities, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this B-16 71 Paragraph and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. As used herein, "Indebtedness" of the Issuer shall mean (i) all existing or future indebtedness of the Issuer for borrowed money, (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) all existing or future obligations of the Issuer under any agreement obligating the Issuer to cause another person to maintain a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) any expense or any claim or amount, to the extent that payment of principal of and interest on the Securities is required by law to be subordinated to the prior payment thereof. Any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, the Securities shall not constitute Indebtedness. However, under current law the Issuer cannot issue any indebtedness which by its terms is subordinate to the Securities. In addition, any other surplus notes or similar obligations of the Issuer shall not constitute Indebtedness and will rank pari passu with the Securities. As used herein, "Policy Claims" shall mean all existing or future claims of policyholders or beneficiaries, as the case may be, under any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts, and funding agreements issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and all claims of The Life Insurance Company Guaranty Corporation of New York or any other guaranty corporation or association of New York or any other jurisdiction, other than claims described in clause (i) of the definition of "Other Creditor Claims" below and claims for interest. As used herein, "Other Creditor Claims" shall mean all other claims which, pursuant to Section 7435, have priority over claims with respect to the Securities. Under Section 7435 as currently in effect, such other claims include (i) claims with respect to the actual and necessary costs and expenses of administration incurred by a liquidator, conservator, rehabilitator or ancillary rehabilitator under Section 7435; (ii) claims with respect to the actual and necessary costs and expenses of administration incurred by The Life Insurance Guaranty Corporation or The Life Insurance Company Guaranty B- 17 72 Corporation of New York; (iii) claims of The Life Insurance Company Guaranty Corporation for certain funds loaned to the Superintendent under Section 7713(d) of the New York Insurance Law; (iv) debts up to $1,200 due to employees for services performed within one year of the commencement of rehabilitation, liquidation, conservation, dissolution or reorganization proceedings; (v) claims for payment for goods furnished or services rendered in the ordinary course of business within 90 days of the declaration of the impairment or insolvency of the Issuer; (vi) claims of the federal or any state or local government (except in the case of claims for a penalty or forfeiture which are included only to the extent of pecuniary loss and reasonable costs occasioned by the act giving rise to the forfeiture or penalty); and (vii) claims of general creditors and all other claims having priority under Section 7435. 11. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, the Issuer shall, in accordance with Rule 144A, comply with the terms of the agreements set forth in Section 7 of the Fiscal Agency Agreement. The provisions of Sections 7 and 8 of the Fiscal Agency Agreement are hereby incorporated mutatis mutandis herein. 12. In case this Security shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and upon the Issuer's request the Fiscal Agent shall authenticate and deliver a new Security, having a number not contemporaneously outstanding, of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on this Security, in exchange and substitution for this Security (upon surrender and cancellation thereof) or in lieu of and substitution for this Security. In the case where this Security is destroyed, lost or stolen, the applicant for a substituted Security shall furnish to the Issuer such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of this Security, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Security and of the ownership thereof, provided, however, that if the registered holder hereof is, in the judgment of the Issuer, an institution of recognized responsibility, such holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Security in lieu of and substitution for this Security. The Fiscal Agent shall authenticate any such substituted Security and deliver the same only upon written request or authorization of the B-l8 73 Issuer. Upon the issuance of any substituted Security, the Issuer may require the payment by the registered holder thereof of a sum sufficient to cover fees and expenses connected therewith. In case this Security has matured or is about to mature and shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except if this Security is mutilated or defaced) upon compliance by the registered holder with the provisions of this Paragraph 12 as hereinabove set forth. 13. Section 10 of the Fiscal Agency Agreement, which Section is hereby incorporated mutatis mutandis by reference herein, provides that, with certain exceptions as therein provided and with the consent of the holders of a majority of the principal amount of the Outstanding Securities of this series present at a meeting duly called pursuant thereto or by written consent of such percentage of the principal amount of all Outstanding Securities, the Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, modify, amend or supplement the Fiscal Agency Agreement or the terms of the Securities of this series or may give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall be conclusive and binding on the holder of this Security and on all future holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation thereof is made upon this Security. The Fiscal Agency Agreement and the terms of the Securities may, with the prior approval of the Superintendent, be modified or amended by the Issuer and the Fiscal Agent, without the consent of any holders of Securities, for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities pursuant to the requirements hereof, thereof or otherwise, or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Fiscal Agency Agreement as permitted by the Securities and the Fiscal Agency Agreement, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto B- 19 74 which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Fiscal Agency Agreement in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder, to all of which each holder of any Security, by acceptance thereof, consents. 14. Holders of Securities may enforce the Fiscal Agency Agreement or the Securities only in the manner set forth below. (a) In the event that any state or federal agency shall obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer, the Securities of all Series will upon the obtaining of such an order or the granting of such approval immediately mature in full without any action on the part of the Fiscal Agent or any holder of the Securities, with payment thereon being subject to the Payment Restrictions, and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, in no event shall the Fiscal Agent or any holder of the Securities be entitled to declare the Securities to immediately mature or otherwise be immediately payable. (b) In the event that the Superintendent approves in whole or in part a payment of any interest on or principal of any Securities and the Issuer fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any holder of Securities. In the event that the Issuer fails to perform any of its other obligations hereunder or under the Fiscal Agency Agreement, each holder of the Securities may pursue any available remedy to enforce the performance of any provision of such Securities or the Fiscal Agency Agreement, provided, however, that such remedy shall in no event include the right to declare the Securities immediately payable, and shall in no circumstances be inconsistent with the provisions of Section 1307. A delay or omission by any Security holder in exercising any right or remedy accruing as a result of the Issuer's failure to perform its obligations hereunder or under the Fiscal Agency Agreement and the continuation thereof shall not impair such right or B-20 75 remedy or constitute a waiver of or acquiescence in such non-performance by the Issuer. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. (c) Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, the right of any holder of Securities to receive payment of the principal of and interest on such holder's Securities on or after the respective scheduled payment or scheduled maturity dates expressed in such Securities, or to bring suit for the enforcement of any such payment on or after such respective scheduled payment or scheduled maturity dates, in each case subject to such payment on such dates having received the approval of the Superintendent pursuant to the Payment Restrictions, including the approval of the Superintendent pursuant to Section 1307, is absolute and unconditional and shall not be impaired or affected without the consent of the holder. [15. (a) Subject to the approval of the Superintendent pursuant to Section 1307, the Notes are subject to redemption at any time on or after November 1, 2003, as a whole or in part, at the election of the Issuer at the following redemption prices (expressed as percentages of principal amount) during the 12-month period beginning November 1 of the years indicated, Redemption Redemption Year Price Year Price - ---- ----- ---- ----- 2003 103.529% 2008 101.764% 2004 103.176% 2009 101.411% 2005 102.823% 2010 101.059% 2006 102.470% 2011 100.706% 2007 102.117% 2012 100.353% and thereafter at a redemption price equal to 100% of the principal amount, together in each case with accrued interest (except where the date of such redemption is a Scheduled Interest Payment Date) to the date of such redemption (subject to the prior approval of the Superintendent pursuant to Section 1307), but interest installments the payment of which have been approved by the Superintendent and which are payable on or prior to such date of redemption will be payable to the holders of record of such Securities at the close of business on the relevant Record Dates set forth herein. Partial redemptions must be in an amount not less than $1,000,000 aggregate principal amount of Securities. B-21 76 (b) In the case of any partial redemption of Securities, the Securities to be redeemed shall be selected by the Fiscal Agent not less than 30 days prior to the date of such redemption, from the Outstanding Securities not previously called for redemption, by such method as the Fiscal Agent shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $250,000 or any integral multiple thereof) of the principal amount of registered Securities of a denomination larger than $500,000. (c) Notices to redeem Securities shall be given to holders of Securities in writing mailed, first-class postage prepaid, to each holder of registered Securities, or portions thereof, so to be redeemed, at his address as it appears in the Security Register. Such notice will be given once not more than 60 days nor less than 30 days prior to the date fixed for redemption. If by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impracticable to give notice to the holders of Securities in the manner prescribed herein, then such notification in lieu thereof as shall be made by the Issuer or by the Fiscal Agent on behalf of and at the instruction of the Issuer shall constitute sufficient provision of such notice, if such notification shall, so far as may be practicable, approximate the terms and conditions of the mailed notice in lieu of which it is given. Neither the failure to give notice nor any defect in any notice given to any particular holder of a Security shall affect the sufficiency of any notice with respect to other Securities. Notices to redeem Securities shall specify the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Securities to be redeemed (or portion thereof in the case of a partial redemption), that interest accrued to the date fixed for redemption (unless the date of redemption is a Scheduled Interest Payment Date) will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue if the Notes scheduled to mature on November 1, 2023 are so redeemed. In addition, in the case of a partial redemption, the Redemption Notice shall specify the Securities called for redemption and the aggregate principal amount of the Securities to remain Outstanding after the redemption. (d) If notice of redemption has been given in the manner set forth in Paragraph 15(c) hereof, the Securities so to be redeemed shall be payable in full on the date specified in such notice and upon presentation and surrender of the Securities at the place or places specified in such B-22 77 notice, the Securities shall be paid and redeemed by the Issuer at the places and in the manner and currency herein specified and at the redemption price together with accrued interest (unless the redemption date is a Scheduled Interest Payment Date) to the redemption date. From and after the redemption date, if monies for the redemption of Securities called for redemption shall have been made available at the Principal Office of the Fiscal Agent for redemption on the redemption date, the Securities called for redemption shall cease to bear interest, and the only right of the holders with respect to such Securities or portion thereof being redeemed shall be to receive payment of the redemption price together with accrued interest (unless the redemption date is an Interest Payment Date) to the redemption date as aforesaid. If monies for the redemption of the Securities are not made available for payment until after the redemption date, the Securities called for redemption shall not cease to bear interest until such monies have been so made available. (e) Any Security which is to be redeemed only in part shall be surrendered with, if the Issuer or the Fiscal Agent so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Fiscal Agent duly executed by, the holder thereof or his attorney duly authorized in writing, and the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver to the holder of such Security without service charge, a new registered Security or Securities, of any authorized denomination as requested by such holder, and as permitted by Section 1(d) of the Agreement, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.] 16. No reference herein to the Fiscal Agency Agreement and no provision of this Security or of the Fiscal Agency Agreement shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. B-23 78 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY (Transfers and exchanges pursuant to ss.6(b) of the Fiscal Agency Agreement) The Chase Manhattan Bank, N.A. as Fiscal Agent 4 Chase MetroTech Center, 3rd Floor Brooklyn, New York 11245 Re: Metropolitan Life Insurance Company, ____% Surplus Notes scheduled to mature on November 1, (the "Securities") Reference is hereby made to the Fiscal Agency Agreement, dated as of November 1, 1993 (the "Fiscal Agency Agreement"), between Metropolitan Life Insurance Company, as Issuer, and The Chase Manhattan Bank, N.A., as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This letter relates to $_________________ principal amount of Restricted Definitive Securities held in definitive form by [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such Securities. In connection with such request and in respect of such Securities, the Transferor does hereby certify that (i) such Securities are owned by the Transferor and are being exchanged without transfer or (ii) such transfer has been effected pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Act"), and accordingly the Transferor does hereby further certify that: (1) the offer of the Securities was not made to a person in the United States; (2) either: (A) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States, or (B) the transaction was executed in, on or through the facilities of a designated offshore C-1 79 securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. Terms used in this certificate and not otherwise defined in the Fiscal Agency Agreement have the meanings set forth in Regulation S under the Act. [Insert Name of Transferor] By:__________________________ Name: Title: Dated: _________________, ________ cc: Metropolitan Life Insurance Company C-2 80 EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM RESTRICTED GLOBAL SECURITY TO REGULATION S GLOBAL SECURITY (Transfers Pursuant to ss. 6(c) (ii) of the Fiscal Agency Agreement) The Chase Manhattan Bank, N.A. as Fiscal Agent 4 Chase MetroTech Center, 3rd Floor Brooklyn, New York 11245 Re: Metropolitan Life Insurance Company, ____% Surplus Notes scheduled to mature on November 1, (the "Securities") Reference is hereby made to the Fiscal Agency Agreement, dated as of November 1, 1993 (the "Fiscal Agency Agreement"), between Metropolitan Life Insurance Company, as Issuer, and The Chase Manhattan Bank, N.A., as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This letter relates to $_________________ principal amount of Securities which are evidenced by a Restricted Global Security (CUSIP No. ________) and held with the U.S. Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Securities to a person who will take delivery thereof in the form of an equal principal amount of Securities evidenced by a Regulation S Global Security (CUSIP No. ___________), which amount, immediately after such transfer, is to be held with the U.S. Depositary through Euroclear or CEDEL or both (Common Code _______). In connection with such request and in respect of such Securities, the Transferor does hereby certify that such transfer has been effected pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Act"), and accordingly the Transferor does hereby further certify that: (1) the offer of the Securities was not made to a person in the United States; (2) either: (A) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf D- 1 81 reasonably believed that the transferee was outside the United States, or (B) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above was held with the U.S Depositary through Euroclear or CEDEL or both (Common Code _______ This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. Terms used in this certificate and not otherwise defined in the Fiscal Agency Agreement have the meanings set forth in Regulation S under the Act. [Insert Name of Transferor] By:__________________________ Name: Title: Dated: _________________, ________ cc: Metropolitan Life Insurance Company D-2 82 EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM RESTRICTED GLOBAL SECURITY TO UNRESTRICTED GLOBAL SECURITY (Transfers Pursuant to ss.6 (c) (iii) of the Fiscal Agency Agreement) The Chase Manhattan Bank, N.A. as Fiscal Agent 4 Chase MetroTech Center, 3rd Floor Brooklyn, New York 11245 Re: Metropolitan Life Insurance Company, ____% Surplus Notes scheduled to mature on November 1. (the "Securities") Reference is hereby made to the Fiscal Agency Agreement, dated as of November 1, 1993 (the "Fiscal Agency Agreement"), between Metropolitan Life Insurance Company, as Issuer, and The Chase Manhattan Bank, N.A., as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This letter relates to $__________________ principal amount of Securities which are evidenced by a Restricted Global Security (CUSIP No. _________) and held with the U.S. Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Securities to a person that will take delivery thereof in the form of an equal principal amount of Securities evidenced by an Unrestricted Global Security (CUSIP No._________). In connection with such request and in respect of such Securities, the Transferor does hereby certify that such transfer has been effected pursuant to and in accordance with Rule 903, Rule 904 or Rule 144 under the Act and accordingly the Transferor does hereby further certify that: (1) if the transfer has been effected pursuant to Rule 903 or Rule 904: (A) the offer of the Securities was not made to a person in the United States; E- 1 83 (B) either: (i) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States, or (ii) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; (C) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and (D) the transaction is not part of a plan or scheme to evade the registration requirements of the United States Securities Act of 1933, as amended (the "Act"); or (2) if the transfer has been effected pursuant to Rule 144, the Securities have been transferred in a transaction permitted by Rule 144. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. [Insert Name of Transferor] By:______________________________ Name: Title: Dated:________________, ______ cc: Metropolitan Life Insurance Company E-2 84 EXHIBIT F FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM REGULATION S GLOBAL SECURITY TO RESTRICTED GLOBAL SECURITY (Transfers Pursuant to ss. 6(c) (iv) of the Fiscal Agency Agreement) The Chase Manhattan Bank, N.A. as Fiscal Agent 4 Chase MetroTech Center, 3rd Floor Brooklyn, New York 11245 Re: Metropolitan Life Insurance Company, ____% Surplus Notes scheduled to mature on November 1, (the "Securities") Reference is hereby made to the Fiscal Agency Agreement, dated as of November 1, 1993 (the "Fiscal Agency Agreement"), between Metropolitan Life Insurance Company, as Issuer, and The Chase Manhattan Bank, N.A., as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This letter relates to $_______________ principal amount of Securities which are evidenced by a Regulation S Global Security (CUSIP No. ________) and held with the U.S. Depository through [Euroclear] [CEDEL] (Common Code _______ in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in Securities to a person that will take delivery thereof in the form of an equal principal amount of Securities evidenced by a Restricted Global Security (CUSIP No._____). In connection with such request, and in respect of such Securities, the Transferor does hereby certify that such transfer is being effected pursuant to and in accordance with Rule 144A under the Act and, accordingly, the Transferor does hereby further certify that the Securities are being transferred to a person that the Transferor reasonably believes is purchasing the Securities for its own account, or for one or more accounts with respect to which such person exercises sole investment discretion, and such person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. F-1 85 This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. [Insert Name of Transferor] By:__________________________ Name: Title: Dated: _________________, ________ cc: Metropolitan Life Insurance Company 86 EXHIBIT G-l EXHIBIT G-1 FORM OF OWNER SECURITIES CERTIFICATION CERTIFICATE METROPOLITAN LIFE INSURANCE COMPANY ____% Surplus Notes scheduled to mature on November 1, ________ This is to certify that, as of the date hereof, except as set forth below, the above-referenced Securities held by you for our account are beneficially owned by (a) non-U.S. person(s) or non-U.S. person(s) who purchased the Securities in transactions which did not require registration under the Act. As used in this paragraph the term "U.S. person" has the meaning given to it by Regulation S under the Securities Act of 1933, as amended (the "Act"). We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Securities held by you for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. [This certification excepts and does not relate to $________________ of such interest in the above Securities in respect of which we are not able to certify and as to which we understand exchange and delivery of definitive Securities (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.] G-1 87 We understand that this certification is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings. Dated:_____________________________________, _______* [Name of Person Making Certification] By:__________________________________________________ - ------------ * To be dated no earlier than 15 days prior to the exchange date to which the certification relates. EXHIBIT G-2 88 EXHIBIT G-2 FORM OF DEPOSITARY SECURITIES CERTIFICATION (TO BE GIVEN BY THE EUROCLEAR OPERATOR OR CEDEL S.A.) CERTIFICATE METROPOLITAN LIFE INSURANCE COMPANY __% Surplus Notes scheduled to mature on November 1, ______ (the "Securities") This is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organizations appearing in our records as persons being entitled to a portion of the principal amount set forth below (our "Member Organizations") substantially to the effect set forth in the Fiscal Agency Agreement, as of the date hereof, $____________ principal amount of the above-captioned Securities is owned by non-U.S. persons or U.S. persons who purchased the Securities in transactions which did not require registration under the United States Securities Act of 1933, as amended. We further certify (i) that we are not making available herewith for exchange any portion of the Regulation S Global Security excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange are no longer true and cannot be relied upon as of the date hereof. We understand that this certification is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with G-2-l 89 which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings. Dated:________________________________________, ______* [Name of Person Making Certification] By:____________________________________________________ - ------------- * To be dated no earlier than 15 days prior to the exchange date to which the certification relates. G-2-2 EX-10.46 12 1995 FISCAL AGENCY AGREEMENT 1 Exhibit 10.46 ================================================================================ FISCAL AGENCY AGREEMENT between METROPOLITAN LIFE INSURANCE COMPANY, Issuer and THE CHASE MANHATTAN BANK, N. A., Fiscal Agent --------------------------------- Dated as of November 13, 1995 --------------------------------- 7% Surplus Notes scheduled to mature on November 1, 2005 7.70% Surplus Notes scheduled to mature on November 1, 2015 7.80% Surplus Notes scheduled to mature on November 1, 2025 ================================================================================ 2 TABLE OF CONTENTS Page ---- 1. The Securities ........................................... 1 (a) General ............................................ 1 (b) Forms of Securities ................................ 1 (c) Book-Entry Provisions .............................. 3 (d) Denominations ...................................... 4 2. Fiscal Agent; Other Agents ............................... 4 3. Authentication 4. Payment and Cancellation ................................. 6 (a) Payment .............................................. 6 (b) Cancellation ......................................... 7 5. Global Securities ........................................ 8 6. Registration, Transfer and Exchange of Securities .................................. 9 (a) General ............................................. 9 (b) Transfers of Restricted Definitive Securities ........................................ 10 (c) Transfer of Global Securities and Interests Therein ................................. 11 (d) Successive Registrations ............................ 11 (e) Information ......................................... 11 (f) Suspension .......................................... 11 (g) Legends ............................................. 11 (h) ...................................................... 12 (i) ...................................................... 12 7. Delivery of Certain Information .......................... 12 (a) Rule 144A Information ............................... 12 (b) Periodic Reports .................................... 13 8. Conditions of Fiscal Agent's Obligations ................. 13 (a) Compensation and Indemnity .......................... 13 (b) Agency .............................................. 13 (c) Advice of Counsel ................................... 14 (d) Reliance ............................................ 14 (e) Interest in Securities, Etc. ........................ 14 (t) Non-Liability for Interest .......................... 14 (g) Certifications ...................................... 15 (h) No Implied Obligations .............................. 15 9. Resignation and Appointment of Successor ................. 15 (a) Fiscal Agent and Paying Agent ........................ 15 -i- 3 (b) Resignation .......................................... 15 (c) Successors ........................................... 16 (d) Acknowledgement ...................................... 17 (e) Merger, Consolidation, Etc. .......................... 17 10. Meetings and Amendments ................................... 18 (a) Calling of Meeting, Notice and Quorum ............... 18 (b) Approval ............................................ 19 (c) Binding Nature of Amendments, Notices, Notations, Etc. .......................... 21 (d) "Outstanding" Defined ............................... 22 11. Governing Law ............................................. 22 12. Notices ................................................... 22 13. Separability .............................................. 23 14. Headings .................................................. 23 15. Counterparts .............................................. 23 EXHIBIT A FORM OF DEFINITIVE SECURITY .......................... A-1 EXHIBIT B FORM OF GLOBAL SECURITY .............................. B-1 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY ................................ C-1 -ii- 4 FISCAL AGENCY AGREEMENT, dated as of November 13, 1995, between METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance corporation organized under the laws of the State of New York (the "Issuer"), having its principal office at One Madison Avenue, New York, New York, and THE CHASE MANHATTAN BANK, N.A., a banking organization organized under the laws of the United States, as Fiscal Agent (together with any successor as Fiscal Agent hereunder, the "Fiscal Agent") . The Exhibits attached hereto shall be deemed to be a part of this Agreement. 1. The Securities. (a) General. This Agreement is made in respect of $700,000,000 aggregate principal amount of Surplus Notes of the Issuer, consisting of $250,000,000 principal amount of 7% Surplus Notes scheduled to mature on November 1, 2005 (the "Notes scheduled to mature 2005"), $200,000,000 principal amount of 7.70% Surplus Notes scheduled to mature on November 1, 2015 (the "Notes scheduled to mature 2015") and $250,000,000 principal amount of 7.80% Surplus Notes scheduled to mature on November 1, 2025 (the "Notes scheduled to mature 2025") . The Notes scheduled to mature 2005, the Notes scheduled to mature 2015 and the Notes scheduled to mature 2025 are sometimes referred to herein collectively as the "Securities" or the "Notes", and each separately as a "Series" of Securities or Notes. Claims based upon the Securities will rank below all Indebtedness, Policy Claims and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). The payment by the Issuer of principal and interest on the Securities shall be conditioned upon the payment restrictions set forth in paragraphs 4 and 10 of the Securities (the "Payment Restrictions"). The Notes scheduled to mature 2005 are scheduled to mature on November 1, 2005, the Notes scheduled to mature 2015 are scheduled to mature on November 1, 2015, and the Notes scheduled to mature 2025 are scheduled to mature on November 1, 2025 (each such date, with respect to its respective series, the "Scheduled Maturity Date") . Any reference herein to the term "scheduled maturity date" or other date for the payment of principal of the Notes shall include the date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer. (b) Forms of Securities. The Securities are being offered and sold by the Issuer pursuant to a Purchase Agreement, dated November 8, 1995 (as may be amended, the 5 "Purchase Agreement"), between the Issuer and the Purchasers named therein (the "Purchasers"). (i) Securities (other than global Securities, as hereinafter defined) offered and sold pursuant to the Purchase Agreement to institutional investors that are "accredited investors", within the meaning of Rule 501(a) (l), (2), (3) or (7), or, if the equity owners thereof all meet one or more of the foregoing criteria, Rule 501 (a) (8) under the Securities Act of 1933, as amended (the "Act") ("Accredited Investors"), shall be issued in definitive, fully registered form without interest coupons, substantially in the form of Security attached as Exhibit A hereto, with such applicable legends as are provided for in Exhibit A ("definitive Securities"). Upon transfer of any definitive Security, registration of such transfer shall be effected in accordance with Section 6 hereof. (ii) Securities offered and sold in reliance on Rule 144A ("Rule 144A") under the Act pursuant to the Purchase Agreement shall be issued in the form of global Securities (the "global Securities") in definitive, fully registered form without interest coupons, substantially in the form of Security attached as Exhibit B hereto, with such applicable legends as are provided for in Exhibit B. Each such global Security shall be registered in the name of a nominee of The Depository Trust Company (the "Depositary") and deposited with the Fiscal Agent, at its New York office, as custodian for the Depositary, duly executed by the Issuer and authenticated by the Fiscal Agent as hereinafter provided. The aggregate principal amount of each global Security may from time to time be increased or decreased by adjustments made on the records of the Fiscal Agent, as custodian for the Depositary, as hereinafter provided. All Securities shall be issued substantially in the form of Security attached hereto as either Exhibit A or B and shall be executed manually or in facsimile on behalf of the Issuer by any two of its Chairman of the Board, President, Chief Financial Officer, Executive Vice Presidents, Senior Vice Presidents or Secretary (the "Authorized Officers"), notwithstanding that such officers, or any of them, shall have ceased, for any reason, to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of any such Security. The Securities (i) may also have such additional provisions, omissions, variations or substitutions as are not inconsistent with the provisions of this Agreement, and (ii) may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with this -2- 6 Agreement, any law or with any rules made pursuant thereto or with the rules of any securities exchange, insurance regulatory or other governmental agency or depositary therefor or as may, consistently herewith, be determined by the Authorized Officers executing such Securities, in each case (i) and (ii) as conclusively evidenced by their proper execution of such Securities. All Securities shall be otherwise substantially identical except as to maturity, interest rate, denomination and as otherwise provided herein. (c) Book-Entry Provisions. This Section 1(c) shall apply to all Securities evidencing all or part of the global Securities that are registered in the name of the Depositary or a nominee thereof. The Issuer shall execute and the Fiscal Agent shall, in accordance with this Section 1(c), authenticate and deliver one or more global Securities as required to be issued pursuant to Section 1(b) (ii) hereof, which (A) shall be registered in the name of the Depositary or its nominee, (B) shall be delivered by the Fiscal Agent to the Depositary or pursuant to the Depositary's instructions and (C) shall bear legends substantially to the following effect: "Unless this Security is presented by an authorized representative of [insert name of Depositary] to the Issuer or its agent for registration of transfer, exchange or payment, and any Security issued in exchange for this Security or any portion hereof is registered in the name of (insert name of nominee of Depositary] or in such other name as is requested by an authorized representative of [insert name of Depositary] (and any payment is made to [insert name of nominee of Depositary] or to such other entity as is requested by an authorized representative of [insert name of Depositary]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [insert name of Depositary] OR A NOMINEE THEREOF IS WRONGFUL inasmuch as the registered owner hereof, [insert name of nominee of Depositary], has an interest herein." "This Security is a global Security within the meaning of the Fiscal Agency Agreement referred to hereinafter. This global Security may not be exchanged, in whole or in part, for a Security registered in the name of any person other than [insert name of Depositary] or a nominee thereof, -3- 7 except in the limited circumstances set forth in Section 5 of the Fiscal Agency Agreement, and may not be transferred, in whole or in part, except in accordance with the restrictions set forth in Section 6(c) of the Fiscal Agency Agreement. Beneficial interests in this global Security may not be transferred except in accordance with Section 6(c) of the Fiscal Agency Agreement." Neither any members of, or participants, in, the Depositary ("Agent Members") nor any other persons on whose behalf Agent Members may act shall have any rights under this Fiscal Agency Agreement with respect to any global Security registered in the name of the Depositary or any nominee thereof, or under any such global Security, and the Depositary or such nominee, as the case may be, may be treated by the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent as the absolute owner and holder of such global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Fiscal Agent or any agent of the Issuer or the Fiscal Agent from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such persons governing the exercise of the rights of a holder of any Security. (d) Denominations. The Securities and beneficial interests in global Securities shall be issuable in minimum denominations of $250,000 and any amount in excess thereof that is an integral multiple of $1,000. 2. Fiscal Agent; Other Agents. The Issuer hereby appoints The Chase Manhattan Bank, N.A., acting through its corporate trust office at 4 Chase MetroTech Center, Brooklyn, New York 11245 and payment office at 1 Chase Manhattan Plaza, Level 1B; Institutional Trust Window, New York, New York 10081 (for payments, exchanges and transfers) in the Borough of Manhattan, The City of New York (together, the "Corporate Trust Office"), as fiscal agent of the Issuer in respect of the Securities upon the terms and subject to the conditions herein set forth, and The Chase Manhattan Bank, N.A. hereby accepts such appointment. The Chase Manhattan Bank, N.A., and any successor or successors as such fiscal agent qualified and appointed in accordance with Section 9 hereof, are herein called the "Fiscal Agent". The Fiscal Agent shall have the powers and authority granted to and conferred -4- 8 upon it in the Securities and hereby and such further powers and authority to act on behalf of the Issuer as may be mutually agreed upon by the Issuer and the Fiscal Agent. The Fiscal Agent shall keep a copy of this Agreement available for inspection during normal business hours at its Corporate Trust Office. The Fiscal Agent or any Paying Agent (as defined below) shall also act as Transfer Agent (as defined below). All of the terms and provisions with respect to such powers and authority contained in the Securities are subject to and governed by the terms and provisions hereof. The Issuer may, at its discretion, appoint one or more agents (a "Paying Agent" or "Paying Agents") for the payment, to the extent permitted under the Payment Restrictions, of the principal of and any interest on the Securities, and one or more agents (a "Transfer Agent" or "Transfer Agents") for the transfer and exchange of Securities, at such place or places as the Issuer may determine; provided, however, that the Issuer shall at all times maintain a Paying Agent and Transfer Agent in the Borough of Manhattan, The City of New York (which Paying Agent and Transfer Agent may be the Fiscal Agent). The Issuer hereby initially appoints the Fiscal Agent at its Corporate Trust Office as principal Paying Agent, Transfer Agent, authenticating agent and securities registrar, and the Fiscal Agent hereby accepts such appointment. Each Transfer Agent shall act as a security registrar and there shall be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as the Issuer may prescribe, the Issuer shall provide for the registration of Securities and the registration of transfers of Securities. The Issuer shall promptly notify the Fiscal Agent of the name and address of any other Paying Agent or Transfer Agent appointed by it and will notify the Fiscal Agent of the resignation or termination of any such Paying Agent or Transfer Agent. Subject to the provisions of Section 9(c) hereof, the Issuer may vary or terminate the appointment of any such Paying Agent or Transfer Agent at any time and from time to time upon giving not less than 90 days' notice to such Paying Agent or Transfer Agent, as the case may be, and to the Fiscal Agent. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent will act to be provided to holders of Securities. 3. Authentication. The Fiscal Agent is authorized, upon receipt of Securities duly executed on behalf of the Issuer for the -5- 9 purposes of the original issuance of Securities, (i) to authenticate said Securities in an aggregate principal amount not in excess of $250,000,000 in the case of the Notes scheduled to mature 2005, $200,000,000 in the case of the Notes scheduled to mature 2015, and $250,000,000 in the case of the Notes scheduled to mature 2025, and to deliver said Securities in accordance with the written order or orders of the Issuer signed on its behalf by an Authorized Officer and (ii) thereafter to authenticate and deliver Securities in accordance with the provisions therein and hereinafter set forth. The Fiscal Agent may, with the consent of the Issuer, appoint by an instrument or instruments in writing one or more agents (which may include itself) for the authentication of the Securities and, with such consent, vary or terminate any such appointment upon written notice and approve any change in the office through which any authenticating agent acts. The Issuer (by written notice to the Fiscal Agent and the authenticating agent whose appointment is to be terminated) may also terminate any such appointment at any time. The Fiscal Agent hereby agrees to solicit written acceptances from the entities concerned (in form and substance satisfactory to the Issuer) of such appointments. In its acceptance of such appointment, each such authenticating agent shall agree to act as an authenticating agent pursuant to the terms and conditions of this Agreement. 4. Payment and Cancellation. (a) Payment. For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer, subject to the Payment Restrictions, shall provide to the Fiscal Agent, in immediately available funds on or prior to 10:00 a.m., New York time, on each date on which a payment of principal of or any interest on the Securities shall be scheduled, as set forth in the text of the Securities, such amount, in U.S. dollars, as is necessary to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on the Securities in the manner, at the times and for the purposes set forth herein and in the text of said Securities; provided that (1) any permitted payment of interest on the Securities may be made by check mailed to the persons (the "registered owners") in whose names such Securities are registered on the register maintained pursuant to Section 6 hereof at the close of business on the record dates designated in the text of the Securities and (2) the Issuer will not provide any such funds to the Fiscal -6- 10 Agent prior to such time as the relevant payment of principal or interest is approved by the Superintendent of Insurance of the State of New York (the "Superintendent"). Permitted payments of principal of or any interest on the Securities may be made, in the case of a registered owner of at least $5,000,000 aggregate principal amount of Securities, by wire transfer to an account maintained by the payee with a bank as specified in the text of the Securities if such registered owner so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payment is to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to the provisions of Section 2 hereof for the payment, subject to the Payment Restrictions, from funds so paid by the Issuer of the principal of and any interest on the Securities in the manner, at the times and for the purposes set forth herein and in the text of said Securities. Notwithstanding the foregoing, the Issuer may provide directly to a Paying Agent funds for the payment, subject to the Payment Restrictions, of the principal thereof and interest payable thereon under an agreement with respect to such funds containing substantially the same terms and conditions set forth in this Section 4(a) and in Section 8(b) hereof; and the Fiscal Agent shall have no responsibility with respect to any funds so provided by the Issuer to any such Paying Agent. Payments of principal of and interest on the Securities shall be made in the manner set forth in the Securities, including the Payment Restrictions set forth therein. (b) Cancellation. All Securities delivered to the Fiscal Agent (or any other Agent appointed by the Issuer pursuant to Section 2 hereof) for payment, registration of transfer or exchange as provided herein or in the Securities shall be marked "cancelled" and, in the case of any other such Agent, forwarded to the Fiscal Agent. All such Securities shall be destroyed by the Fiscal Agent or such other person as may be jointly designated by the Issuer and the Fiscal Agent, which shall thereupon furnish certificates of such destruction to the Issuer. -7- 11 5. Global Securities. (a) Notwithstanding any other provisions of this Agreement or the Securities, a global Security shall not be exchanged in whole or in part for a Security registered in the name of any person other than the Depositary or one or more nominees thereof, provided that a global Security may also be exchanged for Securities registered in the names of any person designated by the Depositary in the event that (i) the Depositary has notified the Issuer that it is unwilling or unable to continue as Depositary for such global Security or such Depositary has ceased to be a "clearing agency" registered under the Securities Exchange Act of 1934 (as may be hereafter amended from time to time, the "Exchange Act"), (ii) an event described in paragraph 14(a) or the first sentence of paragraph 14(b) of the Securities has occurred and is continuing with respect to the Securities, (iii) a request for certificates has been made upon 60 days' prior written notice given to the Fiscal Agent in accordance with the Depositary's customary procedures and a copy of such notice has been received by the Issuer from the Fiscal Agent, or (iv) the holder of an interest (other than the initial purchaser thereof) in such global Security has notified the Fiscal Agent and registrar in writing that it is transferring such beneficial interest to an Accredited Investor who is not a "qualified institutional buyer" within the meaning of Rule 144A, who is required to hold its beneficial interest in the Securities in the form of a definitive Security. Any global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part and any global Security exchanged pursuant to clause (ii), (iii) or (iv) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a global Security or any portion thereof shall be a global Security, provided that any such Security so issued that is registered in the name of a person other than the Depositary or a nominee thereof shall not be a global Security. (b) Securities issued in exchange for a global Security or any portion thereof in accordance with Section 5(a) shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein, including, except as otherwise provided by Section 6(g), the legend regarding transfer restrictions applicable to the global Security set forth on the form of Security attached as Exhibit B hereto. Any -8- 12 global Security to be exchanged in whole shall be surrendered by the Depositary to the Transfer Agent located in the Borough of Manhattan, The City of New York, to be so exchanged. With regard to any global Security to be exchanged in part, either such global Security shall be so surrendered for exchange or, if the Fiscal Agent is acting as custodian for the Depositary or its nominee with respect to such global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Fiscal Agent. Upon any such surrender or adjustment, the Fiscal Agent shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (c) Subject to the provisions of Section 1(c) above, the registered holder may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a holder is entitled to take under this Fiscal Agency Agreement or the Securities. (d) In the event of the occurrence of any of the events specified in paragraph (a) of this Section 5, the Issuer will promptly make available to the Fiscal Agent a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. 6. Registration, Transfer and Exchange of Securities. (a) General. The Fiscal Agent, as agent of the Issuer for this purpose, shall maintain at its Corporate Trust Office in the Borough of Manhattan, The City of New York, a register of Securities for the registration of Securities and the transfers and exchanges thereof. Subject to the provisions of this Section 6, upon presentation for transfer or exchange of any Security at the office of any Transfer Agent accompanied by a written instrument of transfer or exchange in the form approved by the Issuer (it being understood that, until notice to the contrary is given to holders of Securities, the Issuer shall be deemed to have approved the form of instrument of transfer or exchange, if any, printed on any Security), executed by the registered holder, in person or by such holder's attorney thereunto duly authorized in writing, such Security shall be transferred upon the register for the Securities, and a new Security shall be authenticated and issued in the name of the transferee. -9- 13 (b) Transfers of Restricted Definitive Securities. If a holder of definitive, certificated Securities of any Series that bear or are required to bear the legends set forth in the form of Security attached as Exhibit A hereto ("Restricted Definitive Securities") wishes at any time to transfer such Restricted Definitive Securities or to exchange such Restricted Definitive Securities, such exchange or transfer may be effected only in accordance with the provisions of this Section 6(b). Upon the receipt by the Fiscal Agent, as Transfer Agent, at its office in The City of New York of (i) a Restricted Definitive Security accompanied by a written and executed instrument of transfer or exchange as provided in Section 6(a) and (ii) the following additional information and documents, as applicable: (1) if such Restricted Definitive Security is owned by the holder thereof and is being exchanged, without transfer, or if such Restricted Definitive Security is being transferred pursuant to an exemption from registration in accordance with Rule 144A, Rule 144 or Regulation S under the Act, a certification from such holder to that effect, substantially in the form of Exhibit C hereto; or (2) if the Restricted Definitive Security being transferred or exchanged contains a restrictive legend, certification to the effect that such transfer or exchange is in accordance with the restrictions contained in such legend, if required by the Fiscal Agent, the Fiscal Agent shall register the transfer of such Restricted Definitive Security or exchange such Restricted Definitive Security for an equal principal amount of Restricted Definitive Securities of other authorized denominations. To permit registrations of transfers and exchanges, the Issuer shall execute and the Fiscal Agent (or an authenticating agent appointed pursuant to Section 2) shall authenticate and deliver definitive Securities at the Fiscal Agent's or any Transfer Agent's request. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any transfer tax or other governmental charge payable in connection with any registration of transfer or exchange. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid -10- 14 obligations of the Issuer, subject to the Payment Restrictions, evidencing the same debt, and the applicable provisions of this Fiscal Agency Agreement shall apply equally thereto, as the Securities surrendered upon such registration of transfer or exchange. (c) Transfer of Global Securities and Interests Therein. A global Security may not be transferred, in whole or in part, to any person other than the Depositary or a nominee thereof, and no such transfer to any such other person may be registered; provided that this paragraph (c) shall not prohibit any transfer of a Security that is issued in exchange for a global Security but is not itself a global Security. No transfer of a Security to any person shall be effective under this Agreement or the Securities unless and until such Security has been registered in the name of such person. (d) Successive Registrations. Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Security register. No service charge shall be made for any registration of transfer or exchange of the Securities, but the Fiscal Agent may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith and any other amounts required to be paid by the provisions of the Securities. (e) Information. Any Transfer Agent appointed pursuant to Section 2 hereof shall provide to the Fiscal Agent such information as the Fiscal Agent may reasonably require in connection with the delivery by such Transfer Agent of Securities upon transfer or exchange of Securities. (f) Suspension. No Transfer Agent shall be required to make registrations of transfer or exchange of Securities during any periods designated in the text of the Securities as periods during which such registration of transfer and exchanges need not be made. (g) Legends. If Securities are issued upon the transfer, exchange or replacement of Securities not bearing the legends required, as applicable, by the form of Security attached as Exhibit A or Exhibit B hereto (collectively, the "Legend"), the Securities so issued shall not bear the Legend. If Securities are issued upon the transfer, exchange or replacement of Securities bearing the Legend, or if a request is made to remove the Legend on a Security, the Securities so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is -11- 15 delivered to the Issuer such satisfactory evidence, which may include an opinion of independent counsel licensed to practice law in the State of New York, as may be reasonably required by the Issuer that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Act or that such Securities are not "restricted securities" within the meaning of Rule 144 under the Act. Upon provision of such satisfactory evidence, the Fiscal Agent, at the direction of the Issuer, shall authenticate and deliver a Security that does not bear the Legend. The Issuer agrees to indemnify the Fiscal Agent for, and to hold it harmless against, any loss, liability or expense, including the fees and expenses of counsel, reasonably incurred, arising out of or in connection with actions taken or omitted by the Fiscal Agent in reliance upon such legal opinion and the delivery of a Security that does not bear a Legend. (h) With the prior approval of the Superintendent, the Issuer and any person that constitutes an affiliate of the Issuer within the meaning of the Act may at any time purchase Securities in the open market or otherwise at any price, for its own account or the account of others. Any Security so purchased by the Issuer or any such affiliate for its own account shall be promptly surrendered to the Fiscal Agent for cancellation and shall not thereafter be re-issued or resold. (i) The Notes scheduled to mature 2005, the Notes scheduled to mature 2015 and the Notes scheduled to mature 2025 may not be redeemed at the option of the Issuer or any holder of such Notes. 7. Delivery of Certain Information. (a) Rule 144A Information. At any time when the Issuer is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a holder of a definitive Security or the holder of a global Security or a beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished "Rule 144A Information" (as defined below) to such holder, or to a prospective purchaser of such Security or interest designated by such holder, in order to permit compliance by such holder with Rule 144A under the Act in connection with the resale of such Security by such holder. "Rule 144A Information" shall be such information as is specified pursuant to paragraph (d)(4) of Rule 144A (or any successor provision thereto), as such provisions (or successor provision) may be amended from time to time. -12- 16 (b) Periodic Reports. The Issuer shall deliver (or shall cause the Fiscal Agent to deliver) to each holder of a definitive Security, promptly after such items are available, one copy of each annual report to policyholders of the Issuer. In addition, upon the written request of a holder of a definitive Security or the holder of a global Security or a beneficial interest in a global Security, the Issuer shall promptly furnish or cause to be furnished to such holder one copy of the annual and quarterly statutory-basis financial statements of the Issuer as filed by the Issuer with the New York Department of Insurance. 8. Conditions of Fiscal Agent's Obligations. The Fiscal Agent accepts its obligations herein set forth upon the terms and conditions hereof, including the following, to all of which the Issuer agrees and all of which are applicable to the Securities and the holders from time to time thereof: (a) Compensation and Indemnity. The Fiscal Agent shall be entitled to reasonable compensation as agreed with the Issuer for all services rendered by it, and the Issuer agrees promptly to pay such compensation and to reimburse the Fiscal Agent for the reasonable out-of-pocket expenses (including reasonable counsel fees and expenses) incurred by it in connection with or arising out of its services hereunder, or the issuance of the Securities and their offering and sale. The Issuer also agrees to indemnify the Fiscal Agent for, and to hold it harmless against, any loss, damages, claim, liability or expense, incurred without negligence or bad faith, arising out of or in connection with its acting as Fiscal Agent hereunder, as well as the reasonable costs and expenses of defending against any claim of liability in the premises. The obligations of the Issuer under this Section 8(a) shall survive payment of all the Securities or the resignation or removal of the Fiscal Agent. (b) Agency. In acting under this Agreement and in connection with the Securities, the Fiscal Agent is acting solely as agent of the Issuer and does not assume any responsibility for the correctness of the recitals in the Securities (except for the correctness of the statement in its certificate of authentication thereon) or any obligation or relationship of agency or trust, for or with any of the owners or holders of the Securities, except that all funds held by the Fiscal Agent for the payment of principal of and any interest on the Securities, to the extent permitted under the Payment Restrictions, shall be held in trust for such owners or holders, as the case may be, as set forth -13- 17 herein and in the Securities; provided, however, that monies held in respect of the Securities remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer. Upon such repayment, the aforesaid trust with respect to the Securities shall terminate and all liability of the Fiscal Agent and Paying Agents with respect to such funds shall thereupon cease. (c) Advice of Counsel. The Fiscal Agent and any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof may consult with their respective counsel or other independent counsel satisfactory to them, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by them hereunder in good faith and without negligence and in accordance with such opinion. (d) Reliance. The Fiscal Agent and any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof each shall be protected and shall incur no liability for or in respect of any action taken or thing suffered by it in reliance upon any Security, notice, direction, consent, certificate, affidavit, statement, or other paper or document believed by it, in good faith and without negligence, to be genuine and to have been passed upon or signed by the proper parties. (e) Interest in Securities, Etc. The Fiscal Agent, any Paying Agent or Transfer Agent appointed by the Issuer pursuant to Section 2 hereof and their respective officers, directors and employees may become the owners of, or acquire any interest in, any Securities, with the same rights that they would have if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person, and may engage or be interested in any financial or other transaction with the Issuer, and may act on, or as depositary, trustee or agent for, any committee or body of holders of Securities or other obligations of the Issuer, as freely as if they were not the Fiscal Agent, such other Paying Agent or Transfer Agent or such person. (f) Non-Liability for Interest. Subject to any agreement between the Issuer and the Fiscal Agent to the contrary, the Fiscal Agent shall not be under any liability for interest on monies at any time received by it pursuant -14- 18 to any of the provisions of this Agreement or the Securities. (g) Certifications. Whenever in the administration of this Agreement the Fiscal Agent shall deem it desirable that a matter of fact be proved or established prior to taking, suffering or omitting any action hereunder, the Fiscal Agent (unless other evidence be herein specifically prescribed) may, in the absence of bad faith or negligence on its part, rely upon a certificate signed by an Authorized Officer and delivered to the Fiscal Agent as to such matter of fact. (h) No Implied Obligations. The duties and obligations of the Fiscal Agent and the Issuer with respect to matters governed by this Agreement shall be determined solely by the express provisions hereof, and neither the Fiscal Agent nor the Issuer shall be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement and the Securities, as applicable, and no implied covenants or obligations shall be read into this Agreement or the Securities against either the Fiscal Agent or the Issuer. Nothing in this Agreement shall be construed to require the Fiscal Agent to advance or expend its own funds. 9. Resignation and Appointment of Successor. (a) Fiscal Agent and Paying Agent. The Issuer agrees, for the benefit of the holders from time to time of the Securities, that there shall at all times be a Fiscal Agent hereunder which shall be a bank or trust company organized and doing business under the laws of the United States of America or the State of New York, in good standing and having an established place of business in the Borough of Manhattan, The City of New York, and authorized under such laws to exercise corporate trust powers, until all the Securities authenticated and delivered hereunder (i) shall have been delivered to the Fiscal Agent for cancellation or (ii) have become payable, with the approval of the Superintendent, and monies sufficient to pay the full principal of and any interest remaining unpaid on the Securities shall have been made available for payment and either paid or returned to the Issuer as provided herein and in such Securities. (b) Resignation. The Fiscal Agent may at any time resign by giving written notice to the Issuer of such intention on its part, specifying the date on which its desired resignation shall become effective, provided that such date shall not be less than 60 days from the date on -15- 19 which such notice is given, unless the Issuer agrees to accept shorter notice. The Fiscal Agent hereunder may be removed at any time by the filing with it of an instrument in writing signed on behalf of the Issuer and specifying such removal and the date when it shall become effective. Notwithstanding the dates of effectiveness of resignation or removal, as the case may be, to be specified in accordance with the preceding sentences, such resignation or removal shall take effect only upon the appointment by the Issuer, as hereinafter provided, of a successor Fiscal Agent (which, to qualify as such, shall for all purposes hereunder be a bank or trust company organized and doing business under the laws of the United States of America or of the State of New York, in good standing and having and acting through an established place of business in the Borough of Manhattan, The City of New York, authorized under such laws to exercise corporate trust powers and having a combined capital and surplus in excess of $50,000,000) and the acceptance of such appointment by such successor Fiscal Agent. Upon its resignation or removal, the Fiscal Agent shall be entitled to payment by the Issuer pursuant to Section 8 hereof of compensation for services rendered and to reimbursement of reasonable out-of-pocket expenses incurred hereunder. (c) Successors. In case at any time the Fiscal Agent (or any Paying Agent if such Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent) shall resign, or shall be removed, or shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or shall file a voluntary petition in bankruptcy or make an assignment for the benefit of its creditors or consent to the appointment of a receiver of all or any substantial part of its property, or shall admit in writing its inability to pay or meet its debts as they severally mature, or if a receiver of it or of all or any substantial part of its property shall be appointed, or if an order of any court shall be entered approving any petition filed by or against it under the provisions of applicable receivership, bankruptcy, insolvency or other similar legislation, or if any public officer shall take charge or control of it or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor Fiscal Agent or Paying Agent, as the case may be, qualified as aforesaid, shall be appointed by the Issuer by an instrument in writing, filed with the successor Fiscal Agent or Paying Agent, as the case may be, and the predecessor Fiscal Agent or Paying Agent, as the case may be. Upon the appointment as aforesaid of a successor Fiscal Agent or Paying Agent, as the case may be, and acceptance by such successor of such appointment, the Fiscal Agent or Paying -16- 20 Agent, as the case may be, so succeeded shall cease to be Fiscal Agent or Paying Agent, as the case may be, hereunder. If no successor Fiscal Agent or other Paying Agent, as the case may be, shall have been so appointed by the Issuer and shall have accepted appointment as hereinafter provided, and, in the case of such other Paying Agent, if such other Paying Agent is the only Paying Agent located in a place where, by the terms of the Securities or this Agreement, the Issuer is required to maintain a Paying Agent, then any holder of a Security who has been a bona fide holder of a Security for at least six months (which Security, in the case of such other Paying Agent, is referred to in this sentence), on behalf of himself and all others similarly situated, or the Fiscal Agent, may petition any court of competent jurisdiction for the appointment of a successor fiscal or paying agent, as the case may be. The Issuer shall give prompt written notice to each other Paying Agent of the appointment of a successor Fiscal Agent. (d) Acknowledgement. Any successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to the Issuer an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as Fiscal Agent hereunder and all provisions hereof shall be binding on such successor Fiscal Agent, and such predecessor, upon payment of its compensation and reimbursement of its disbursements then unpaid, shall thereupon become obligated to transfer, deliver and pay over, and such successor Fiscal Agent shall be entitled to receive, all monies, securities, books, records or other property on deposit with or held by such predecessor as Fiscal Agent hereunder. (e) Merger, Consolidation, Etc. Any bank or trust company into which the Fiscal Agent hereunder may be merged, or resulting from any merger or consolidation to which the Fiscal Agent shall be a party, or to which the Fiscal Agent shall sell or otherwise transfer all or substantially all the assets and business of the Fiscal Agent, provided that it shall be qualified as aforesaid, shall be the successor Fiscal Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. -17- 21 10. Meetings and Amendments. (a) Calling of Meeting, Notice and Quorum. A meeting of holders of Securities of a Series may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Securities of such Series to be made, given or taken by holders of Securities of such Series or to modify, amend or supplement the terms of the Securities of such Series or this Agreement as hereinafter provided, and subject to the requirement hereinafter set forth that the Issuer and the Fiscal Agent may, only with the prior approval of the Superintendent, modify, amend or supplement this Fiscal Agency Agreement or the terms of the Securities or give consents or waivers or take other actions with respect thereto. The Fiscal Agent may at any time call a meeting of holders of Securities of such Series for any such purpose to be held at such time and at such place in the Borough of Manhattan, The City of New York as the Fiscal Agent shall determine. Notice of every meeting of holders of Securities of a Series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given as provided in the terms of the Securities of such Series, not less than 30 nor more than 60 days prior to the date fixed for the meeting (provided that, in the case of any meeting to be reconvened after adjournment for lack of a quorum, such notice shall be so given not less then 15 nor more than 60 days prior to the date fixed for such meeting). In case at any time the Issuer or the holders of at least 10% in aggregate principal amount of the Outstanding Securities (as defined in subsection (d) of this Section) of a Series shall have requested the Fiscal Agent to call a meeting of the holders of Securities of such Series for any such purpose, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, the Fiscal Agent shall call such meeting for such purposes by giving notice thereof. To be entitled to vote at any meeting of holders of Securities of a Series, a person shall be a holder of Outstanding Securities of such Series or a person duly appointed by an instrument in writing as proxy for such a holder. The persons entitled to vote a majority in principal amount of the Outstanding Securities of a Series shall constitute a quorum. At the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the Outstanding Securities of a Series shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. The -18- 22 Fiscal Agent may make such reasonable and customary regulations consistent herewith as it shall deem advisable for any meeting of holders of Securities of a Series with respect to the proof of the appointment of proxies in respect of holders of Securities of such Series, the record date for determining the registered owners of Securities of such Series who are entitled to vote at such meeting (which date shall be designated by the Fiscal Agent and set forth in the notice calling such meeting hereinabove referred to and which shall be not less than 15 nor more than 60 days prior to such meeting, provided that nothing in this paragraph shall be construed to render ineffective any action taken by holders of the requisite principal amount of Outstanding Securities of a Series on the date such action is taken), the adjournment and chairmanship of such meeting, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. (b) Approval. (i) At any meeting of holders of Securities of a Series duly called and held as specified above, upon the affirmative vote, in person or by proxy thereunto duly authorized in writing, of the holders of not less than a majority in aggregate principal amount of the Securities of the Series then Outstanding represented at such meeting, or (ii) with the written consent of the holders of not less than a majority in aggregate principal amount of the Securities of such Series then Outstanding, in each case (i) or (ii) the Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, modify, amend or supplement the terms of the Securities of such Series or this Agreement in any way, and the holders of Securities of such Series may make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of future compliance or past failure to perform) or other action provided by this Agreement or the Securities of such Series to be made, given or taken by holders of Securities of such Series; provided, however, that any such action, modification, amendment or supplement to be effected pursuant to clause (i) of this subsection (b) shall be approved by the holders of not less than 25% of the aggregate principal amount of Securities of such Series then Outstanding; and provided, further, that no such action, modification, amendment or supplement, however effected, may, without the consent of the holder of each Security of such Series affected thereby, (A) change the Scheduled Interest Payment Date or Scheduled Maturity Date (in each case, as defined in the Securities of such Series) of the principal of or any installment of interest on any Security -19- 23 of such Series, (B) reduce the principal amount of any Security of such Series or the interest rate thereon, (C) change the currency in which, or the required place at which, payment with respect to interest or principal in respect of the Securities of such Series is payable, (D) change the Issuer's obligations under Section 7(a) hereof in any manner adverse to the interests of the holder of a Security of such Series, (E) impair the right of a holder of a Security of such Series to institute suit for the enforcement of any payment, if such payment is permitted under the Payment Restrictions, on or with respect to any Security of such Series, (F) reduce the above-stated percentage of the principal amount of Outstanding Securities of such Series the vote or consent of the holders of which is necessary to modify, amend or supplement this Agreement or the terms and conditions of the Securities of such Series or to make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of any future compliance or past failure to perform) or other action provided hereby or thereby to be made, taken or given, (G) reduce the percentage in aggregate principal amount of Outstanding Securities of such Series that constitutes the quorum required at any meeting of holders of Securities of such Series at which a resolution is adopted, (H) change the restrictions on payment set forth in the Securities in a manner adverse to such holder, or (I) change the provisions of Paragraph 10 of the Securities in a manner adverse to such holder. The Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, without the vote or consent of any holder of Securities, amend this Agreement or the Securities of a Series for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities of such Series, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities of such Series or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Securities of such Series as permitted by this Agreement and the Securities of such Series, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities of such Series to the extent required by any change in applicable law or regulation, or the interpretation thereof, or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any -20- 24 defective provision contained herein or in the Securities of such Series in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder. It shall not be necessary for the vote or consent of the holders of Securities to approve the particular form of any proposed modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action, but it shall be sufficient if such vote or consent shall approve the substance thereof. The Fiscal Agent may request an opinion of counsel in connection with any amendment or supplement entered into hereunder. (c) Binding Nature of Amendments, Notices, Notations, Etc. Any instrument given by or on behalf of any holder of a Security of a Series in connection with any consent to or vote for any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action shall be irrevocable once given and shall be conclusive and binding on all subsequent holders of such Security or any Security issued directly or indirectly in exchange or substitution therefor or in lieu thereof. Any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10(b) hereof shall be conclusive and binding on all holders of Securities of a Series, whether or not they have given such consent or cast such vote or were present at any meeting, and whether or not notation of such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action is made upon the Securities of such Series. Notice of any modification or amendment of, supplement to, or request, demand, authorization, direction, notice, consent, waiver or other action with respect to the Securities of a Series or this Agreement (other than for purposes of curing any ambiguity or of curing, correcting or supplementing any defective provision hereof or thereof) shall be given to each holder of Securities affected thereby, in all cases as provided in the Securities of such Series. Securities of a Series authenticated and delivered after the effectiveness of any such modification, amendment, supplement, request, demand, authorization, direction, -21- 25 notice, consent, waiver or other action may bear a notation in the form approved by the Fiscal Agent and the Issuer as to any matter provided for in such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action. New Securities of such Series modified to conform, in the opinion of the Fiscal Agent and the Issuer, to any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action taken, made or given in accordance with Section 10(b) hereof may be prepared by the Issuer, authenticated by the Fiscal Agent and delivered in exchange for Outstanding Securities of such Series. (d) "Outstanding" Defined. For purposes of the provisions of this Agreement and the Securities, any Security authenticated and delivered pursuant to this Agreement shall, as of any date of determination, be deemed to be "Outstanding", except: (i) Securities theretofore cancelled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation; (ii) Securities which have become payable, to the extent permitted under the Payment Restrictions, at the Scheduled Maturity Date or otherwise, and with respect to which, in each case, monies sufficient to pay the principal thereof and any interest thereon shall have been paid; and (iii) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to this Agreement; provided, however, that in determining whether the holders of the requisite principal amount of Outstanding Securities of a Series are present at a meeting of holders of Securities of such Series for quorum purposes or have consented to or voted in favor of any request, demand, authorization, direction, notice, consent, waiver, amendment, modification or supplement hereunder, Securities of such Series owned directly or indirectly by the Issuer, or any affiliate of the Issuer, shall be disregarded and deemed not to be Outstanding. 11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. -22- 26 12. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing, shall specify this Agreement by name and date and shall identify the Securities, and if sent to the Fiscal Agent shall be delivered, transmitted by facsimile or telegraphed to it at The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, 3rd Floor, Brooklyn, New York 11245, Attention: James D. Heaney, Corporate Trust Administration, telephone: (718) 242-7276, fax: (718) 242-5885, and if sent to the Issuer shall be delivered, transmitted by facsimile or telegraphed to it at Metropolitan Life Insurance Company, One Madison Avenue, New York, New York 10010, Attention: Senior Vice President and Treasurer, telephone: (212) 578-5705, fax: (212) 578-3910. The foregoing addresses for notices or communications may be changed by written notice given by the addressee to each party hereto, and the addressee's address shall be deemed changed for all purposes from and after the giving of such notice. If the Fiscal Agent shall receive any notice or demand addressed to the Issuer by the holder of a Security, the Fiscal Agent shall promptly forward such notice or demand to the Issuer. 13. Separability. In case any provision in this Agreement or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 14. Headings. The section headings herein are for convenience of reference only and shall not affect the construction hereof. 15. Counterparts. This Agreement may be executed in one or more counterparts, and by each party separately on a separate counterpart, and each such counterpart when executed and -23- 27 delivered shall be deemed to be an original. Such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Fiscal Agency Agreement as of the date first above written. METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Arthur G. Typermass ------------------------------------- Name: Arthur G. Typermass Title: Senior Vice-President and Treasurer THE CHASE MANHATTAN BANK, N.A. By: /s/ J.D. Heaney ------------------------------------- Name: J.D. Heaney Title: Vice-President Attest: /s/ Kathleen Perry ---------------------------- KATHLEEN PERRY ASSISTANT SECRETARY -24- 28 EXHIBIT A FORM OF DEFINITIVE SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM AND IN ACCORDANCE WITH THE FISCAL AGENCY AGREEMENT, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE FISCAL AGENT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM SUCH REGISTRATION PROVIDED BY RULE 144A UNDER THE ACT (TOGETHER WITH ANY SUCCESSOR PROVISION AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "RULE 144A"). [INCLUDE IF SECURITY IS A DEFINITIVE SECURITY OR SECURITY ISSUED IN EXCHANGE THEREFOR (UNLESS, PURSUANT TO SECTION 6(G) OF THE FISCAL AGENCY AGREEMENT, THE ISSUER DETERMINES THAT THE LEGEND MAY BE REMOVED)] -- THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF METROPOLITAN LIFE INSURANCE COMPANY (THE "ISSUER") THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (l) BY THE INITIAL INVESTOR (I) IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A, IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S (TOGETHER WITH ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "REGULATION S") UNDER THE ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (l) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO AN INSTITUTIONAL INVESTOR THAT IS AN "ACCREDITED INVESTOR", AS DEFINED IN RULE 501(a) (l), (2), (3) OR (7) OR, IF THE EQUITY OWNERS THEREOF ALL MEET ONE OR MORE OF THE FOREGOING CRITERIA, RULE 501 (a) (8), UNDER THE ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT, IF THE HOLDER PROPOSES TO SELL OR TRANSFER THIS SECURITY TO ANY EMPLOYEE BENEFIT PLAN (AS A-1 29 DEFINED IN SECTION 3 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED), THE HOLDER WILL COMPLY WITH THE RESTRICTIONS SET FORTH IN PARAGRAPH 9 HEREOF. PAYMENTS OF PRINCIPAL AND INTEREST ON THIS SECURITY MAY ONLY BE MADE OUT OF THE ISSUER'S FREE AND DIVISIBLE SURPLUS AND WITH THE PRIOR APPROVAL OF THE SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK (THE "SUPERINTENDENT"), IN ACCORDANCE WITH SECTION 1307 OF THE NEW YORK INSURANCE LAW (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "SECTION 1307"). THERE ARE NO GUIDELINES OR INTERPRETATIONS AS TO THE EXTENT OF THE SUPERINTENDENT'S DISCRETION UNDER SECTION 1307 IN DETERMINING WHETHER THE FINANCIAL CONDITION OF THE ISSUER WARRANTS THE MAKING OF SUCH PAYMENTS. A-2 30 METROPOLITAN LIFE INSURANCE COMPANY ___% Surplus Note scheduled to mature on November 1, 20___ No. R-_____ $______________ METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the State of New York (herein called the "Issuer"), for value received, hereby promises to pay, subject to the approval of the Superintendent pursuant to Section 1307, to_____________________ or registered assigns, the principal sum of ______________ United States dollars ($___________) on November 1, 20__ (the "Scheduled Maturity Date") , and to pay interest thereon, subject to the approval of the Superintendent pursuant to Section 1307, from November 1, 1995 or from the most recent Scheduled Interest Payment Date to which interest has been paid or duly provided for, semiannually in arrears on May 1 and November 1 in each year, commencing May 1, 1996 (each a "Scheduled Interest Payment Date"), at the rate of ___% per annum, until the principal hereof is paid or duly provided for. This Security is not subject to redemption prior to the Scheduled Maturity Date. The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall also be deemed to be the scheduled maturity date. As specified on the reverse hereof, all payments of principal of or interest on this Security may be made only out of the Issuer's free and divisible surplus and only with the prior approval of the Superintendent. The interest so payable, and punctually paid or duly provided for, on any Scheduled Interest Payment Date shall be paid, in accordance with the terms of the Fiscal Agency Agreement hereinafter referred to, to the person (the "registered holder") in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the April 15 or the October 15 (whether or not a Business Day (as defined on the reverse hereof), as the case may be (each a "Regular Record Date"), next preceding such Scheduled Interest Payment Date. Interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered holder on such Regular Record Date and shall be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Issuer, notice whereof shall be given to registered holders of the Securities not less than 15 days prior to such special record date. A-3 31 Principal of this Security shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent hereinafter referred to and at the offices of such other Paying Agents as the Issuer shall have appointed pursuant to the Fiscal Agency Agreement. Payments of principal of the Securities shall be made only against surrender of the Securities. Payments of interest on this Security may be made, in accordance with the foregoing and subject to applicable laws and regulations, by check mailed on or before the scheduled payment date of such payment to the person entitled thereto at such person's address appearing on the aforementioned register. In the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, payments of principal or interest may be made by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the applicable scheduled payment date or scheduled maturity date hereof, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer agrees that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the full principal of and interest remaining unpaid on this Security have been made available for payment and either paid or returned to the Issuer as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York for the payment of the principal of and interest on the Securities as herein provided. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security may be executed by the Issuer by manual or facsimile signatures, and such signatures may be executed on separate counterparts. Unless the certificate of authentication hereon has been executed by the Fiscal Agent by manual signature, A-4 32 this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: METROPOLITAN LIFE INSURANCE COMPANY By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. THE CHASE MANHATTAN BANK, N.A. as Fiscal Agent By: ---------------------------------- Authorized Officer A-5 33 FORM OF REVERSE 1. This Security is one of a duly authorized issue of __% Surplus Notes scheduled to mature on November 1, 20__ of the Issuer (herein called the "Securities" or "Notes"), limited in aggregate principal amount to $[__,000,000]. The Issuer and The Chase Manhattan Bank, N.A. (as "Fiscal Agent") have entered into a Fiscal Agency Agreement, dated as of __________, 1995 (such instrument, as it may be duly amended from time to time, is herein called the "Fiscal Agency Agreement"), which provides for the mechanism for issuing the Securities and, inter alia, sets forth certain duties of the Fiscal Agent in connection therewith. As used herein, the term "Fiscal Agent" includes any successor fiscal agent under the Fiscal Agency Agreement. Copies of the Fiscal Agency Agreement are on file and available for inspection at the corporate trust office of the Fiscal Agent in the Borough of Manhattan, The City of New York. Holders of Securities are referred to the Fiscal Agency Agreement for a statement of the terms thereof, including those relating to transfer, payment, exchanges and certain other matters. The Fiscal Agent or any Paying Agent shall also act as Transfer Agent and Securities registrar. Terms used herein which are defined in the Fiscal Agency Agreement but not otherwise defined herein shall have the meanings assigned to such terms in the Fiscal Agency Agreement. The Securities are direct and unsecured obligations of the Issuer and, subject to the payment restrictions contained in paragraphs 4 and 10 hereof (the "Payment Restrictions"), are scheduled to mature on November 1, 20__. Section 1307 provides that the Securities are not part of the legal liabilities of the Issuer and are not a basis of any set-off against the Issuer. The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall be deemed to be the scheduled maturity date. 2. The Securities are issuable only in fully registered form without coupons. Securities are issuable in minimum denominations of $250,000 and integral multiples of $1,000 above that amount. 3. The Issuer shall maintain, in the Borough of Manhattan, The City of New York, a Transfer Agent where Securities may be registered or surrendered for registration A - 6 34 of transfer or exchange. The Issuer has initially appointed the corporate trust office of the Fiscal Agent as its Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause each Transfer Agent to act as a Securities registrar and shall cause to be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Securities and registration of transfers of Securities. The Issuer reserves the right to vary or terminate the appointment of any Transfer Agent or to appoint additional or other Transfer Agents or to approve any change in the office through which any Transfer Agent acts, provided that there shall at all times be a Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent shall act to be provided to holders of Securities. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, the transfer of a Security is registrable on the aforementioned register upon surrender of such Security at any Transfer Agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the registered holder thereof or his attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, at the option of the registered holder upon request confirmed in writing, Securities may be exchanged for Securities of any authorized denominations and aggregate principal amount upon surrender of the Securities to be exchanged at the office of any Transfer Agent. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, the Securities which the registered holder making the exchange is entitled to receive. Any registration of transfer or exchange shall be effected upon the Issuer being satisfied with the documents of title and identity of the person making the request and subject to the restrictions set forth in the immediately following paragraph and such reasonable regulations as the Issuer may from time to time agree with the Fiscal Agent. A-7 35 All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent may treat the person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer nor the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 4. (a) Notwithstanding anything to the contrary set forth herein or in the Fiscal Agency Agreement, any payment of principal of, interest on or any monies owing with respect to this Security, whether at the scheduled payment date or scheduled maturity date specified herein or otherwise, may be made only (i) out of the free and divisible surplus of the Issuer which the Superintendent determines to be available for such payments under Section 1307 and (ii) with the prior approval of the Superintendent whenever, in his judgment, the financial condition of the Issuer warrants such payment, in accordance with Section 1307. If the Superintendent does not approve the making of any payment of principal of or interest on this Security on the scheduled payment date or scheduled maturity date thereof, as specified herein, the scheduled payment date or scheduled maturity date, as the case may be, shall be extended and such payment shall be made by the Issuer on the next following Business Day on which the Issuer shall have the approval of the Superintendent to make such payment. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the rate of interest stated on the face hereof. Interest will not accrue on interest with respect to which the scheduled payment date has been extended, during the period of such extension. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. A-8 36 (b) Any payment of principal of or interest on any Security as to which the approval of the Superintendent has been obtained and which is not punctually paid or duly provided for on the scheduled payment date or scheduled maturity date thereof, as set forth herein (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of this Security on the relevant record date designated herein, and such Unpaid Amount will instead be payable to the registered owner of this Security on a subsequent special record date. The Issuer shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Issuer shall mail to each holder of the Securities and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each holder of the Securities in the manner set forth in Section 4(a) of the Fiscal Agency Agreement. 5. (a) For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer shall provide, subject to the Payment Restrictions, to the Fiscal Agent in immediately available funds on or prior to 10:00 a.m., New York time, of each date on which a payment of principal of or any interest on this Security is payable, as set forth herein, such amounts as are necessary (with any amounts then held by the Fiscal Agent and available for the purpose) to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on this Security as set forth herein and in the Fiscal Agency Agreement. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 principal amount of Securities, by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to A-9 37 the provisions of Section 2 of the Fiscal Agency Agreement for the payment from funds so paid by the Issuer of the principal of and any interest on this Security. Any monies held in respect of this Security remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer upon written request and upon such repayment all liability of the Fiscal Agent with respect thereto shall cease, without, however, limiting in any way any obligation the Issuer may have to pay the principal of and interest on this Security, subject to the Payment Restrictions. (b) In any case where the scheduled payment date or scheduled maturity date of any Security shall be at any place of payment a day on which banking institutions are not carrying out transactions in U.S. dollars or are authorized or obligated by law or executive order to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place which is not a day on which banking institutions in the applicable jurisdiction are generally authorized or obligated by law or executive order to close (a "Business Day"), with the same force and effect as if made on the scheduled payment date or scheduled maturity date thereof, and no interest shall accrue for the period after such date. 6. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision thereof or taxing authority of or in the foregoing with respect to the Fiscal Agency Agreement or the initial issuance of this Security. Except as otherwise specifically provided in this Security, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or any political subdivision or taxing authority thereof or therein. 7. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, (a) Except with respect to transactions covered by Paragraph 8 hereof, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights (charter A-10 38 and statutory) and franchise; provided, however, that the Issuer shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the Issuer has used its best efforts to not disadvantage in any material respect the holders of the Securities, or that not preserving such right or franchise is in the best interest of the policyholders of the Issuer having considered the interests of the holders of the Securities. (b) The Issuer will not be or become an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), if such action would cause the Issuer to be in violation of the Investment Company Act at any time prior to payment in full of the Securities. (c) The Issuer shall use its best efforts to obtain the approval of the Superintendent in accordance with Section 1307 for the payment by the Issuer of interest on and principal of the Securities on the scheduled payment dates or scheduled maturity dates thereof, and, in the event any such approval has not been obtained for any such payment at or prior to the scheduled payment date or scheduled maturity date thereof, as the case may be, to continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to the scheduled payment date or scheduled maturity date thereof (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer), the Issuer will seek the approval of the Superintendent to make each payment of interest on and principal of the Securities. In addition, the Issuer shall notify or cause to be notified the Fiscal Agent no later than 5 Business Days (as defined herein), and the Fiscal Agent will notify each holder, prior to the scheduled payment date for interest on or the scheduled maturity date for principal of any Security (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer) in the event that the Superintendent has not then approved the making of any such payment on such scheduled payment date or such scheduled maturity date, and thereafter shall promptly notify the Fiscal Agent, and the Fiscal Agent will notify each holder, in the event that the Issuer shall have failed A-11 39 to make any such payment on any such scheduled payment date or such scheduled maturity date. 8. For so long as any of the Securities remain Outstanding or any amounts remain unpaid on any of the Securities, the Issuer may convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other corporation or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any person, firm or corporation, if (i) (A) in the case of a merger or consolidation, the Issuer is the surviving corporation or (B) in the case of a merger or consolidation where the Issuer is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor corporation is a corporation organized and existing under the laws of the United States or a State thereof and such corporation expressly assumes by supplemental fiscal agency agreement all the obligations of the Issuer under the Securities and the Fiscal Agency Agreement, (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer or other disposition, the Issuer shall not have failed to make payment of interest on or principal of the Securities after having received the Superintendent's prior approval to make such payment and (iii) the Issuer has delivered to the Fiscal Agent an Officer's Certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this paragraph and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Issuer as provided in clause (i) (B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Issuer hereunder and under the Fiscal Agency Agreement and all such obligations of the Issuer shall terminate. 9. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as to which the Issuer is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Security, unless the acquisition of the Security is exempt under one or more of Prohibited Transaction exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Security shall constitute a representation by such A-12 40 Person to the Issuer and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, and may acquire this Security under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Securities set forth in this Paragraph 9 are in addition to those otherwise set forth in Section 6 of the Fiscal Agency Agreement and under applicable law. 10. (a) The Issuer agrees, and each Security holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Paragraph, to the prior payment in full of all Indebtedness, Policy Claims and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). (b) Upon any distribution to creditors of the Issuer in any rehabilitation, liquidation, conservation, dissolution or reorganization proceeding relating to the Issuer or its property, the priority of claims of Security holders shall be determined in accordance with Section 7435. In a proceeding commenced under Article 74 of the New York Insurance Law, claims for principal of or interest on the Securities constitute Class 7 claims under Section 7435, as currently in effect. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (c) If a distribution is made to Security holders that, because of this Paragraph, should not have been made to them, the Security holders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Other Creditor Claims and pay it over to them as their interests may appear. (d) The Issuer shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Issuer that would cause a payment of principal of or interest on the Securities to violate this Paragraph. (e) This Paragraph defines the relative rights of Security holders, on the one hand, and holders of any other claims, in accordance with Section 7435, on the other hand. Nothing in this Security or the Fiscal Agency Agreement A-13 41 shall (i) impair, as between the Issuer and Security holders, the obligation of the Issuer which is, subject to the Payment Restrictions, absolute and unconditional to pay principal of and interest on the Securities in accordance with their terms; (ii) affect the relative rights of Security holders and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Other Creditor Claims; or (iii) prevent the Fiscal Agent or any Security holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Other Creditor Claims to receive distributions otherwise payable to Security holders. (f) No right of any holder of Policy Claims, Indebtedness or Other Creditor Claims to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Issuer or by its failure to comply with the terms of this Fiscal Agency Agreement. (g) Each holder of Securities, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Paragraph and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. As used herein, "Indebtedness" of the Issuer shall mean (i) all existing or future indebtedness of the Issuer for borrowed money, (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) all existing or future obligations of the Issuer under any agreement obligating the Issuer to cause another person to maintain a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) any expense or any claim or amount, to the extent that payment of principal of and interest on the Securities is required by law to be subordinated to the prior payment thereof. Any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, the Securities shall not constitute Indebtedness. However, under current law the Issuer cannot issue any indebtedness which by its terms is subordinate to the Securities. In addition, any other surplus notes or similar obligations of the Issuer, including the Issuer's 6.30% Surplus Notes scheduled to mature on November 1, 2003 and its 7.45% Surplus Notes scheduled to mature on November 1, 2023, shall not constitute Indebtedness and will rank pari passu with the Securities. A-14 42 As used herein, "Policy Claims" shall mean all existing or future claims of policyholders or beneficiaries, as the case may be, under any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts, and funding agreements issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and all claims of The Life Insurance Company Guaranty Corporation of New York or any other guaranty corporation or association of New York or any other jurisdiction, other than claims described in clause (i) of the definition of "Other Creditor Claims" below and claims for interest. As used herein, "Other Creditor Claims" shall mean all other claims which, pursuant to Section 7435, have priority over claims with respect to the Securities. Under Section 7435 as currently in effect, such other claims include (i) claims with respect to the actual and necessary costs and expenses of administration incurred by a liquidator, conservator, rehabilitator or ancillary rehabilitator under Section 7435; (ii) claims with respect to the actual and necessary costs and expenses of administration incurred by The Life Insurance Guaranty Corporation or The Life Insurance Company Guaranty Corporation of New York; (iii) claims of The Life Insurance Company Guaranty Corporation for certain funds loaned to the Superintendent under Section 7713(d) of the New York Insurance Law; (iv) debts up to $1,200 due to employees for services performed within one year of the commencement of rehabilitation, liquidation, conservation, dissolution or reorganization proceedings; (v) claims for payment for goods furnished or services rendered in the ordinary course of business within 90 days of the declaration of the impairment or insolvency of the Issuer; (vi) claims of the federal or any state or local government (except in the case of claims for a penalty or forfeiture which are included only to the extent of pecuniary loss and reasonable costs occasioned by the act giving rise to the forfeiture or penalty); and (vii) claims of general creditors and all other claims having priority under Section 7435. 11. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, the Issuer shall, in accordance with Rule 144A, comply with the terms of the agreements set forth in Section 7 of the Fiscal Agency Agreement. The provisions of A-15 43 Sections 7 and 8 of the Fiscal Agency Agreement are hereby incorporated mutatis mutandis herein. 12. In case this Security shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and upon the Issuer's request the Fiscal Agent shall authenticate and deliver a new Security, having a number not contemporaneously outstanding, of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on this Security, in exchange and substitution for this Security (upon surrender and cancellation thereof) or in lieu of and substitution for this Security. In the case where this Security is destroyed, lost or stolen, the applicant for a substituted Security shall furnish to the Issuer such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of this Security, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Security and of the ownership thereof, provided, however, that if the registered holder hereof is, in the judgment of the Issuer, an institution of recognized responsibility, such holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Security in lieu of and substitution for this Security. The Fiscal Agent shall authenticate any such substituted Security and deliver the same only upon written request or authorization of the Issuer. Upon the issuance of any substituted Security, the Issuer may require the payment by the registered holder thereof of a sum sufficient to cover fees and expenses connected therewith. In case this Security has matured or is about to mature and shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except if this Security is mutilated or defaced) upon compliance by the registered holder with the provisions of this Paragraph 12 as hereinabove set forth. 13. Section 10 of the Fiscal Agency Agreement, which Section is hereby incorporated mutatis mutandis by reference herein, provides that, with certain exceptions as therein provided and with the consent of the holders of a majority of the principal amount of the Outstanding Securities of this series present at a meeting duly called pursuant thereto or by written consent of such percentage of the prIncipal amount of all Outstanding Securities, the Issuer and the Fiscal Agent may, with the prior approval of A-16 44 the Superintendent, modify, amend or supplement the Fiscal Agency Agreement or the terms of the Securities of this series or may give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall be conclusive and binding on the holder of this Security and on all future holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation thereof is made upon this Security. The Fiscal Agency Agreement and the terms of the Securities may, with the prior approval of the Superintendent, be modified or amended by the Issuer and the Fiscal Agent, without the consent of any holders of Securities, for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities pursuant to the requirements hereof, thereof or otherwise, or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Fiscal Agency Agreement as permitted by the Securities and the Fiscal Agency Agreement, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Fiscal Agency Agreement in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder, to all of which each holder of any Security, by acceptance thereof, consents. 14. Holders of Securities may enforce the Fiscal Agency Agreement or the Securities only in the manner set forth below. (a) In the event that any state or federal agency shall obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer, the Securities of all Series will upon the obtaining of such an order or the granting of such approval immediately mature in full without any action on the part of the A-17 45 Fiscal Agent or any holder of the Securities, with payment thereon being subject to the Payment Restrictions, and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, in no event shall the Fiscal Agent or any holder of the Securities be entitled to declare the Securities to immediately mature or otherwise be immediately payable. (b) In the event that the Superintendent approves in whole or in part a payment of any interest on or principal of any Securities and the Issuer fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any holder of Securities. In the event that the Issuer fails to perform any of its other obligations hereunder or under the Fiscal Agency Agreement, each holder of the Securities may pursue any available remedy to enforce the performance of any provision of such Securities or the Fiscal Agency Agreement, provided, however, that such remedy shall in no event include the right to declare the Securities immediately payable, and shall in no circumstances be inconsistent with the provisions of Section 1307. A delay or omission by any Security holder in exercising any right or remedy accruing as a result of the Issuer's failure to perform its obligations hereunder or under the Fiscal Agency Agreement and the continuation thereof shall not impair such right or remedy or constitute a waiver of or acquiescence in such non-performance by the Issuer. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. (c) Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, the right of any holder of Securities to receive payment of the principal of and interest on such holder's Securities on or after the respective scheduled payment or scheduled maturity dates expressed in such Securities, or to bring suit for the enforcement of any such payment on or after such respective scheduled payment or scheduled maturity dates, in each case subject to such payment on such dates having received the approval of the Superintendent pursuant to the Payment Restrictions, including the approval of the Superintendent pursuant to Section 1307, is absolute and unconditional and shall not be impaired or affected without the consent of the holder. A-18 46 15. No reference herein to the Fiscal Agency Agreement and no provision of this Security or of the Fiscal Agency Agreement shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. A-19 47 EXHIBIT B FORM OF GLOBAL SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM AND IN ACCORDANCE WITH THE FISCAL AGENCY AGREEMENT, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE FISCAL AGENT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM SUCH REGISTRATION PROVIDED BY RULE 144A UNDER THE ACT (TOGETHER WITH ANY SUCCESSOR PROVISION AND AS SUCH MAY BE HEREAFTER AMENDED FROM TIME TO TIME), "RULE 144A"). UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] TO METROPOLITAN LIFE INSURANCE COMPANY (THE "ISSUER") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IN EXCHANGE FOR THIS SECURITY OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF DEPOSITARY] OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF DEPOSITARY] OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF DEPOSITARY], HAS AN INTEREST HEREIN. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER. THIS GLOBAL SECURITY MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A SECURITY REGISTERED IN THE NAME OF ANY PERSON OTHER THAN [INSERT NAME OF DEPOSITARY] OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES SET FORTH IN SECTION 5 OF THE FISCAL AGENCY AGREEMENT, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 6(C) OF THE FISCAL AGENCY AGREEMENT. [INCLUDE IF SECURITY IS A GLOBAL SECURITY OR SECURITY ISSUED IN EXCHANGE THEREFOR (UNLESS, PURSUANT TO SECTION 6(G) OF THE FISCAL AGENCY AGREEMENT, THE ISSUER DETERMINES THAT THE LEGEND MAY BE REMOVED)] - - THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) IN A B-1 48 MINIMUM PRINCIPAL AMOUNT OF $250,000 TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S (TOGETHER WITH ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "REGULATION S") UNDER THE ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO AN INSTITUTIONAL INVESTOR THAT IS AN "ACCREDITED INVESTOR", AS DEFINED IN RULE 501(a) (1), (2), (3) or (7) OR, IF THE EQUITY OWNERS THEREOF ALL MEET ONE OR MORE OF THE FOREGOING CRITERIA, RULE 501(a) (8), UNDER THE ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT, IF THE HOLDER PROPOSES TO SELL OR TRANSFER THIS SECURITY TO ANY EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED), THE HOLDER WILL COMPLY WITH THE RESTRICTIONS SET FORTH IN PARAGRAPH 9 HEREOF. PAYMENTS OF PRINCIPAL AND INTEREST ON THIS SECURITY MAY ONLY BE MADE OUT OF THE ISSUER'S FREE AND DIVISIBLE SURPLUS AND WITH THE PRIOR APPROVAL OF THE SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, IN ACCORDANCE WITH SECTION 1307 OF THE NEW YORK INSURANCE LAW (TOGETHER WITH ANY SUCCESSOR PROVISION, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "SECTION 1307"). THERE ARE NO GUIDELINES OR INTERPRETATIONS AS TO THE EXTENT OF THE SUPERINTENDENT'S DISCRETION UNDER SECTION 1307 IN DETERMINING WHETHER THE FINANCIAL CONDITION OF THE ISSUER WARRANTS THE MAKING OF SUCH PAYMENTS. B-2 49 METROPOLITAN LIFE INSURANCE COMPANY __% Surplus Note scheduled to mature on November 1, 20 CUSIP NO.:_______ No. R-___________ $____________ METROPOLITAN LIFE INSURANCE COMPANY, a mutual life insurance company organized under the laws of the State of New York (herein called the "Issuer"), for value received, hereby promises to pay, subject to the approval of the Superintendent pursuant to Section 1307, to ______________________ or registered assigns, the principal sum of ______________ United States dollars ($____________), or such other amount (not to exceed [ ] million dollars ($[__,000,000]) when taken together with all of the Issuer's __% Surplus Notes scheduled to mature on November 1, 20__ issued and outstanding in definitive certificated form or in the form of another global Security) as may from time to time represent the principal amount of the Issuer's __% Surplus Notes scheduled to mature on November 1, 20__ in respect of which beneficial interests, are held through the Depositary in the form of a global Security, on November 1, 20__ (the "Scheduled Maturity Date"), and to pay interest thereon, subject to the approval of the Superintendent pursuant to Section 1307, from November 1, 1995 or from the most recent Scheduled Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on May 1 and November 1 in each year, commencing May 1, 1996 (each a "Scheduled Interest Payment Date"), at the rate of ___% per annum, until the principal hereof is paid or duly provided for. This Security is not subject to redemption prior to the Scheduled Maturity Date. The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall also be deemed to be the scheduled maturity date. As specified on the reverse hereof, all payments of principal of (and premium, if any, on) or interest on this Security may be made only out of the Issuer's free and divisible surplus and only with the prior approval of the Superintendent. The interest so payable, and punctually paid or duly provided for, on any Scheduled Interest Payment Date shall be paid, in accordance with the terms of the Fiscal Agency Agreement hereinafter referred to, to the person (the "registered holder") in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the April 15 or the October 15 (whether or not a Business Day (as defined on the B-3 50 reverse hereof)), as the case may be (each a "Regular Record Date"), next preceding such Scheduled Interest Payment Date. Interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered holder on such Regular Record Date and shall be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on a special record date for the payment of such interest to be fixed by the Issuer, notice whereof shall be given to registered holders of the Securities not less than 15 days prior to such special record date. Principal of this Security shall be payable against surrender hereof at the corporate trust office of the Fiscal Agent hereinafter referred to and at the offices of such other Paying Agents as the Issuer shall have appointed pursuant to the Fiscal Agency Agreement. Payments of principal of the Securities shall be made only against surrender of the Securities. Payments of interest on this Security may be made, in accordance with the foregoing and subject to applicable laws and regulations, by check mailed on or before the scheduled payment date of such payment to the person entitled thereto at such person's address appearing on the aforementioned register. In the case of a registered holder of at least $5,000,000 aggregate principal amount of Securities, payments of principal or interest may be made by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the applicable scheduled payment date or scheduled maturity date hereof, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer agrees that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the full principal of and interest remaining unpaid on this Security have been made available for payment and either paid or returned to the Issuer as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York for the payment of the principal of and interest on the Securities as herein provided. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which B-4 51 further provisions shall for all purposes have the same effect as if set forth at this place. This Security may be executed by the Issuer by manual or facsimile signatures, and such signatures may be executed on separate counterparts. Unless the certificate of authentication hereon has been executed by the Fiscal Agent by manual signature, this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: METROPOLITAN LIFE INSURANCE COMPANY By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. THE CHASE MANHATTAN BANK, N.A. as Fiscal Agent By: --------------------------------- Authorized Officer B-5 52 FORM OF REVERSE 1. This Security is one of a duly authorized issue of __% Surplus Notes scheduled to mature on November 1, 20__ of the Issuer (herein called the "Securities" or "Notes"), limited in aggregate principal amount to $[___,000,000]. The Issuer and The Chase Manhattan Bank, N.A. (as "Fiscal Agent") have entered into a Fiscal Agency Agreement, dated as of __________, 1995 (such instrument, as it may be duly amended from time to time, is herein called the "Fiscal Agency Agreement"), which provides for the mechanism for issuing the Securities and, inter alia, sets forth certain duties of the Fiscal Agent in connection therewith. As used herein, the term "Fiscal Agent" includes any successor fiscal agent under the Fiscal Agency Agreement. Copies of the Fiscal Agency Agreement are on file and available for inspection at the corporate trust office of the Fiscal Agent in the Borough of Manhattan, The City of New York. Holders of Securities are referred to the Fiscal Agency Agreement for a statement of the terms thereof, including those relating to transfer, payment, exchanges and certain other matters. The Fiscal Agent or any Paying Agent shall also act as Transfer Agent and Securities registrar. Terms used herein which are defined in the Fiscal Agency Agreement but not otherwise defined herein shall have the meanings assigned to such terms in the Fiscal Agency Agreement. The Securities are direct and unsecured obligations of the Issuer and, subject to the payment restrictions contained in paragraphs 4 and 10 hereof (the "Payment Restrictions"), are scheduled to mature on November 1, 20__. Section 1307 provides that the Securities are not part of the legal liabilities of the Issuer and are not a basis of any set-off against the Issuer. The date upon which any state or federal agency obtains an order or grants approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer shall be deemed to be the scheduled maturity date. 2. The Securities are issuable only in fully registered form without coupons. Securities are issuable in minimum denominations of $250,000 and integral multiples of $1,000 above that amount. 3. The Issuer shall maintain, in the Borough of Manhattan, The City of New York, a Transfer Agent where Securities may be registered or surrendered for registration B-6 53 of transfer or exchange. The Issuer has initially appointed the corporate trust office of the Fiscal Agent as its Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause each Transfer Agent to act as a Securities registrar and shall cause to be kept at the office of each Transfer Agent a register in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Securities and registration of transfers of Securities. The Issuer reserves the right to vary or terminate the appointment of any Transfer Agent or to appoint additional or other Transfer Agents or to approve any change in the office through which any Transfer Agent acts, provided that there shall at all times be a Transfer Agent in the Borough of Manhattan, The City of New York. The Issuer shall cause notice of any resignation, termination or appointment of the Fiscal Agent or any Paying Agent or Transfer Agent and of any change in the office through which any such Agent shall act to be provided to holders of Securities. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, the transfer of a Security is registrable on the aforementioned register upon surrender of such Security at any Transfer Agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the registered holder thereof or his attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. Subject to the restrictions set forth herein and in the Fiscal Agency Agreement, at the option of the registered holder upon request confirmed in writing, Securities may be exchanged for Securities of any authorized denominations and aggregate principal amount upon surrender of the Securities to be exchanged at the office of any Transfer Agent. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Fiscal Agent shall authenticate and deliver, the Securities which the registered holder making the exchange is entitled to receive. Any registration of transfer or exchange shall be effected upon the Issuer being satisfied with the documents of title and identity of the person making the request and subject to the restrictions set forth in the immediately following paragraph and such reasonable regulations as the Issuer may from time to time agree with the Fiscal Agent. B-7 54 All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Fiscal Agent and any agent of the Issuer or the Fiscal Agent may treat the person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer nor the Fiscal Agent nor any such agent shall be affected by notice to the contrary. 4. (a) Notwithstanding anything to the contrary set forth herein or in the Fiscal Agency Agreement, any payment of principal of, interest on or any monies owing with respect to this Security, whether at the scheduled payment date or scheduled maturity date specified herein or otherwise, may be made only (i) out of the free and divisible surplus of the Issuer which the Superintendent determines to be available for such payments under Section 1307 and (ii) with the prior approval of the Superintendent whenever, in his judgment, the financial condition of the Issuer warrants such payment, in accordance with Section 1307. If the Superintendent does not approve the making of any payment of principal of or interest on this Security on the scheduled payment date or scheduled maturity date thereof, as specified herein, the scheduled payment date or scheduled maturity date, as the case may be, shall be extended and such payment shall be made by the Issuer on the next following Business Day on which the Issuer shall have the approval of the Superintendent to make such payment. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the rate of interest stated on the face hereof. Interest will not accrue on interest with respect to which the scheduled payment date has been extended, during the period of such extension. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. B-8 55 (b) Any payment of principal of or interest on any Security as to which the approval of the Superintendent has been obtained and which is not punctually paid or duly provided for on the scheduled payment date or scheduled maturity date thereof, as set forth herein (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of this Security on the relevant record date designated herein, and such Unpaid Amount will instead be payable to the registered owner of this Security on a subsequent special record date. The Issuer shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Issuer shall mail to each holder of the Securities and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each holder of the Securities in the manner set forth in Section 4(a) of the Fiscal Agency Agreement. 5. (a) For so long as the Fiscal Agent is acting as a Paying Agent hereunder, the Issuer shall provide, subject to the Payment Restrictions, to the Fiscal Agent in immediately available funds on or prior to 10:00 a.m., New York time, of each date on which a payment of principal of or any interest on this Security is payable, as set forth herein, such amounts as are necessary (with any amounts then held by the Fiscal Agent and available for the purpose) to make such payment, and the Issuer hereby authorizes and directs the Fiscal Agent from funds so provided to it to make or cause to be made payment of the principal of and any interest, as the case may be, on this Security as set forth herein and in the Fiscal Agency Agreement. Payments of principal of or any interest on the Securities may be made, in the case of a registered holder of at least $5,000,000 principal amount of Securities, by wire transfer to an account maintained by the payee with a bank if such registered holder so elects by giving notice to the Fiscal Agent, not less than 15 days (or such fewer days as the Fiscal Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payments are to be made. Unless such designation is revoked, any such designation made by such holder with respect to such Securities shall remain in effect with respect to any future payments with respect to such Securities payable to such holder. The Issuer shall pay any reasonable administrative costs in connection with making any such payments. The Fiscal Agent shall arrange directly with any other Paying Agent who may have been appointed by the Issuer pursuant to B-9 56 the provisions of Section 2 of the Fiscal Agency Agreement for the payment from funds so paid by the Issuer of the principal of and any interest on this Security. Any monies held in respect of this Security remaining unclaimed at the end of two years after such principal and such interest shall have become payable in accordance with the Payment Restrictions (whether at the Scheduled Maturity Date or otherwise) and monies sufficient therefor shall have been duly made available for payment shall, together with any interest made available for payment thereon, be repaid to the Issuer upon written request and upon such repayment all liability of the Fiscal Agent with respect thereto shall cease, without, however, limiting in any way any obligation the Issuer may have to pay the principal of and interest on this Security, subject to the Payment Restrictions. (b) In any case where the scheduled payment date or scheduled maturity date of any Security shall be at any place of payment a day on which banking institutions are not carrying out transactions in U.S. dollars or are authorized or obligated by law or executive order to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place which is not a day on which banking institutions in the applicable jurisdiction are generally authorized or obligated by law or executive order to close (a "Business Day"), with the same force and effect as if made on the scheduled payment date or scheduled maturity date thereof, and no interest shall accrue for the period after such date. 6. The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States of America or any governmental entity or any political subdivision thereof or taxing authority of or in the foregoing with respect to the Fiscal Agency Agreement or the initial issuance of this Security. Except as otherwise specifically provided in this Security, the Issuer shall not be required to make any payment with respect to any tax, duty, assessment or other governmental charge of whatever nature imposed or levied by any government or any political subdivision or taxing authority thereof or therein. 7. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, (a) Except with respect to transactions covered by Paragraph 8 hereof, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights (charter B-10 57 and statutory) and franchise; provided, however, that the Issuer shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and that the Issuer has used its best efforts to not disadvantage in any material respect the holders of the Securities, or that not preserving such right or franchise is in the best interest of the policyholders of the Issuer having considered the interests of the holders of the Securities. (b) The Issuer will not be or become an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), if such action would cause the Issuer to be in violation of the Investment Company Act at any time prior to payment in full of the Securities. (c) The Issuer shall use its best efforts to obtain the approval of the Superintendent in accordance with Section 1307 for the payment by the Issuer of interest on and principal of the Securities on the scheduled payment dates or scheduled maturity dates thereof, and, in the event any such approval has not been obtained for any such payment at or prior to the scheduled payment date or scheduled maturity date thereof, as the case may be, to continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to the scheduled payment date or scheduled maturity date thereof (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer), the Issuer will seek the approval of the Superintendent to make each payment of interest on and principal of the Securities. In addition, the Issuer shall notify or cause to be notified the Fiscal Agent no later than 5 Business Days (as defined herein), and the Fiscal Agent will notify each holder, prior to the scheduled payment date for interest on or the scheduled maturity date for principal of any Security (excluding any such scheduled maturity date which arises as a result of the obtaining of an order or the granting of approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer) in the event that the Superintendent has not then approved the making of any such payment on such scheduled payment date or such scheduled maturity date, and thereafter shall promptly notify the Fiscal Agent, and the Fiscal Agent will notify each holder, in the event that the Issuer shall have failed B-11 58 to make any such payment on any such scheduled payment date or such scheduled maturity date. 8. For so long as any of the Securities remain Outstanding or any amounts remain unpaid on any of the Securities, the Issuer may convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other corporation or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any person, firm or corporation, if (i) (A) in the case of a merger or consolidation, the Issuer is the surviving corporation or (B) in the case of a merger or consolidation where the Issuer is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor corporation is a corporation organized and existing under the laws of the United States or a State thereof and such corporation expressly assumes by supplemental fiscal agency agreement all the obligations of the Issuer under the Securities and the Fiscal Agency Agreement, (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer or other disposition, the Issuer shall not have failed to make payment of interest on or principal of the Securities after having received the Superintendent's prior approval to make such payment and (iii) the Issuer has delivered to the Fiscal Agent an Officer's Certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this paragraph and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Issuer as provided in clause (i) (B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Issuer hereunder and under the Fiscal Agency Agreement and all such obligations of the Issuer shall terminate. 9. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as to which the Issuer is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Security, unless the acquisition of the Security is exempt under one or more of Prohibited Transaction exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Security shall constitute a representation by such B-12 59 Person to the Issuer and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, and may acquire this Security under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Securities set forth in this Paragraph 9 are in addition to those otherwise set forth in Section 6 of the Fiscal Agency Agreement and under applicable law. 10. (a) The Issuer agrees, and each Security holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Paragraph, to the prior payment in full of all Indebtedness, Policy Claims and Other Creditor Claims (each as hereinafter defined), in accordance with Section 7435 of the New York Insurance Law (together with any successor provision, and as may be hereafter amended from time to time, "Section 7435"). (b) Upon any distribution to creditors of the Issuer in any rehabilitation, liquidation, conservation, dissolution or reorganization proceeding relating to the Issuer or its property, the priority of claims of Security holders shall be determined in accordance with Section 7435. In a proceeding commenced under Article 74 of the New York Insurance Law, claims for principal of or interest on the Securities constitute Class 7 claims under Section 7435, as currently in effect. If the Superintendent approves a payment of principal of or interest on the Securities in an amount that is less than the full amount of principal of and interest on the Securities then scheduled to be paid in respect of the Securities, payment of such partial amount shall be made pro rata among Security holders as their interests may appear. (c) If a distribution is made to Security holders that, because of this Paragraph, should not have been made to them, the Security holders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Other Creditor Claims and pay it over to them as their interests may appear. (d) The Issuer shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Issuer that would cause a payment of principal of or interest on the Securities to violate this Paragraph. (e) This Paragraph defines the relative rights of Security holders, on the one hand, and holders of any other claims, in accordance with Section 7435, on the other hand. Nothing in this Security or the Fiscal Agency Agreement B-13 60 shall (i) impair, as between the Issuer and Security holders, the obligation of the Issuer which is, subject to the Payment Restrictions, absolute and unconditional to pay principal of and interest on the Securities in accordance with their terms; (ii) affect the relative rights of Security holders and creditors of the Issuer, other than holders of Policy Claims, Indebtedness or Other Creditor Claims; or (iii) prevent the Fiscal Agent or any Security holder from exercising any available remedies upon a breach by the Issuer of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Other Creditor Claims to receive distributions otherwise payable to Security holders. (f) No right of any holder of Policy Claims, Indebtedness or Other Creditor Claims to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Issuer or by its failure to comply with the terms of this Fiscal Agency Agreement. (g) Each holder of Securities, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Paragraph and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. As used herein, "Indebtedness" of the Issuer shall mean (i) all existing or future indebtedness of the Issuer for borrowed money, (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which is guaranteed by the Issuer, (iii) all existing or future obligations of the Issuer under any agreement obligating the Issuer to cause another person to maintain a minimum level of net worth, or otherwise to ensure the solvency of such person and (iv) any expense or any claim or amount, to the extent that payment of principal of and interest on the Securities is required by law to be subordinated to the prior payment thereof. Any indebtedness of the Issuer which by its express terms is subordinated in right of payment to, or ranks equally with, the Securities shall not constitute Indebtedness. However, under current law the Issuer cannot issue any indebtedness which by its terms is subordinate to the Securities. In addition, any other surplus notes or similar obligations of the Issuer, including the Issuer's 6.30% Surplus Notes scheduled to mature on November 1, 2003 and its 7.45% Surplus Notes scheduled to mature on November 1, 2023, shall not constitute Indebtedness and will rank pari passu with the Securities. B-14 61 As used herein, "Policy Claims" shall mean all existing or future claims of policyholders or beneficiaries, as the case may be, under any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts, and funding agreements issued, assumed or renewed by the Issuer on or prior to the date hereof or hereafter created, all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Issuer in the applicable separate accounts and all claims of The Life Insurance Company Guaranty Corporation of New York or any other guaranty corporation or association of New York or any other jurisdiction, other than claims described in clause (i) of the definition of "Other Creditor Claims" below and claims for interest. As used herein, "Other Creditor Claims" shall mean all other claims which, pursuant to Section 7435, have priority over claims with respect to the Securities. Under Section 7435 as currently in effect, such other claims include (i) claims with respect to the actual and necessary costs and expenses of administration incurred by a liquidator, conservator, rehabilitator or ancillary rehabilitator under Section 7435; (ii) claims with respect to the actual and necessary costs and expenses of administration incurred by The Life Insurance Guaranty Corporation or The Life Insurance Company Guaranty Corporation of New York; (iii) claims of The Life Insurance Company Guaranty Corporation for certain funds loaned to the Superintendent under Section 7713 (d) of the New York Insurance Law; (iv) debts up to $1,200 due to employees for services performed within one year of the commencement of rehabilitation, liquidation, conservation, dissolution or reorganization proceedings; (v) claims for payment for goods furnished or services rendered in the ordinary course of business within 90 days of the declaration of the impairment or insolvency of the Issuer; (vi) claims of the federal or any state or local government (except in the case of claims for a penalty or forfeiture which are included only to the extent of pecuniary loss and reasonable costs occasioned by the act giving rise to the forfeiture or penalty); and (vii) claims of general creditors and all other claims having priority under Section 7435. 11. For so long as any of the Securities remain Outstanding or any amount remains unpaid on any of the Securities, the Issuer shall, in accordance with Rule 144A, comply with the terms of the agreements set forth in Section 7 of the Fiscal Agency Agreement. The provisions of B-15 62 Sections 7 and 8 of the Fiscal Agency Agreement are hereby incorporated mutatis mutandis herein. 12. In case this Security shall become mutilated, defaced, destroyed, lost or stolen, the Issuer will execute and upon the Issuer's request the Fiscal Agent shall authenticate and deliver a new Security, having a number not contemporaneously outstanding, of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on this Security, in exchange and substitution for this Security (upon surrender and cancellation thereof) or in lieu of and substitution for this Security. In the case where this Security is destroyed, lost or stolen, the applicant for a substituted Security shall furnish to the Issuer such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of this Security, the applicant shall also furnish to the Issuer satisfactory evidence of the destruction, loss or theft of this Security and of the ownership thereof, provided, however, that if the registered holder hereof is, in the judgment of the Issuer, an institution of recognized responsibility, such holder's written agreement of indemnity shall be deemed to be satisfactory for the issuance of a new Security in lieu of and substitution for this Security. The Fiscal Agent shall authenticate any such substituted Security and deliver the same only upon written request or authorization of the Issuer. Upon the issuance of any substituted Security, the Issuer may require the payment by the registered holder thereof of a sum sufficient to cover fees and expenses connected therewith. In case this Security has matured or is about to mature and shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, subject to the Payment Restrictions, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except if this Security is mutilated or defaced) upon compliance by the registered holder with the provisions of this Paragraph 12 as hereinabove set forth. 13. Section 10 of the Fiscal Agency Agreement, which Section is hereby incorporated mutatis mutandis by reference herein, provides that, with certain exceptions as therein provided and with the consent of the holders of a majority of the principal amount of the Outstanding Securities of this series present at a meeting duly called pursuant thereto or by written consent of such percentage of the principal amount of all Outstanding Securities, the Issuer and the Fiscal Agent may, with the prior approval of the Superintendent, modify, amend or supplement the Fiscal B-16 63 Agency Agreement or the terms of the Securities of this series or may give consents or waivers or take other actions with respect thereto. Any such modification, amendment, supplement, consent, waiver or other action shall be conclusive and binding on the holder of this Security and on all future holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation thereof is made upon this Security. The Fiscal Agency Agreement and the terms of the Securities may, with the prior approval of the Superintendent, be modified or amended by the Issuer and the Fiscal Agent, without the consent of any holders of Securities, for the purpose of (a) adding to the covenants of the Issuer for the benefit of the holders of Securities, or (b) surrendering any right or power conferred upon the Issuer, or (c) securing the Securities pursuant to the requirements hereof, thereof or otherwise, or (d) evidencing the succession of another corporation to the Issuer and the assumption by such successor of the covenants and obligations of the Issuer herein and in the Fiscal Agency Agreement as permitted by the Securities and the Fiscal Agency Agreement, or (e) modifying the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or transfer of restricted securities generally, or (f) accommodating the issuance, if any, of Securities in book-entry or certificated form and matters related thereto which do not adversely affect the interest of any Security holder in any material respect, or (g) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Fiscal Agency Agreement in a manner which does not adversely affect the interest of any Security holder in any material respect, or (h) effecting any amendment which the Issuer and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interest of any Security holder, to all of which each holder of any Security, by acceptance thereof, consents. 14. Holders of Securities may enforce the Fiscal Agency Agreement or the Securities only in the manner set forth below. (a) In the event that any state or federal agency shall obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of the Issuer, the Securities of all Series will upon the obtaining of such an order or the granting of such approval immediately mature in full without any action on the part of B-17 64 the Fiscal Agent or any holder of the Securities, with payment thereon being subject to the Payment Restrictions, and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, in no event shall the Fiscal Agent or any holder of the Securities be entitled to declare the Securities to immediately mature or otherwise be immediately payable. (b) In the event that the Superintendent approves in whole or in part a payment of any interest on or principal of any Securities and the Issuer fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any holder of Securities. In the event that the Issuer fails to perform any of its other obligations hereunder or under the Fiscal Agency Agreement, each holder of the Securities may pursue any available remedy to enforce the performance of any provision of such Securities or the Fiscal Agency Agreement, provided, however, that such remedy shall in no event include the right to declare the Securities immediately payable, and shall in no circumstances be inconsistent with the provisions of Section 1307. A delay or omission by any Security holder in exercising any right or remedy accruing as a result of the Issuer's failure to perform its obligations hereunder or under the Fiscal Agency Agreement and the continuation thereof shall not impair such right or remedy or constitute a waiver of or acquiescence in such non-performance by the Issuer. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. (c) Notwithstanding any other provision of this Security or the Fiscal Agency Agreement, the right of any holder of Securities to receive payment of the principal of and interest on such holder's Securities on or after the respective scheduled payment or scheduled maturity dates expressed in such Securities, or to bring suit for the enforcement of any such payment on or after such respective scheduled payment or scheduled maturity dates, in each case subject to such payment on such dates having received the approval of the Superintendent pursuant to the Payment Restrictions, including the approval of the Superintendent pursuant to Section 1307, is absolute and unconditional and shall not be impaired or affected without the consent of the holder. B-18 65 15. No reference herein to the Fiscal Agency Agreement and no provision of this Security or of the Fiscal Agency Agreement shall alter or impair the obligation of the Issuer, subject to the Payment Restrictions, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. B-19 66 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR EXCHANGE OR TRANSFER OF RESTRICTED DEFINITIVE SECURITY (Transfers and exchanges pursuant to ss.6(b) of the Fiscal Agency Agreement) The Chase Manhattan Bank, N.A. as Fiscal Agent 4 Chase MetroTech Center, 3rd Floor Brooklyn, New York 11245 Re: Metropolitan Life Insurance Company, ____% Surplus Notes scheduled to mature on November 1, 20__ (the "Securities") Reference is hereby made to the Fiscal Agency Agreement, dated as of ________, 1995 (the "Fiscal Agency Agreement"), between Metropolitan Life Insurance Company, as Issuer, and The Chase Manhattan Bank, N.A., as Fiscal Agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Fiscal Agency Agreement. This 1etter relates to $________________ principal amount of Restricted Definitive Securities held in definitive form by [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such Securities. In connection with such request and in respect of such Securities, the Transferor does hereby certify that (i) such Securities are owned by the Transferor and are being exchanged without transfer or (ii) such transfer has been effected pursuant to and in accordance with Rule 144A, Rule 144 or Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Act"), and accordingly the Transferor does hereby further certify that: I. if the transfer is being effected pursuant to and in accordance with Rule 144A under the Act, that the Securities are being transferred to a person that the Transferor reasonably believes is purchasing the Securities for its own account, or for one or more accounts with respect to which such person exercises sole investment discretion, and such person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction; or C-1 67 II. if the transfer is being effected pursuant to Rule 144, the Securities are being transferred in a transaction in accordance with Rule 144; or III. if the transfer is being effected pursuant to Rule 903 or 904: (1) the offer of the Securities was not made to a person in the United States; (2) either: (A) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States, or (B) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and the Purchasers. Terms used in this certificate and not otherwise defined in the Fiscal Agency Agreement have the meanings set forth in Rule 144A, Rule 144 or Regulation S under the Act. [Insert Name of Transferor] By:______________________ Name: Title: Dated: ______________ cc: Metropolitan Life Insurance Company C-2 EX-10.48 13 FISCAL AGENCY AGREEMENT 1 Exhibit 10.48 ================================================================================ FISCAL AGENCY AGREEMENT between GENERAL AMERICAN LIFE INSURANCE COMPANY as Issuer and THE BANK OF NEW YORK as Fiscal Agent ---------------------------- dated as of January 24, 1994 ---------------------------- $107,000,000 7 5/8% Surplus Notes due 2024 ================================================================================ 2 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS 1.1. Definitions ..................................... 1 1.2. Rules of Construction ........................... 5 ARTICLE II THE NOTES 2.1. Form ............................................ 6 2.2 Form of Fiscal Agent's Certificate of Authentication ................................. 7 2.3. Execution and Authentication .................... 7 2.4. Registrar, Paying Agent, Depository and Custodian ................................... 8 2.5. Payment on Notes ................................ 9 2.6. Noteholder Lists ................................ 11 2.7. Replacement Notes ............................... 11 2.8. Outstanding Notes ............................... 12 2.9. Treasury Notes .................................. 12 2.10. Temporary Notes ................................. 13 2.11. Cancellation .................................... 13 2.12. Person Deemed Owner ............................. 13 ARTICLE III PAYMENT RESTRICTIONS 3.1. Payment Restrictions ............................ 14 3.2. Unpaid Amounts .................................. 14 ARTICLE IV TRANSFER AND EXCHANGE; TRANSFER RESTRICTIONS 4.1. Transfer and Exchange ........................... 15 4.2. ERISA Restrictions .............................. 20 ARTICLE V COVENANTS 5.1 Payment of Interest and Principal ............... 21 5.2 Rule 144A Information ........................... 21 5.3 Other Information ............................... 21 i 3 Page ---- 5.4. Corporate Existence ............................. 22 5.5. Compliance with Investment Company Act .......... 22 5.6. Maintenance of Debt Service Account ........................................ 22 ARTICLE VI DEMUTUALIZATION, MERGER, CONSOLIDATION OR SALE BY THE COMPANY 6.1. Demutualization, Merger, Consolidation or Sale of Assets ................................. 22 ARTICLE VII REMEDIES 7.1. Remedies ........................................ 23 7.2. Restoration of Rights and Remedies .............. 24 7.3. Rights and Remedies Cumulative .................. 25 7.4. Delay or Omission Not Waiver .................... 25 ARTICLE VIII SUBORDINATION 8.1. Subordination .................................. 25 8.2. Rehabilitation, Liquidation, Reorganization, Conservation or Dissolution ................... 25 8.3. Distribution ................................... 26 8.4. Notice of Violation ............................ 26 8.5. Rights of Noteholders .......................... 27 ARTICLE IX FISCAL AGENT 9.1. Duties of Fiscal Agent ......................... 27 9.2. Rights of Fiscal Agent ......................... 28 9.3. Individual Rights of Fiscal Agent .............. 29 9.4. Fiscal Agent's Disclaimer ...................... 29 9.5. Compensation and Indemnity ..................... 29 9.6. Replacement of Fiscal Agent .................... 30 9.7. Successor Fiscal Agent, Agents by Merger, Etc ........................................... 31 9.8. Eligibility .................................... 31 9.9. Appointment of Authenticating Agent ............ 31 ii 4 Page ---- ARTICLE X AMENDMENTS, SUPPLEMENTS AND WAIVERS 10.1. Without Consent of Holders .................... 34 10.2. With Consent of Holders ....................... 35 10.3. Revocation and Effect of Consents ............. 36 10.4. Notation on or Exchange of Notes .............. 37 10.5. Fiscal Agent to Sign Amendments, Etc .......... 37 ARTICLE XI MEETINGS OF HOLDERS 11.1. Purposes for Which Meetings May Be Called ....... 37 11.2. Call, Notice and Place of Meetings .............. 37 11.3. Persons Entitled to Vote at Meetings ............ 38 11.4. Quorum .......................................... 38 11.5. Action by Written Consent ....................... 39 11.6. Determination of Voting Rights; Conduct and Adjournment of Meetings ........................ 39 11.7. Counting Votes and Recording Action of Meetings ....................................... 40 ARTICLE XII MISCELLANEOUS 12.1. Notices ......................................... 41 12.2. Governing Law ................................... 41 12.3. No Recourse Against Others ...................... 42 12.4. Duplicate Originals ............................. 42 12.5. Headings and Table of Contents .................. 42 12.6. Successor and Assigns ........................... 42 12.7. Separability .................................... 42 12.8. Legal Holidays .................................. 42 EXHIBIT A - FORM OF NOTE CERTIFICATE EXHIBIT B - FORM OF NOTE IN GLOBAL FORM EXHIBIT C - CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES iii 5 FISCAL AGENCY AGREEMENT, dated as of January 24, 1994, between GENERAL AMERICAN LIFE INSURANCE COMPANY, a mutual life insurance corporation organized under the laws of the State of Missouri (the "Company"), and THE BANK OF NEW YORK, a New York banking corporation, as Fiscal Agent (together with any successor as Fiscal Agent hereunder, the "Fiscal Agent"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 7 5/8% Surplus Notes due 2024 (the "Notes"): ARTICLE I DEFINITIONS SECTION 1.1 Definitions In this Agreement, unless the context otherwise requires; "Agent" means any Registrar, Paying Agent, Co-Registrar or Custodian; "Agreement" means this Agreement, as amended or supplemented from time to time; "Beneficial Holder" means each participant in the Depository that holds an interest in a Note, as indicated in the Participants List; "Board of Directors" or "Board" means the Board of Directors of the Company or any duly authorized committee of the Board; "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions are authorized or required by law or executive order to close in St. Louis, Missouri or in New York, New York; "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a particular section of the Code shall include any successor Code section; 6 "Company Order" means any request, instruction, order or directive signed by at least two Officers; "Co-Registrar" has the meaning set forth in Section 2.4; "Custodian" has the meaning set forth in Section 2.1; "Debt Service Account" means the account established and maintained during the term of the Notes equal to the amount of interest expected to accrue annually on the Notes. "Depository" means, with respect to the Notes issuable or issued in whole or in part in global form, the person specified in Section 2.4(c) as the Depository with respect to the Notes, until a successor shall have been appointed and becomes such pursuant to the applicable provisions of this Agreement, and, thereafter, "Depository" shall mean such successor; "DTC" means The Depository Trust Company; "Event of Default" means an event described in Section 7.1(a) or (b); "Exchange Act" means the Securities Exchange Act of 1934, as amended; "Holder" or "Noteholder" means the person in whose name a Note is registered on the Registrar's books; "Indebtedness" means any of the following (i) all existing or future indebtedness of the Company for borrowed money; (ii) all existing or future indebtedness for borrowed money of other persons, the payment of which as guaranteed by the Company; (iii) all existing or future obligations of the Company under any agreement obligating the Company to cause another person to maintain a minimum level of net worth, or satisfy any financial ratio requirement or otherwise to ensure the solvency of such person; or (iv) any expense or any claim or amount, to the extent that payment of interest on and principal of the Notes is required by law to be subordinated to the prior payment thereof; provided that Indebtedness does not include (x) any surplus or contribution 2 7 notes or similar obligations of the Company issued after the date of issuance of the Notes or (y) any indebtedness of the Company which by its express terms is subordinated in right of payment to, or ranks pari passu with, the Notes; "Initial Purchasers" means each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Salomon Brothers Inc., each as initial purchaser under the Purchase Agreement, dated January 14, 1994, with the Company; "Institutional Accredited Investor" means an institutional investor that is an "accredited investor" within the meaning of Rule 501(a) (1), (2), (3) or (7) under the Securities Act. "Interest Payment Date" shall mean each January 15 and July 15 commencing July 15, 1994; "Maturity Date" means January 15, 2024; "Missouri Department" means the Department of Insurance of the State of Missouri or such successor governmental body or authority from time to time; "Missouri Director" means the Director of Insurance of the State of Missouri, or such governmental officer, body or authority as may after the date hereof succeed to such Director as the primary regulator of the Company's financial condition under applicable law; "Notes" means the 7 5/8% Surplus Notes due 2024 described above issued, authenticated and delivered under this Agreement; "Officer" means the Chairman, the President, any Vice President, the Chief Financial Officer, Secretary or Treasurer of the Company; "Officers' Certificate" means a certificate signed by at least two Officers; "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Fiscal Agent. The counsel may be an employee of or counsel to the Company; 3 8 "Participants List" means the list furnished by the Depository showing persons that have a beneficial interest in the Notes evidenced by any Note in global form held by the Depository and the amount of such interest; "Paying Agent" has the meaning set forth in Section 2.4; "Payment Restrictions" means the payment restrictions on the Notes set forth in Article III herein; "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, estate, unincorporated organization or government or any agency or political subdivision thereof; "Policy Claims" means all existing or future claims of policyholders or beneficiaries, as the case may be, under any and all existing or future policies, endorsements, riders and other contracts of insurance, annuity contracts, including, without limitation, guaranteed investment contracts, and funding agreements issued, assumed or renewed by the Company on or prior to the date hereof or hereafter created and all claims under separate account agreements to the extent such claims are not fully discharged by the assets held by the Company in the applicable separate accounts; "Prior Claims" means all claims, other than Policy Claims or Indebtedness, which, pursuant to Section 375.1218 of Mo. Rev. Stat., have priority over claims with respect to the Notes; "QIB" means a "qualified institutional buyer" as defined in Rule 144A under the Securities Act; "Record Date" means, for interest payable on any Scheduled Interest Payment Date (i) where the relevant Interest Payment Date is January 15, the preceding January 1 and (ii) where the relevant Interest Payment Date is July 15, the preceding July 1; "Registrar" has the meaning set forth in Section 2.4; 4 9 "Responsible Officer" means any officer or assistant officer of the Fiscal Agent assigned by the Fiscal Agent to administer the transactions contemplated hereby; "Restricted Note" means any Note that bears or is required to bear the legend set forth in Section 4.1 (b); "Scheduled Maturity Date" means the first day on or following the Maturity Date on which the Company has satisfied all the Payment Restrictions; "Scheduled Interest Payment Date" means the first day on or following each Interest Payment Date on which the Company has satisfied all the Payment Restrictions; "Securities Act" means the Securities Act of 1933, as amended; "Special Surplus Account" means the account established and maintained by the Company so long as any of the Notes are outstanding to report all outstanding principal indebtedness on the Notes; "Stated Rate" means a rate of interest equal to 7 5/8% per annum; and "Unassigned Funds (Surplus)" means the total of lines 33 and 34 of the "Liability, Surplus and Other Funds" page of the Company's annual and quarterly statements filed with the statements filed with the state insurance regulatory authorities. SECTION 1.2. Rules of Construction. In this Agreement, unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement and the forms of Note included as Exhibits hereby as a whole, and not to any particular Article, Section or other subdivision; 5 10 (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) any reference to a party includes its successors from time to time. ARTICLE II THE NOTES SECTION 2.1. Form. Notes sold by the Initial Purchasers to Institutional Accredited Investors shall be issued in definitive, fully-registered and certificated form (each a "Note Certificate" and collectively the "Note Certificates") and shall be substantially in the form of Exhibit A, which is part of this Agreement, and all of the provisions of which shall be deemed to be included in this Agreement. Each Note initially issued in the form of a Note Certificate shall be registered in such names and denominations as designated by the Initial Purchasers. The Notes may have notations, legends or endorsements required by law, securities exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes sold by the Initial Purchasers to QIBs in reliance on Rule 144A under the Securities Act ("Rule 144A") shall be represented initially by a global Note, substantially in the form of Exhibit B, which is part of this Agreement, and all of the provisions of which shall be deemed to be included in this Agreement. The global Note shall be deposited with a Person (which may be the Fiscal Agent) appointed by the Company to act as custodian for the Depository (the "Custodian") and registered in the name of the Depository or a nominee thereof. The global Note shall represent such of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and 6 11 that the aggregate amount of outstanding Notes represented thereby may from time to time be increased or reduced to reflect transfers or exchanges. Any endorsement of a Note in global form to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Fiscal Agent or the Custodian, at the direction of the Fiscal Agent, in such manner and upon written instructions given by the Holder thereof. Payment of interest on and principal of any global Note shall be made to the Holder thereof. The Notes and beneficial interests therein shall be issuable in minimum denominations of (i) $250,000 and integral multiples of $1,000 in excess thereof if initially sold to an Institutional Accredited Investor and (ii) $1,000 and integral multiples of $1,000 in excess thereof if initially sold to a QIB. SECTION 2.2. Form of Fiscal Agent's Certificate of Authentication. The Fiscal Agent's certificate of authentication shall be in substantially the following form: This is one of the Notes of a series issued under the within-mentioned Fiscal Agency Agreement. Dated: THE BANK OF NEW YORK, as Fiscal Agent By: ________________________________ Authorized Signatory SECTION 2.3. Execution and Authentication. Any two Officers shall sign the Notes on behalf of the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Fiscal Agent. The Fiscal Agent's signature shall be conclusive evidence that the Note has been authenticated under this Agreement. 7 12 The Fiscal Agent shall authenticate Notes for original issue in the aggregate principal amount of $107,000,000 upon a Company Order. The aggregate principal amount of Notes outstanding at any time may not exceed the sum of (i) $107,000,000 and (ii) the principal amount of lost, destroyed or stolen Notes for which replacement Notes are issued pursuant to Section 2.7. Pursuant to Section 9.9 hereof, the Fiscal Agent may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Fiscal Agent may do so, other than upon original issuance or pursuant to Section 2.7. Except as stated in the immediately preceding sentence and in Section 9.9, each reference in this Agreement to authentication by the Fiscal Agent includes authentication by such agent. SECTION 2.4. Registrar, Paying Agent, Depository and Custodian. (a) The Company shall appoint itself or another Person to maintain an office or agency where Notes may be presented for registration of transfer or exchange (the Company or such other Person being referred to, in such capacity, as the "Registrar"). As set forth in Article IV hereof, the Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-Registrars (each, a "Co-Registrar") and may act as Co-Registrar. The Company initially appoints the Fiscal Agent to act as Registrar. (b) The Company shall appoint itself or another Person to maintain an office or agency where Notes may be presented for payment (the Company or such other Person being referred to, in such capacity, as the "Paying Agent"). The term "Paying Agent" includes any additional paying agent. The Company initially appoints the Fiscal Agent to act as Paying Agent. (c) The Company shall appoint one or more other Persons to act as Depository with respect to any Notes issued in global form. The Company initially appoints DTC to act as Depository with respect to the Notes in global form. As set forth in Section 4.1(d) hereof, the Company may, in certain circumstances, appoint a successor Depository, and may at any time determine that the Notes issued in the form of global Notes shall no longer be represented by such global Notes. 8 13 (d) The Company shall appoint itself or one or more other Persons to act as Custodian with respect to any Notes issued in global form. The Company initially appoints the Fiscal Agent to act as Custodian with respect to the Notes in global form. (e) The Company shall notify the Fiscal Agent of the name and address of the Depository and of any Agent not a party to this Agreement, and shall give the Fiscal Agent at least 30 days' written notice prior to changing the Depository or any such Agent. SECTION 2.5. Payment on Notes. (a) The Company, subject to the Payment Restrictions, shall provide to the Paying Agent, in immediately available funds on or prior to 12:00 noon, New York time, on each Scheduled Interest Payment Date or the Scheduled Maturity Date, such amount, in U.S. dollars, as is necessary to make such payment as is due, and the Company hereby authorizes and directs the Paying Agent from funds so provided to it to make or cause to be made payment of the interest on and principal of the Notes in the manner, at the times and for the purposes set forth herein and in the text of the Notes; provided that (1) any approved payment of interest on the Notes may be made by check mailed to the persons (the "registered owners") in whose names such Notes are registered on the register maintained pursuant to Section 4.1 hereof at the close of business on the relevant Record Date and (2) the Company will not provide any such funds to the Paying Agent prior to such time as the relevant payment of interest or principal is approved by the Missouri Director. Payments of interest on or principal of the Notes may be made, in the case of a registered owner of at least $5,000,000 aggregate principal amount of Notes, by wire transfer to an account maintained by the registered owner with a bank if such registered owner so elects by giving written notice to the Paying Agent, not less than 15 days (or such fewer days as the Paying Agent may accept at its discretion) prior to the date on which such payments are scheduled to be made, of such election and of the account to which payment is to be made. Unless such designation is revoked, any such designation made by such Holder with respect to such Notes shall remain in effect with respect to any future payments with respect to such Notes payable to such Holder. The Company shall pay any reasonable 9 14 administrative costs in connection with making any such payments. (b) The Company shall use its best efforts to obtain the approval of the Missouri Director for the payment by the Company of interest on and principal of the Notes on the Interest Payment Dates and the Maturity Date, and, in the event any such approval has not been obtained for any such payment at or prior to the relevant Interest Payment Date or Maturity Date, as the case may be, continue to use its best efforts to obtain such approval promptly thereafter. Not less than 45 days prior to each Interest Payment Date and the Maturity Date, the Company will seek the approval of the Missouri Director to make each payment, in whole or in part, of interest on and principal of the Notes, respectively. If the Missouri Director approves a payment of interest on or principal of the Notes in an amount that is less than the full amount of interest on or principal of the Notes then scheduled to be paid in respect of the Notes, payment of such partial amount shall be made pro rata among Noteholders as their interests may appear. In addition, the Company shall notify or cause to be notified in writing each Holder and the Fiscal Agent no later than five Business Days prior to each Interest Payment Date and the Maturity Date in the event that the Missouri Director has not then approved the making of any such payment or partial payment on such date, and thereafter will promptly notify in writing each Holder and the Fiscal Agent in the event that the Company shall have failed to make any such payment on any such date. (c) Interest on each Note shall be paid on each Scheduled Interest Payment Date to the Holder of such Note at the close of business on the Record Date for the relevant Interest Payment Date. Principal of the Notes shall be payable only against presentation and surrender thereof at the principal office of the Paying Agent, or at such other location of a Paying Agent as the Company shall have otherwise instructed the Fiscal Agent in writing. (d) Whenever a Scheduled Interest Payment Date or the Scheduled Maturity Date is not a Business Day, then such payment need not be made on such date but shall be made on the next succeeding Business Day, and (provided such payment is made on such next succeeding Business 10 15 Day) no interest shall accrue on the amount of such payment from and after such date to such next succeeding Business Day. If such payment is not so made in full on such Scheduled Interest Payment Date or the Scheduled Maturity Date (or, pursuant to this Section 2.5(d), such next succeeding Business Day), interest will continue to accrue, to the extent permitted by law, on such unpaid interest or principal at the Stated Rate. (e) The Company shall require each Paying Agent other than the Fiscal Agent to agree in writing that the Paying Agent will hold in trust for the benefit of Noteholders or the Fiscal Agent all money held by the Paying Agent for the payment of interest on or principal of the Notes, and will notify the Fiscal Agent in writing of any failure by the Company to make any such payment. Until any such failure has been remedied, the Fiscal Agent may require a Paying Agent to pay all money held by it to the Fiscal Agent. In the event the Company wishes to terminate the Fiscal Agent's appointment as Paying Agent, the Company shall provide ten days' prior written notice to the Fiscal Agent that the Fiscal Agent's appointment to act as Paying Agent is so terminated and the Fiscal Agent may conclusively rely on such notice. The Company at any time may require a Paying Agent to pay all money held by the Paying Agent to the Fiscal Agent. Upon doing so the Paying Agent shall have no further liability for the money so paid. SECTION 2.6. Noteholder Lists. The Fiscal Agent shall preserve in as current a form as is reasonably practicable a list of the names and addresses of Noteholders. If the Fiscal Agent is not the Registrar, the Company shall furnish to the Fiscal Agent not less than five business days prior to each Interest Payment Date and at such other times as the Fiscal Agent may request in writing a list in such form and as of such date as the Fiscal Agent may reasonably require of the names and addresses of Noteholders. SECTION 2.7. Replacement Notes. If any Note shall be mutilated, destroyed, lost or stolen, the Company shall, upon the written request of the Holder of such Note, issue and execute, and the Fiscal Agent shall authenticate and deliver, in replacement thereof, a replacement Note payable to and registered in the name of such Holder and in the same principal amount as the Note 11 16 so mutilated, destroyed, lost or stolen. If the Note being replaced has become mutilated, the Holder shall surrender such Note to the Fiscal Agent. If the Note has been destroyed, lost or stolen, the Holder of such Note shall furnish to the Company and the Fiscal Agent (i) satisfactory evidence of such Holder's ownership of such Note, (ii) satisfactory evidence of the destruction, loss or theft of such Note and (iii) such security or indemnity as may be required by the Company and the Fiscal Agent to save harmless the Company and the Fiscal Agent. Upon the issuance of a replacement Note pursuant to this Section, the Holder requesting such replacement Note shall pay to the Fiscal Agent a sum sufficient to cover any transfer tax or governmental charge payable in connection with the issuance of such replacement Note. Any Note issued pursuant to this Section shall be registered with the Registrar. Every replacement Note shall be an additional obligation of the Company. SECTION 2.8. Outstanding Notes. The Notes outstanding at any time are all Notes authenticated by the Fiscal Agent (or an authenticating agent appointed pursuant to Section 2.2) except for those cancelled by the Fiscal Agent, those delivered to the Fiscal Agent for cancellation, those reductions in the interests in a global Note effected by the Fiscal Agent hereunder, and those described in this Section as not outstanding. A Note does not cease to be outstanding because the Company holds the Note. If a Note is replaced pursuant to Section 2.6, it ceases to be outstanding unless the Fiscal Agent receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. SECTION 2.9. Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company shall be disregarded, except that for the purposes of determining whether the Fiscal Agent shall be protected in relying on any such direction, waiver or consent, only Notes which the Fiscal Agent knows are so owned shall be so disregarded. 12 17 SECTION 2.10. Temporary Notes. Until Note Certificates are ready for delivery, the Company may prepare and execute and the Fiscal Agent shall authenticate temporary Notes. The temporary Notes shall be substantially in the form of Note Certificates, with such variations as the Company and the Fiscal Agent may consider appropriate. Every temporary Note shall be executed by the Company and authenticated by the Fiscal Agent, and registered by the Registrar, upon the conditions, and with like effect, as a Note Certificate. Without unreasonable delay, the Company shall prepare and execute and the Fiscal Agent shall authenticate Note Certificates in exchange for temporary Notes. Prior to such exchange, such temporary Notes shall constitute Note Certificates for all purposes of this Agreement. SECTION 2.11. Cancellation. The Company at any time may deliver Notes to the Fiscal Agent for cancellation. The Registrar and Paying Agent shall promptly forward to the Fiscal Agent any Notes surrendered to them for registration of transfer, exchange or payment. The Fiscal Agent shall cancel all Notes surrendered for registration of transfer, exchange, payment or cancellation and, subject to the Fiscal Agent's internal policies, may destroy cancelled Notes and deliver a certificate of such destruction to the Company, unless the Company directs the Fiscal Agent to deliver cancelled Notes to the Company. The Company may not issue new Notes to replace Notes that it has paid or delivered to the Fiscal Agent for cancellation. SECTION 2.12. Person Deemed Owner. Prior to due presentment for transfer, the Company, the Fiscal Agent, the authenticating agent, if any, and any Agent may treat the Holder as the owner of such Note for the purpose of receiving payment of interest on and principal of such Note and for all other purposes whatsoever, and neither the Company, the Fiscal Agent, the authenticating agent, nor any other Agent shall be affected by notice to the contrary. 13 18 ARTICLE III PAYMENT RESTRICTIONS SECTION 3.1. Payment Restrictions. Except as set forth in Section 8.2(3) of this Agreement, each payment of interest on or principal of the Notes may be made only (i) with the approval of the Missouri Director, which approval will be granted only when the Missouri Director is satisfied that the financial condition of the Company warrants such payment, (ii) with respect to the payment of interest on the Notes, only out of Unassigned Funds (Surplus), and (iii) with respect to the payment of principal on the Notes, only out of Unassigned Funds (Surplus), the Special Surplus Account and the Debt Service Account. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the Stated Rate. Interest will not, however, accrue on interest with respect to which the Scheduled Interest Payment Date has been delayed following the Interest Payment Date. SECTION 3.2. Unpaid Amounts. Subject to Section 2.5(d), any payment of interest on or principal of any Note which is not punctually paid or duly provided for on the relevant Scheduled Interest Payment Date or Scheduled Maturity Date, as the case may be (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of such Note on the relevant Record Date, and such Unpaid Amount, together with accrued interest thereon (if any) to the extent provided in Section 2.5(d) hereof, will instead be payable to the registered owner of such Note on a subsequent special record date. The Company shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Company shall mail to each Holder of the Notes and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay, upon receipt of immediately available funds, the amount of interest or principal to be so paid to each Holder of the Notes in the manner set forth in Section 2.5(a). 14 19 ARTICLE IV TRANSFER AND EXCHANGE; TRANSFER RESTRICTIONS SECTION 4.1. Transfer and Exchange. (a) When Note Certificates are presented to the Registrar with a request to register the transfer of such Note Certificates or to exchange such Note Certificates for an equal principal amount of Note Certificates of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Note Certificates surrendered for transfer or exchange (A) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney, duly authorized in writing and (B) in the case of Restricted Notes in certificated form only, shall be accompanied by the following additional information and documents, as applicable: (i) if such Restricted Note is being exchanged, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit C hereto); or (ii) if such Restricted Note is being transferred to a QIB in accordance with Rule 144A or pursuant to an exemption from registration in accordance with Rule 144(k) or Regulation S under the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto). To permit registrations of transfers and exchanges, the Company shall execute and the Fiscal Agent (or an authenticating agent appointed pursuant to Section 9.9) shall authenticate and deliver Note Certificates at the Registrar's request, and upon written direction of the Company. No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or other governmental charge payable in connection with any registration of transfer or exchange. 15 20 All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Agreement, as the Notes surrendered upon such registration of transfer or exchange. (b) Except as permitted by this Section 4.1(b), each certificate evidencing the Notes in global form and each of the Note Certificates (and all securities issued in exchange therefore or substitution thereof) shall bear a legend in substantially the following form: THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF GENERAL AMERICAN LIFE INSURANCE COMPANY THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A, IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO AN INSTITUTIONAL ACCREDITED INVESTOR, AS DEFINED IN RULE 501(a) (1), (2), (3) OR (7) UNDER THE SECURITIES ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. Upon any request for sale or other transfer of a Restricted Note (including any Restricted Notes represented by a Note in global form) made subsequent to the later of the date which is three years after the date of original issuance of the Notes and the last date on which the Company or an affiliate of the Company within the 16 21 meaning of Rule 144 under the Securities Act was the Holder of such Restricted Note and with respect to which a certification substantially in the form of Exhibit C hereto is furnished by the transferor, (i) in the case of any Restricted Note in certificated form, the Registrar shall permit the Holder thereof to exchange such Restricted Note for Note Certificates that do not bear the legend set forth above and such request shall be effective to rescind any restriction on the further transfer of such Note, and (ii) any such Restricted Notes represented by a Note in global form shall not be subject to any restriction on transfer set forth above; and in each such case, such Notes (whether in certificated or global form) shall no longer constitute "Restricted Notes" for purposes of this Agreement. The Registrar and the Company shall be entitled (but not obligated) to require such additional certificates and information as it may reasonably deem necessary to demonstrate that any sale or other transfer of a Restricted Note is made in compliance with the applicable restrictions set forth above. (c) Notwithstanding any other provisions of this Agreement or the Notes, a global Note shall not be exchanged in whole or in part for a Note registered in the name of any person other than the Depository or a nominee thereof, provided that a global Note may be exchanged for Notes registered in the names of any person designated by the Depository in the event that (i) the Depository has notified the Company that it is unwilling or unable to continue as Depository for such global Note and the Company has not appointed a successor Depository within 60 days of receiving such notice, or such Depository has ceased to be a "clearing agency" registered under the Exchange Act, (ii) an Event of Default has occurred and is continuing, (iii) a request is made in accordance with Section 4.1(f), or (iv) the Company, at its sole discretion, determines that the Notes issued in the form of a global Note shall no longer be represented by such global Note. Any global Note exchanged pursuant to clause (i) or (iv) above shall be so exchanged in whole and not in part and any global Note exchanged pursuant to clause (ii) or (iii) above may be exchanged in whole or from time to time in part as directed by the Depository. Any Note issued in exchange for a global Note or any portion thereof shall be a global Note, provided that any such Note so issued that is registered 17 22 in the name of a person other than the Depository or a nominee thereof shall not be a global Note. (d) If at any time the Depository for the Notes notifies the Company that it is unwilling or unable to continue as Depository for the Notes, the Company may within 60 days of receiving such notice appoint a successor Depository with respect to the Notes. (e) If in accordance with Section 4.1(c) Notes in global form will no longer be represented by a global Note, the Company will execute, and the Fiscal Agent, upon receipt of a Company Order for the authentication and delivery of Note Certificates, will authenticate and deliver, Note Certificates in an aggregate principal amount equal to the principal amount of the Notes in global form, in exchange for such Notes in global form. If a Note Certificate is issued in exchange for any portion of a global Note after the close of business at the office or agency where such exchange occurs on any Record Date and before the opening of business at such office or agency on the next succeeding Scheduled Interest Payment Date, interest will not be payable on such Scheduled Interest Payment Date in respect of such Note Certificate, but will be payable on such Scheduled Interest Payment Date only to the person to whom interest in respect of such portion of such global Note is payable in accordance with the provisions of this Agreement. Note Certificates issued in exchange for a Note in global form pursuant to this Section shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Fiscal Agent. Upon execution and authentication, the Fiscal Agent shall deliver such Note Certificates to the Persons in whose names such Notes are so registered. (f) Any Person having a beneficial interest in Notes in global form may upon request exchange its interest in the Notes in global form for a Note Certificate at any time by giving at least 60 days' prior written notice to the Fiscal Agent in accordance with the Depository's customary procedures. Upon receipt by the Registrar and the Fiscal Agent of (i) written or electronic instruc- 18 23 tions from the Depository or its nominee on behalf of any Person having a beneficial interest in Notes in global form, identifying such Person as a Beneficial Holder and specifying the amount of such Person's interest, (ii) a written order of such Person requesting issuance of a Note Certificate and containing registration instructions, and (iii) in the case of Restricted Notes only, a certification from such Person in substantially the form of Exhibit C hereto, the Fiscal Agent or the Custodian, at the direction of the Fiscal Agent, will cause, in accordance with the standing instructions and procedures existing between the Depository and the Custodian, the aggregate principal amount of the Notes in global form to be reduced and, following such reduction, the Company will execute and, upon receipt of a Company Order for the authentication and delivery of a Note Certificate, the Fiscal Agent will authenticate and deliver to such Person, as the case may be, a Note Certificate. A Note Certificate may be exchanged by the Holder at any time for a beneficial interest in Notes in global form or transferred by the Holder at any time in accordance with Rule 144A to a QIB wishing to hold the Notes in global form upon satisfaction of the requirements set forth below. Upon receipt by the Registrar and the Fiscal Agent of a Note Certificate, duly endorsed or accompanied by appropriate instruments of exchange or transfer, as the case may be, in form satisfactory to the Registrar, together with (a) certification from the Holder, substantially in the form of Exhibit C hereto, that such Note Certificate is either being exchanged for a beneficial interest in Notes in global form or being transferred to a QIB in accordance with Rule 144A and (b) written instructions from the Holder surrendering such Note Certificate for a beneficial interest in Notes in global form or transferring Notes to a QIB in accordance with Rule 144A, directing the Fiscal Agent to make, or to direct the Custodian to make an endorsement on the Note in global form to reflect an increase in the aggregate principal amount of the Notes represented by the Note in global form, the Fiscal Agent shall cancel such Note Certificate and cause, or direct the Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Custodian, the aggregate principal amount of Notes in global form to be increased accordingly. 19 24 (g) At such time as all interests in a Note in global form have either been exchanged for Note Certificates or cancelled, such Note in global form shall be cancelled by the Fiscal Agent in accordance with the standing procedures and instructions existing between the Depository and the Custodian. At any time prior to such cancellation, if any interest in a global Note is exchanged for Note Certificates or cancelled, the principal amount of Notes represented by such Note in global form shall, in accordance with the standing procedures and instructions existing between the Depository and the Custodian, be reduced and an endorsement shall be made on such Note in global form, by the Fiscal Agent or the Custodian, at the direction of the Fiscal Agent, to reflect such reduction. (h) Notwithstanding anything in this Agreement to the contrary, (i) all transfers and exchanges of the Notes may be made only in accordance with the procedures set forth in this Agreement (including the restrictions on transfer), (ii) all Notes, whether issued in certificated or global form, shall be registered as to interest and principal with the Registrar, (iii) the transfer of a Note may be effected only by the surrender of the old Note and either the reissuance by the Company of the old Note to the new Holder or the issuance by the Company of a new Note to the new Holder, and (iv) the transfer and exchange of a beneficial interest in a Note issued in global form may only be effected through the Depository in accordance with the procedures promulgated by the Depository. SECTION 4.2. ERISA Restrictions. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Code, as to which the Company is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire any Note or interest therein, unless such acquisition is exempt under one or more of Prohibited Transaction Exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of a Note constitutes a representation by such Person to the Company and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a 20 25 Plan, and may acquire such Note under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The restrictions on purchases of the Notes set forth in this Section are in addition to those set forth in Section 4.1 hereof and under applicable law. ARTICLE V COVENANTS SECTION 5.1. Payment of Interest and Principal. The Company will duly and punctually pay or cause to be paid the interest on and principal of the Notes in accordance with, and subject to, the terms of the Notes and this Agreement. SECTION 5.2. Rule 144A Information. So long as the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or Beneficial Holder, the Company shall promptly furnish or cause the Fiscal Agent to furnish (if such information has been provided to the Fiscal Agent) to such Holder, or to a prospective purchaser of such Note or interest designated by such Holder, as the case may be, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act ("Rule 144A Information") to permit compliance with Rule 144A in connection with resales of the Notes; provided, however, that the Company shall not be required to furnish Rule 144A Information in connection with any request made on or after the date which is three years from the later of (x) the date of original issuance of such Note (or any predecessor Note) or (y) the date such Note (or any predecessor Note) was last held by the Company or an affiliate of the Company within the meaning of Rule 144 under the Securities Act. So long as the Company is required to furnish Rule 144A Information as set forth herein, the Company shall notify the Fiscal Agent in writing if at any time it becomes subject to Section 13 or l5(d) of the Exchange Act. SECTION 5.3. Other Information. The Company shall deliver (or shall cause the Fiscal Agent to deliver) to each Holder, upon written request, promptly after such items are available, one copy of [(i) each annual 21 26 report to policyholders of the Company,] (ii) each Annual Statement, as filed by the Company with the Missouri Department, in the form generally made available by the Company to the public and (iii) Quarterly Statutory-Basis Financial Statements of the Company, as filed by the Company with the Missouri Department. SECTION 5.4. Corporate Existence. Subject to Article VI, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchise; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or that not preserving such right or franchise is in the best interests of the policyholders of the Company and, in each case, that any such action is effected only in a manner which does not adversely affect the interests of any Noteholder in any material respect. SECTION 5.5. Compliance with Investment Company Act. So long as any of the Notes are outstanding, the Company will not take any action that would cause the Company to cease to be an "insurance company" as defined in the Investment Company Act of 1940, as amended. SECTION 5.6. Maintenance of Debt Service Account. So long as any of the Notes are outstanding, the Company will maintain the Debt Service Account. ARTICLE VI DEMUTUALIZATION, MERGER, CONSOLIDATION OR SALE BY THE COMPANY SECTION 6.1. Demutualization, Merger, Consolidation or Sale of Assets. (a) The Company shall not convert itself from a mutual life insurance company into a stock life insurance company (such conversion, a "demutualization"), merge or consolidate with or into any other Person or sell, convey, transfer or otherwise dispose of all or substantially all of its assets to any Person, unless (i) (A) in the case of a merger or consolidation, the Company is the surviving corporation or (B) 22 27 in the case of a merger or consolidation where the Company is not the surviving corporation and in the case of any such sale, conveyance, transfer or other disposition, the successor is a corporation organized and existing under the laws of the United States or a state thereof and such corporation expressly assumes by supplemental fiscal agency agreement all the obligations of the Company under the Notes and the Fiscal Agency Agreement; (ii) at the time of any such demutualization, merger or consolidation, or such sale, conveyance, transfer, or other disposition, the Company shall not have failed to make payment of interest on or principal of the Notes after having received the Missouri Director's prior approval to make such payment; and (iii) the Company shall have delivered to the Fiscal Agent an Officers' Certificate stating that such demutualization, merger, consolidation, sale, conveyance, transfer or other disposition complies with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with. In the event of the assumption by a successor corporation of the obligations of the Company as provided in clause (i) (B) of the immediately preceding sentence, such successor corporation shall succeed to and be substituted for the Company hereunder and under the Notes and all such obligations of the Company shall terminate. (b) Upon any demutualization, merger, consolidation or any transfer of all or substantially all of the assets, of the Company in accordance with this Section, the successor corporation formed by such consolidation or demutualization or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement and under the Notes with the same effect as if such successor corporation had been named as the Company herein. ARTICLE VII REMEDIES SECTION 7.1. Remedies. Holders of the Notes may enforce the Fiscal Agency Agreement or the Notes only in the manner set forth below (an event described in 23 28 either Section 7.1(a) or 7.1(b) is referred to herein as an "Event of Default"). (a) In the event that any state or federal agency shall obtain an order or grant approval for the rehabilitation, liquidation, reorganization, conservation or dissolution of the Company, the Notes will, upon the obtaining of such an order or the granting of such approval, immediately become payable in full without any action on the part of the Fiscal Agent or any Holder, with payment thereon being subject to the Payment Restrictions and any restrictions imposed as a consequence of, or pursuant to, such proceedings. Notwithstanding any other provision of this Fiscal Agency Agreement or the Notes, in no event shall the Fiscal Agent or any Holder of the Notes be entitled to declare the Notes to be immediately mature or otherwise be immediately payable. (b) In the event that the Missouri Director approves in whole or in part a payment of any interest on or principal of any Notes and the Company fails to pay the full amount of such approved payment on the date such amount is scheduled to be paid, such approved amount will be immediately payable on such date without any action on the part of the Fiscal Agent or any Holder. (c) In the event that the Company fails to perform any of its other obligations hereunder or under the Notes, each holder of the Notes may pursue any available remedy to enforce the performance of any provision of the Fiscal Agency Agreement or such Notes, provided, however, that such remedy shall in no event include the right to declare the Notes immediately payable. A delay or omission by any Noteholder in exercising any right or remedy accruing as a result of the Company's failure to perform its obligations hereunder or under the Notes and the continuation thereof shall not impair such right or remedy or constitute a waiver of or acquiescence in such non-performance by the Company. To the extent permitted by law, no remedy is exclusive of any other remedy and all remedies are cumulative. SECTION 7.2. Restoration of Rights and Remedies. If any Holder has instituted any proceeding to enforce any right or remedy under this Agreement and such proceeding has been discontinued or abandoned for any 24 29 reason, or has been determined adversely to such Holder, then and in every such case the Company and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Holders shall continue as though no such proceeding had been instituted. SECTION 7.3. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 7.4. Delay or Omission Not Waiver. No delay or omission of any Holder to exercise any right or remedy accruing pursuant to this Article shall impair any such right or remedy or constitute a waiver thereof or an acquiescence therein. Every right and remedy given by this Article or by law to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Holders. ARTICLE VIII SUBORDINATION SECTION 8.1. Subordination. The Company agrees, and each Noteholder by accepting a Note agrees, that the indebtedness evidenced by the Notes is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Policy Claims, Indebtedness and Prior Claims. SECTION 8.2. Rehabilitation, Liquidation, Reorganization, Conservation or Dissolution. Upon any distribution to creditors of the Company in a rehabilitation, liquidation, reorganization, conservation or dissolution relating to the Company or its property: 25 30 (1) holders of Policy Claims, Indebtedness and Prior Claims shall be entitled to receive payment in full, in cash or in a manner satisfactory to the holders of such Policy Claims, Indebtedness and Prior Claims, of all Policy Claims, Indebtedness and Prior Claims before Noteholders shall be entitled to receive any payments of interest on or principal of the Notes; (2) until the Policy Claims, Indebtedness and Prior Claims have been paid in full in cash or in a manner satisfactory to the holders of such Policy Claims, Indebtedness and Prior Claims, any distribution to which Noteholders would be entitled but for this Article shall be made to holders of Policy Claims, holders of Indebtedness and holders of Prior Claims as their interests may appear, except that Noteholders may receive securities that are subordinated to Policy Claims, Indebtedness and Prior Claims to at least the same extent as the Notes; and (3) after payment in full of all Policy Claims, Indebtedness and Prior Claims, and prior to any payment to any Person in respect of such Person's ownership interest in the Company, the Noteholders shall be entitled to receive, notwithstanding clause (ii) of Section 3.1, payment in full of all amounts due under this Agreement and the Notes. A distribution may consist of cash, securities or other property. SECTION 8.3. Distribution. If a distribution is made to Noteholders that, because of this Article, should not have been made to them, the Noteholders who receive the distribution shall hold it in trust for holders of Policy Claims, Indebtedness and Prior Claims and pay it over to them as their interests may appear. SECTION 8.4. Notice of Violation. The Company shall promptly notify the Fiscal Agent and the Paying Agent of any facts known to the Company that would cause a payment of interest on or principal of the Notes to violate this Article. 26 31 SECTION 8.5. Rights of Noteholders. (a) Nothing in this Article shall (i) impair, as between the Company and Noteholders, the obligation of the Company which is, subject to the Payment Restrictions, absolute and unconditional to pay interest on and principal of the Notes in accordance with their terms; (ii) affect the relative rights of Noteholders and creditors of the Company other than holders of Policy Claims, Indebtedness or Prior Claims; or (iii) prevent the Fiscal Agent or any Noteholder from exercising any available remedies upon a breach by the Company of its obligations hereunder, subject to the rights of holders of Policy Claims, Indebtedness or Prior Claims to receive distributions otherwise payable to Noteholders. (b) Each Noteholder, by acceptance thereof, authorizes and directs the Fiscal Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. ARTICLE IX FISCAL AGENT SECTION 9.1. Duties of Fiscal Agent. (a) The Fiscal Agent acts under this Agreement solely as agent of the Company and does not assume any obligation or relationship of agency or trust for or with the Holders of the Notes, except that all funds held by the Fiscal Agent for the payment of interest on or principal of, and any other amounts with respect to, the Notes shall be held in trust but need not be segregated from other funds, except as required by law, and shall be applied as set forth herein and in the Notes. The Fiscal Agent need perform only those duties that are specifically set forth in this Agreement and no others. (b) In the absence of gross negligence or bad faith on its part, the Fiscal Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Fiscal Agent and conforming to the requirements of this Agreement. However, the Fiscal Agent shall examine the certificates and opinions 27 32 to determine whether or not they conform to the requirements of this Agreement, but need not verify the accuracy of the contents thereof. (c) The Fiscal Agent shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proven that the Fiscal Agent was grossly negligent in ascertaining the pertinent facts. (d) Except as provided in Section 9.8 and Article X of this Agreement, no provision of this Agreement shall require the Fiscal Agent to expend, risk or maintain its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 9.2. Rights of Fiscal Agent. (a) In the absence of gross negligence or bad faith, the Fiscal Agent may rely and shall be protected in acting or refraining from acting upon any document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Fiscal Agent need not investigate any fact or matter stated in the document. (b) Before the Fiscal Agent acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Fiscal Agent shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Fiscal Agent shall not be liable for any action it takes or omits to take in good faith without gross negligence which (i) is taken pursuant to any Company Order addressed and delivered to the Fiscal Agent or (ii) the Fiscal Agent otherwise believes to be authorized or within its rights or powers. (d) The Fiscal Agent may consult with counsel of its choice, which may be counsel to the Company, and the advice of such counsel as to matters of law shall be full and complete authorization and protection in respect of any action taken, omitted or suffered by it hereunder 28 33 in good faith without gross negligence and in accordance with the advice or opinion of such counsel. (e) The Fiscal Agent shall not be bound and shall have no duty to ascertain or inquire as to the performance or observance of any covenants, conditions or agreements on the part of the Company under this Agreement. (f) The Fiscal Agent shall not be required to give any bond or surety in respect of the execution of its powers or in respect of this Agreement. SECTION 9.3. Individual Rights of Fiscal Agent. The Fiscal Agent in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company with the same rights the Fiscal Agent would have if it were not Fiscal Agent. Any Agent may do the same with like rights. SECTION 9.4. Fiscal Agent's Disclaimer. The Fiscal Agent makes no representation as to the validity or adequacy of this Agreement or the Notes, shall not be accountable for the Company's use of the proceeds from the sale of the Notes or the use or application of any money received by any Paying Agent other than the Fiscal Agent, and shall not be responsible for any statement in the Notes other than the Fiscal Agent's certificate of authentication. SECTION 9.5. Compensation and Indemnity. The Company shall from time to time pay to the Fiscal Agent compensation for its services as agreed in writing by the Company from time to time. The Fiscal Agent's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Fiscal Agent, within 45 days after receiving written request therefor, for all reasonable out-of-pocket disbursement fees and expenses incurred by the Fiscal Agent in connection with the performance of its duties under this Agreement, including, without limitation, those incurred in connection with the enforcement of any remedy hereunder or the interpretation of any provision hereunder. Such expenses may include the reasonable compensation and out-of-pocket expenses of the Fiscal Agent's agents and counsel. 29 34 The Company shall indemnify the Fiscal Agent for, and hold it harmless against, any loss or liability incurred by it in connection with its acting as Fiscal Agent under this Agreement. The Fiscal Agent shall promptly notify the Company of any claim for which the Fiscal Agent may seek indemnity, including costs and expenses of defending itself against any claim for liability arising from the exercise or performance of any of its powers or duties hereunder. The Company need not pay for any settlement made without its consent. The Company need not reimburse any expense or indemnify against any lose or liability incurred by the Fiscal Agent through its gross negligence or bad faith. The Fiscal Agent shall have a lien or right of set-off on all funds hereunder for reasonable fees and expenses (including fees and expenses of its agents and counsel) incurred as a result of performance of its duties hereunder. The obligations of the Company under this Section shall survive payment of all the Notes or the resignation or removal of the Fiscal Agent, as the case may be. SECTION 9.6. Replacement of Fiscal Agent. A resignation or removal of the Fiscal Agent and appointment of a successor Fiscal Agent shall become effective only upon the successor Fiscal Agent's acceptance of appointment as provided in this Section. The Fiscal Agent may resign at any time by giving 60 days' prior written notice thereof to the Company. Either the Company or the Holders of a majority in principal amount of the Notes may remove the Fiscal Agent at any time by giving written notice thereof to the Fiscal Agent and, in the case where removal is at the election of the Holders of a majority in principal amount of the Notes, to the Company. If the Fiscal Agent resigns or is removed or if a vacancy exists in the office of Fiscal Agent for any reason, the Company shall promptly appoint a successor Fiscal Agent. Within one year after the successor Fiscal Agent takes office, the Holders of a majority in principal amount of the Notes may appoint a successor Fiscal 30 35 Agent to replace the successor Fiscal Agent appointed by the Company. If a successor Fiscal Agent does not take office within 60 days after the retiring Fiscal Agent resigns or is removed, the retiring Fiscal Agent, the Company or the Holders of at least 10% in principal amount of the Notes may petition any court of competent jurisdiction for the appointment of a successor Fiscal Agent. If the Fiscal Agent fails to comply with Section 9.8, any Noteholder or Beneficial Holder may petition any court of competent jurisdiction for the removal of the Fiscal Agent and the appointment of a successor Fiscal Agent. A successor Fiscal Agent shall deliver a written acceptance of its appointment to the retiring Fiscal Agent and to the Company. Thereupon the retiring Fiscal Agent shall transfer all property held by it as Fiscal Agent to the successor Fiscal Agent, the resignation or removal of the retiring Fiscal Agent shall become effective, and the successor Fiscal Agent shall have all the rights, powers and duties of the Fiscal Agent under this Agreement. The successor Fiscal Agent shall mail a notice of its succession to Noteholders. SECTION 9.7. Successor Fiscal Agent, Agents by Merger, Etc. If the Fiscal Agent or any Agent consolidates with, merges or converts into, or transfers all or substantially all of its fiscal agency business to, another corporation, the successor corporation without any further act shall be the successor Fiscal Agent or Agent, as the case, may be. SECTION 9.8. Eligibility. The Fiscal Agent shall have a combined capital and surplus of at least $100 million as set forth in its most recent annual report to its shareholders. SECTION 9.9. Appointment of Authenticating Agent. The Fiscal Agent may appoint an authenticating agent or agents with respect to the Notes (each an "Authenticating Agent") which shall be authorized to act on behalf of the Fiscal Agent to authenticate the Notes whenever the Fiscal Agent may do so, other than upon 31 36 original issuance or pursuant to Section 2.7, and Notes so authenticated shall be entitled to the benefits of this Agreement and shall be valid and obligatory for all purposes as if authenticated by the Fiscal Agent hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Fiscal Agent, a copy of which instrument shall be promptly furnished to the Company. Wherever reference is made in this Agreement to the authentication of the Notes by the Fiscal Agent or the Fiscal Agent's certificate of authentication, such reference shall be deemed to include authentication, and delivery on behalf of the Fiscal Agent by an Authenticating Agent and a certificate of authentication executed on behalf of the Fiscal Agent by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a bank or trust company or corporation organized and doing business in good standing under the laws of the United States of America or of any State or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $1,500,000 and subject to supervision or examination by Federal or State authorities. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or further act on the part of the Fiscal Agent or the Authenticating Agent. 32 37 An Authenticating Agent for the Notes may at any time resign by giving written notice of resignation to the Fiscal Agent. The Fiscal Agent may at any time terminate the agency of an Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Fiscal Agent may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment to all Noteholders. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of the Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Notes of such series may have endorsed thereon, in addition to or in lieu of the Fiscal Agent's certificate of authentication, an alternate certificate of authentication substantially in the following form: This is one of the Notes of a series issued under the within-mentioned Fiscal Agency Agreement. Dated: ___________ THE BANK OF NEW YORK, as Fiscal Agent By: _________________________ as Authenticating Agent By: ___________________________ Authorized Signatory Sections 9.2, 9.4 and 9.5 shall be applicable to any Authenticating Agent. 33 38 ARTICLE X AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 10.1. Without Consent of Holders. The Company and the Fiscal Agent may amend or supplement this Agreement or the Notes without the consent of any Noteholder for the purpose of: (1) adding to the covenants of the Company for the benefit of the Noteholders; or (2) surrendering any right or power conferred on the Company: or (3) securing the Notes; or (4) evidencing the succession of another corporation to the Company and the assumption by any such successor of the covenants and obligations of the Company herein and in the Notes, as permitted by this Agreement and the Notes; or (5) modifying the restrictions on, and procedures for, resale and other transfers of the Notes to the extent required by any change in applicable law or regulation, or the interpretation thereof, or in the practices relating to the resale or transfer of restricted securities generally; or (6) accommodating the issuance, if any, of Note Certificates or Notes in book-entry form and matters related thereto which do not adversely affect the interests of any Noteholder in any material respect; or (7) curing any ambiguity or correcting or supplementing any defective provision herein or in the Notes in a manner which does not adversely affect the interests of any Noteholder in any material respect; or (8) effecting any amendment which the Company and the Fiscal Agent may determine is necessary or desirable and which shall not adversely affect the interests of any Noteholder. 34 39 SECTION 10.2. With Consent of Holders. The Company and the Fiscal Agent may amend or supplement this Agreement or the Notes (i) with the written consent of the Noteholders of at least a majority in aggregate principal amount of the Notes or (ii) upon the adoption of a resolution, at a meeting of Holders held pursuant to Article XI at which a quorum is present, by the Holders of not less than a majority in principal amount of the Notes. In addition, the Holders of a majority in aggregate principal amount of the Notes may waive compliance by the Company with any provision of this Agreement or the Notes, either by written consent or by affirmative vote at a meeting of Holders as described above. Without the written consent or affirmative vote of each Noteholder affected, no amendment, supplement or waiver under this Section may: (1) change the dates for payment of interest on, or the stated maturity date of the principal of, any Note; (2) reduce the interest rate on, or the principal amount of, any Note; (3) change the place or currency of payment of interest on or principal of any Note; (4) change the Company's obligations under Section 5.2 hereof; (5) impair any right to institute suit for the enforcement of any payment, if such payment has been approved by the Missouri Director, on or with respect to any Note; (6) modify the subordination provisions in a manner adverse to the Noteholders; (7) reduce the percentage in principal amount of Notes, the consent of whose Holders is required for modification or amendment of this Agreement or the Notes or to make, take or give any request, demand, authorization, direction, notice, consent, waiver (including waiver of future compliance or past failure to perform) or other action provided thereby to be made, taken or given; 35 40 (8) reduce the percentage of aggregate principal amount of outstanding Notes that constitutes the quorum at any meeting of Noteholders at which a resolution is adopted; or (9) change the Payment Restrictions in a manner adverse to any Noteholder. In addition, without the prior approval of the Missouri Director, no amendment, supplement or waiver under this Section may change the Payment Restrictions in any manner. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. The Company may establish, by delivery of an Officers' Certificate to the Fiscal Agent, a record date for determining Noteholders of record entitled to give any consent or waiver. After an amendment or supplement under this Section becomes effective, the Fiscal Agent shall mail to Noteholders a notice briefly describing the amendment or supplement. Any failure of the Fiscal Agent to mail each such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment or supplemental agreement. SECTION 10.3. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a written consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the written consent as to such Note or portion of a Note if a Responsible Officer of the Fiscal Agent receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Noteholder. Notwithstanding the foregoing, if a record date has been established for the purpose of determining Noteholders entitled to consent, such written notice of revocation 36 41 must be signed by the Noteholder of record as of the record date or his duly appointed proxy. SECTION 10.4. Notation on or Exchange of Notes. The Fiscal Agent may place an appropriate notation relating to an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue, and the Fiscal Agent shall authenticate, new Notes that reflect the amendment, supplement or waiver. SECTION 10.5. Fiscal Agent to Sign Amendments, Etc. In executing, or accepting the additional obligations created by, any supplemental agreement permitted by this Article or the modifications thereby of the obligations created by this Agreement, the Fiscal Agent shall be entitled to receive, and (subject to Section 9.1) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate stating that the execution of such supplemental agreement is authorized or permitted by this Agreement. The Fiscal Agent shall sign any amendment or supplement authorized pursuant to this Article if the amendment or supplement does not adversely affect the rights of the Fiscal Agent. If the amendment or supplement does adversely affect the Fiscal Agent's rights, the Fiscal Agent may, but need not, sign it. ARTICLE XI MEETINGS OF HOLDERS SECTION 11.1. Purposes for Which Meetings May Be Called. A meeting of Holders of the Notes may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be made, given or taken by Holders of the Notes. SECTION 11.2. Call, Notice and Place of Meetings. The Company may at any time, and at the written request and direction of the Holders of at least 25% of the aggregate principal amount of the Notes at any time, the Fiscal Agent shall on behalf of such Holders, call a 37 42 meeting of Holders of the Notes for any purpose specified in Section 11.1 hereof. Each such meeting shall be held at such time and at such place in New York, New York or St. Louis, Missouri as the Company or the Holders calling such meeting shall determine. Notice of any such meeting of Holders of the Notes, setting forth the time and the place of such meeting and, in general terms, the action proposed to be taken at such meeting, shall be given by the Company to the Fiscal Agent and the Holders of the Notes, or by the Fiscal Agent (on behalf and at the direction of the Holders calling the meeting) to the Company and the Holders of the Notes, not less than 30 nor more than 60 days prior to the date fixed for the meeting. If the Fiscal Agent shall not have given notice of any meeting as directed by the requisite Holders within 21 days after receiving such direction, such Holders may call a meeting of the Holders generally by giving written notice thereof to the Company, the Fiscal Agent and the Holders of the Notes in the manner described above. SECTION 11.3. Persons Entitled to Vote at Meetings. To be entitled to vote at any meeting of Holders of the Notes, a Person shall be (i) a Holder of the Notes or (ii) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more of the Notes. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Fiscal Agent and its counsel, and any representatives of the Company and its counsel. SECTION 11.4. Quorum. At any meeting of the Holders of the Notes, a majority in aggregate principal amount of the Notes shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of the Notes, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the 38 43 reconvening of any adjourned meeting shall be given as provided in Section 11.2, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Any action taken at any meeting of Holders of the Notes duly held in accordance with this Section, if taken by the Holders of an aggregate principal amount of the Notes required for such action by this Agreement, shall be binding on all the Holders of the Notes, whether or not present or represented at the meeting. SECTION 11.5. Action by Written Consent. Any action required or permitted to be taken by the Holders of the Notes may be effected by consent in writing by such Holders of the Notes. SECTION 11.6. Determination of Voting Rights; Conduct and Adjournment of Meetings. (a) Notwithstanding any other provisions of this Agreement, the Company may make such reasonable regulations as it may deem advisable for any meeting of Holders of the Notes in regard to proof of the holding of the Notes and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without other proof. (b) The Company shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Holders of the Notes, in which case the Holders of the Notes calling the meeting shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Notes represented at the meeting. (c) At any meeting each Holder of a Note or proxy therefor shall be entitled to one vote for each $1,000 principal amount of the Notes held or represented by such Holder; provided that no vote shall be cast or counted at any meeting in respect of any Note ruled by 39 44 the chairman of the meeting to be not outstanding or otherwise not entitled to vote. The chairman of the meeting shall have no right to vote, except as a Holder of a Note or proxy. (d) Any meeting of Holders of the Notes duly called pursuant to Section 11.2 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Notes represented at the meeting, and such meeting may be held as so adjourned without further notice. SECTION 11.7. Counting Votes and Recording Action of Meetings. The vote upon any resolution submitted to any meeting of Holders of the Notes shall be by written ballots on which shall be subscribed the signatures of the Holders of the Notes or of their representatives by proxy and the principal amounts and serial numbers, if applicable, of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record, at least in triplicate, of the proceedings of each meeting of Holders of the Notes shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken at such meeting and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that such notice was given as provided in Section 11.2 and, if applicable, Section 11.4 hereof. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to each of the Company and the Fiscal Agent, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be presumptive evidence of the matters therein stated. 40 45 ARTICLE XII MISCELLANEOUS SECTION 12.1. Notices. Any notice or communication to the Company or the Fiscal Agent by the other shall be duly given if in writing and delivered in person or mailed by first class mail addressed as follows: If to the Company: General American Life Insurance Company 700 Market Street St. Louis, Missouri 63101 Attention: David Terzog Telephone: (314) 444-0451 Facsimile: (314) 444-0726 If to the Fiscal Agent: The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Administration Telephone: (212) 815-2745 Facsimile: (212) 815-5915 The Company or the Fiscal Agent by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Noteholder shall be mailed by first-class mail to its address as shown on the register kept by the Registrar. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If the Company mails a notice or communication to Noteholders, it shall mail a copy to the Fiscal Agent and each Agent at the same time. If a notice or communication is mailed in the manner provided above within the time prescribed it is duly given, whether or not the addressee receives it. SECTION 12.2. Governing Law. This Agreement and the Notes shall be governed by and construed in accordance with the laws of the State of New York, except the 41 46 provisions regarding the Payment Restrictions set forth in Section 3.1, which shall be governed by, and construed in accordance with, the laws of the State of Missouri. SECTION 12.3. No Recourse Against Others. No director, officer, employee, member or policyholder, as such, of the Company shall have any liability for any obligation of the Company under the Notes or the Agreement or for any claim based on, in respect of or by reason of such obligations or their creation. Each Noteholder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. SECTION 12.4. Duplicate Originals. The parties may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is sufficient to prove this Agreement. SECTION 12.5. Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 12.6. Successor and Assigns. All covenants and agreements in this Agreement by the Company shall bind its successor and assigns, whether so expressed or not. SECTION 12.7. Separability. In case any provision of this Agreement or the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.8. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open either in New York City, St. Louis, Missouri, or in the city where the principal corporate office of the Fiscal Agent is located. If a payment date is a Legal Holiday at a place of payment, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 42 47 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. GENERAL AMERICAN LIFE INSURANCE COMPANY By: ------------------------------- Name: Title: Executive Vice President and Treasurer THE BANK OF NEW YORK, as Fiscal Agent By:_______________________________ Name: Title: 48 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. GENERAL AMERICAN LIFE INSURANCE COMPANY By:_______________________________ Name: Title: THE BANK OF NEW YORK, as Fiscal Agent By:/s/ W.T. Cunningham ------------------------------- Name: W.T. CUNNINGHAM Title: VICE PRESIDENT 49 EXHIBIT A - FORM OF NOTE CERTIFICATE (Face of Note) CUSIP No.___________ $___________ GENERAL AMERICAN LIFE INSURANCE COMPANY 7 5/8% Surplus Note due 2024 GENERAL AMERICAN LIFE INSURANCE COMPANY, a mutual life insurance corporation organized under the laws of the State of Missouri, promises to pay to __________ or registered assigns, the principal sum of $___________ on the first business day on or after __________, ____ on which the Payment Restrictions (as defined on the reverse hereof) are satisfied. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, GENERAL AMERICAN LIFE INSURANCE COMPANY has caused this Note to be signed by its duly authorized officers and its corporate seal to be affixed hereto or imprinted hereon. GENERAL AMERICAN LIFE INSURANCE COMPANY By:_________________________________ Name: Title: By:_________________________________ Name: Title: Dated: ____________ Certificate of Authentication: This is one of the Notes of a series issued under the within-mentioned Fiscal Agency Agreement. Dated: __________ THE BANK OF NEW YORK, as Fiscal Agent By_______________________ Authorized Signatory 50 (Reverse of Note) GENERAL AMERICAN LIFE INSURANCE COMPANY 7 5/8% Surplus Note due 2024 THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "RULE 144A"). THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF GENERAL AMERICAN LIFE INSURANCE COMPANY THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A, IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO AN INSTITUTIONAL ACCREDITED INVESTOR, AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFERRED TO IN (A) ABOVE. 1. Interest. GENERAL AMERICAN LIFE INSURANCE COMPANY ("General American"), a mutual life insurance corporation organized under the laws of the State of 2 51 Missouri, promises to pay interest on the principal amount of this Note at the rate of 7 5/8% per annum. General American will pay interest semi-annually on January 15 and July 15 of each year, commencing July 15, 1994 (or if later, in each case, on the first day following such date on which the Payment Restrictions are satisfied) to holders of Notes at the close of business on the relevant record dates specified in paragraph 2 below. Interest on the Notes will accrue from the most recent date to which interest has been paid or if no interest has been paid, from January 24, 1994. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. General American will pay interest on the Notes to the persons who are registered holders of Notes at the close of business on the January 1 or July 1 next preceding the Interest Payment Date (including Notes that are cancelled after the record date and on or before the Interest Payment Date). Holders must surrender Notes to a Paying Agent to collect payments of principal. General American will pay interest and principal in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, General American may pay interest and principal by check payable in such money. It may mail an interest check to a Holder's registered address. Payments of interest on or principal of the Notes may be made, in the case of a registered owner of at least $5,000,000 aggregate principal amount of Notes, by wire transfer to an account maintained by the registered owner with a bank. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding Business Day, and no interest on the amount payable on such payment date shall accrue for the intervening period. 3. Paying Agent; Registrar. Initially, The Bank of New York (the "Fiscal Agent") will act as Paying Agent and Registrar. General American may change any Paying Agent, Registrar or co-registrar by giving notice to the Fiscal Agent. General American may act as Paying Agent, Registrar or co-registrar. 4. Agreement. General American issued this Note as one of a duly authorized issue of Notes of General American designated as its 7 5/8% Surplus Notes due 2024 (the "Notes") under a Fiscal Agency Agreement, dated as of January 24, 1994 (the "Agreement"), between General American and the Fiscal Agent. The terms of the Notes 3 52 include those stated in the Agreement. The Notes are subject to all such terms, and Noteholders are referred to the Agreement for a statement of such terms. Unless the context otherwise requires, terms used herein that are defined in the Agreement shall have the respective meanings assigned thereto in the Agreement. 5. Payment Restrictions. (a) Except as set forth in Section 8.2(3) of the Agreement relating to the rehabilitation, liquidation, reorganization, conservation or dissolution of General American, each payment of interest on or principal of the Notes may be made only (i) with the approval of the Missouri Director, which approval will be granted only when the Missouri Director is satisfied that the financial condition of the Company warrants such payment, and (ii) only out of Unassigned Funds (Surplus), the Special Surplus Account and the Debt Service Account. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the Stated Rate. Interest will not, however, accrue on interest with respect to which the Scheduled Interest Payment Date has been delayed following the Interest Payment Date. If the Missouri Director approves a payment of interest on or principal of the Notes in an amount that is less than the full amount of interest on or principal of the Notes then scheduled to be paid in respect of the Notes, payment of such partial amount shall be made pro rata among Noteholders as their interests may appear. (b) Subject to Section 2.5(d) of the Agreement, any payment of interest on or principal of any Note which is not punctually paid or duly provided for on the relevant Scheduled Interest Payment Date or Scheduled Maturity Date, as the case may be (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of such Note on the relevant Record Date, and such Unpaid Amount, together with accrued interest thereon (if any) to the extent provided in Section 2.5(d) of the Agreement, will instead be payable to the registered owner of such Note on a subsequent special record date. The Company shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Company shall mail to each Holder of the Notes and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each 4 53 Holder of the Notes in the manner set forth in Section 2.5(a) of this Agreement. 6. ERISA Restrictions. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Code, as to which General American is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Note, unless the acquisition of the Note is exempt under one or more of Prohibited Transaction Exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Note constitutes a representation by such Person to General American and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, but may acquire such Note under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. 7. Subordination. The Notes are subordinated to Policy Claims, Indebtedness and Prior Claims, in each case as defined in the Agreement. To the extent provided in the Agreement, Policy Claims, Indebtedness and Prior Claims must be paid in full before the Notes may be paid. General American agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Agreement and authorizes the Fiscal Agent to give effect to such provisions, and each Noteholder appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. 8. Denominations, Transfer, Exchange. Certain of the Notes were initially represented by Notes issued in global form. Such global Note represents such of the outstanding Notes as shall be specified therein or endorsed thereon in accordance with the Agreement. The Note Certificates are in registered form without coupons in minimum denominations of $250,000 and whole multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Agreement. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Agreement. 9. Persons Deemed Owners. The Holder of a Note may be treated as its owner for all purposes. 5 54 10. Amendment, Supplement, Waiver. Subject to certain exceptions set forth in Section 10.2 of the Agreement, the Agreement or the Notes may be amended or supplemented, with the consent of General American and the Holders of a majority in aggregate principal amount of the Notes, and any existing default may be waived with the consent of the Holders of at least a majority in aggregate principal amount of the Notes. Without the consent of any Noteholder, the Agreement or the Notes may be amended, inter alia, to cure any ambiguity or correct any defective provision, to evidence the succession of another entity to General American and provide for assumption of General American's covenants and obligations under the Agreement and the Notes or to make any change that the Fiscal Agent and General American determine is necessary or desirable and which shall not materially adversely affect the rights of any Noteholder all as set forth in Section 10.1 of the Agreement. 11. Fiscal Agent Dealings With General American. The Fiscal Agent under the Agreement, in its individual, or any other capacity, may make loans to, accept deposits from, and perform services for General American and may otherwise deal with General American as if it were not Fiscal Agent. 12. No Recourse Against Others. A director, officer, employee or member, as such, of General American shall not have any liability for any obligations of General American under the Notes or the Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Noteholder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 13. Authentication. This Note shall not be valid until authenticated by the manual signature of the Fiscal Agent or an Authenticating Agent on the face hereof. 14. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as: TEN COM (= tenants in common), TENANT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 6 55 15. Governing Law. The laws of the State of New York shall govern the Agreement and the Notes, except the provisions regarding Payment Restrictions set forth in Section 3.1. of the Agreement which shall be governed by, and construed in accordance with, the laws of the State of Missouri. General American will furnish to any Noteholder upon written request and without charge a copy of the Agreement. Requests may be made to: General American Life Insurance Company, 700 Market Street, St. Louis, Missouri 63101, Attention: Treasurer. 7 56 ASSIGNMENT FORM To assign this Note fill in the form below: We assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _____________________________ agent to transfer this Note on the books of General American Life Insurance Company. The agent may substitute another to act for him. Date:_______________ Your signature:_______________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guaranteed: 8 57 EXHIBIT B - FORM OF NOTE IN GLOBAL FORM (Face of Note) CUSIP No. 368770 AAl $____________ GENERAL AMERICAN LIFE INSURANCE COMPANY 7 5/8% Surplus Note due 2024 GENERAL AMERICAN LIFE INSURANCE COMPANY, a mutual life insurance corporation organized under the laws of the State of Missouri, promises to pay to Cede & Co., or registered assigns, the principal sum of $___________ on the first business day on or after _____________, on which the Payment Restrictions (as defined on the reverse hereof) are satisfied. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, GENERAL AMERICAN LIFE INSURANCE COMPANY has caused this Note to be signed by its duly authorized officers and its corporate seal to be affixed hereto or imprinted hereon. GENERAL AMERICAN LIFE INSURANCE COMPANY By:_______________________________________ Name: Title: By:_______________________________________ Name: Title: Dated:__________________ Certificate of Authentication: This is one of the Notes of a series issued under the within-mentioned Fiscal Agency Agreement Dated:__________________ THE BANK OF NEW YORK, as Fiscal Agent By_____________________________________ Authorized Signatory 58 (Reverse of Note) GENERAL AMERICAN LIFE INSURANCE COMPANY 7 5/8% Surplus Note due 2024 Unless and until it is exchanged in whole or in part for Note Certificates, this Note may not be transferred except as a whole (i) by the Depository to a nominee of the Depository, (ii) by a nominee of the Depository to the Depository or another nominee of the Depository or (iii) by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. Unless this certificate is presented by an authorized representative of The Depository Trust Company, 55 Water Street, New York, New York ("DTC") to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT", AND THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED) IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME, "RULE 144A"). THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF GENERAL AMERICAN LIFE INSURANCE COMPANY THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) BY THE INITIAL INVESTOR (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A, IN A TRANSACTION IN ACCORDANCE WITH RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S (OR ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT OR (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 (OR 2 59 ANY SUCCESSOR PROVISION THERETO, AND AS MAY BE HEREAFTER AMENDED FROM TIME TO TIME) UNDER THE SECURITIES ACT (IF AVAILABLE) OR (2) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (1) ABOVE AND, IN ADDITION, IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 TO AN INSTITUTIONAL ACCREDITED INVESTOR, AS DEFINED IN RULE 501(a) (1), (2), (3) OR (7) UNDER THE SECURITIES ACT, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES, AND (B) THAT THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESTRICTIONS REFEREED TO IN (A) ABOVE. 1. Interest. GENERAL AMERICAN LIFE INSURANCE COMPANY ("General American"), a mutual life insurance corporation organized under the laws of the State of Missouri, promises to pay interest on the principal amount of this Note at the rate of 7 5/8% per annum. General American will pay interest semi-annually on January 15 and July 15 of each year, commencing July 15, 1994 (or if later, in each case, on the first day following such date on which the Payment Restrictions are satisfied) to holders of Notes at the close of business on the relevant record dates specified in paragraph 2 below. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from January 24, 1994. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. General American will pay interest on the Notes to the persons who are registered holders of Notes at the close of business on the January 1 or July 1 next preceding the Interest Payment Date (including Notes that are cancelled after the record date and on or before the Interest Payment Date). Holders must surrender Notes to a Paying Agent to collect payments of principal. General American will pay interest and principal in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, General American may pay interest and principal by check payable in such money. It may mail an interest check to a Holder's registered address. Payments of interest on or principal of the Notes may be made, in the case of a registered owner of 3 60 at least $5,000,000 aggregate principal amount of Notes, by wire transfer to an account maintained by the registered owner with a bank. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding Business Day, and no interest on the amount payable on such payment date shall accrue for the intervening period. 3. Paying Agent; Registrar. Initially, The Bank of New York (the "Fiscal Agent") will act as Paying Agent and Registrar. General American may change any Paying Agent, Registrar or co-registrar by giving notice to the Fiscal Agent. General American may act as Paying Agent, Registrar or co-registrar. 4. Agreement. General American issued this Note as one of a duly authorized issue of Notes of General American designated as its 7 5/8% Surplus Notes due 2024 (the "Notes") under a Fiscal Agency Agreement, dated as of January 24, 1994 (the "Agreement"), between General American and the Fiscal Agent. The terms of the Notes include those stated in the Agreement. The Notes are subject to all such terms, and Noteholders are referred to the Agreement for a statement of such terms. Unless the context otherwise requires, terms used herein that are defined in the Agreement shall have the respective meanings assigned thereto in the Agreement. 5. Payment Restrictions. (a) Except as set forth in Section 8.2(3) of the Agreement relating to the rehabilitation, liquidation, reorganization, conservation or dissolution of General American, each payment of interest on or principal of the Notes may be made only (i) with the approval of the Missouri Director, which approval will be granted only when the Missouri Director is satisfied that the financial condition of the Company warrants such payment, and (ii) only out of Unassigned Funds (Surplus), the Special Surplus Account and the Debt Service Account. Interest will continue to accrue on any such unpaid principal through the actual date of payment at the Stated Rate. Interest will not, however, accrue on interest with respect to which the Scheduled Interest Payment Date has been delayed following the Interest Payment Date. If the Missouri Director approves a payment of interest on or principal of the Notes in an amount that is less than the full amount of interest on or principal of the Notes then scheduled to be paid in respect of the Notes, payment of such partial amount shall be made pro rata among Noteholders as their interests may appear. 4 61 (b) Subject to Section 2.5(d) of the Agreement, any payment of interest on or principal of any Note which is not punctually paid or duly provided for on the relevant Scheduled Interest Payment Date or Scheduled Maturity Date, as the case may be (such payment being referred to as an "Unpaid Amount"), will forthwith cease to be payable to the registered owner of such Note on the relevant Record Date, and such Unpaid Amount, together with accrued interest thereon (if any) to the extent provided in Section 2.5(d) of the Agreement, will instead be payable to the registered owner of such Note on a subsequent special record date. The Company shall fix the special record date and payment date for the payment of any Unpaid Amount. At least 15 days before the special record date, the Company shall mail to each Holder of the Notes and the Fiscal Agent a notice that states the special record date, payment date and amount of interest or principal to be paid. On the payment date set forth in such notice, the Paying Agent shall pay the amount of interest or principal to be so paid to each Holder of the Notes in the manner set forth in Section 2.5(a) of the Agreement. 6. ERISA Restrictions. No employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the prohibited transaction provisions of the Code, as to which General American is a party in interest or a disqualified person (each a "Plan"), and no Person acting on behalf of a Plan, may acquire this Note, unless the acquisition of the Note is exempt under one or more of Prohibited Transaction Exemptions 84-14, 90-1 or 91-38 (or any amendment thereof) or another applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. The purchase by any Person of this Note constitutes a representation by such Person to General American and the Fiscal Agent that such Person either (i) is not a Plan or (ii) is a Plan, but may acquire such Note under an applicable exemption from the prohibitions under Section 406 of ERISA and Section 4975 of the Code. 7. Subordination. The Notes are subordinated to Policy Claims, Indebtedness and Prior Claims, in each case as defined in the Agreement. To the extent provided in the Agreement, Policy Claims, Indebtedness and Prior Claims must be paid in full before the Notes may be paid. General American agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained 5 62 in the Agreement and authorizes the Fiscal Agent to give effect to such provisions, and each Noteholder appoints the Fiscal Agent its attorney-in-fact for any and all such purposes. 8. Denomination, Transfer, Exchange. This global security represents such of the outstanding Notes as shall be specified herein or endorsed herein in accordance with the Agreement. The aggregate amount of outstanding Notes represented hereby may from time to time be reduced or increased to reflect exchanges. The Note Certificates are in registered form without coupons in minimum denominations of $250,000 and whole multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Agreement. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Agreement. 9. Persons Deemed Owners. The Holder of a Note may be treated as its owner for all purposes. 10. Amendment, Supplement, Waiver. Subject to certain exceptions set forth in Section 10.2 of the Agreement, the Agreement or the Notes may be amended or supplemented, with the consent of General American and the Holders of a majority in aggregate principal amount of the Notes, and any existing default may be waived with the consent of the Holders of at least a majority in aggregate principal amount of the Notes. Without the consent of any Noteholder, the Agreement or the Notes may be amended, inter alia, to cure any ambiguity or correct any defective provision, to evidence the succession of another entity to General American and provide for assumption of General American's covenants and obligations under the Agreement and the Notes or to make any change that the Fiscal Agent and General American determine is necessary or desirable and which shall not materially adversely affect the rights of any Noteholder all as set forth in Section 10.1 of the Agreement. 11. Fiscal Agent Dealings With General American. The Fiscal Agent under the Agreement, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for General American and may otherwise deal with General American as if it were not Fiscal Agent. 6 63 12. No Recourse Against Others. A director, officer, employee or member, as such, of General American shall not have any liability for any obligations of General American under the Notes or the Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Noteholder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 13. Authentication. This Note shall not be valid until authenticated by the manual signature of the Fiscal Agent or an Authenticating Agent on the face hereof. 14. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as: TEN COM (= tenants in common), TENANT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 15. Governing Law. The laws of the State of New York shall govern the Agreement and the Notes, except the provisions regarding Payment Restrictions set forth in Section 3.1 of the Agreement which shall be governed by, and construed in accordance with, the laws of the State of Missouri. General American will furnish to any Noteholder upon written request and without charge a copy of the Agreement. Requests may be made to: General American Life Insurance Company, 700 Market Street, St. Louis, Missouri 63101, Attention: Treasurer. 7 64 ASSIGNMENT FORM To assign this Note fill in the form below; We assign and transfer this note to ________________________________________________________________________________ (Insert assignee's social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) an irrevocably appoint__________________________________________________________ agent to transfer this Note on the books of General American Life Insurance Company. The agent may substitute another to act for him. Date:__________________ Your signature:______________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guaranteed: 8 65 SCHEDULE OF EXCHANGES FOR NOTE CERTIFICATES The following exchanges of a part of this Note in global form for Note Certificates or of Note Certificates for a part of this Note in global form have been made: Principal Amount of Amount of Amount of this Note Signature of decrease in Principal in global authorized Principal Amount Amount of form following officer of Date of of this Note this Note such decrease Fiscal Agent Exchange in global form in global form (or increase) or Custodian - -------- -------------- -------------- ------------- ------------ 9 66 EXHIBIT C - CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES Re: 7 5/8% Surplus Note due 2024 of General American Life Insurance Company. This Certificate relates to $________________ principal amount of Notes held in * __ book-entry or *__ certificated form by -_____________ (the "Transferor"). The Transferor*: [_] has requested the Registrar and the Fiscal Agent by written order to deliver in exchange for its beneficial interest in Notes in global form held by the Depository a Note Certificate or Note Certificates of authorized denominations and in an aggregate principal amount equal to its beneficial interest in such Notes in global form (or the portion thereof indicated above); or [_] has requested the Registrar and the Fiscal Agent by written order to cause it, in exchange for its surrendering a Note Certificate or Note Certificates for cancellation, to be recorded as the owner of a beneficial interest in Notes in global form of an authorized denomination and an aggregate principal amount equal to its aggregate interest in such Note Certificate or Note Certificates (or the portion thereof indicated above); or [_] has requested the Registrar and the Fiscal Agent by written order to exchange or register the transfer of a Note or Notes. In connection with such request and in respect of each such Note, the Transferor does hereby certify to General American Life Insurance Company and the Registrar as follows:* [_] Such Note is owned by the Transferor and is being exchanged without transfer; or [_] Such Note is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")) in reliance on Rule 144A; or [_] Such Note is being transferred in accordance with Rule 144(k) under the Securities Act; or 67 [_] Such Note is being transferred in accordance with Regulation S under the Securities Act; or [_] Such Note is being transferred pursuant to another available exemption from registration under the Securities Act. [INSERT NAME OF TRANSFEROR] By:____________________________________________ Date:_____________________ * Check applicable box. 2 EX-10.49 14 AMENDED & RESTATED TRUST AGREEMENT 1 Exhibit 10.49 AMENDED AND RESTATED TRUST AGREEMENT among GENAMERICA CORPORATION, as Depositor and WILMINGTON TRUST COMPANY, as Property Trustee DAVID L. HERZOG, JOHN W. HAYDEN, and CHRISTOPHER A. MARTIN, as Administrative Trustees Dated as of June 6, 1997 GENAMERICA CAPITAL I 2 TABLE OF CONTENTS Page ARTICLE I DEFINED TERMS Section 1.01. DEFINITIONS ................................................ 1 ARTICLE II ESTABLISHMENT OF THE TRUST Section 2.01. NAME ........................................................ 10 Section 2.02. OFFICE OF THE PROPERTY TRUSTEE; PRINCIPAL PLACE OF BUSINESS.. 10 Section 2.03. INITIAL CONTRIBUTION OF TRUST PROPERTY; ORGANIZATIONAL EXPENSES................................................... 10 Section 2.04. ISSUANCE OF THE CAPITAL SECURITIES........................... 10 Section 2.05. PURCHASE OF DEBENTURES; ISSUANCE OF THE COMMON SECURITIES.... 10 Section 2.06. DECLARATION OF TRUST......................................... 11 Section 2.07. AUTHORIZATION TO ENTER INTO CERTAIN TRANSACTIONS............. 11 Section 2.08. ASSETS OF TRUST.............................................. 14 Section 2.09. TITLE TO TRUST PROPERTY...................................... 14 ARTICLE III PAYMENT ACCOUNT Section 3.01. PAYMENT ACCOUNT.............................................. 15 ARTICLE IV DISTRIBUTIONS; REDEMPTION Section 4.01. DISTRIBUTIONS................................................ 15 Section 4.02. REDEMPTION................................................... 16 Section 4.03. SUBORDINATION OF COMMON SECURITIES........................... 18 Section 4.04. PAYMENT PROCEDURES........................................... 19 Section 4.05. TAX RETURNS AND REPORTS...................................... 19 Section 4.06. PAYMENT OF TAXES, DUTIES, ETC................................ 20 Section 4.07. PAYMENTS UNDER INDENTURE..................................... 20 ARTICLE V TRUST SECURITIES CERTIFICATES Section 5.01. INITIAL OWNERSHIP............................................ 20 Section 5.02. THE TRUST SECURITIES CERTIFICATES............................ 20 Section 5.03. DELIVERY OF TRUST SECURITIES CERTIFICATES.................... 21 Section 5.04. GLOBAL CAPITAL SECURITY...................................... 21 Section 5.05. REGISTRATION OF TRANSFER AND EXCHANGE GENERALLY; CERTAIN TRANSFERS AND EXCHANGES; CAPITAL SECURITIES CERTIFICATES; SECURITIES ACT LEGENDS..................................... 23 Section 5.06. MUTILATED, DESTROYED, LOST OR STOLEN TRUST SECURITIES CERTIFICATES............................................... 27 Section 5.07. PERSONS DEEMED SECURITYHOLDERS............................... 27 Section 5.08. ACCESS TO LIST OF SECURITYHOLDERS' NAMES AND ADDRESSES....... 27 3 Section 5.09. MAINTENANCE OF OFFICE OR AGENCY.............................. 28 Section 5.10. APPOINTMENT OF PAYING AGENT.................................. 28 Section 5.11. OWNERSHIP OF COMMON SECURITIES BY DEPOSITOR.................. 28 Section 5.12. GLOBAL CAPITAL SECURITIES CERTIFICATES; COMMON SECURITIES CERTIFICATE................................................ 29 Section 5.13. NOTICES TO CLEARING AGENCY................................... 30 Section 5.14. DEFINITIVE CAPITAL SECURITIES CERTIFICATES................... 30 Section 5.15. RIGHTS OF SECURITYHOLDERS.................................... 31 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING Section 6.01. LIMITATIONS ON VOTING RIGHTS................................. 33 Section 6.02. NOTICE OF MEETINGS........................................... 34 Section 6.03. MEETINGS OF CAPITAL SECURITYHOLDERS.......................... 34 Section 6.04. VOTING RIGHTS................................................ 35 Section 6.05. PROXIES, ETC................................................. 35 Section 6.06. SECURITYHOLDER ACTION BY WRITTEN CONSENT..................... 35 Section 6.07. RECORD DATE FOR VOTING AND OTHER PURPOSES.................... 35 Section 6.08. ACTS OF SECURITYHOLDERS...................................... 36 Section 6.09. INSPECTION OF RECORDS........................................ 37 ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01. REPRESENTATIONS AND WARRANTIES OF THE BANK AND THE PROPERTY TRUSTEE.................................................... 37 Section 7.02. REPRESENTATIONS AND WARRANTIES OF PARENT..................... 38 ARTICLE VIII THE TRUSTEES Section 8.01. CERTAIN DUTIES AND RESPONSIBILITIES.......................... 39 Section 8.02. CERTAIN NOTICES.............................................. 40 Section 8.03. CERTAIN RIGHTS OF PROPERTY TRUSTEE........................... 40 Section 8.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES....... 43 Section 8.05. MAY HOLD SECURITIES.......................................... 43 Section 8.06. COMPENSATION; INDEMNITY; FEES................................ 43 Section 8.07. CORPORATE PROPERTY TRUSTEE REQUIRED; ELIGIBILITY OF TRUSTEES................................................... 43 Section 8.03. CONFLICTING INTERESTS........................................ 44 Section 8.09. CO-TRUSTEES AND SEPARATE TRUSTEE............................. 44 Section 8.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR............ 45 Section 8.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR....................... 47 Section 8.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF A TRUSTEE...................................... 48 Section 8.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST DEPOSITOR OR TRUST...................................................... 48 Section 8.14. REPORTS BY PROPERTY TRUSTEE.................................. 49 Section 8.15. REPORTS TO THE PROPERTY TRUSTEE.............................. 49 Section 8.16. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT............. 50 Section 8.17. NUMBER OF TRUSTEES........................................... 50 Section 8.18. DELEGATION OF POWER.......................................... 50 Section 8.18. VOTING....................................................... 5I ARTICLE IX TERMINATION AND LIQUIDATION Section 9.01. TERMINATION UPON EXPIRATION DATE.............................. 51 Section 9.02. EARLY TERMINATION............................................. 51 Section 9.03. TERMINATION................................................... 51 Section 9.04. LIQUIDATION................................................... 52 Section 9.05. MERGER, CONSOLIDATION, AMALGAMATION OR REPLACEMENT OF THE TRUST....................................................... 53 4 ARTICLE X MISCELLANEOUS PROVISIONS Section 10.01. EXPENSE AGREEMENT........................................... 54 Section 10.02. LIMITATION OF RIGHTS OF SECURITYHOLDERS..................... 54 Section 10.03. AMENDMENT................................................... 54 Section 10.04. SEPARABILITY................................................ 56 Section 10.05. GOVERNING LAW............................................... 56 Section 10.06. PAYMENTS DUE ON NON-BUSINESS DAY............................ 56 Section 10.07. SUCCESSORS.................................................. 56 Section 10.08. HEADINGS.................................................... 56 Section 10.09. REPORTS, NOTICES AND DEMANDS................................ 56 Section 10.10. AGREEMENT NOT TO PETITION................................... 57 Section 10.12. RIGHTS UNDER INDENTURE...................................... 58 Section 10.13. EFFECTIVENESS............................................... 58 Section 10.14. INTENTION OF THE PARTIES.................................... 58 Exhibit A Certificate of Trust Exhibit B Form of Common Securities Certificate Exhibit C Form of Capital Securities Certificate 5 GENAMERICA CAPITAL I Certain Sections of this Trust Agreement relating to Sections 310 through 318 of the Trust Indenture Act of 1939: Trust Indenture Trust Agreement Act Section Section - ---------------- --------------- Section 310(a)(1) ........................................... 8.07 (a)(2) ........................................... 8.07 (a)(3) ........................................... 8.09 (a)(4) ........................................... Not Applicable (b) ........................................... 8.08 Section 311(a) ........................................... 8.13 (b) ........................................... 8.13 Section 312(a) ........................................... 5.07 (b) ........................................... 5.07 (c) ........................................... 5.07 Section 313(a) ........................................... 8.14(a) (a)(4) ........................................... 8.14(b) (b) ........................................... 8.14(b) (c) ........................................... 8.14(a) (d) ........................................... 8.14(a),8.14(b) Section 314(a) ........................................... 8.15 (b) ........................................... Not Applicable (c)(1) ........................................... 8.16 (c)(2) ........................................... 8.16 (c)(3) ........................................... 8.16 (d) ........................................... Not Applicable (e) ........................................... 1.01 Section 315(a) ........................................... 8.01 (b) ........................................... 8.02, 8.14(b) (c) ........................................... 8.01(a) (d) ........................................... 8.01, 8.03 (e) ........................................... Not Applicable Section 316(a) ........................................... Not Applicable (a)(1)(A).......................................... Not Applicable (a)(1)(B).......................................... Not Applicable (a)(2) ........................................... Not Applicable (b) ........................................... Not Applicable (c) ........................................... Not Applicable Section 317(a)(1) ........................................... Not Applicable (a)(2) ........................................... Not Applicable (b) ........................................... 5.09 Section 318(a) ........................................... 10.10 Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Trust Agreement 6 AMENDED AND RESTATED TRUST AGREEMENT, dated as of June 6, 1997, among (i) GenAmerica Corporation, a Missouri corporation (the "Depositor" or "Parent"), (ii) Wilmington Trust Company, a banking corporation duly organized and existing under the laws of Delaware, as trustee (the "Property Trustee" and, in its separate corporate capacity and not in its capacity as Property Trustee, the "Bank"), (iii) David L. Herzog, an individual, John W. Hayden, an individual, and Christopher A. Martin, an individual, each of whose address is c/o GenAmerica Corporation, 700 Market Street, St. Louis, Missouri 63101 (each, an "Administrative Trustee" and collectively, the "Administrative Trustees") (the Property Trustee and the Administrative Trustees being referred to collectively as the "Trustees") and (iv) the several Holders, as hereinafter defined. WITNESSETH: WHEREAS, the Depositor, the Property Trustee and the Administrative Trustees have heretofore duly declared and established a business trust pursuant to the Delaware Business Trust Act by the entering into of that certain Trust Agreement, dated as of May 30, 1997 (the "Original Trust Agreement"), and by the execution and filing by the Property Trustee with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on June 2, 1997, the form of which is attached as Exhibit A; and WHEREAS, the Depositor and the Property Trustee desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the acquisition by the Trust (as defined herein) from the Depositor of all of the right, title and interest in the Debentures (as defined herein), (ii) the issuance of the Common Securities (as defined herein) by the Trust to the Depositor and (iii) the issuance and sale of the Capital Securities (as defined herein) by the Trust pursuant to the Placement Agreement (as defined herein). NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, each party, for the benefit of the other party and for the benefit of the Securityholders (as defined herein), hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: ARTICLE I DEFINED TERMS Section 1.01. DEFINITIONS. For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; 7 (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "ACT" has the meaning specified in Section 6.08. "ADDITIONAL AMOUNT" means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of Additional Interest (as defined in the Indenture) paid by the Depositor on a Like Amount of Debentures for such period. "ADDITIONAL SUMS" has the meaning specified in Section 1005 of the Indenture. "ADMINISTRATIVE TRUSTEE" means each of the individuals identified as an "Administrative Trustee" in the preamble to this Trust Agreement, solely in his capacity as Administrative Trustee of the Trust formed and continued hereunder and not in his individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor Trustee appointed as herein provided. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "APPLICABLE PROCEDURES" means, with respect to any transfer or transaction involving a Global Capital Security, the rules and procedures of the Clearing Agency for such Global Capital Security, in each case to the extent applicable to such transaction and as in effect from time to time. "BANK" has the meaning specified in the preamble to this Trust Agreement. "BANKRUPTCY EVENT" means, with respect to any Person: (a) the entry of a decree or order by a court having jurisdiction in the premises judging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or appointing a receiver, liquidator, assignee, trustee sequestrator or other similar official of such Person or of any substantial part of its property, or ordering the winding up -2- 8 or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or of the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of such Person or of any substantial part of its property or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated as a bankrupt, or the making by it of an assignment for the benefit of creditors, or the taking of action by such Person in furtherance of any such action. "BANKRUPTCY LAWS" has the meaning specified in Section 10.10. "BOARD RESOLUTION" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Depositor to have been duly adopted by the Depositor's Board of Directors or a duly authorized committee thereof or officers of the Depositor to which authority to act on behalf of the Board of Directors has been delegated and to be in full force and effect on the date of such certification, and delivered to the Property Trustee. "BUSINESS DAY" means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to remain closed, or (c) a day on which the Property Trustee's Corporate Trust Office or the Debenture Trustee's Corporate Trust Office is closed for business. "CAPITAL SECURITIES CERTIFICATE" means a certificate evidencing ownership of Capital Securities, substantially in the form attached as Exhibit C. "CAPITAL SECURITY" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "CERTIFICATE DEPOSITORY AGREEMENT" means the agreement among the Trust, the Depositor and The Depository Trust Company, as the initial Clearing Agency, dated as of the Closing Date, relating to the Capital Securities Certificates. "CLEARING AGENCY" means an organization registered as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency. "CLEARING AGENCY PARTICIPANT" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. -3- 9 "CODE" means the Internal Revenue Code of 1986, as amended. "COMMISSION" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "COMMON SECURITIES CERTIFICATE" means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit B. "COMMON SECURITY" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "CORPORATE TRUST OFFICE" means the principal office of either the Property Trustee or the Trustee named in the Indenture. So long as Wilmington Trust Company serves in both capacities, such principal office is located in Wilmington, Delaware. "DEBENTURE EVENT OF DEFAULT" means an "Event of Default" as defined in the Indenture. "DEBENTURE REDEMPTION DATE" means "Redemption Date" as defined in the Indenture. "DEBENTURE TRUSTEE" means Wilmington Trust Company, a banking corporation duly organized and existing under the laws of the State of Delaware, or any successor thereto. "DEBENTURES" means the $128,866,000 aggregate principal amount of the Parent's 8.525% Junior Subordinated Debentures, issued pursuant to the Indenture. "DEFINITIVE CAPITAL SECURITIES CERTIFICATES" means either or both (as the context requires) of (i) Capital Securities Certificates issued as Global Capital Securities Certificates as provided in Section 5.02(b) and (ii) Capital Securities Certificates issued in certificated, fully registered form as provided in Section 5.02(c). "DELAWARE BUSINESS TRUST ACT" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801, ET SEQ., as it may be amended from time to time. "DEPOSITOR" has the meaning specified in the preamble to this Trust Agreement and includes GenAmerica Corporation in its capacity as Holder of the Common Securities. "DIRECT ACTION" has the meaning specified in Section 5.12(c). -4- 10 "DISTRIBUTION DATE" has the meaning specified in Section 4.01(a). "DISTRIBUTIONS" means amounts payable in respect of the Trust Securities as provided in Section 4.01. "EVENT OF DEFAULT" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default by the Trust or the Property Trustee in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default by the Trust or the Property Trustee in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty a default in the performance of which or the breach of which is dealt with in clause (b) or (c), above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the defaulting Trustee or Trustees by the Holders of at least 25% in aggregate Liquidation Amount of the Outstanding Capital Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Property Trustee and the failure by the Depositor to appoint a successor Property Trustee within 60 days thereof. "EXPENSE AGREEMENT" means the Agreement as to Expenses and Liabilities between the Parent and the Trust, substantially in the form attached as Exhibit A to the Indenture, as amended from time to time. "GLOBAL CAPITAL SECURITIES CERTIFICATE" means a Capital Securities Certificate, evidencing ownership of Global Capital Securities. "GLOBAL CAPITAL SECURITY" means a Capital Security, the ownership and transfers of which shall be made through book-entries by a Clearing Agency as described in Section 5.04. "GUARANTEE" means the Guarantee Agreement executed and delivered by the Parent and Wilmington Trust Company, a banking corporation, as trustee, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the Holders of the Capital Securities, as amended from time to time. -5- 11 "INDENTURE" means the Junior Subordinated Indenture, dated as of June 6, 1997, between the Parent and the Debenture Trustee, as trustee, as amended or supplemented from time to time. "LIEN" means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "LIKE AMOUNT" means (a) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Debentures to be contemporaneously redeemed in accordance with the Indenture and the proceeds of which will be used to pay the Redemption Price of such Trust Securities, (b) with respect to a distribution of Debentures to Holders of Trust Securities in connection with a dissolution or liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Debentures are distributed, and (c) with respect to any distribution of Additional Amounts to Holders of Trust Securities, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities in respect of which such distribution is made. "LIQUIDATION AMOUNT" means the stated amount of $1,000 per Trust Security. "LIQUIDATION DATE" means the date of dissolution, winding-up or termination and liquidation of the Trust pursuant to Section 9.04(a). "LIQUIDATION DISTRIBUTION" has the meaning specified in Section 9.04(d). "MAJORITY IN LIQUIDATION AMOUNT OF THE CAPITAL SECURITIES" or "MAJORITY IN LIQUIDATION AMOUNT OF THE COMMON SECURITIES" means, except as provided by the Trust Indenture Act, Capital Securities or Common Securities, as the case may be, representing more than 50% of the aggregate Liquidation Amount of all then Outstanding Capital Securities or Common Securities, as the case may be. "OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Investment Officer, the Chief Executive Officer, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 8.16 shall be the principal executive, financial investment or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; -6- 12 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "OPINION OF COUNSEL" means a written opinion of counsel, who may be counsel for the Trust, the Property Trustee or the Depositor, and may be an employee of any thereof, and who shall be acceptable to the Property Trustee. "ORIGINAL TRUST AGREEMENT" has the meaning specified in the recitals to this Trust Agreement. "OUTSTANDING", when used with respect to Trust Securities, means, as of the date of determination, all Trust Securities theretofore executed, authenticated and delivered under this Trust Agreement, EXCEPT: (a) Trust Securities theretofore canceled by the Administrative Trustees or delivered to the Administrative Trustees for cancellation; (b) Trust Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent; PROVIDED that, if such Trust Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Trust Securities that have been paid or in exchange for or in lieu of which other Capital Securities have been executed, authenticated and delivered pursuant to this Trust Agreement; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Capital Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Capital Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (a) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Capital Securities which such Trustee knows to be so owned shall be so disregarded and (b) the foregoing shall not apply at any time when all of the Outstanding Capital Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Capital Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right so to act with respect to such Capital Securities and that the pledgee is not the Depositor or any Affiliate of the Depositor. "OWNER" means each Person who is the beneficial owner of a Global Capital Securities Certificate as reflected in the records of the Clearing Agency or, if a Clearing Agency Participant is not the Owner, then as reflected in the records of a Person maintaining -7- 13 an account with such Clearing Agency (directly or indirectly, in accordance with the rules of such Clearing Agency). "PARENT" has the meaning specified in the preamble to this Trust Agreement. "PAYING AGENT" means any paying agent or co-paying agent appointed pursuant to Section 5.10 and shall initially be the Bank. "PAYMENT ACCOUNT" means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee with the Bank in its corporate trust department for the benefit of the Securityholders in which all amounts paid in respect of the Debentures will be held and from which the Property Trustee shall make payments to the Securityholders in accordance with Section 4.01. "PERSON" means any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "PLACEMENT AGREEMENT" means the Placement Agreement, dated June 5, 1997 among GenAmerica Corporation, General American Life Insurance Company (for the specific purpose set forth therein), GenAmerica Capital I, A. G. Edwards & Sons, Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated and Conning & Company. "PROPERTY TRUSTEE" means the commercial bank or trust company identified as the "Property Trustee" in the preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust heretofore formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as herein provided. "REDEMPTION DATE" means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture Redemption Date shall be a Redemption Date for a Like Amount of Trust Securities. "REDEMPTION PRICE" means, with respect to any date fixed for redemption of any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to such date, plus the amount of the premium, if any, paid by the Depositor upon the concurrent redemption of a Like Amount of Debentures allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities. "RELEVANT TRUSTEE" shall have the meaning specified in Section 8.10. "RESTRICTED CAPITAL SECURITIES" means all Capital Securities required pursuant to Section 5.05(c) to bear a Restricted Capital Securities Legend. Such term includes the Global Capital Securities Certificate. -8- 14 "RESTRICTED CAPITAL SECURITIES CERTIFICATE" means a certificate evidencing ownership of Restricted Capital Securities. "RESTRICTED CAPITAL SECURITIES LEGEND" means a legend substantially in the form of the legend required in Section 5.05(c). "SECURITIES REGISTER" and "SECURITIES REGISTRAR" have the respective meanings specified in Section 5.05(a). "SECURITYHOLDER" or "HOLDER" means a Person in whose name a Trust Security or Securities is registered in the Securities Register; any such Person shall be deemed to be a beneficial owner within the meaning of the Delaware Business Trust Act; provided, however, that in determining whether the Holders of the requisite amount of Capital Securities have voted on any matter provided for in this Trust Agreement, then for the purpose of any such determination, so long as Definitive Capital Securities Certificates have not been issued, the term Securityholders or Holders as used herein shall refer to Owners. "TRUST" means the Delaware business trust created and continued hereby and identified on the cover page to this Trust Agreement. "TRUST AGREEMENT" means this Amended and Restated Trust Agreement, as the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including all exhibits hereto, including, for all purposes of this Trust Agreement and any such modification, amendment or supplement, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "TRUST PROPERTY" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Payment Account, (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to the trusts of this Trust Agreement and (d) the rights of the Property Trustee under the Guarantee. "TRUST SECURITY" means any one of the Common Securities or the Capital Securities. "TRUST SECURITIES CERTIFICATE" means any one of the Common Securities Certificates or the Capital Securities Certificates. "TRUSTEES" has the meaning specified in the preamble to this Trust Agreement. -9- 15 ARTICLE II ESTABLISHMENT OF THE TRUST Section 2.01. NAME. The Trust created and continued hereby shall be known as "GenAmerica Capital I," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. Section 2.02. OFFICE OF THE PROPERTY TRUSTEE; PRINCIPAL PLACE OF BUSINESS. The office of the Property Trustee in the State of Delaware is Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration, or such other address in the State of Delaware as the Property Trustee may designate by written notice to the Securityholders and the Depositor. The principal place of business of the Trust is c/o GenAmerica Corporation, 700 Market Street, St. Louis, Missouri 63101. Section 2.03. INITIAL CONTRIBUTION OF TRUST PROPERTY; ORGANIZATIONAL EXPENSES. The Property Trustee acknowledges receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. Section 2.04. ISSUANCE OF THE CAPITAL SECURITIES. On June 5, 1997, the Depositor, both on its own behalf and on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Placement Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.02 and deliver in accordance with the Placement Agreement, one or more Capital Securities Certificates, registered in the name of the Persons entitled thereto, in an aggregate amount of 125,000 Capital Securities having an aggregate Liquidation Amount of $125,000,000 against receipt of the aggregate purchase price of such Capital Securities of $125,000,000, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. Upon order by an Administrative Trustee, such Capital Securities Certificates shall be authenticated by the Property Trustee. Section 2.05. PURCHASE OF DEBENTURES; ISSUANCE OF THE COMMON SECURITIES. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.02 and deliver to the Depositor, Common Securities Certificates, registered in the name of the Depositor, in an aggregate amount of 3,866 Common Securities having an aggregate Liquidation Amount of $3,866,000 against payment by the Depositor of such amount. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor Debentures, registered in the name of the -10- 16 Property Trustee on behalf of the Trust and having an aggregate principal amount equal to $128,866,000, and, in satisfaction of the purchase price for such Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $128,866,000. Section 2.06. DECLARATION OF TRUST. The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities and use the proceeds from such sale to acquire the Debentures, and (b) to engage in those activities necessary, convenient or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties set forth herein, and the Trustees hereby accept such appointment. The Property Trustee hereby declares that it will hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Trust and the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein and in accordance with applicable law with respect to accomplishing the purposes of the Trust. Section 2.07. AUTHORIZATION TO ENTER INTO CERTAIN TRANSACTIONS. (a) The Property Trustee and the Administrative Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Property Trustee and the Administrative Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the following: (i) As among the Trustees, the Administrative Trustees shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Expense Agreement and the Certificate Depository Agreement and such other agreements as may be necessary or desirable in connection with the purposes and function of the Trust; (C) assisting in any registration of the Capital Securities under state securities or blue sky laws; (D) assisting in the approval for trading of the Capital Securities upon the PORTAL System and the preparation and filing of any periodic and other reports and other documents pursuant to the foregoing; (E) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; -11- 17 (F) the consent to the appointment of a Paying Agent, authenticating agent and Securities Registrar in accordance with this Trust Agreement (which consent shall not be unreasonably withheld); (G) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (H) unless otherwise determined by the Property Trustee or the Holders of at least a majority of Liquidation Amount of the Capital Securities, or as otherwise required by the Delaware Business Trust Act or the Trust Indenture Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrative Trustees) any documents that the Administrative Trustees have the power to execute pursuant to this Trust Agreement; and (I) the taking of any action incidental to the foregoing as the Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Payment Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (D) the distribution through the Paying Agent of amounts distributable to the Securityholders in respect of the Trust Securities; (F) registering transfers of the Trust Securities in accordance with this Trust Agreement; (F) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (G) the sending of notices of default and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; -12- 18 (H) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (I) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (J) after an Event of Default (other than under paragraph (b), (c), (d) or (e) of the definition of such term if such Event of Default is by or with respect to the Property Trustee, in which case the Administrative Trustees shall have such power, duty and authority) the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder); and (K) any of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 2.7(a)(i)(E) and (I) herein; and in the event of a conflict between the action of the Administrative Trustees and the action of the Property Trustee, the action of the Property Trustee shall prevail. (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees and the Trust shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Securityholders, except as expressly provided herein, (iii) take any action that would result in more than an insubstantial risk that the Trust would fail or cease to qualify as a "grantor trust" for United States Federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a Lien on any of the Trust Property. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Capital Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects as actions of the Trust): (i) to prepare preliminary and final Offering Memoranda with respect to the transactions contemplated by the Placement Agreement; -13- 19 (ii) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by or on behalf of the Trust, and advise the Trustees of actions they must take on behalf of the Trust, and prepare for execution and filing any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such States and in connection with the sale of the Capital Securities; (iii) to negotiate the terms of, and execute and deliver, the Placement Agreement providing for the sale of the Capital Securities; and (iv) to take any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not (i) be deemed to be an "investment company" required to be registered under the Investment Company Act of 1940, as amended, or (ii) fail or cease to qualify as a grantor trust for United States Federal income tax purposes and so that the Debentures will be treated as indebtedness of the Depositor for United States Federal income tax purposes. In this connection, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or this Trust Agreement, that each of the Depositor and the Administrative Trustees determines in its discretion to be necessary or desirable for such purposes as long as such action does not adversely affect in any material respect the interests of the Holders of the Capital Securities. In no event shall the Trustees be liable to the Trust or the Holders for any failure to comply with this section that results from a change in law or regulation or in the interpretation thereof. (e) All prior actions taken by the Administrative Trustees on behalf of Parent in furtherance of Parent's powers, duties and obligations under the Original Trust Agreement are hereby ratified and affirmed as actions of the Trust. Section 2.08. ASSETS OF TRUST. The assets of the Trust shall consist of the Trust Property. Section 2.09. TITLE TO TRUST PROPERTY. Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Trust and the Securityholders in accordance with this Trust Agreement. -14- 20 ARTICLE III PAYMENT ACCOUNT Section 3.01. PAYMENT ACCOUNT. (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments or proceeds with respect to, the Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof. ARTICLE IV DISTRIBUTIONS; REDEMPTION Section 4.01. DISTRIBUTIONS. (a) The Trust Securities represent undivided beneficial interests in the Trust Property, and Distributions (including Additional Amounts) will be made on the Trust Securities at the rate and on the dates that payments of interest (including Additional Interest, as defined in the Indenture) are made on the Debentures. Accordingly: (i) Distributions on the Trust Securities shall be cumulative, and will accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accumulate from June 6, 1997, and, except in the event (and to the extent) that the Parent exercises its right to defer interest payments for the Debentures pursuant to Section 301 of the Indenture (an "Extension Period"), shall be payable semi-annually in arrears on June 30 and December 31 of each year, commencing on December 31, 1997. If any date on which Distributions are otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day which is a Business Day (and without any additional distribution or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, payment of such Distribution shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date on which such payment was originally payable (each date on which distributions are payable in accordance with this Section 4.01(a), a "Distribution Date"). -15- 21 (ii) Subject to Section 4.03 hereof, all Distributions will be made pro rata on each of the Trust Securities. Distributions payable on the Capital Securities shall be fixed at a rate of 8.525% per annum of the Liquidation Amount of the Capital Securities. Distributions payable on the Common Securities shall be fixed at a rate of 8.525% per annum of the Liquidation Amount of the Common Securities. The amount of Distributions payable for any full semi-annual period shall be computed on the basis of twelve 30-day months and a 360-day year and, for any period shorter than a full monthly period, shall be computed on the basis of the actual number of days elapsed in such period. During any Extension Period with respect to the Debentures, Distributions on Trust Securities shall be deferred for a period equal to the Extension Period. The amount of Distributions payable for any period shall include the Additional Amounts, if any. (iii) Distributions on the Trust Securities shall be made by the Property Trustee from the Payment Account and shall be deemed payable on each Distribution Date only to the extent that the Trust has funds available in the Payment Account for the payment of such Distributions. (b) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities at the close of business on the relevant record date, which shall be the fifteenth day of the month in which the relevant Distribution Date occurs. Section 4.02. REDEMPTION. (a) On each Debenture Redemption Date and on the stated maturity of the Debentures, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Security Register. All notices of redemption or liquidation shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number or numbers of the Capital Securities affected; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the aggregate Liquidation Amount of the particular Trust Securities to be redeemed; (v) that on the Redemption Date the Redemption Price will become due and payable upon each such Trust Security to be redeemed and that Distributions thereon will cease to accrue on and after said date; and -16- 22 (vi) the place or places where the Trust Securities are to be surrendered for the payment of the Redemption Price. (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption of Debentures. Redemptions of the Trust Securities shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Capital Securities, then, by 12:00 noon, New York time, on the Redemption Date, subject to Section 4.02(c), the Property Trustee will, so long as the Capital Securities are in book-entry-only form, irrevocably deposit with the Clearing Agency for the Capital Securities funds sufficient to pay the applicable Redemption Price, will give such Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the Holders thereof. If the Capital Securities are no longer in book-entry-only form, the Property Trustee, subject to Section 4.02(c), will irrevocably deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders thereof upon surrender of their Capital Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Securityholders holding Trust Securities so called for redemption will cease, except the right of such Securityholders to receive the Redemption Price and any Distribution payable in respect of the Trust Securities on or prior to the Redemption Date, but without interest on such Redemption Price, and such Trust Securities will cease to be outstanding. In the event that any date fixed for redemption of Trust Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities will continue to accumulate, as set forth in Section 4.01, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. (e) Payment of the Redemption Price on the Trust Securities and distribution of Debentures to holders of Capital Securities shall be made to the record holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be the date fifteen (15) days prior to the relevant Redemption Date or Liquidation Date, as applicable. -17- 23 (f) Subject to Section 4.03(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed, and the amount of the premium, if any, paid by the Parent upon the redemption of a Like Amount of Debentures pursuant to the Indenture, shall be allocated proportionally between the Common Securities and the Capital Securities according to their aggregate Liquidation Amounts. The particular Capital Securities to be redeemed shall be selected on a pro rata basis (based upon Liquidation Amounts) not more than 60 days prior to the Redemption Date by the Property Trustee from the Outstanding Capital Securities not previously called for redemption, by such method (including, without limitation, by lot) as the Property Trustee shall deem fair and appropriate; provided that, after giving effect to such redemption, no Holder shall hold Capital Securities with an aggregate Liquidation Amount of less than $100,000; and provided further that, so long as the Capital Securities are in book-entry-only form, such selection shall be made in accordance with the customary procedures for the Clearing Agency for the Capital Securities. The Property Trustee shall promptly notify the Security Registrar in writing of the Capital Securities selected for redemption and, in the case of any Capital Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Capital Securities shall relate, in the case of any Capital Securities redeemed or to be redeemed only in part, to the portion of the aggregate Liquidation Amount of Capital Securities which has been or is to be redeemed. Section 4.03. SUBORDINATION OF COMMON SECURITIES. (a) Payment of Distributions (including Additional Amounts, if applicable) on, the Redemption Price of and the Liquidation Distribution in respect of the Trust Securities, as applicable, shall be made, subject to Section 4.02(f), pro rata among the Capital Securities and the Common Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date, Redemption Date or Liquidation Date any Event of Default resulting from a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of or Liquidation Distribution in respect of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Capital Securities for all distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Capital Securities, then called for redemption, or in the case of payment of the Liquidation Distribution the full amount of such Liquidation Distribution on all Outstanding Capital Securities, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or the Redemption Price of, Capital Securities then due and payable. (b) In the case of the occurrence of any Event of Default resulting from any Debenture Event of Default, the Holder of Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement -18- 24 until the effect of all such Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated. Until all such Events of Default under this Trust Agreement with respect to the Capital Securities have been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Capital Securities and not on behalf of the Holder of the Common Securities, and only the Holders of the Capital Securities will have the right to direct the Property Trustee to act on their behalf. Section 4.04. PAYMENT PROCEDURES. Payments of Distributions (including Additional Amounts if applicable) in respect of the Capital Securities shall be made at (i) the Corporate Trust office of the Property Trustee, (ii) the principal office of any Paying Agent, or (iii) the principal office of the Securities Registrar; provided that payment of any Distribution may be made, at the option of the Administrative Trustees, by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register or by wire transfer in immediately available funds at such place and to such account as may be designated by the Person entitled thereto as specified in the Securities Register; if the Capital Securities are held by a Clearing Agency, such payments shall be made either by check or by wire transfer, at the option of the Paying Agent, to the Clearing Agency in immediately available funds, which shall credit the relevant Persons' accounts at such Clearing Agency on the applicable Distribution Dates. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Holder of the Common Securities. Section 4.05. TAX RETURNS AND REPORTS. (a) The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and filed by January 31 following each calendar year all Federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, by January 31 following each calendar year the Administrative Trustees shall (a) prepare and file (or cause to be prepared or filed) the Internal Revenue Service Form 1041 (or any successor form) required to be filed in respect of the Trust in each taxable year of the Trust and (b) prepare and furnish (or cause to be prepared and furnished) to each Securityholder the related Internal Revenue Service Form 1099 (or any successor form). The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns, reports and schedules promptly after such filing or furnishing. (b) In the event that any withholding tax is imposed on the Trust's payment to a Securityholder, such tax shall reduce the amount otherwise distributable to the Securityholder in accordance with this Section. Any Securityholder who is a nonresident alien individual or which is organized under the laws of a jurisdiction outside the United States shall, on or prior to the date such Securityholder becomes a Securityholder, (a) so notify the Trust and the Trustees, and (b) either (i) provide the Trust and the Trustees with Internal Revenue Service form 1001, 4224, 8709 or W-8, as appropriate, or (ii) notify the Trust and the Trustees that it is not entitled to an exemption from United States withholding tax or a reduction in the rate thereof on payments of interest. Any such Securityholder agrees by its acceptance of a Capital Security, on an ongoing basis, to provide like certification for each -19- 25 taxable year for which it is necessary to provide such information and to notify the Trust and the Trustees should subsequent circumstances arise affecting the information provided the Trustees in clauses (a) and (b) above. The Trustees shall be fully protected in relying upon, and each Securityholder by its acceptance of a Capital Security hereunder agrees to indemnify and hold the Trustees harmless against all claims or liability of any kind arising in connection with or related to the Trustees' reliance upon any documents, forms or information provided by any Securityholder to the Trustees. In addition, if the Trustees have not withheld taxes on any payment made to any Securityholder, and the Trustees are subsequently required to remit to any taxing authority any such amount not withheld, such Securityholder shall return such amount to the Trustees upon written demand by the Trustees. The Trustees shall be liable only for direct (but not consequential) damages to any Securityholder due to the Trustees' violation of the Code and only to the extent such liability is caused by the Trustees' failure to act in accordance with its standard of care under this Agreement. The Trustees shall comply with United States Federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. Section 4.06. PAYMENT OF TAXES, DUTIES, ETC. OF THE TRUST. Upon receipt under the Debentures of Additional Sums (as defined in the Indenture), the Property Trustee shall promptly pay any taxes, duties or governmental charges of whatsoever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority. Section 4.07. PAYMENTS UNDER INDENTURE. Any amount payable hereunder to any Holder of Capital Securities (and any Owner with respect thereto) shall be reduced by the amount of any corresponding payment such Holder (and Owner with respect to a Holder's Capital Securities) has directly received pursuant to Section 508 of the Indenture or Section 5.12 of this Trust Agreement. ARTICLE V TRUST SECURITIES CERTIFICATES Section 5.01. INITIAL OWNERSHIP. Upon the formation of the Trust and the contribution by the Depositor pursuant to Section 2.03 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. Section 5.02. THE TRUST SECURITIES CERTIFICATES. (a) The Capital Securities Certificates shall be issued in minimum denominations of $100,000 Liquidation Amount (100 Capital Securities) and integral multiples of $1,000 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $1,000 Liquidation Amount and integral multiples thereof. The Trust Securities Certificates shall be executed on behalf of the Trust by manual signature of at least one Administrative Trustee and, if so ordered by an Administrative Trustee, authenticated by the Property Trustee. Trust Securities Certificates bearing the manual signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall -20- 26 be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 5.04 and 5.05. (b) The Capital Securities Certificates issued to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), upon original issuance, will be issued in the form of a Global Capital Securities Certificate registered in the name of Cede & Co. ("Cede"), as the Clearing Agency's nominee, and deposited with or on behalf of the Clearing Agency for credit by the Clearing Agency to the respective accounts of the Owners thereof (or such other accounts as they may direct). Except as set forth herein, record ownership of the Global Capital Security may be transferred, in whole or in part, only to another nominee of the Clearing Agency or to a successor of the Clearing Agency or its nominee. (c) The Capital Securities Certificates issued to Persons other than Qualified Institutional Buyers, upon their original issuance, shall be issued in definitive form and may not be represented by the Global Capital Securities Certificate. (d) A single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. (e) Pending the preparation of definitive Trust Securities Certificates, the Administrative Trustees may execute on behalf of the Trust and deliver, temporary Trust Securities Certificates which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Trust Securities Certificates in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Administrative Trustees executing such temporary Trust Securities Certificates may determine, as evidenced by their execution of such Trust Securities Certificates. If temporary Trust Securities Certificates are issued, the Trust will cause definitive Trust Securities Certificates to be prepared without unreasonable delay. After the preparation of definitive Trust Securities Certificates, the temporary Trust Securities Certificates, shall be exchangeable for definitive Trust Securities Certificates upon surrender of the temporary Trust Securities Certificates at any office or agency of the Trust, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Trust Securities Certificates, the Administrative Trustees shall execute and deliver in exchange therefor a like amount of definitive Trust Securities Certificates having the same date of issuance and the same terms as such temporary Trust Securities Certificates. Until so exchanged, the temporary Trust Securities Certificates shall in all respects be entitled to the same benefits under this Trust Agreement as definitive Trust Securities Certificates. -21- 27 Section 5.03. DELIVERY OF TRUST SECURITIES CERTIFICATES. On the Closing Date, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be executed on behalf of the Trust and delivered to or upon the written order of the Depositor, executed by one authorized officer thereof, without further corporate action by the Depositor, in authorized denominations. Section 5.04. GLOBAL CAPITAL SECURITY. (a) The Global Capital Securities issued under this Trust Agreement will be registered in the name of Cede, as a nominee of the Clearing Agency, and delivered to its custodian therefor, and such Global Capital Security shall constitute a single Capital Security for all purposes of this Trust Agreement. (b) Notwithstanding any other provision in this Trust Agreement, the Global Capital Security may not be exchanged in whole or in part for Capital Securities registered, and no transfer of the Global Capital Security in whole or in part may be registered, in the name of any Person other than the Clearing Agency for such Global Capital Security, Cede, or other nominee thereof unless (i) such Clearing Agency advises the Property Trustee in writing that such Clearing Agency is no longer willing or able to continue as Clearing Agency with respect to such Global Capital Security, and the Depositor is unable to locate a qualified successor, (ii) the Depositor at its sole option advises the Clearing Agency in writing that it elects to terminate the book-entry system through the Clearing Agency, or (iii) there shall have occurred and be continuing a Debenture Event of Default. If a Capital Security which is not a Global Capital Security is transferred to a Holder which desires to take delivery in the form of a beneficial interest in a Global Capital Security, then such transfer shall be permitted pursuant to the provisions of Section 5.05(b)(i). In addition, beneficial interests in a Global Capital Security may be exchanged by or on behalf of the Clearing Agency for certificated Capital Securities upon transfer of such beneficial interests to a non-Qualified Institutional Buyer. (c) If the Global Capital Security is to be exchanged for Capital Securities or canceled in whole, it shall be surrendered by or on behalf of the Clearing Agency or its nominee to the Securities Registrar for exchange or cancellation as provided in this Article V. If the Global Capital Security is to be exchanged for Capital Securities or canceled in part, or if a Capital Security is to be exchanged in whole or in part for a beneficial interest in the Global Capital Security, then either (i) such Global Capital Security shall be so surrendered for exchange or cancellation as provided in this Article V or (ii) the aggregate Liquidation Amount thereof shall be reduced, subject to Section 5.02, or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the aggregate Liquidation Amount of such Capital Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Security Registrar, whereupon the Property Trustee, in accordance with the Applicable Procedures, shall instruct the Clearing Agency or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of the Global Capital Security by the Clearing Agency and Clearing Agency Participants, accompanied by registration instructions executed by an Administrative Trustee on behalf of the Trust and, to the extent required in Section 5.05(c), a Restricted Capital Securities Certificate, the Property Trustee shall, subject to this Article V, countersign and make -22- 28 available for delivery any executed Capital Securities delivered to it issuable in exchange for such Global Capital Security (or any portion thereof) in accordance with the instructions of the Clearing Agency. The Property Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (d) The Clearing Agency or its nominee, as the registered owner of the Global Capital Security, shall be considered the Holder of the Capital Securities represented by the Global Capital Security for all purposes under this Trust Agreement and the Capital Securities, and owners of beneficial interests in the Global Capital Security shall hold such interests pursuant to the Applicable Procedures and, except as otherwise provided herein, shall not be entitled to have any of the individual Capital Securities represented by the Global Capital Security registered in their names, shall not receive nor be entitled to receive physical delivery of any such Capital Securities in definitive form and shall not be considered the Holders thereof under this Trust Agreement. Accordingly, any such Owner's beneficial interest in the Global Capital Security shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Clearing Agency or its nominee. The Securities Registrar and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Trust Agreement relating to the Global Capital Securities (including the giving of notices or other communications required under this Trust Agreement, the payment of the Liquidation Amount of and Distributions on the Global Capital Securities and the giving of instructions or directions to Owners of Global Capital Securities) as the sole Holder of Global Capital Securities and shall have no obligations to the Owners thereof. Neither the Property Trustee nor the Securities Registrar shall have any liability in respect of any transfers effected by the Clearing Agency. (e) The rights of Owners of beneficial interests in the Global Capital Security shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such owners and the Clearing Agency. Neither the Clearing Agency nor its nominee will consent or vote with respect to the Capital Securities. Under its usual procedures, the Clearing Agency or its nominee would mail an Omnibus Proxy to the Trust as soon as possible after the relevant record date. The Omnibus Proxy assigns the consenting or voting rights of the Clearing Agency or its nominee to those Clearing Agency Participants, identified in a listing attached to such Omnibus Proxy, to whose accounts the Capital Securities are credited on such record date. Section 5.05. REGISTRATION OF TRANSFER AND EXCHANGE GENERALLY; CERTAIN TRANSFERS AND EXCHANGES; CAPITAL SECURITIES CERTIFICATES; SECURITIES ACT LEGENDS. (a) The Property Trustee shall keep or cause to be kept at its Corporate Trust Office a register or registers for the purpose of registering Capital Securities Certificates and Common Securities Certificates and transfers and exchanges of Capital Securities Certificates and Common Securities Certificates in which the registrar and transfer agent with respect to the Capital Securities (the "Securities Registrar"), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Capital Securities Certificates and Common Securities Certificates (subject to Section 5.11 in the case of Common Securities Certificates) and registration of transfers and exchanges of Capital Securities Certificates and Common Securities Certificates as herein provided. Such -23- 29 register is herein sometimes referred to as the "Securities Register." The Property Trustee is hereby appointed "Securities Registrar" for the purpose of registering Capital Securities and transfers of Capital Securities as herein provided. The provisions of Sections 8.01, 8.03 and 8.06 hereunder shall apply to the Property Trustee also in its role as Securities Registrar. Upon surrender for registration of transfer of any Capital Security at the offices or agencies of the Property Trustee designated for that purpose, the Administrative Trustees shall execute, and the Property Trustee shall countersign and make available for delivery, in the name of the designated transferee or transferees, one or more new Capital Securities of any authorized denominations of like tenor and aggregate liquidation amount and bearing such restrictive legends as may be required by this Trust Agreement. At the option of the Holder, Capital Securities may be exchanged for other Capital Securities of any authorized denominations, of like tenor and aggregate Liquidation Amount and bearing such restrictive legends as may be required by this Trust Agreement, upon surrender of the Capital Securities to be exchanged at such office or agency. Whenever any securities are so surrendered for exchange, an Administrative Trustee shall execute and the Property Trustee shall countersign and make available for delivery the Capital Securities that the Holder making the exchange is entitled to receive. All Capital Securities issued upon any transfer or exchange of Capital Securities shall be the valid obligations of the Trust, entitled to the same benefits under this Trust Agreement as the Capital Securities surrendered upon such transfer or exchange. Every Capital Security presented or surrendered for transfer or exchange shall (if so required by the Property Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Property Trustee and the Securities Registrar, duly executed by the Holder thereof or such Holder's attorney duly authorized in writing. No service charge shall be made to a Holder for any transfer or exchange of Capital Securities, but the Property Trustee or the Securities Registrar may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Capital Securities. Neither the Trust nor the Property Trustee shall be required, pursuant to the provisions of this Section, to register the transfer of or exchange any Capital Security so selected for redemption in whole or in part, except, in the case of any such Capital Security to be redeemed in part, any portion thereof not to be redeemed. The Capital Securities will be issued, and may be transferred, only in blocks having a Liquidation Amount of not less than $100,000 and integral multiples of $1,000 in excess thereof. Any transfer, sale or other disposition of Capital Securities in a block having a Liquidation Amount of less than $100,000 shall be deemed to be void and of no legal effect whatsoever. Any such transferee shall be deemed not to be the Holder of such Capital Securities for any purpose, including but not limited to the receipt of Distributions on such -24- 30 Capital Securities, and such transferee shall be deemed to have no interest whatsoever in such Capital Securities. (b) Certain Transfers and Exchanges. Subject to Section 5.04(c), but notwithstanding any other provision of this Trust Agreement, transfers and exchanges of Capital Securities and beneficial interests in a Global Capital Security shall be made only in accordance with this Section 5.05(b) and Section 5.04(c). (i) Non-Global Capital Security to Global Capital Security. If the Holder of Capital Security (other than the Global Capital Security) wishes at any time to transfer all or any portion of such Capital Security to a Person who wishes to take delivery thereof in the form of a beneficial interest in the Global Capital Security, such transfer may be effected only in accordance with the provisions of this clause (b)(i) and subject to the Applicable Procedures. Upon receipt by the Securities Registrar of (A) such Capital Security as provided in Section 5.05(a) and instructions satisfactory to the Securities Registrar directing that a beneficial interest in the Global Capital Security in a specified liquidation amount not greater than the liquidation amount of such Capital Security to be credited to a specified Clearing Agency Participant's account, (B) a Capital Securities Certificate duly executed by such Holder or such Holder's attorney duly authorized in writing, and (C) a certification substantially similar to that attached hereto as Exhibit D, then the Securities Registrar shall cancel such Capital Security (and issue a new Capital Security in respect of any untransferred portion thereof) and increase the aggregate Liquidation Amount of the Global Capital Security by the specified Liquidation Amount as provided in Section 5.04(c). (ii) Non-Global Capital Security to Non-Global Capital Security. A Capital Security that is not a Global Capital Security may be transferred, in whole or in part, to a Person who takes delivery in the form of another Capital Security that is not a Global Capital Security as provided in Section 5.05(a); provided that if the Capital Security to be transferred in whole or in part is a Restricted Capital Security, the Securities Registrar shall have received a Restricted Capital Securities Certificate duly executed by the transferor Holder or such Holder's attorney duly authorized in writing. (iii) Exchanges Between Global Capital Security and Non-Global Capital Security. A beneficial interest in the Global Capital Security may be exchanged for a Capital Security that is not a Global Capital Security only as provided in Section 5.04. (iv) Limitations Relating to Liquidation Amount. Notwithstanding any other provision of this Trust Agreement and unless otherwise specified as permitted by this Trust Agreement, Capital Securities or portions thereof may be transferred or exchanged only in Liquidation Amounts of not less than $100,000 and integral multiples of $1,000 in excess thereof. Any transfer, exchange or other disposition of Capital Securities in contravention of this Section 5.05(b)(iv) shall be deemed to be void and of no legal effect whatsoever, any such transferee shall be deemed not to be the Holder or owner of any beneficial interest in such Capital Securities for any -25- 31 purpose, including but not limited to the receipt of interest payable on such Capital Securities, and such transferee shall be deemed to have no interest whatsoever in such Capital Securities. (c) Restricted Securities Legend. (i) Except as set forth in this Section 5.05(c), all Capital Securities shall bear a Restricted Capital Securities legend substantially in the following form: THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE CORPORATION OR ANY "AFFILIATE" OF THE CORPORATION WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) AS LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(l), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND GENAMERICA PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND -26- 32 (ii) PURSUANT TO CLAUSE (D) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING MEMORANDUM DATED JUNE 5, 1997. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. (ii) Subject to the following paragraphs of this Section 5.05(c), a new Capital Security (other than a Global Capital Security) that does not bear a Restricted Capital Securities Legend may be issued in exchange for or in lieu of a Restricted Capital Security or any portion thereof that bears such a legend if, in the Depositor's judgment, placing such a legend upon such new Capital Security is not necessary to ensure compliance with the registration requirements of the Securities Act, and the Property Trustee, at the written direction of the Trust in the form of an Officers' Certificate, shall countersign and deliver such a new Capital Security as provided in this Article V. (iii) Notwithstanding the foregoing provisions of this Section 5.05(c), a successor Capital Security of a Capital Security that does not bear a Restricted Capital Securities Legend shall not bear such form of legend unless the Depositor has reasonable cause to believe that such successor Capital Security is a "restricted security" within the meaning of Rule 144 under the Securities Act, in which case the Property Trustee, at the written direction of the Trust in the form of an Officer's Certificate, shall countersign and deliver a new Capital Security bearing a Restricted Capital Securities Legend in exchange for such successor Capital Security as provided in this Article V. (iv) Upon any sale or transfer of a Restricted Capital Security (including any Restricted Capital Security represented by a Global Capital Security) pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 under the Securities Act after such registration ceases to be effective: (A) in the case of any Restricted Capital Security that is a definitive Capital Security, the Securities Registrar shall permit the Holder thereof to exchange such Restricted Capital Security for a definitive Capital Security that does not bear the Restricted Securities Legend and rescind any restriction on the transfer of such Restricted Capital Security; and (B) in the case of any Restricted Capital Security that is represented by a Global Capital Security, the Securities Registrar shall permit the Holder of such Global Capital Security to exchange such Global Capital Security for another Global Capital Security that does not bear the Restricted Securities Legend. (v) If Restricted Capital Securities are being presented or surrendered for transfer or exchange then there shall be (if so required by the Property Trustee), (A) if such Restricted Capital Securities are being delivered to the Securities Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Restricted Capital Securities are being transferred, if the Trust or Securities Registrar so requests, evidence reasonably -27- 33 satisfactory to them as to the compliance with the restrictions set forth in the Restricted Capital Securities Legend. Section 5.06. MUTILATED, DESTROYED, LOST OR STOLEN TRUST SECURITIES CERTIFICATES. If (a) any mutilated Trust Securities Certificate shall be surrendered to the Securities Registrar, or if the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate and (b) there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute and cause to be made available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section, the Administrative Trustees or the Securities Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. Section 5.07. PERSONS DEEMED SECURITYHOLDERS. Prior to due presentation of a Trust Securities Certificate for registration of transfer, the Administrative Trustees or the Securities Registrar shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving distributions and for all other purposes whatsoever, and neither the Trustees nor the Securities Registrar shall be bound by any notice to the contrary. Section 5.08. ACCESS TO LIST OF SECURITYHOLDERS' NAMES AND ADDRESSES. The duties and responsibilities of the Depositor and any other party to provide any list of Securityholders shall be as set forth in the Trust Indenture Act, including Section 312 of such Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities Certificate, and each Owner shall be deemed to have agreed not to hold either the Depositor, the Property Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. Section 5.09. MAINTENANCE OF OFFICE OR AGENCY. The Administrative Trustees shall maintain an office or offices or agency or agencies where Capital Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate the Corporate Trust Office of the Property Trustee, which address is c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, as the office for such purposes. Such offices may also consist of the principal office of any Paying Agent or the principal office of the Securities Registrar. The Administrative Trustees shall give prompt written -28- 34 notice to the Depositor and to the Securityholders of any change in the location of the Securities Register or any such office or agency. Section 5.10. APPOINTMENT OF PAYING AGENT. The Paying Agent shall make distributions to Securityholders from the Payment Account and shall report the amounts of such distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent in their sole discretion. The Paying Agent shall initially be the Bank, and any co-paying agent chosen by the Bank, and acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In the event that the Bank shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor that is acceptable to the Property Trustee and the Depositor to act as Paying Agent (which shall be a bank or trust company). The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 8.01, 8.03 and 8.06 shall apply to the Bank also in its role as Paying Agent, for so long as the Bank shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. Section 5.11. OWNERSHIP OF COMMON SECURITIES BY DEPOSITOR. On the Closing Date, the Depositor shall acquire and thereafter shall retain beneficial and record ownership of the Common Securities. Any attempted transfer of the Common Securities other than as set forth in the preceding sentence shall be void; provided that any permitted successor of the Depositor under the Indenture may succeed to the Depositor's ownership of the Common Securities. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating substantially "THIS CERTIFICATE IS NOT TRANSFERABLE". Section 5.12. RIGHTS OF SECURITYHOLDERS. (a) The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 2.09, and the Securityholders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and -29- 35 in this Trust Agreement. The Trust Securities shall have no preemptive or similar rights and when issued and delivered to Securityholders against payment of the purchase price therefor and upon such payment will be fully paid and nonassessable by the Trust. The Holders of the Trust Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (b) For so long as any Capital Securities remain Outstanding, if, upon a Debenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in aggregate principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of at least 25% in Liquidation Amount of the Capital Securities then Outstanding shall have such right by a notice in writing to the Depositor and the Debenture Trustee; and upon any such declaration such principal amount of and the accrued interest on all of the Debentures shall become immediately due and payable, provided that the payment of principal and interest on such Debentures remains subordinated to the extent provided in the Indenture. At any time after such a declaration of acceleration with respect to the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as in the Indenture provided, if the holders of a majority in aggregate principal amount of the outstanding Debentures fail to annul any such declaration and waive such default, the Holders of a majority in Liquidation Amount of the Capital Securities, by written notice to the Depositor and the Debenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Depositor has paid or deposited with the Debenture Trustee a sum sufficient to pay: (A) all overdue installments of interest (including any Additional Interest (as defined in the Indenture) on all of the Debentures, (B) the principal of (and premium, if any, on) any Debenture which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Debentures, and (C) all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Debenture Trustee and the Property Trustee, their agents and counsel; and (ii) all Debenture Events of Default, other than the non-payment of the principal of the Debentures which has become due solely by such acceleration, have been cured or waived as provided in Section 513 of the Indenture. The holders of a majority in aggregate Liquidation Amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default under the Indenture, except a default in the payment of principal of (or premium, if any) or interest (including any Additional Interest, as defined in the Indenture) on any Debenture -30- 36 (unless such default has been cured and a sum sufficient to pay all matured installments of interest (including any Additional Interest, as defined in the Indenture) and principal due otherwise than by acceleration (and premium, if any) has been deposited with the Debenture Trustee) or a default in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. Upon such waiver, any such default or Event of Default shall cease to exist, and any default or Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Trust Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Upon receipt by the Property Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, by Holders of the Capital Securities all or part of which are represented by Global Capital Securities Certificates, a record date shall be established for determining Holders of Outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Property Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day which is 90 days after such record date, such notice of declaration or acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice which has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 5.12(b). (c) For so long as any Capital Securities remain outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement and the Indenture, upon a Debenture Event of Default specified in Section 501(1) or 501(2) of the Indenture, any Holder of Capital Securities shall have the right to institute a proceeding directly against the Depositor, pursuant to Section 508 of the Indenture, for enforcement of payment to such Holder of the principal amount of (and premium, if any) or interest (including any Additional Interest, as defined in the Indenture) on Debentures having a principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such Holder (a "Direct Action"). Except as set forth in Section 5.12(b) and (c), the Holders of Capital Securities shall have no right to exercise directly any right or remedy available to the holders of, or in respect of, the Debentures. -31- 37 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING Section 6.01. LIMITATIONS ON VOTING RIGHTS. (a) Except as provided in this Section, in Section 10.03 and in the Indenture and as otherwise required by law, no Holder of Capital Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Debentures, (ii) waive any past default which is waivable under Section 513 of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of Capital Securities, except by a subsequent vote of the Holders of Capital Securities. The Property Trustee shall notify all Holders of the Capital Securities of any notice of default received from the Debenture Trustee. In addition to obtaining the foregoing approvals of the Holders of the Capital Securities, prior to taking any of the foregoing actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that the Trust will not fail to be classified as a grantor trust for United States Federal income tax purposes on account of such action. (c) Except as provided in Section 10.03, if any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Capital Securities, whether by way of amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Capital Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Capital Securities. No amendment to this Trust Agreement may be made if, as a result of such amendment, the Trust would fail to be classified as a grantor trust for United States Federal income tax purposes or would lose its exemption from status as an "investment company" under the Investment Company Act. -32- 38 Section 6.02. NOTICE OF MEETINGS. Notice of all meetings of the Capital Securityholders, stating the time, place and purpose of the meeting, shall be given by the Administrative Trustees pursuant to Section 10.09 to each Capital Securityholder of record, at his registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. Any and all notices to which any Capital Securityholder hereunder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Capital Securityholder of record at his last known address as recorded on the Securities Register. Section 6.03. MEETINGS OF CAPITAL SECURITYHOLDERS. No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Securityholders to vote on any matter upon the written request of the Capital Securityholders of record of at least 25% in aggregate Liquidation Amount of the Outstanding Capital Securities and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Capital Securityholders to vote on any matters as to the which Capital Securityholders are entitled to vote. Capital Securityholders of record of at least 50% in aggregate Liquidation Amount of the Outstanding Capital Securities, present in person or by proxy, shall constitute a quorum at any meeting of Securityholders. If a quorum is present at a meeting, an affirmative vote by the Capital Securityholders of record present, in person or by proxy, holding at least a majority in aggregate Liquidation Amount of the Capital Securities held by the Capital Securityholders of record present, either in person or by proxy, at such meeting shall constitute the action of the Securityholders, unless this Trust Agreement requires a greater number of affirmative votes. Section 6.04. VOTING RIGHTS. Securityholders shall be entitled to one vote for each $1,000 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. Section 6.05. PROXIES, ETC. At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Securityholders of record shall be entitled to vote. When Trust Securities are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed -33- 39 by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution. Section 6.06. SECURITYHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken by Securityholders at a meeting may be taken without a meeting if Securityholders holding at least a majority in aggregate Liquidation Amount of all Outstanding Trust Securities entitled to vote in respect of such action (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing. The Administrative Trustees shall cause a notice of any matter upon which action by written consent of the Securityholders is to be taken, to be given to each Holder of record of the Outstanding Capital Securities in the same manner as that set forth in Section 6.02 for notice of meetings. Section 6.07. RECORD DATE FOR VOTING AND OTHER PURPOSES. For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees or the Property Trustee may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. Section 6.08. ACTS OF SECURITYHOLDERS. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders or Owners may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders or Owners in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders or Owners signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 8.01) conclusive in favor of the Trustees, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. -34- 40 The ownership of Trust Securities shall be proved by the Securities Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount. If any dispute shall arise between the Securityholders of Trust Securities and the Administrative Trustees or among such Securityholders or Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, consent, waiver or other Act of such Securityholder or Trustee under this Article VI, then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter. A Securityholder may institute a legal proceeding directly against the Depositor under the Guarantee to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee (as defined in the Guarantee), the Trust or any Person. Section 6.09. INSPECTION OF RECORDS. Upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by Securityholders during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01. REPRESENTATIONS AND WARRANTIES OF THE BANK AND THE PROPERTY TRUSTEE. The Bank and the Property Trustee, each severally on behalf of and as to itself, as of the date hereof, and each successor Property Trustee at the time of the successor Property Trustee's acceptance of its appointment as Property Trustee hereunder (the term "Bank" being used to refer to such successor Property Trustee in its separate corporate capacity) hereby represents and warrants (as applicable) as to itself only and for the benefit of the Depositor and the Securityholders that: (a) the Bank is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; -35- 41 (b) the Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Bank and constitutes the valid and legally binding agreement of the Bank enforceable against the Bank in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the execution, delivery and performance by the Bank of this Trust Agreement have been duly authorized by all necessary corporate and other action on the part of the Bank and the Property Trustee, and do not require any approval of stockholders of the Bank and such execution, delivery and performance will not (i) violate the Bank's Charter or By-laws, (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Property Trustee or the Bank is a party or by which it is bound, or (iii) violate any law, governmental rule or regulation of the State of Delaware or the United States governing the banking or trust powers of the Bank and the Property Trustee or any order, judgment or decree applicable to the Property Trustee or the Bank; (e) neither the authorization, execution or delivery by the Property Trustee of this Trust Agreement nor the consummation of any of the transactions by the Bank or the Property Trustee contemplated herein or therein require the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing federal law governing the banking or trust powers of the Bank or the Property Trustee or under the laws of the State of Delaware; (f) there are no proceedings pending or, to the best of the Bank's knowledge, threatened against or affecting the Bank or the Property Trustee in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Bank to enter into or perform its obligations as one of the Trustees under this Trust Agreement; and (g) the principal place of business of the Property Trustee is located in the State of Delaware. Section 7.02. REPRESENTATIONS AND WARRANTIES OF PARENT. The Parent hereby represents and warrants for the benefit of the Securityholders that: -36- 42 (a) this Trust Agreement has been duly authorized, executed and delivered by Parent and constitutes the valid and legally binding agreement of Parent enforceable against Parent in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (b) the Trust Securities Certificates issued on the Closing Date on behalf of the Trust have been duly authorized and will have been duly and validly executed, issued and delivered by the Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Securityholders will be, as of each such date, entitled to the benefits of this Trust Agreement; and (c) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Bank or the Property Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII THE TRUSTEES Section 8.01. CERTAIN DUTIES AND RESPONSIBIL1TIES. (a) The duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and, in the case of the Property Trustee, by the Trust Indenture Act as if such Act were applicable to this Trust Agreement. Notwithstanding the foregoing, no provision of this Trust Agreement shall require the Trustees to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section. No Administrative Trustee shall be liable for its act or omission as a result of such Person's gross negligence or willful misconduct. To the extent that, at law or in equity, any Trustee has duties and liabilities relating to the Trust or to the Holders, such Trustee shall not be liable to the Trust or to any Holder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Holders to replace such other duties and liabilities of the Trustees. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance -37- 43 with the terms hereof. Each Securityholder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.01(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) The Property Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Trust Agreement and no implied covenants shall be read into this Trust Agreement against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived), the Property Trustee shall exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Trust Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) the Property Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in Liquidation Amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; (iii) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Payment Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement and the Trust Indenture Act; (iv) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Depositor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.01 and except to the extent otherwise required by law; and (v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective -38- 44 duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of the Administrative Trustees or the Depositor. Section 8.02. CERTAIN NOTICES. Within five Business Days after the occurrence of any Event of Default, the Property Trustee shall transmit, in the manner and to the extent provided in Section 10.09, notice of any Event of Default actually known to the Property Trustee to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. Within five Business Days after the receipt of notice of the Depositor's exercise of its right to defer the payment of interest on the Debentures pursuant to the Indenture, the Administrative Trustees shall transmit, in the manner and to the extent provided in Section 10.09, notice of such exercise to the Securityholders and the Property Trustee, unless such exercise shall have been revoked. Section 8.03. CERTAIN RIGHTS OF PROPERTY TRUSTEE. Subject to the provisions of Section 8.01 and except as provided by law: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action or (ii) in construing any of the provisions in this Trust Agreement the Property Trustee finds the same ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Capital Securityholders are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting written instructions of the Depositor as to the course of action to be taken. The Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within ten Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than two Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; -39- 45 (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officer's Certificate; (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officer's Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Property Trustee may (at the expense of Depositor) consult with counsel (which counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees) and the written advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, provided that the Property Trustee shall be responsible for its own negligence or misconduct with respect to selection of any agent or attorney appointed by it hereunder; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder the Property Trustee (i) may -40- 46 request instructions from the Holders of the Trust Securities which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under the terms of the Trust Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in acting in accordance with such instructions; and (k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. Section 8.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust and the Depositor, and the Trustees do not assume any responsibility for their correctness. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Debentures. Section 8.05. MAY HOLD SECURITIES. Except as provided in the definition of the term "Outstanding" in Article I, any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, subject to Sections 8.08 and 8.13, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. Section 8.06. COMPENSATION; INDEMNITY; FEES. The Trust shall: (a) pay to the Trustees from time to time reasonable compensation for all services rendered by them hereunder and in the case of the Property Trustee, such compensation as is separately agreed by the Depositor and the Property Trustee (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be -41- 47 attributable to its negligence or bad faith (or, in the case of the Administrative Trustees, any such expense, disbursement or advance as may be attributable to its, his or her gross negligence, bad faith or willful misconduct). The Depositor agrees to indemnify each of the Trustees or any predecessor Trustee for, and to hold the Trustees harmless against, any loss, damage, claims, liability, tax, penalty or expense of any kind and nature whatsoever incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Trust Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder except any such expense, disbursement or advance as may be attributable to such Trustee's negligence, bad faith or willful misconduct (or, in the case of the Administrative Trustees, any such expense, disbursement or advance as may be attributable to its, his or her gross negligence, bad faith or willful misconduct). The provisions of this Section 8.06 shall survive the termination of this Trust Agreement. To secure the Trustees' rights under this Section 806, the Property Trustee shall have a lien against the Trust Property which lien shall be subordinate to the rights of the Securityholders but prior to the rights of Depositor as to any Trust Property. Section 8.07. CORPORATE PROPERTY TRUSTEE REQUIRED; ELIGIBILITY OF TRUSTEES. (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is a national or state chartered bank and eligible pursuant to the Trust Indenture Act to act as such (as if such Act were applicable to this Trust Agreement) and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Trustee with respect to the Trust Securities that shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity with its principal place of business in the State of Delaware and that otherwise meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. Section 8.08. CONFLICTING INTERESTS. If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner -42- 48 provided by, and subject to the provisions of, the Trust Indenture Act (as if such Act were applicable to this Trust Agreement) and this Trust Agreement. Section 8.09. CO-TRUSTEES AND SEPARATE TRUSTEE. Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor and the Administrative Trustees, by agreed action of the majority of such Trustees, shall have power to appoint, and upon the written request of the Administrative Trustees, the Depositor shall for such purpose join with the Administrative Trustees in the execution, delivery, and performance of all instruments and agreements necessary or proper to appoint one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law, to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Trust Agreement. If the Depositor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall also have the power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section shall satisfy the requirements of Section 8.07. Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged, and delivered by the Depositor. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: (a) The Trust Securities shall be executed by one or more Administrative Trustees, and the Trust Securities shall be delivered by the Property Trustee, and all rights, powers, duties, and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder, shall be exercised, solely by such Trustees and not by such co-trustee or separate trustee. (b) The rights, powers, duties, and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties, and obligations shall be exercised and performed by such co-trustee or separate trustee. -43- 49 (c) The Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case a Debenture Event of Default has occurred and is continuing, the Property Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery, and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section. (d) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee, or any other trustee hereunder. (e) The Property Trustee shall not be liable by reason of any act of a co-trustee or separate trustee. (f) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. Section 8.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Relevant Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Relevant Trustee in accordance with the applicable requirements of Section 8.11. Subject to the immediately preceding paragraph, the Relevant Trustee may resign at any time with respect to the Trust Securities by giving written notice thereof to the Securityholders. If the instrument of acceptance by a successor Relevant Trustee required by Section 8.11 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the resigning Relevant Trustee may petition, at the expense of the Trust, any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. Subject to the following sentence, any of the Trustees may be removed at any time by Act of the Common Securityholder. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Outstanding Capital Securities, delivered to the Property Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Common Securityholder at any time. If the Relevant Trustee shall resign, be removed or become incapable of continuing to act as Relevant Trustee, or if a vacancy shall occur in the office of any Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees with respect to the Trust Securities and the Trust, and the retiring Relevant Trustee shall comply -44- 50 with the applicable requirements of Section 8.11. If the Property Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee at a time when a Debenture Event of Default shall have occurred and be continuing, the Capital Securityholders, by Act of the Securityholders of a majority in Liquidation Amount of the Capital Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees with respect to the Trust Securities and the Trust, and such successor Trustee shall comply with the applicable requirements of Section 8.11. If an Administrative Trustee shall resign, be removed or become incapable of continuing to act as Administrative Trustee at a time when a Debenture Event of Default shall have occurred and be continuing, the Common Securityholder may appoint a successor Administrative Trustee, which successor Trustee shall comply with the applicable requirements of Section 8.11 or the Common Securityholder may reduce the number of Administrative Trustees pursuant to Section 8.17(a). If no successor Relevant Trustee with respect to the Trust Securities shall have been so appointed by the Common Securityholder or the Capital Securityholders and accepted appointment in the manner required by Section 8.11, any Securityholder who has been a Securityholder of Trust Securities for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. The Relevant Trustee shall give notice of each resignation and each removal of the Relevant Trustee with respect to the Trust Securities and the Trust and each appointment of a successor Relevant Trustee with respect to the Trust Securities and the Trust to all Securityholders in the manner provided in Section 10.09 and shall give notice to the Depositor. Each notice shall include the name of the successor Relevant Trustee with respect to the Trust Securities and the Trust and the address of its Corporate Trust Office if it is the Property Trustee. Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Property Trustee who is a natural person dies or becomes incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of remaining Administrative Trustees if there are at least two of them prior to such vacancy or (b) otherwise by the Depositor (with the successor in each case being an individual who satisfies the eligibility requirement for Administrative Trustees set forth in Section 8.07). Additionally, notwithstanding the foregoing or any other provision of this Trust Agreement, in the event the Depositor believes that any Administrative Trustee or a Property Trustee who is a natural person, as the case may be, has become incompetent or incapacitated, the Depositor, by notice to the remaining Trustees, may terminate the status of such Person as an Administrative Trustee or a Property Trustee, as the case may be (in which case the vacancy so created will be filled in accordance with the preceding sentence). Section 8.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. In case of the appointment hereunder of a successor Relevant Trustee with respect to all Trust Securities and the Trust, every such successor Relevant Trustee so appointed shall execute, acknowledge and deliver to the Trust and to the retiring Relevant Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring -45- 51 Relevant Trustee shall become effective and such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on the request of the Depositor or the successor Relevant Trustee, such retiring Relevant Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Relevant Trustee all the rights, powers and trusts of the retiring Relevant Trustee and shall duly assign, transfer and deliver to such successor Relevant Trustee all property and money held by such retiring Relevant Trustee hereunder. In case of the appointment hereunder of a successor Relevant Trustee with respect to the Trust Securities and the Trust, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Trust Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust and (b) shall add to or change any of the provisions of this Trust Agreement as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees of the same trust and that each such Relevant Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Relevant Trustee and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. Upon request of any such successor Relevant Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Relevant Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be. No successor Relevant Trustee shall accept its appointment unless at the time of such acceptance such successor Relevant Trustee shall be qualified and eligible under this Article. Section 8.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF A TRUSTEE. Any Person into which the Property Trustee or any Administrative Trustee which is not a natural person may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Relevant Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of any such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such Person shall be otherwise -46- 52 qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. Section 8.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST DEPOSITOR OR TRUST. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Trust or any other obligor upon the Trust Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any Distributions on the Trust Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Trust Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee. Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement adjustment or compensation affecting the Trust Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 8.14. REPORTS BY PROPERTY TRUSTEE. (a) Within 60 days after December 31 of each year commencing with December 31, 1997 the Property Trustee shall transmit by mail to all Securityholders, as their names and addresses appear in the Securities Register, and to the Depositor, a brief report dated as of such December 31 with respect to: (i) its eligibility under Section 8.07 or, in lieu thereof, if to the best of its knowledge it has continued to be eligible under said Section, a written statement to such effect; -47- 53 (ii) a statement that the Property Trustee has complied with all of its obligations under this Trust Agreement during the twelve-month period (or, in the case of the initial report, the period since the Closing Date) ending with such December 31 or, if the Property Trustee has not complied in any material respect with such obligations, a description of such non-compliance; and (iii) any change in the property and funds in its possession as Property Trustee since the date of its last report and any action taken by the Property Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Trust Securities. (b) In addition the Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Property Trustee with the PORTAL System or any successor thereto if the Capital Securities are listed thereon or, with the Commission (in either case as may be required by the rules thereof) and with the Depositor. Section 8.15. REPORTS TO THE PROPERTY TRUSTEE. Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Section 8.16. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. At the Closing and as thereafter required, each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 3 14(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(l) of the Trust Indenture Act may be given in the form of an Officers' Certificate. Section 8.17. NUMBER OF TRUSTEES. (a) The number of Trustees shall be four, provided that the Holder of all the Common Securities, by written instrument may increase or decrease the number of Administrative Trustees. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 8.10. -48- 54 (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul, dissolve or terminate the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.10, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. Section 8.18. DELEGATION OF POWER. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 2.07(a), including any governmental filing; and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. Section 8.19. VOTING. Except as otherwise provided in this Trust Agreement, the consent or approval of the Administrative Trustees shall require consent or approval by not less than a majority of the Administrative Trustees, unless there are only two, in which case both must consent. ARTICLE IX TERMINATION AND LIQUIDATION Section 9.01. TERMINATION UPON EXPIRATION DATE. The Trust shall automatically terminate on June 30, 2032, (the "Expiration Date") following the distribution of the Trust Property in accordance with Section 9.04. Section 9.02. EARLY TERMINATION. Upon the first to occur of any of the following events (such first occurrence, an "Early Termination Event"): (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor; (b) the written direction to the Property Trustee from the Depositor at any time (which direction is optional and wholly within the discretion of the Depositor) to terminate the Trust and distribute Debentures to the Securityholders in exchange for the Capital Securities; -49- 55 (c) the redemption of all of the Capital Securities in connection with the redemption of all the Debentures; and (d) the entry of an order for dissolution of the Trust shall have been entered by a court of competent jurisdiction. then the Trustees shall take such action as is required by Section 4.02 or Section 9.04, as applicable, and as soon as practicable thereafter, the Trustees shall cause to be filed a certificate of cancellation relating to the Trust with the Secretary of State of the State of Delaware. Section 9.03. TERMINATION. The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders upon the liquidation of the Trust pursuant to Section 9.04, or upon the redemption of all of the Trust Securities pursuant to Section 4.02, of all amounts required to be distributed hereunder upon the final payment of the Trust Securities; (b) the payment of any expenses owed by the Trust; (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Securityholders; and (d) the filing of a certificate of cancellation relating to the Trust with the Secretary of State of the State of Delaware. Section 9.04. LIQUIDATION. (a) If an Early Termination Event specified in clause (a), (b) or (d) of Section 9.02 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Debentures, subject to Section 9.04(d). Notice of liquidation shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the Liquidation Date; (ii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and any Trust Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Debentures; and (iii) provide such information with respect to the mechanics by which Holders may exchange Trust Securities Certificates for Debentures, or if Section 9.04(d) applies, receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. -50- 56 (b) Except where Section 9.02(c) or 9.04(d) applies, in order to effect the liquidation of the Trust and distribution of the Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 9.02 (c) or 9.04(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) The Depository Trust Company ("DTC") or its nominee, as the record Holder of the Capital Securities, will receive a registered global certificate or certificates representing the Debentures to be delivered upon such distribution, (iii) any Capital Securities Certificates not held by the DTC or its nominee will be deemed to represent a Like Amount of Debentures, bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributors on such Trust Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments or interest or principal will be made to Holders of Trust Securities Certificates with respect to such Debentures), (iv) certificates representing a Like Amount of Debentures will be issued to the Holder of the Common Securities Certificates, upon surrender of such certificates to the Administrative Trustees or their agent for exchange, (v) all rights of Securityholders holding Trust Securities will cease, except the right of such Securityholders to receive Debentures upon surrender of Trust Securities Certificates, and (vi) the Depositor shall use its best efforts to have the Debentures listed for quotation on the PORTAL System or such other quotation system as the Capital Securities are then listed, if any. (d) In the event that, notwithstanding the other provisions of this Section 9.04, whether because of an order for dissolution entered by a court of competent jurisdiction or payment at the stated maturity thereof of all principal of and interest on the Debentures or otherwise, distribution of the Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be dissolved, wound-up or terminated, by the Property Trustee in such manner as the Property Trustee determines. In such event, on the date of the dissolution, winding-up or other termination of the Trust, Securityholders will be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If, upon any such dissolution, winding up or termination, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a PRO RATA basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination PRO RATA (determined as aforesaid) with Holders of Capital Securities, except that, if an Event of Default specified in Section 501(1) or 501(2) of the Indenture has occurred and is continuing, the Capital Securities shall have a priority over the Common Securities. In the event the Capital Securities are issued in certificated form, the Liquidation Distribution will -51- 57 be payable at (i) the Corporate Trust Office of the Property Trustee, (ii) the principal office of any Paying Agent, or (iii) the principal office of the Securities Registrar; provided THAT payment of any Liquidation Distribution may be made, at the option of the Administrative Trustees, by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Registrar or by wire transfer in immediately available funds at such place and to such account as may be designated by the Person entitled thereto as specified in the Securities Register. Section 9.05. MERGER, CONSOLIDATION, AMALGAMATION OR REPLACEMENT OF THE TRUST. The Trust may not merge, consolidate or amalgamate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except pursuant to this Section 9.05. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Holders of the Capital Securities or the Property Trustee, the Trust may merge, consolidate or amalgamate with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Capital Securities or (b) substitutes for the Capital Securities other securities having substantially the same terms as the Capital Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Capital Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Depositor expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Debentures, (iii) the Successor Securities are approved for quotation on the PORTAL System (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Capital Securities (including any Successor Securities) in any material respect, (vi) such successor entity has a purpose substantially identical to that of the Trust, (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an opinion from independent counsel to the Trust experienced in such matters to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Capital Securities (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an investment company under the 1940 Act and (viii) the Depositor or any permitted successor or assignee owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except with the consent of Holders of 100% in Liquidation Amount of the Capital Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other entity or permit any other entity to consolidate, amalgamate or merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, -52- 58 conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for United States Federal income tax purposes. ARTICLE X MISCELLANEOUS PROVISIONS Section 10.01. EXPENSE AGREEMENT. It is the contemplation of the parties that the Expense Agreement shall be entered into no later than June 6, 1997. Section 10.02. LIMITATION OF RIGHTS OF SECURITYHOLDERS. The death or incapacity of any person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor entitle the legal representatives or heirs of such person or any Securityholder for such person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. Section 10.03. AMENDMENT. (a) This Trust Agreement may be amended from time to time by the Trustees and the Depositor, without the consent of any Securityholders, (i) with respect to acceptance of appointment by a successor Trustee, (ii) to cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided such amendment is not inconsistent with the other provisions of this Trust Agreement, or (iii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States Federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an "investment company" under the Investment Company Act of 1940, as amended; provided, however, that in the case of either clause (ii) or clause (iii), such action shall not adversely affect in any material respect the interests of any Securityholder and any amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders. (b) Except as provided in Section 10.03(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor with (i) the consent of Trust Securityholders representing not less than a majority in Liquidation Amount of the Trust Securities then Outstanding and (ii) the receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States Federal income tax purposes or the Trust's exemption from status as an "investment company" under the Investment Company Act of 1940, as amended. (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder (such consent being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust Agreement may not be amended to (i) change the amount or timing of any Distribution on the Trust Securities or otherwise -53- 59 adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a Securityholder to institute suit for the enforcement of any such payment on or after such date; notwithstanding any other provision herein without the unanimous consent of the Securityholders (such consent being obtained in accordance with Section 6.03 or 6.06 hereof), paragraph (b) of this Section 10.03 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to (i) fail or cease to qualify, as evidenced by an Opinion of Counsel, for an exemption from status of an "investment company" under the Investment Company Act of 1940, as amended, or (ii) fail or cease to be classified, as evidenced by an Opinion of Counsel, as a grantor trust for United States Federal income tax purposes. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor and the Administrative Trustees, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor or the Administrative Trustees. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. (g) The Property Trustee shall not be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee shall be entitled to receive an Opinion of Counsel and an Officer's Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement. Section 10.04. SEPARABILITY. In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.05. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE DEPOSITOR, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PROVISIONS. Section 10.06. PAYMENTS DUE ON NON-BUSINESS DAY. If the date fixed for any payment on any Trust Security shall be a day which is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day which is a Business Day (except as otherwise provided in Section 4.01(a) and 4.02(d)), with the same force and effect as though made on the date fixed for such payment, and no Distribution shall accumulate on such unpaid amount thereon for the period after such date. -54- 60 Section 10.07. SUCCESSORS. This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or any Relevant Trustee, including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. Section 10.08. HEADINGS. The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. Section 10.09. REPORTS, NOTICES AND DEMANDS. Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor shall be given or served in writing by deposit thereof, postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Capital Securityholder, to such Capital Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Common Securityholder or the Depositor, to GenAmerica Corporation, 700 Market Street, St. Louis, Missouri 63101, Attention: Secretary, facsimile no.: (314) 444-0510. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the Property Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the Trust) as follows: (a) with respect to the Property Trustee, to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration; and (b) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked "Attention: Administrative Trustees of GenAmerica Capital I c/o Secretary." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. Section 10.10. AGREEMENT NOT TO PETITION. Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, reorganization, arrangement, insolvency, liquidation or other similar law (including, without limitation, the United States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation of this Section 10.10, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor, it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom and such other defenses, if any, as counsel for the Property Trustee or -55- 61 the Trust may assert. The provisions of this Section 10.10 shall survive the termination of this Trust Agreement. Section 10.11. TRUST INDENTURE ACT; CONFLICT WITH TRUST INDENTURE ACT. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a Trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act (including the duties imposed by Sections 310 to 317 of such Act through the operation of Section 318(c)) that would be required under such Act to be a part of and govern this Agreement were to be so qualified, the latter provision shall control. If any provision of this Trust Agreement modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Trust Agreement as so modified or excluded, as the case may be. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. Section 10.12. RIGHTS UNDER INDENTURE. The Trust may not assign any of its rights under the Indenture without the prior written consent of the Depositor. Section 10.13. EFFECTIVENESS. This Trust Agreement shall become effective when signed by the Depositor and the Bank. Section 10.14. INTENTION OF THE PARTIES. It is the intention of the parties hereto that the Trust not be characterized for United States Federal income tax purposes as a corporation or a partnership, but rather that the Trust be characterized as a grantor trust or otherwise in a manner and that each Owner be treated as owning an undivided beneficial interest in the assets of the Trust. The provisions of this Trust Agreement shall be interpreted to further this intention of the parties. -56- 62 THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THOSE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. GENAMERICA CORPORATION By: /S/ LEONARD M. RUBENSTEIN Name: Leonard M. Rubenstein Title: Chief Investment Officer WILMINGTON TRUST COMPANY, as Property Trustee By: /S/ EMMETT R. HARMON Name: Emmett R. Harmon Title: Vice President /S/ David L. Herzog David L. Herzog as Administrative Trustee /S/ JOHN W. HAYDEN John W. Hayden as Administrative Trustee /S/ CHRISTOPHER A. MARTIN Christopher A. Martin as Administrative Trustee -57- 63 EXHIBIT A CERTIFICATE OF TRUST OF GENAMERICA CAPITAL I THIS Certificate of Trust of GenAmerica Capital I (the "Trust"), dated May __, 1997, is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 DEL. C. Section 3801 ET SEQ.) 1. NAME. The name of the business trust being formed hereby is GenAmerica Capital I. 2. DELAWARE TRUSTEE. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. 3. EFFECTIVE DATE. This Certificate of Trust shall be effective upon filing. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first-above written. Wilmington Trust Company, as trustee By: __________________________ Name: Title: -58- 64 EXHIBIT B THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT TO THE DEPOSITOR OR AN AFFILIATE OF THE DEPOSITOR IN COMPLIANCE WITH APPLICABLE LAW AND SECTION 5.11 OF THE TRUST AGREEMENT Certificate Number Number of Common Securities C-l Certificate Evidencing Common Securities of GenAmerica Capital I 8.525% Common Securities (liquidation amount $1,000 per Common Security) GenAmerica Capital I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that GenAmerica Corporation (the "Holder") is the registered owner of ________ (_) common securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the 8.525% Common Securities (liquidation amount $1,000 per Common Security) (the "Common Securities"). Except in accordance with Section 5.11 of the Trust Agreement (as defined below) the Common Securities are not transferable and any attempted transfer hereof other than in accordance therewith shall be void. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of June 6, 1997, among the Holder, as Depositor, Wilmington Trust Company, as Property Trustee, the Administrative Trustees named therein, and the holders, from time to time, of undivided beneficial interests in the assets of the Trust, as the same may be amended from time to time (the "Trust Agreement") including the designation of the terms of the Common Securities as set forth therein. The Trust will furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. Terms used but not defined herein have the meanings set forth in the Trust Agreement. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this 6th day of June, 1997. GENAMERICA CAPITAL I By: ___________________________ Name: Administrative Trustee -59- 65 EXHIBIT C IF THE CAPITAL SECURITY IS TO BE A GLOBAL CERTIFICATE INSERT - This Capital Security is a Global Capital Securities Certificate within the meaning of the Trust Agreement hereinafter referred to and is registered in the name of The Depository Trust Company, a New York corporation ("DTC") or a nominee of the DTC. This Capital Security is exchangeable for Capital Securities Certificates registered in the name of a person other than the DTC or its nominee only in the limited circumstances described in the Trust Agreement and no transfer of this Capital Security (other than a transfer of this Capital Security as a whole by the DTC to a nominee of the DTC or by a nominee of the DTC to the DTC or another nominee of the DTC) may be registered except in limited circumstances described in the Trust Agreement. Unless this Capital Security is presented by an authorized representative of the DTC to GenAmerica Capital I or its agent for registration of transfer, exchange or payment, and any Capital Securities Certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of the DTC (and any payment hereon is made to Cede & Co. or to such other entity as requested by an authorized representative of the DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.] Certificate Number Number of Capital Securities P- CUSIP NO. Certificate Evidencing Capital Securities of GenAmerica Capital I 8.525% Capital Securities (liquidation amount $1,000 per Capital Security) GenAmerica Capital I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _________________ (the "Holder") is the registered owner of ______________ ( ) Capital Securities of the Trust representing an undivided beneficial interest in the assets of the Trust and designated the GenAmerica Capital I 8.525% Capital Securities (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). The Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 5.04 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities are set forth in, and this certificate and the Capital Securities represented hereby and issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the trust dated as of June 6, 1997, among GenAmerica Corporation, a Missouri corporation, as Depositor, Wilmington Trust Company, as Property Trustee, the Administrative Trustees named therein, and the holders, from time to time, of undivided beneficial interests in the assets of the Trust, as the same may be amended from time to time (the "Trust Agreement") -60- 66 including the designation of the terms of Capital Securities as set forth therein. The Holder is entitled to the benefits of the Guarantee Agreement entered into by GenAmerica Corporation, a Missouri corporation, and Wilmington Trust Company as guarantee trustee, dated as of June 6, 1997 (the "Guarantee") to the extent provided therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this 6th day of June, 1997. GENAMERICA CAPITAL I By: _____________________________ Name: Administrative Trustee CERTIFICATE OF AUTHENTICATION This is one of the [__%] Capital Securities Referred to in the Amended and Restated Trust Agreement. WILMINGTON TRUST COMPANY, as Authentication Agent and Registrar By_____________________________________ Authorized Signature -61- 67 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security to: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert assignee's social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert address and zip code of assignee) and irrevocably appoints ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: Signature: ________________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature(s) Guaranteed: The signature(s) should be guaranteed by an eligible quarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to S.E.C. Rule l7Ad-15. -62- EX-10.50 15 EMPLOYMENT CONTINUATION AGREEMENT 1 EXHIBIT 10.50 ================================================================================ LISA M. WEBER EMPLOYMENT CONTINUATION AGREEMENT MARCH 16, 2000 METROPOLITAN LIFE INSURANCE COMPANY ================================================================================ 2 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (the "Company"), and Lisa M. Weber (the "Executive"), dated as of this 16th day of March, 2000. W I T N E S S E T H : WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds a critical position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of its policyholders, and if, at the relevant time, it is a stock company, its shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to her financial and job security; WHEREAS, the Company desires to assure itself of the Executive's services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of her position without undue distraction and to exercise her judgment without bias due to her personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as each such term is defined in Section 2 hereof); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Term. The initial term of this Agreement shall commence on the date hereof and continue until the third anniversary of the date hereof. Thereafter, this Agreement will automatically renew for successive and 3 consecutive additional three year periods following the end of its initial term and any extended term, unless the Company or the Executive gives the other party written notice at least 180 days prior to the date the term hereof would otherwise renew that it or she does not want the term to be so extended; provided, however, that, the Company may not deliver a notice of nonrenewal after (i) a Potential Change of Control (as is defined in Section 2(b) hereof) unless the Board of Directors has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). Notwithstanding anything to the contrary in this Agreement, the term of this Agreement shall in all events expire (regardless of when the term would otherwise have expired) on the second anniversary of a Change of Control. (b) Effective Date. Notwithstanding the provisions of Section 1(a) hereof, this Agreement shall govern the terms and conditions of the Executive's employment and the benefits and compensation to be provided to the Executive commencing on the date on which a Potential Change of Control or a Change of Control occurs (the "Effective Date") and ending on the date the term of this Agreement otherwise expires, provided that if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person (within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)), acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power (as defined below) of the Company's securities; (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Company (the "Board") or the board of directors of any successor to the Company provided, however, that any director elected to the Board, or nominated for election, by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause 2(a)(ii); (iii) the policyholders of the Company, if at the time in question the Company is a mutual life insurance company, approve a merger, consolidation, division, sale or other disposition of all or substantially all of the assets of the 2 4 Company (a "Mutual Event");provided, however, that a Mutual Event shall not be treated as a Change of Control for purposes of this Agreement if (x) the Company is the surviving company in any such merger or other transaction and (y) pursuant to the terms of the agreement governing the transaction constituting the Mutual Event, the persons who were directors of the Company immediately prior to such Mutual Event constitute at least 75% of the members of the Board immediately following the consummation of such Mutual Event; or (iv) the stockholders of the Company, if at the time in question the Company is a stock company, approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event; or (v) any other event occurs which the Board declares to be a Change of Control. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred merely as a result of (i) the conversion of the Company from a mutual life insurance company to a stock company whose shareholders are either (x) primarily persons who were policyholders of the Company immediately prior to such transaction and/or a trust holding the shares of the Company for the benefit of such policyholders or (y) another corporation the shares of which are held primarily by the persons and/or trust described in subclause (x); (ii) the Company becoming a direct or indirect subsidiary of a mutual holding company whose members are primarily persons who were policyholders of the Company immediately prior to such transaction or (iii) an underwritten offering of the equity securities of the Company where no Person (including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)) acquires more than 25% of the beneficial ownership interests in such securities. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: 3 5 (i) a Person commences a tender offer, with adequate financing, which, if consummated, would result in such Person being the "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 10% or more of the combined Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) any person (including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)) other than the Company attempts, directly or indirectly, to replace more than 25% of the directors of the Company; provided, however, that any action taken in support of a nominee approved by a majority of the members of the Board then in office shall not be given any effect in determining whether a Potential Change of Control has occurred; (iv) certification, pursuant to New York Insurance Law Section 4210(h)(1)(B) (or any successor provision thereto) of an independent nomination of candidates to replace more than 25% of the members of the Board; or (v) any other event occurs which the Board declares to be a Potential Change of Control. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. (c) Voting Power. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. 4 6 (d) Affiliate. An "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Company. 3. Employment Period. Subject to Section 6 hereof, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the expiration of the term of this Agreement. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) hereof. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or at any other office or location not more than 35 miles from such pre-Effective Date location. (b) Business Time. During the Employment Period, the Executive agrees to devote her full attention during normal business hours to the business and affairs of the Company and to use her best efforts to perform faithfully and efficiently the responsibilities assigned to her hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing her personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which she is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which she is serving or with which she is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any Affiliate immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as the "Base 5 7 Salary". Neither the Base Salary nor any increase in the Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, the Executive shall be afforded the opportunity to receive an annual bonus (the "Annual Bonus Opportunity") in an amount which provides the Executive with the same bonus opportunity as other executives of the Company of comparable rank. If any fiscal year commences but does not end during the Employment Period, Executive shall receive a pro-rated amount in respect of the Annual Bonus Opportunity for the portion of the fiscal year occurring during the Employment Period. Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or any prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the level made available from time to time to executives of comparable rank. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, her dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and any Affiliate at the level made available from time to time to other similarly situated officers. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect from time to time with respect to expenses incurred by other similarly situated officers. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available from time to time to other similarly situated officers. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' 6 8 fees, on the same terms and conditions applicable from time to time with respect to the indemnification of its other senior officers of comparable rank. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, "Disability" shall mean the Executive's inability to perform the duties of her position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date; provided, however, that the Executive's employment may not be terminated for Disability hereunder unless the Executive has requested that she be considered for, and has qualified to receive, long-term disability benefits under such plan. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), upon not less than 60 days' written notice to the Company, provided that any termination by the Executive pursuant to Section 6(d) hereof on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act of dishonesty or gross misconduct on the Executive's part which results or is intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of her obligations under Section 4 hereof, which violations are demonstrably willful and deliberate on the Executive's part. (d) Good Reason. After the Effective Date, the Executive may terminate her employment at any time for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the Effective Date: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or 7 9 responsibilities as contemplated by Section 4(a) hereof, or (B) any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 hereof, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) requiring the Executive to be based at any office or location more than 35 miles from the location at which the Executive performed her duties immediately prior to the Effective Date, except for travel reasonably required in the performance of the Executive's responsibilities; (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b) hereof; or (v) any failure to make any payment when due under the terms of the letter agreement between the Company and the Executive dated as of February 4, 1998 (the "Offer Letter"). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e) hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice given, (i) in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination or (ii) in the case of a termination for Good Reason, within 120 days of the Executive's having actual knowledge of the events giving rise to such termination. Any such Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specify the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing her rights hereunder. 8 10 (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or her beneficiary or estate), at the times determined below (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under or in accordance with the terms and conditions of the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 30 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Lump Sum Payments. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period or (y) the Executive terminates her employment at any time during the Employment Period 9 11 for Good Reason, the Company shall pay to the Executive, at the times determined below, the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual rate of Base Salary as then in effect; (2) the average of the annual bonuses payable to the Executive under the Annual Variable Incentive Plan (or any successor plan thereto) for the each of the three fiscal years of the Company (or, if less, the number of prior fiscal years during which Executive was an employee of the Company or an Affiliate) ended immediately prior to the Effective Date for which an annual bonus amount had been determined by the Board (or any committee thereof) prior to the Effective Date. If the Executive was employed by the Company for only a portion of any fiscal year included in the period for which the average referred to in the immediately preceding sentence is determined and the bonus payable for such fiscal year took into account such partial period of employment, such bonus for such fiscal year shall be annualized for purposes of calculating such average; and (3) the average of the long-term incentive compensation amounts payable to the Executive with respect to each of the last three performance periods (or, if the Executive participated in the long-term compensation program in respect to a lesser number of such performance periods, such lesser number) ended prior to the Effective Date for which the amount payable had been determined by the Board (or any committee thereof) prior to the Effective Date; provided, however, that, the amount determined under this subclause (3) shall be reduced (but not below zero) by the "Determined Value" (as defined below) of any vested stock options, restricted stock or similar equity-based award relating to the Company's common equity on the earlier to occur of the Executive's Date of Termination or the date on which a Change of Control occurs. For 10 12 purposes of this Agreement, Determined Value shall mean the excess of the "Equity Value" over the price, if any, payable by the Executive in respect of such stock option or other award and Equity Value shall be determined to be (x) in the case of a Change of Control occurring by reason of a merger, recapitalization or similar transaction or as a result of a tender offer, the value received by the Company's equity holders in such transaction or the price paid in such tender offer (with the value of any non-cash consideration to be determined in good faith by the Compensation Committee of the Board as constituted immediately prior to the Effective Date) and (y) in the case of any other Change of Control or where the date as of which such Determined Value is measured is the Executive's Date of Termination, the average of the high and low reported sales prices of such equity on the principal securities market on which such equity is traded on the relevant date; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. The Executive (and, to the extent applicable, her dependents) shall be entitled, after the Date of Termination until the third anniversary of the Date of Termination (the "End Date"), to continue participation in all of the Company's employee and executive plan providing medical, dental and long-term disability benefits (collectively, the "Continuing Benefit Plans"); provided, however, that the participation by the Executive (and, to the extent applicable, her dependents) in any Continuing Benefit Plan shall cease on the date, if any, prior to the End Date on which the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer ("Prior Date"). The Executive's participation in the Continuing Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date or the Prior Date. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. 11 13 (iii) Termination of Employment Within Three Years of Normal Retirement Date. Notwithstanding anything else to the contrary contained in this Section 7(c), if the Executive's employment with the Company terminates at any time during the three year period ending on the Executive's normal retirement date, as determined in accordance with the Company's policies then in effect for the Company's senior executives (the "Normal Retirement Date"), and the Executive would be entitled to receive severance benefits under this Section 7(c), then (i) the multiplier in Section 7(c)(i) shall not be three, but shall be a number equal to three times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. (iv) Offer Letter Deferred Compensation Benefit. In the event that, during the Employment Period, the Executive terminates her employment hereunder for Good Reason or the Company terminates the Executive's employment other than for Cause, the Executive shall be vested in the deferred compensation benefit described therein and such benefit shall be paid to the Executive at the same time and on the same basis as though she had continued in the employ of the Company until the fifth anniversary of her date of hire (regardless of the date on which her employment terminates). The benefit provided under this Section 7(c)(iv) shall be in lieu of (and not in addition to) the deferred compensation benefit provided under the Offer Letter. (d) Discharge of the Company's Obligations. Except as expressly provided below, the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e) hereof) following termination of her employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims she may have in respect of her employment by the Company or any of its Affiliates. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Affiliates. Notwithstanding anything else in this Section 7(d) to the contrary, except as provided in Section 7(c), nothing in this Agreement shall be construed to release, limit, modify or supercede in any way the Executive's rights in respect of any deferred compensation amount payable to her under the Offer Letter (as modified by Section 7(c)(iv) hereof). (e) Limit on Payments by the Company. (i) Application of Section 7(e) Hereof. In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken 12 14 together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any Affiliate (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Promptly after delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which she would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that she will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel 13 15 selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount allocable to such Covered Payments," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for her benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlements under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting her payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for her benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. 14 16 If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company's obligation to indemnify the Executive pursuant to Section 5(g) hereof. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any Affiliate and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any Affiliate, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be diminished or otherwise affected by any circumstances, including, but not limited to, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, but not limited to, her reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 15 17 the Executive shall not prevail, in whole or in part, as to at least one material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Company Property. The Agreement to Protect Corporate Property previously executed by the Executive is incorporated herein and made a part hereof. The Executive hereby reaffirms her commitments under such agreement, and again agrees to be bound by each of the covenants contained therein for the benefit of the Company in consideration of the benefits made available to her hereby. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. Without limiting the generality of the foregoing, if prior to the occurrence of a Change of Control, the Company is a party to a merger, recapitalization, demutualization, restructuring, reorganization or similar transaction, as a result of which the Company becomes a subsidiary of any entity that was a subsidiary of the Company immediately prior to such transaction, from and after the date of such transaction the term Company as used in the definition of Change of Control and Potential Change of Control (but not as used in any other Section hereof, unless required to effect the intent that a Potential Change of Control or a Change of Control in respect of such entity shall cause the Effective Date of this Agreement to occur) shall refer to both the Company and such entity. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c) hereof, any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in New York City and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be 16 18 applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement and, to the extent provided under Section 7(d), the Offer Letter constitute the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that she is entering into this Agreement of her own free will and accord, and with no duress, that she has read this Agreement and that she understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Metropolitan Life Insurance Company One Madison Avenue New York, New York 10010 Att.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 17 19 (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or her rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set her hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. METROPOLITAN LIFE INSURANCE COMPANY /s/ Gary A. Beller -------------------------- By: Gary A. Beller Title: Senior Executive Vice-President and General Counsel WITNESSED: - ------------------------------ EXECUTIVE: /s/ Lisa N. Weber ------------------------- 18 20 WITNESSED: - -------------------- 19 EX-23.1 16 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Policyholders of Metropolitan Life Insurance Company: We consent to the use in this Amendment No. 2 to Registration Statement No. 333-91517 of our reports dated February 7, 2000 and February 11, 2000, relating to the consolidated financial statements of Metropolitan Life Insurance Company and subsidiaries and the balance sheet of MetLife, Inc. appearing in the Prospectus, which is part of such Registration Statement, and of our report dated February 7, 2000 relating to the consolidated financial statement schedules of Metropolitan Life Insurance Company and subsidiaries appearing elsewhere in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche LLP New York, New York March 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----