-----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, VHLSvp5Gg4Np9KH+QP599Z5/+sKyqcrRp1WL4EI+r0gKlpztcUhwj6BE2x217l0M YdSZFAjWKql01pdJztRgIQ== 0000950123-08-008734.txt : 20080804 0000950123-08-008734.hdr.sgml : 20080804 20080804062110 ACCESSION NUMBER: 0000950123-08-008734 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080804 DATE AS OF CHANGE: 20080804 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15787 FILM NUMBER: 08986557 BUSINESS ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 10-Q 1 y63995e10vq.htm FORM 10-Q FORM 10-Q
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 
OR
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE TRANSITION PERIOD FROM          TO          
 
Commission file number: 001-15787
 
 
MetLife, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   13-4075851
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
200 Park Avenue, New York, NY   10166-0188
(Address of principal executive offices)   (Zip Code)
 
(212) 578-2211
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
         
Large accelerated filer þ
      Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
At July 30, 2008, 709,778,752 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
 


 

 
Table of Contents
 
         
    Page
 
Part I — Financial Information
       
    4  
    4  
    5  
    6  
    7  
    8  
    57  
    151  
    154  
Part II — Other Information
       
    154  
    156  
    156  
    157  
    158  
    159  
    E-1  
 EX-10.1: AMENDMENT NO. 17 TO THE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION


2


Table of Contents

Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of MetLife, Inc. and its subsidiaries, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on MetLife, Inc. and its subsidiaries. Such forward-looking statements are not guarantees of future performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


3


Table of Contents

 
Part I — Financial Information
 
Item 1.   Financial Statements
 
MetLife, Inc.

Interim Condensed Consolidated Balance Sheets
June 30, 2008 (Unaudited) and December 31, 2007

(In millions, except share and per share data)
 
                 
    June 30,
    December 31,
 
    2008     2007  
 
Assets
               
Investments:
               
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $244,766 and $238,761, respectively)
  $ 241,191     $ 242,242  
Equity securities available-for-sale, at estimated fair value (cost: $5,802 and $5,891, respectively)
    5,420       6,050  
Trading securities, at estimated fair value (cost: $914 and $768, respectively)
    883       779  
Mortgage and consumer loans
    48,999       47,030  
Policy loans
    10,764       10,419  
Real estate and real estate joint ventures held-for-investment
    7,294       6,735  
Real estate held-for-sale
    34       34  
Other limited partnership interests
    6,707       6,155  
Short-term investments
    1,980       2,648  
Other invested assets
    13,335       12,642  
                 
Total investments
    336,607       334,734  
Cash and cash equivalents
    13,815       10,368  
Accrued investment income
    3,320       3,630  
Premiums and other receivables
    15,402       14,607  
Deferred policy acquisition costs and value of business acquired
    22,917       21,521  
Current income tax recoverable
    590       303  
Goodwill
    5,161       4,910  
Other assets
    8,274       8,330  
Separate account assets
    149,701       160,159  
                 
Total assets
  $ 555,787     $ 558,562  
                 
Liabilities and Stockholders’ Equity
               
Liabilities
               
Future policy benefits
  $ 134,123     $ 132,262  
Policyholder account balances
    144,238       137,349  
Other policyholder funds
    10,740       10,176  
Policyholder dividends payable
    1,037       994  
Policyholder dividend obligation
          789  
Short-term debt
    623       667  
Long-term debt
    9,694       9,628  
Collateral financing arrangements
    5,847       5,732  
Junior subordinated debt securities
    5,224       4,474  
Shares subject to mandatory redemption
    159       159  
Deferred income tax liability
    1,017       2,457  
Payables for collateral under securities loaned and other transactions
    45,979       44,136  
Other liabilities
    14,864       14,401  
Separate account liabilities
    149,701       160,159  
                 
Total liabilities
    523,246       523,383  
                 
Contingencies, Commitments and Guarantees (Note 8)
               
Stockholders’ Equity
               
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 84,000,000 shares issued and outstanding; $2,100 aggregate liquidation preference
    1       1  
Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 786,766,664 shares
issued; 709,749,252 shares and 729,223,440 shares outstanding at June 30, 2008
and December 31, 2007, respectively
    8       8  
Additional paid-in capital
    17,647       17,098  
Retained earnings
    21,441       19,884  
Treasury stock, at cost; 77,017,412 shares and 57,543,224 shares at June 30, 2008 and
December 31, 2007, respectively
    (4,047 )     (2,890 )
Accumulated other comprehensive income (loss)
    (2,509 )     1,078  
                 
Total stockholders’ equity
    32,541       35,179  
                 
Total liabilities and stockholders’ equity
  $ 555,787     $ 558,562  
                 
 
See accompanying notes to interim condensed consolidated financial statements.


4


Table of Contents

 
MetLife, Inc.

Interim Condensed Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 2008 and 2007 (Unaudited)

(In millions, except per share data)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
 
Revenues
                               
Premiums
  $ 7,701     $ 6,903     $ 15,294     $ 13,668  
Universal life and investment-type product policy fees
    1,421       1,307       2,838       2,587  
Net investment income
    4,584       4,835       9,091       9,355  
Other revenues
    371       411       766       795  
Net investment gains (losses)
    (362 )     (239 )     (1,248 )     (277 )
                                 
Total revenues
    13,715       13,217       26,741       26,128  
                                 
Expenses
                               
Policyholder benefits and claims
    7,715       6,855       15,458       13,628  
Interest credited to policyholder account balances
    1,265       1,465       2,576       2,841  
Policyholder dividends
    446       432       876       856  
Other expenses
    2,963       2,834       5,639       5,730  
                                 
Total expenses
    12,389       11,586       24,549       23,055  
                                 
Income from continuing operations before provision for income tax
    1,326       1,631       2,192       3,073  
Provision for income tax
    381       476       598       892  
                                 
Income from continuing operations
    945       1,155       1,594       2,181  
Income (loss) from discontinued operations, net of income tax
    1       8             (1 )
                                 
Net income
    946       1,163       1,594       2,180  
Preferred stock dividends
    31       34       64       68  
                                 
Net income available to common shareholders
  $ 915     $ 1,129     $ 1,530     $ 2,112  
                                 
Income from continuing operations available to common shareholders per common share
                               
Basic
  $ 1.28     $ 1.51     $ 2.14     $ 2.82  
                                 
Diluted
  $ 1.26     $ 1.47     $ 2.10     $ 2.76  
                                 
Net income available to common shareholders per common share
                               
Basic
  $ 1.28     $ 1.52     $ 2.14     $ 2.82  
                                 
Diluted
  $ 1.26     $ 1.48     $ 2.10     $ 2.76  
                                 
 
See accompanying notes to interim condensed consolidated financial statements.


5


Table of Contents

 
MetLife, Inc.

Interim Condensed Consolidated Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2008 (Unaudited)

(In millions)
 
                                                                         
                                  Accumulated Other
       
                                  Comprehensive Income (Loss)        
                                  Net
    Foreign
    Defined
       
                Additional
          Treasury
    Unrealized
    Currency
    Benefit
       
    Preferred
    Common
    Paid-in
    Retained
    Stock
    Investment
    Translation
    Plans
       
    Stock     Stock     Capital     Earnings     at Cost     Gains (Losses)     Adjustments     Adjustment     Total  
 
Balance at December 31, 2007
  $ 1     $ 8     $ 17,098     $ 19,884     $ (2,890 )   $ 971     $ 347     $ (240 )   $ 35,179  
Cumulative effect of a change in accounting principles, net of income tax (Note 1)
                            27               (10 )                     17  
                                                                         
Balance at January 1, 2008
    1       8       17,098       19,911       (2,890 )     961       347       (240 )     35,196  
Treasury stock transactions, net
                    408               (1,157 )                             (749 )
Deferral of stock-based compensation
                    141                                               141  
Dividends on preferred stock
                            (64 )                                     (64 )
Comprehensive income:
                                                                       
Net income
                            1,594                                       1,594  
Other comprehensive income (loss):
                                                                       
Unrealized gains (losses) on derivative instruments, net of income tax
                                            (33 )                     (33 )
Unrealized investment gains (losses), net of related offsets and income tax
                                            (3,624 )                     (3,624 )
Foreign currency translation adjustments, net of income tax
                                                    80               80  
                                                                         
Other comprehensive income (loss)
                                                                    (3,577 )
                                                                         
Comprehensive income (loss)
                                                                    (1,983 )
                                                                         
Balance at June 30, 2008
  $ 1     $ 8     $ 17,647     $ 21,441     $ (4,047 )   $ (2,696 )   $ 427     $ (240 )   $ 32,541  
                                                                         
 
See accompanying notes to interim condensed consolidated financial statements.


6


Table of Contents

 
MetLife, Inc.

Interim Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007 (Unaudited)

(In millions)
 
                 
    Six Months Ended June 30,  
    2008     2007  
 
Net cash provided by operating activities
  $ 5,475     $ 4,141  
                 
Cash flows from investing activities
               
Sales, maturities and repayments of:
               
Fixed maturity securities
    46,828       59,923  
Equity securities
    786       926  
Mortgage and consumer loans
    3,066       5,134  
Real estate and real estate joint ventures
    119       385  
Other limited partnership interests
    380       740  
Purchases of:
               
Fixed maturity securities
    (52,188 )     (71,736 )
Equity securities
    (705 )     (1,761 )
Mortgage and consumer loans
    (5,205 )     (6,533 )
Real estate and real estate joint ventures
    (622 )     (1,226 )
Other limited partnership interests
    (880 )     (875 )
Net change in short-term investments
    684       (78 )
Purchases of businesses, net of cash received of $44 and $13, respectively
    (350 )     (43 )
Proceeds (payments) from sales of businesses, net of cash disposed of $0 and $14, respectively
    (4 )     44  
Net change in other invested assets
    (1,013 )     494  
Net change in policy loans
    (345 )     (22 )
Other, net
    (74 )     (84 )
                 
Net cash used in investing activities
    (9,523 )     (14,712 )
                 
Cash flows from financing activities
               
Policyholder account balances:
               
Deposits
    29,146       29,133  
Withdrawals
    (23,082 )     (25,680 )
Net change in payables for collateral under securities loaned and other transactions
    1,843       4,744  
Net change in short-term debt
    (44 )     27  
Long-term debt issued
    117       458  
Long-term debt repaid
    (66 )     (267 )
Collateral financing arrangements issued
    115       2,254  
Junior subordinated debt securities issued
    750        
Dividends on preferred stock
    (64 )     (68 )
Treasury stock acquired
    (1,250 )     (775 )
Stock options exercised
    31       75  
Debt and equity issuance costs
    (9 )      
Other, net
    8       67  
                 
Net cash provided by financing activities
    7,495       9,968  
                 
Change in cash and cash equivalents
    3,447       (603 )
Cash and cash equivalents, beginning of period
    10,368       7,107  
                 
Cash and cash equivalents, end of period
  $ 13,815     $ 6,504  
                 
Supplemental disclosures of cash flow information:
               
Net cash paid during the period for:
               
Interest
  $ 572     $ 449  
                 
Income tax
  $ 315     $ 1,447  
                 
Non-cash transactions during the period:
               
Business acquisitions:
               
Assets acquired
  $ 1,411     $  
Cash paid
    (394 )      
                 
Liabilities assumed
  $ 1,017     $  
                 
 
See accompanying notes to interim condensed consolidated financial statements.


7


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
1.   Business, Basis of Presentation, and Summary of Significant Accounting Policies
 
Business
 
“MetLife” or the “Company” refers to MetLife, Inc., a Delaware corporation incorporated in 1999 (the “Holding Company”), and its subsidiaries, including Metropolitan Life Insurance Company (“MLIC”). MetLife is a leading provider of insurance and other financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. Through its domestic and international subsidiaries and affiliates, MetLife offers life insurance, annuities, automobile and homeowners insurance, retail banking and other financial services to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions.
 
Basis of Presentation
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The most critical estimates include those used in determining:
 
  (i)  the fair value of investments in the absence of quoted market values;
 
  (ii)  investment impairments;
 
  (iii)  the recognition of income on certain investment entities;
 
  (iv)  the application of the consolidation rules to certain investments;
 
  (v)  the existence and fair value of embedded derivatives requiring bifurcation;
 
  (vi)  the fair value of and accounting for derivatives;
 
  (vii)  the capitalization and amortization of deferred policy acquisition costs (“DAC”) and the establishment and amortization of value of business acquired (“VOBA”);
 
  (viii)  the measurement of goodwill and related impairment, if any;
 
  (ix)  the liability for future policyholder benefits;
 
  (x)  accounting for income taxes and the valuation of deferred tax assets;
 
  (xi)  accounting for reinsurance transactions;
 
  (xii)  accounting for employee benefit plans; and
 
  (xiii)  the liability for litigation and regulatory matters.
 
In applying the Company’s accounting policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations. Actual results could differ from these estimates.
 
The accompanying unaudited interim condensed consolidated financial statements include the accounts of: (i) the Holding Company and its subsidiaries; (ii) partnerships and joint ventures in which the Company has control; and (iii) variable interest entities (“VIEs”) for which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line-by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 5. Intercompany accounts and transactions have been eliminated.


8


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The Company uses the equity method of accounting for investments in equity securities in which it has more than a 20% interest and for real estate joint ventures and other limited partnership interests in which it has more than a minor equity interest or more than a minor influence over the joint venture’s or partnership’s operations, but does not have a controlling interest and is not the primary beneficiary. The Company uses the cost method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and virtually no influence over the joint venture’s or the partnership’s operations.
 
Minority interest related to consolidated entities included in other liabilities was $1.7 billion and $1.8 billion at June 30, 2008 and December 31, 2007, respectively.
 
Certain amounts in the prior year period’s unaudited interim condensed consolidated financial statements have been reclassified to conform with the 2008 presentation. Such reclassifications include $2.3 billion relating to long-term debt issued which has been reclassified to collateral financing arrangements issued on the consolidated statement of cash flow for the six months ended June 30, 2007. See also Note 14 for reclassifications related to discontinued operations.
 
The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company at June 30, 2008, its consolidated results of operations for the three months and six months ended June 30, 2008 and 2007, its consolidated cash flows for the six months ended June 30, 2008 and 2007, and its consolidated statement of stockholders’ equity for the six months ended June 30, 2008, in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2007 consolidated balance sheet data was derived from audited consolidated financial statements included in MetLife’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”), which includes all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2007 Annual Report.
 
Adoption of New Accounting Pronouncements
 
Fair Value
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a consistent framework for measuring fair value, establishes a fair value hierarchy based on the observability of inputs used to measure fair value, and requires enhanced disclosures about fair value measurements.
 
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Prior to SFAS 157, the fair value of a liability was often based on a settlement price concept, which assumed the liability was extinguished. Under SFAS 157, fair value is based on the amount that would be paid to transfer a liability to a third party with the same credit standing. SFAS 157 requires that fair value be a market-based measurement in which the fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant. Accordingly, fair value is no longer determined based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, SFAS 157 requires consideration of three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The approaches are not new, but SFAS 157 requires that entities determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. SFAS 157 prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that


9


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
observable inputs are not available. The Company has categorized its assets and liabilities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. SFAS 157 defines the input levels as follows:
 
  Level 1  Unadjusted quoted prices in active markets for identical assets or liabilities.
 
  Level 2  Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
  Level 3  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
Effective January 1, 2008, the Company adopted SFAS 157 and applied the provisions of the statement prospectively to assets and liabilities measured at fair value. The adoption of SFAS 157 changed the valuation of certain freestanding derivatives by moving from a mid to bid pricing convention as it relates to certain volatility inputs as well as the addition of liquidity adjustments and adjustments for risks inherent in a particular input or valuation technique. The adoption of SFAS 157 also changed the valuation of the Company’s embedded derivatives, most significantly the valuation of embedded derivatives associated with certain riders on variable annuity contracts. The change in valuation of embedded derivatives associated with riders on annuity contracts resulted from the incorporation of risk margins associated with non capital market inputs and the inclusion of the Company’s own credit standing in their valuation. At January 1, 2008, the impact of adopting SFAS 157 on assets and liabilities measured at fair value was $30 million ($19 million, net of income tax) and was recognized as a change in estimate in the accompanying unaudited condensed consolidated statement of income where it was presented in the respective income statement caption to which the item measured at fair value is presented. There were no significant changes in fair value of items measured at fair value and reflected in accumulated other comprehensive income (loss). The addition of risk margins and the Company’s own credit spread in the valuation of embedded derivatives associated with annuity contracts may result in significant volatility in the Company’s consolidated net income in future periods. Note 15 presents the fair value of all assets and liabilities required to be measured at fair value as well as the expanded fair value disclosures required by SFAS 157.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities the option to measure most financial instruments and certain other items at fair value at specified election dates and to recognize related unrealized gains and losses in earnings. The fair value option is applied on an instrument-by-instrument basis upon adoption of the standard, upon the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election is an irrevocable election. Effective January 1, 2008, the Company elected the fair value option on fixed maturity and equity securities backing certain pension products sold in Brazil. Such securities will now be presented as trading securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”) on the consolidated balance sheet with subsequent changes in fair value recognized in net investment income. Previously, these securities were accounted for as available-for-sale securities in accordance with SFAS 115 and unrealized gains and losses on these securities were recorded as a separate component of accumulated other comprehensive income (loss). The Company’s


10


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
insurance joint venture in Japan also elected the fair value option for certain of its existing single premium deferred annuities and the assets supporting such liabilities. The fair value option was elected to achieve improved reporting of the asset/liability matching associated with these products. Adoption of SFAS 159 by the Company and its Japanese joint venture resulted in an increase in retained earnings of $27 million, net of income tax, at January 1, 2008. The election of the fair value option resulted in the reclassification of $10 million, net of income tax, of net unrealized gains from accumulated other comprehensive income (loss) to retained earnings on January 1, 2008.
 
Effective January 1, 2008, the Company adopted FASB Staff Position (“FSP”) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”). FSP 157-1 amends SFAS 157 to provide a scope out exception for lease classification and measurement under SFAS No. 13, Accounting for Leases. The Company also adopted FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 which delays the effective date of SFAS 157 for certain nonfinancial assets and liabilities that are recorded at fair value on a nonrecurring basis. The effective date is delayed until January 1, 2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business combination and the impairment testing of goodwill and long-lived assets.
 
Other
 
Effective January 1, 2008, the Company adopted FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP 39-1”). FSP 39-1 amends FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts (“FIN 39”), to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with FIN 39. FSP 39-1 also amends FIN 39 for certain terminology modifications. Upon adoption of FSP 39-1, the Company did not change its accounting policy of not offsetting fair value amounts recognized for derivative instruments under master netting arrangements. The adoption of FSP 39-1 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.
 
Effective January 1, 2008, the Company adopted SEC Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”), which amends SAB No. 105, Application of Accounting Principles to Loan Commitments. SAB 109 provides guidance on (i) incorporating expected net future cash flows when related to the associated servicing of a loan when measuring fair value; and (ii) broadening the SEC staff’s view that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment or to written loan commitments that are accounted for at fair value through earnings. Internally-developed intangible assets are not considered a component of the related instruments. The adoption of SAB 109 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.
 
Effective January 1, 2008, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) Implementation Issue E-23, Clarification of the Application of the Shortcut Method (“Issue E-23”). Issue E-23 amended SFAS 133 by permitting interest rate swaps to have a non-zero fair value at inception when applying the shortcut method of assessing hedge effectiveness, as long as the difference between the transaction price (zero) and the fair value (exit price), as defined by SFAS 157, is solely attributable to a bid-ask spread. In addition, entities are not precluded from applying the shortcut method of assessing hedge effectiveness in a hedging relationship of interest rate risk involving an interest bearing asset or liability in situations where the hedged item is not recognized for accounting purposes until settlement date as long as the period between trade date and settlement date of the hedged item is consistent with generally established conventions in the marketplace. The adoption of Issue E-23 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.


11


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Future Adoption of New Accounting Pronouncements
 
Business Combinations
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations — A Replacement of FASB Statement No. 141 (“SFAS 141(r)”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). Under SFAS 141(r) and SFAS 160:
 
  •  All business combinations (whether full, partial or “step” acquisitions) result in all assets and liabilities of an acquired business being recorded at fair value, with limited exceptions.
 
  •  Acquisition costs are generally expensed as incurred; restructuring costs associated with a business combination are generally expensed as incurred subsequent to the acquisition date.
 
  •  The fair value of the purchase price, including the issuance of equity securities, is determined on the acquisition date.
 
  •  Certain acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies.
 
  •  Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.
 
  •  Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date and are presented as equity rather than liabilities.
 
  •  When control is attained on previously noncontrolling interests, the previously held equity interests are remeasured at fair value and a gain or loss is recognized.
 
  •  Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions.
 
  •  When control is lost in a partial disposition, realized gains or losses are recorded on equity ownership sold and the remaining ownership interest is remeasured and holding gains or losses are recognized.
 
The pronouncements are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied. The Company is currently evaluating the impact of SFAS 141(r) on its accounting for future acquisitions and the impact of SFAS 160 on its consolidated financial statements.
 
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(r) and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
 
Derivatives
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of


12


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements.
 
Other
 
In June 2008, the FASB ratified as final the consensus on Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides a framework for evaluating the terms of a particular instrument and whether such terms qualify the instrument as being indexed to an entity’s own stock. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied by recording a cumulative effect adjustment to the opening balance of retained earnings at the date of adoption. The Company is currently evaluating the impact of EITF 07-5 on its consolidated financial statements.
 
In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP 140-3”). FSP 140-3 provides guidance for evaluating whether to account for a transfer of a financial asset and repurchase financing as a single transaction or as two separate transactions. FSP 140-3 is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of FSP 140-3 on its consolidated financial statements.
 
In December 2007, the FASB ratified as final the consensus on EITF Issue No. 07-6, Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause (“EITF 07-6”). EITF 07-6 addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus concludes that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under current guidance. EITF 07-6 applies prospectively to new arrangements entered into and assessments on existing transactions performed in fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 07-6 to have a material impact on its consolidated financial statements.
 
2.   Acquisitions and Dispositions
 
During the first quarter of 2008, the Company completed acquisitions which were accounted for using the purchase method of accounting in the Institutional and International segments. As a result of these acquisitions, goodwill and other intangible assets increased by $169 million and $149 million, respectively.
 
During the second quarter of 2008, MetLife Bank, N.A. (“MetLife Bank”), included within the Corporate & Other segment, completed an acquisition which was accounted for using the purchase method of accounting. As a result of this acquisition, goodwill and other intangible assets increased by $68 million and $5 million, respectively. In June 2008, MetLife Bank, entered into an agreement to acquire a residential mortgage origination company. The transaction is expected to be completed during the third quarter of 2008.
 
In June 2008, the Company and Reinsurance Group of America, Inc. (“RGA”) entered into an agreement to execute a tax-free split-off transaction whereby shareholders of the Company will be offered the ability to exchange their MetLife shares for shares in RGA based upon an exchange ratio determined at the time of the exchange offer. The transaction has the effect of the Company exchanging substantially all of its 52% ownership in RGA for shares of its own stock. The transaction is subject to RGA’s shareholders approving a recapitalization, state insurance regulatory approval as well as acceptance of the offer by a sufficient number of MetLife shareholders. See also Note 13.


13


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
3.   Investments
 
Fixed Maturity and Equity Securities Available-for-Sale
 
The following tables present the cost or amortized cost, gross unrealized gain and loss, estimated fair value of the Company’s fixed maturity and equity securities, and the percentage that each sector represents by the respective total holdings at:
 
                                         
    June 30, 2008  
    Cost or
                         
    Amortized
    Gross Unrealized     Estimated
    % of
 
    Cost     Gain     Loss     Fair Value     Total  
    (In millions)  
 
U.S. corporate securities
  $ 79,131     $ 1,126     $ 4,002     $ 76,255       31.6 %
Residential mortgage-backed securities
    55,551       487       1,530       54,508       22.6  
Foreign corporate securities
    37,516       1,444       1,343       37,617       15.6  
U.S. Treasury/agency securities
    19,108       1,178       106       20,180       8.4  
Commercial mortgage-backed securities
    19,234       73       889       18,418       7.6  
Foreign government securities
    14,075       1,693       392       15,376       6.4  
Asset-backed securities
    14,185       54       1,167       13,072       5.4  
State and political subdivision securities
    5,653       100       272       5,481       2.3  
Other fixed maturity securities
    313       5       34       284       0.1  
                                         
Total fixed maturity securities
  $ 244,766     $ 6,160     $ 9,735     $ 241,191       100.0 %
                                         
Common stock
  $ 2,576     $ 369     $ 194     $ 2,751       50.8 %
Non-redeemable preferred stock
    3,226       30       587       2,669       49.2  
                                         
Total equity securities
  $ 5,802     $ 399     $ 781     $ 5,420       100.0 %
                                         
 
                                         
    December 31, 2007  
    Cost or
                         
    Amortized
    Gross Unrealized     Estimated
    % of
 
    Cost     Gain     Loss     Fair Value     Total  
    (In millions)  
 
U.S. corporate securities
  $ 77,875     $ 1,725     $ 2,174     $ 77,426       32.0 %
Residential mortgage-backed securities
    56,267       611       389       56,489       23.3  
Foreign corporate securities
    37,359       1,740       794       38,305       15.8  
U.S. Treasury/agency securities
    19,771       1,487       13       21,245       8.8  
Commercial mortgage-backed securities
    17,676       251       199       17,728       7.3  
Foreign government securities
    13,535       1,924       188       15,271       6.3  
Asset-backed securities
    11,549       41       549       11,041       4.6  
State and political subdivision securities
    4,394       140       115       4,419       1.8  
Other fixed maturity securities
    335       13       30       318       0.1  
                                         
Total fixed maturity securities
  $ 238,761     $ 7,932     $ 4,451     $ 242,242       100.0 %
                                         
Common stock
  $ 2,488     $ 568     $ 108     $ 2,948       48.7 %
Non-redeemable preferred stock
    3,403       61       362       3,102       51.3  
                                         
Total equity securities
  $ 5,891     $ 629     $ 470     $ 6,050       100.0 %
                                         


14


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The Company is not exposed to any significant concentrations of credit risk in its equity securities portfolio. The Company is exposed to concentrations of credit risk related to U.S. Treasury securities and obligations of U.S. government and agencies. Additionally, at June 30, 2008 and December 31, 2007, the Company had exposure to fixed maturity securities backed by sub-prime mortgage loans with estimated fair values of $1.8 billion and $2.2 billion, respectively, and unrealized losses of $560 million and $219 million, respectively. These securities are classified within asset-backed securities in the immediately preceding tables. At June 30, 2008, 33% of the asset-backed securities backed by sub-prime mortgage loans have been guaranteed by financial guarantee insurers, of which 11%, 38% and 7% were guaranteed by financial guarantee insurers who were Aaa, Aa and A rated, respectively.
 
Overall, at June 30, 2008, $6.5 billion of the estimated fair value of the Company’s fixed maturity securities were credit enhanced by financial guarantee insurers of which $2.8 billion, $2.4 billion, $1.1 billion and $0.2 billion, are included within state and political subdivision securities, U.S. corporate securities, asset-backed securities and mortgage-backed securities, respectively, and 12%, 29% and 40% were guaranteed by financial guarantee insurers who were Aaa, Aa and A rated, respectively.
 
Unrealized Loss for Fixed Maturity and Equity Securities Available-for-Sale
 
The following tables present the estimated fair value and gross unrealized loss of the Company’s fixed maturity (aggregated by sector) and equity securities in an unrealized loss position, aggregated by length of time that the securities have been in a continuous unrealized loss position at:
 
                                                 
    June 30, 2008  
    Less than 12 months     Equal to or Greater than 12 months     Total  
    Estimated
    Gross
    Estimated
    Gross
    Estimated
    Gross
 
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Loss     Value     Loss     Value     Loss  
    (In millions, except number of securities)  
 
U.S. corporate securities
  $ 36,446     $ 2,018     $ 16,424     $ 1,984     $ 52,870     $ 4,002  
Residential mortgage-backed securities
    26,181       1,096       4,275       434       30,456       1,530  
Foreign corporate securities
    14,554       670       6,788       673       21,342       1,343  
U.S. Treasury/agency securities
    4,607       92       180       14       4,787       106  
Commercial mortgage-backed securities
    10,878       455       4,248       434       15,126       889  
Foreign government securities
    5,229       334       729       58       5,958       392  
Asset-backed securities
    7,864       666       2,186       501       10,050       1,167  
State and political subdivision securities
    2,005       144       793       128       2,798       272  
Other fixed maturity securities
    77       34                   77       34  
                                                 
Total fixed maturity securities
  $ 107,841     $ 5,509     $ 35,623     $ 4,226     $ 143,464     $ 9,735  
                                                 
Equity securities
  $ 2,114     $ 433     $ 1,223     $ 348     $ 3,337     $ 781  
                                                 
Total number of securities in an unrealized loss position
    10,942               3,398                          
                                                 
 


15


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
                                                 
    December 31, 2007  
          Equal to or Greater
       
    Less than 12 months     than 12 months     Total  
    Estimated
    Gross
    Estimated
    Gross
    Estimated
    Gross
 
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Loss     Value     Loss     Value     Loss  
    (In millions, except number of securities)  
 
U.S. corporate securities
  $ 29,237     $ 1,431     $ 12,119     $ 743     $ 41,356     $ 2,174  
Residential mortgage-backed securities
    14,404       279       6,195       110       20,599       389  
Foreign corporate securities
    11,189       484       6,321       310       17,510       794  
U.S. Treasury/agency securities
    432       3       625       10       1,057       13  
Commercial mortgage-backed securities
    2,518       102       3,797       97       6,315       199  
Foreign government securities
    3,593       161       515       27       4,108       188  
Asset-backed securities
    7,627       442       1,271       107       8,898       549  
State and political subdivision securities
    1,334       81       476       34       1,810       115  
Other fixed maturity securities
    91       30       1             92       30  
                                                 
Total fixed maturity securities
  $ 70,425     $ 3,013     $ 31,320     $ 1,438     $ 101,745     $ 4,451  
                                                 
Equity securities
  $ 2,771     $ 398     $ 543     $ 72     $ 3,314     $ 470  
                                                 
Total number of securities in an unrealized loss position
    8,395               3,063                          
                                                 
 
Aging of Gross Unrealized Loss for Fixed Maturity and Equity Securities Available-for-Sale
 
The following tables present the cost or amortized cost, gross unrealized loss and number of securities for fixed maturity and equity securities, where the estimated fair value had declined and remained below cost or amortized cost by less than 20% or 20% or more at:
 
                                                 
    June 30, 2008  
    Cost or Amortized Cost     Gross Unrealized Loss     Number of Securities  
    Less than
    20% or
    Less than
    20% or
    Less than
    20% or
 
    20%     more     20%     more     20%     more  
    (In millions, except number of securities)  
 
Less than six months
  $ 86,859     $ 10,144     $ 2,748     $ 2,666       8,067       1,498  
Six months or greater but less than nine months
    11,896       799       807       296       1,260       159  
Nine months or greater but less than twelve months
    11,286       141       820       66       1,188       28  
Twelve months or greater
    36,106       86       3,087       26       2,921       34  
                                                 
Total
  $ 146,147     $ 11,170     $  7,462     $  3,054                  
                                                 
 

16


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
                                                 
    December 31, 2007  
    Cost or Amortized Cost     Gross Unrealized Loss     Number of Securities  
    Less than
    20% or
    Less than
    20% or
    Less than
    20% or
 
    20%     more     20%     more     20%     more  
    (In millions, except number of securities)  
 
Less than six months
  $ 49,463     $ 1,943     $ 1,670     $ 555       6,339       644  
Six months or greater but less than nine months
    17,353       23       844       7       1,461       31  
Nine months or greater but less than twelve months
    9,410       7       568       2       791       1  
Twelve months or greater
    31,731       50       1,262       13       3,192       32  
                                                 
Total
  $ 107,957     $ 2,023     $  4,344     $  577                  
                                                 
 
At June 30, 2008 and December 31, 2007, $7.3 billion and $4.0 billion, respectively, of unrealized losses related to fixed maturity securities with an unrealized loss position of less than 20% of cost or amortized cost, which represented 5% and 4%, respectively, of the cost or amortized cost of such securities. At June 30, 2008 and December 31, 2007, $182 million and $322 million, respectively, of unrealized losses related to equity securities with an unrealized loss position of less than 20% of cost, which represented 9% and 10%, respectively, of the cost of such securities.
 
At June 30, 2008, $2.5 billion and $599 million of unrealized losses related to fixed maturity securities and equity securities, respectively, with an unrealized loss position of 20% or more of cost or amortized cost, which represented 27% and 28% of the cost or amortized cost of such fixed maturity securities and equity securities, respectively. Of such unrealized losses of $2.5 billion and $599 million, $2.1 billion and $589 million related to fixed maturity securities and equity securities, respectively, that were in an unrealized loss position for a period of less than six months. At December 31, 2007, $429 million and $148 million of unrealized losses related to fixed maturity securities and equity securities, respectively, with an unrealized loss position of 20% or more of cost or amortized cost, which represented 28% and 31% of the cost or amortized cost of such fixed maturity securities and equity securities, respectively. Of such unrealized losses of $429 million and $148 million, $407 million and $148 million related to fixed maturity securities and equity securities, respectively, that were in an unrealized loss position for a period of less than six months.
 
The Company held 115 fixed maturity securities and 16 equity securities, each with a gross unrealized loss at June 30, 2008 of greater than $10 million. These 115 fixed maturity securities represented 19%, or $1.8 billion in the aggregate, of the gross unrealized loss on fixed maturity securities. These 16 equity securities represented 33%, or $260 million in the aggregate, of the gross unrealized loss on equity securities. The Company held 23 fixed maturity securities and 7 equity securities, each with a gross unrealized loss at December 31, 2007 of greater than $10 million. These 23 fixed maturity securities represented 8%, or $358 million in the aggregate, of the gross unrealized loss on fixed maturity securities. These 7 equity securities represented 21%, or $101 million in the aggregate, of the gross unrealized loss on equity securities.
 
In the Company’s impairment review process, the duration of, and severity of, an unrealized loss position, such as unrealized losses of 20% or more for equity securities, which was $599 million at June 30, 2008 and $148 million at December 31, 2007, is given greater weight and consideration, than for fixed maturity securities. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows, as well as the Company’s ability and intent to be hold the security, including holding the security until the earlier of a recovery in value, or until maturity. Whereas for an equity security, greater weight and consideration is given by the Company to a decline in market value and the likelihood such market value decline will recover.

17


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
At June 30, 2008 and December 31, 2007, the Company had $10.5 billion and $4.9 billion, respectively, of gross unrealized losses related to its fixed maturity and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized loss, as follows:
 
                 
    June 30,
    December 31,
 
    2008     2007  
 
Sector:
               
U.S. corporate securities
    38 %     44 %
Foreign corporate securities
    13       16  
Asset-backed securities
    11       11  
Residential mortgage-backed securities
    15       8  
Foreign government securities
    4       4  
Commercial mortgage-backed securities
    8       4  
Other
    11       13  
                 
Total
    100 %     100 %
                 
Industry:
               
Finance
    30 %     34 %
Industrial
    2       18  
Mortgage-backed
    23       12  
Asset-backed
    11       11  
Utility
    7       8  
Government
    5       4  
Consumer
    8       3  
Communication
    5       2  
Other
    9       8  
                 
Total
    100 %     100 %
                 
 
As disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report, the Company performs a regular evaluation, on a security-by-security basis, of its investment holdings in accordance with its impairment policy in order to evaluate whether such securities are other-than-temporarily impaired. One of the criteria which the Company considers in its other-than-temporary impairment analysis is its intent and ability to hold securities for a period of time sufficient to allow for the recovery of their value to an amount equal to or greater than cost or amortized cost. The Company’s intent and ability to hold securities considers broad portfolio management objectives such as asset/liability duration management, issuer and industry segment exposures, interest rate views and the overall total return focus. In following these portfolio management objectives, changes in facts and circumstances that were present in past reporting periods may trigger a decision to sell securities that were held in prior reporting periods. Decisions to sell are based on current conditions or the Company’s need to shift the portfolio to maintain its portfolio management objectives including liquidity needs or duration targets on asset/liability managed portfolios. The Company attempts to anticipate these types of changes and if a sale decision has been made on an impaired security and that security is not expected to recover prior to the expected time of sale, the security will be deemed other-than-temporarily impaired in the period that the sale decision was made and an other-than-temporary impairment loss will be recognized.
 
Based upon the Company’s current evaluation of the securities in accordance with its impairment policy, the cause of the decline being attributable to a rise in market yields caused principally by a current widening of credit spreads which resulted from a lack of market liquidity and a short-term market dislocation versus a long-term deterioration in credit quality, and the Company’s current intent and ability to hold the fixed maturity and equity


18


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
securities with unrealized losses for a period of time sufficient for them to recover, the Company has concluded that the aforementioned securities are not other-than-temporarily impaired.
 
Securities Lending
 
The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity and equity securities, 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 $43.6 billion and $41.1 billion and an estimated fair value of $43.7 billion and $42.1 billion were on loan under the program at June 30, 2008 and December 31, 2007, respectively. Securities loaned under such transactions may be sold or repledged by the transferee. The Company was liable for cash collateral under its control of $44.9 billion and $43.3 billion at June 30, 2008 and December 31, 2007, respectively. Security collateral of $19 million and $40 million on deposit from customers in connection with the securities lending transactions at June 30, 2008 and December 31, 2007, respectively, may not be sold or repledged and is not reflected in the unaudited interim condensed consolidated financial statements.
 
Net Investment Income
 
The components of net investment income are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Fixed maturity securities
  $ 3,586     $ 3,747     $ 7,223     $ 7,345  
Equity securities
    85       64       156       104  
Mortgage and consumer loans
    709       698       1,424       1,373  
Policy loans
    167       158       332       315  
Real estate and real estate joint ventures
    204       252       380       486  
Other limited partnership interests
    71       453       203       764  
Cash, cash equivalents and short-term investments
    103       113       214       260  
Other
    157       193       269       346  
                                 
Total investment income
    5,082       5,678       10,201       10,993  
Less: Investment expenses
    498       843       1,110       1,638  
                                 
Net investment income
  $ 4,584     $ 4,835     $ 9,091     $ 9,355  
                                 


19


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Net Investment Gains (Losses)
 
The components of net investment gains (losses) are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Fixed maturity securities
  $ (300 )   $ (236 )   $ (504 )   $ (328 )
Equity securities
    (3 )     14       (13 )     76  
Mortgage and consumer loans
    (35 )     13       (62 )     13  
Real estate and real estate joint ventures
    4       37       2       39  
Other limited partnership interests
    (12 )     14       (15 )     16  
Derivatives
    (57 )     (153 )     (580 )     (204 )
Other
    41       72       (76 )     111  
                                 
Net investment gains (losses)
  $ (362 )   $ (239 )   $ (1,248 )   $ (277 )
                                 
 
The Company periodically disposes of fixed maturity and equity securities at a loss. Generally, such losses are insignificant in amount or in relation to the cost basis of the investment, are attributable to declines in fair value occurring in the period of the disposition or are as a result of management’s decision to sell securities based on current conditions or the Company’s need to shift the portfolio to maintain its portfolio management objectives.
 
Losses from fixed maturity and equity securities deemed other-than-temporarily impaired, included within net investment gains (losses), were $196 million and $336 million for the three months and six months ended June 30, 2008, respectively, and $21 million and $24 million for the three months and six months ended June 30, 2007, respectively.
 
Trading Securities
 
The Company has a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities, the execution of short sale agreements and asset and liability matching strategies for certain insurance products. Trading securities and short sale agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income related to fixed maturity securities.
 
At June 30, 2008 and December 31, 2007, trading securities were $883 million and $779 million, respectively, and liabilities associated with the short sale agreements in the trading securities portfolio, which were included in other liabilities, were $47 million and $107 million, respectively. The Company had pledged $300 million and $407 million of its assets, primarily consisting of trading securities, as collateral to secure the liabilities associated with the short sale agreements in the trading securities portfolio at June 30, 2008 and December 31, 2007, respectively.
 
Interest and dividends earned on trading securities in addition to the net realized and unrealized gains (losses) recognized on the trading securities and the related short sale agreement liabilities included within net investment income totaled $9 million, and ($42) million for the three months and six months ended June 30, 2008, respectively, and $16 million and $31 million for the three months and six months ended June 30, 2007, respectively. Included within unrealized gains (losses) on such trading securities and short sale agreement liabilities are changes in fair value of ($4) million and ($47) million for the three months and six months ended June 30, 2008, respectively, and $4 million and $15 million for the three months and six months ended June 30, 2007, respectively.


20


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
4.   Derivative Financial Instruments
 
Types of Derivative Financial Instruments
 
The following table presents the notional amount and current market or fair value of derivative financial instruments, excluding embedded derivatives, held at:
 
                                                 
    June 30, 2008     December 31, 2007  
          Current Market
          Current Market
 
    Notional
    or Fair Value     Notional
    or Fair Value  
    Amount     Assets     Liabilities     Amount     Assets     Liabilities  
    (In millions)  
 
Interest rate swaps
  $ 36,542     $ 899     $ 591     $ 62,519     $ 785     $ 768  
Interest rate floors
    48,517       565             48,937       621        
Interest rate caps
    25,651       90             45,498       50        
Financial futures
    6,180       33       4       10,817       89       57  
Foreign currency swaps
    20,756       1,733       2,026       21,399       1,480       1,724  
Foreign currency forwards
    5,570       43       100       4,185       76       16  
Options
    2,409       938             2,043       713       1  
Financial forwards
    2,480       68       12       4,600       122       2  
Credit default swaps
    4,260       58       33       6,850       58       35  
Synthetic GICs
    3,934                   3,670              
Other
    250             5       250       43        
                                                 
Total
  $ 156,549     $ 4,427     $ 2,771     $ 210,768     $ 4,037     $ 2,603  
                                                 
 
The above table does not include notional amounts for equity futures, equity variance swaps, and equity options. At June 30, 2008 and December 31, 2007, the Company owned 8,354 and 4,658 equity future contracts, respectively. Fair values of equity futures are included in financial futures in the preceding table. At June 30, 2008 and December 31, 2007, the Company owned 865,427 and 695,485 equity variance swaps, respectively. Fair values of equity variance swaps are included in financial forwards in the preceding table. At June 30, 2008 and December 31, 2007, the Company owned 170,450,122 and 77,374,937 equity options, respectively. Fair values of equity options are included in options in the preceding table.
 
This information should be read in conjunction with Note 4 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report.
 
The Company commenced the use of inflation swaps during the first quarter of 2008. Inflation swaps are used as an economic hedge to reduce inflation risk generated from inflation-indexed liabilities. Inflation swaps are included in interest rate swaps in the preceding table.


21


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Hedging
 
The following table presents the notional amount and fair value of derivatives by type of hedge designation at:
 
                                                 
    June 30, 2008     December 31, 2007  
    Notional
    Fair Value     Notional
    Fair Value  
    Amount     Assets     Liabilities     Amount     Assets     Liabilities  
    (In millions)  
 
Fair value
  $ 11,731     $ 879     $ 144     $ 10,006     $ 650     $ 99  
Cash flow
    4,673       176       359       4,717       161       321  
Foreign operations
    2,670       33       121       1,872       11       119  
Non-qualifying
    137,475       3,339       2,147       194,173       3,215       2,064  
                                                 
Total
  $ 156,549     $ 4,427     $ 2,771     $ 210,768     $ 4,037     $ 2,603  
                                                 
 
The following table presents the settlement payments recorded in income for the:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Qualifying hedges:
                               
Net investment income
  $ 4     $ 8     $ 2     $ 17  
Interest credited to policyholder account balances
    42       (10 )     63       (21 )
Other expenses
    (1 )     1       (1 )     2  
Non-qualifying hedges:
                               
Net investment income
    1             (1 )      
Net investment gains (losses)
    (26 )     68       (18 )     130  
                                 
Total
  $ 20     $ 67     $ 45     $ 128  
                                 
 
Fair Value Hedges
 
The Company designates and accounts for the following as fair value hedges when they have met the requirements of SFAS 133: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities to floating rate liabilities; and (iii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated investments and liabilities.
 
The Company recognized net investment gains (losses) representing the ineffective portion of all fair value hedges as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Changes in the fair value of derivatives
  $ (323 )   $ 11     $ 22     $ (2 )
Changes in the fair value of the items hedged
    313       (10 )     (27 )     4  
                                 
Net ineffectiveness of fair value hedging activities
  $ (10 )   $ 1     $ (5 )   $ 2  
                                 
 
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. There were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.


22


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Cash Flow Hedges
 
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of SFAS 133: (i) interest rate swaps to convert floating rate investments to fixed rate investments; (ii) interest rate swaps to convert floating rate liabilities to fixed rate liabilities; and (iii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments and liabilities.
 
For the three months and six months ended June 30, 2008 and 2007, the Company did not recognize any net investment gains (losses) which represented the ineffective portion of all cash flow hedges. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions did not occur on the anticipated date or in the additional time period permitted by SFAS 133. The net amounts reclassified into net investment gains (losses) for the three months and six months ended June 30, 2008 related to such discontinued cash flow hedges were losses of $3 million and $7 million, respectively, and for the three months and six months ended June 30, 2007, related to such discontinued cash flow hedges were losses of $0 and $3 million, respectively. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments, for the three months and six months ended June 30, 2008 and 2007.
 
The following table presents the components of other comprehensive income (loss), before income tax, related to cash flow hedges:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Other comprehensive income (loss) balance at the beginning of the period
  $ (361 )   $ (229 )   $ (270 )   $ (208 )
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges
    (11 )     (64 )     (46 )     (88 )
Amounts reclassified to net investment gains (losses)
    51       43       (7 )     42  
Amounts reclassified to net investment income
    3       3       5       8  
Amortization of transition adjustment
    1             1       (1 )
Amounts reclassified to other expenses
    (1 )     (1 )     (1 )     (1 )
                                 
Other comprehensive income (loss) balance at the end of the period
  $ (318 )   $ (248 )   $ (318 )   $ (248 )
                                 
 
At June 30, 2008, $10 million of the deferred net loss on derivatives accumulated in other comprehensive income (loss) is expected to be reclassified to earnings within the next 12 months.
 
Hedges of Net Investments in Foreign Operations
 
The Company uses forward exchange contracts, foreign currency swaps, options and non-derivative financial instruments to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on the forward exchange contracts based upon the change in forward rates. There was no ineffectiveness recorded for the three months and six months ended June 30, 2008 and 2007.
 
The Company’s consolidated statement of stockholders’ equity for the three months and six months ended June 30, 2008 includes losses of $12 million and $17 million, respectively, related to foreign currency contracts and non-derivative financial instruments used to hedge its net investments in foreign operations and for the three and six months ended June 30, 2007 includes losses of $85 million and $83 million, respectively, related to foreign currency contracts and non-derivative financial instruments used to hedge its net investments in foreign operations. At June 30, 2008 and December 31, 2007, the cumulative foreign currency translation loss recorded in accumulated other comprehensive income (loss) related to these hedges was $386 million and $369 million, respectively. When


23


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income (loss) are reclassified to the consolidated statements of income, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign operations.
 
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
 
The Company enters into the following derivatives that do not qualify for hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest rate swaps, purchased caps and floors, and interest rate futures to economically hedge its exposure to interest rates; (ii) foreign currency forwards, swaps and option contracts to economically hedge its exposure to adverse movements in exchange rates; (iii) credit default swaps to economically hedge exposure to adverse movements in credit; (iv) equity futures, equity index options, interest rate futures and equity variance swaps to economically hedge liabilities embedded in certain variable annuity products; (v) swap spread locks to economically hedge invested assets against the risk of changes in credit spreads; (vi) financial forwards to buy and sell securities; (vii) synthetic guaranteed interest contracts; (viii) credit default swaps and total rate of return swaps to synthetically create investments; (ix) basis swaps to better match the cash flows of assets and related liabilities; (x) credit default swaps held in relation to trading portfolios; (xi) swaptions to hedge interest rate risk; and (xii) inflation swaps to reduce risk generated from inflation-indexed liabilities.
 
The following table presents changes in fair value related to derivatives that do not qualify for hedge accounting:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Net investment gains (losses), excluding embedded derivatives
  $ (353 )   $ (311 )   $ (287 )   $ (484 )
Policyholder benefits and claims
    2       (15 )     59       (16 )
Net investment income (1)
    (37 )     (9 )     39       (9 )
                                 
Total
  $ (388 )   $ (335 )   $ (189 )   $ (509 )
                                 
 
 
(1) Changes in fair value related to economic hedges of equity method investments in joint ventures that do not qualify for hedge accounting and changes in fair value related to derivatives held in relation to trading portfolios.
 
Embedded Derivatives
 
The Company has certain embedded derivatives that are required to be separated from their host contracts and accounted for as derivatives. These host contracts principally include: variable annuities with guaranteed minimum withdrawal, guaranteed minimum accumulation and certain guaranteed minimum income riders; guaranteed investment contracts with equity or bond indexed crediting rates; assumed and retroceded reinsurance on equity indexed annuities and assumed and retroceded reinsurance written on a funds withheld basis.


24


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The following table presents the fair value of the Company’s embedded derivatives at:
 
                 
    June 30,
    December 31,
 
    2008     2007  
    (In millions)  
 
Net embedded derivatives within asset host contracts:
               
Ceded guaranteed minimum benefit riders
  $ 12     $ 6  
Ceded reinsurance on equity indexed annuities
    81       66  
Funds withheld on assumed reinsurance
    (245 )     (85 )
Other
    (16 )     (16 )
                 
Net embedded derivatives within asset host contracts
  $ (168 )   $ (29 )
                 
Net embedded derivatives within liability host contracts:
               
Direct guaranteed minimum benefit riders
  $ 456     $ 285  
Assumed reinsurance on equity indexed annuities
    574       534  
Other
    15       60  
                 
Net embedded derivatives within liability host contracts
  $ 1,045     $ 879  
                 
 
The following table presents changes in fair value related to embedded derivatives:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
          (In millions)        
 
Net investment gains (losses)
  $ 358     $ 106     $ (221 )   $ 159  
Interest credited to policyholder account balances
  $ (2 )   $ 34     $ (22 )   $ 25  
Other expenses
  $ (3 )   $ (4 )   $ 4     $ (3 )
Policyholder benefits and claims
  $ 1     $     $ 1     $  
 
Credit Risk
 
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company’s derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date.
 
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange-traded futures are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.
 
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of June 30, 2008 and December 31, 2007, the Company was obligated to return cash collateral under its control of $1.1 billion and $833 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. As of June 30, 2008 and December 31, 2007, the Company had also accepted collateral consisting of various securities with a fair market value of $658 million and $678 million, respectively, which are held in separate custodial


25


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
accounts. The Company is permitted by contract to sell or repledge this collateral, but as of June 30, 2008 and December 31, 2007, none of the collateral had been sold or repledged.
 
As of June 30, 2008 and December 31, 2007, the Company provided collateral of $284 million and $162 million, respectively, which is included in fixed maturity securities in the consolidated balance sheets. In addition, the Company has exchange-traded futures, which require the pledging of collateral. As of June 30, 2008 and December 31, 2007, the Company pledged collateral of $123 million and $167 million, respectively, which is included in fixed maturity securities. The counterparties are permitted by contract to sell or repledge this collateral. As of June 30, 2008 and December 31, 2007, the Company provided cash collateral of $76 million and $102 million, respectively, which is included in premiums and other receivables in the consolidated balance sheet.
 
5.   Closed Block
 
On April 7, 2000, (the “Demutualization Date”), MLIC converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance approving MLIC’s plan of reorganization, as amended (the “Plan”). On the Demutualization Date, MLIC established a closed block for the benefit of holders of certain individual life insurance policies of MLIC.


26


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Information regarding the closed block liabilities and assets designated to the closed block is as follows:
 
                 
    June 30,
    December 31,
 
    2008     2007  
    (In millions)  
 
Closed Block Liabilities
               
Future policy benefits
  $ 43,378     $ 43,362  
Other policyholder funds
    309       323  
Policyholder dividends payable
    749       709  
Policyholder dividend obligation
          789  
Payables for collateral under securities loaned and other transactions
    6,610       5,610  
Other liabilities
    606       290  
                 
Total closed block liabilities
    51,652       51,083  
                 
Assets Designated to the Closed Block
               
Investments:
               
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost:
               
$30,759 and $29,631, respectively)
    30,676       30,481  
Equity securities available-for-sale, at estimated fair value (cost: $1,493 and $1,555, respectively)
    1,642       1,875  
Mortgage loans on real estate
    7,382       7,472  
Policy loans
    4,307       4,290  
Real estate and real estate joint ventures held-for-investment
    321       297  
Short-term investments
    9       14  
Other invested assets
    954       829  
                 
Total investments
    45,291       45,258  
Cash and cash equivalents
    395       333  
Accrued investment income
    486       485  
Deferred income tax assets
    751       640  
Premiums and other receivables
    248       151  
                 
Total assets designated to the closed block
    47,171       46,867  
                 
Excess of closed block liabilities over assets designated to the closed block
    4,481       4,216  
                 
Amounts included in accumulated other comprehensive income:
               
Unrealized investment gains (losses), net of income tax of $25 and $424, respectively
    46       751  
Unrealized gains (losses) on derivative instruments, net of income tax benefit of ($19) and ($19), respectively
    (36 )     (33 )
Allocated to policyholder dividend obligation, net of income tax benefit of $0 and ($284), respectively
          (505 )
                 
Total amounts included in accumulated other comprehensive income
    10       213  
                 
Maximum future earnings to be recognized from closed block assets and liabilities
  $ 4,491     $ 4,429  
                 


27


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Information regarding the closed block policyholder dividend obligation is as follows:
 
                 
    Six Months Ended
    Year Ended
 
    June 30, 2008     December 31, 2007  
    (In millions)  
 
Balance at beginning of period
  $ 789     $ 1,063  
Change in unrealized investment and derivative gains (losses)
    (789 )     (274 )
                 
Balance at end of period
  $     $ 789  
                 
 
Information regarding the closed block revenues and expenses is as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 686     $ 707     $ 1,337     $ 1,383  
Net investment income and other revenues
    577       580       1,141       1,163  
Net investment gains (losses)
    (8 )     37       (73 )     50  
                                 
Total revenues
    1,255       1,324       2,405       2,596  
                                 
Expenses
                               
Policyholder benefits and claims
    844       864       1,647       1,672  
Policyholder dividends
    379       371       750       738  
Other expenses
    54       58       110       117  
                                 
Total expenses
    1,277       1,293       2,507       2,527  
                                 
Revenues, net of expenses before income tax
    (22 )     31       (102 )     69  
Provision (benefit) for income tax
    (9 )     11       (40 )     24  
                                 
Revenues, net of expenses and income tax
  $ (13 )   $ 20     $ (62 )   $ 45  
                                 
 
The change in the maximum future earnings of the closed block is as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Balance at end of period
  $ 4,491     $ 4,431     $ 4,491     $ 4,431  
Less:
                               
Cumulative effect of a change in accounting principle, net of income tax
                      (4 )
Balance at beginning of period
    4,478       4,451       4,429       4,480  
                                 
Change during period
  $ 13     $ (20 )   $ 62     $ (45 )
                                 
 
MLIC charges 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. MLIC also charges the closed block for expenses of maintaining the policies included in the closed block.


28


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
6.   Insurance
 
Insurance Liabilities
 
Insurance liabilities are as follows:
 
                                                 
    Future Policy Benefits     Policyholder Account Balances     Other Policyholder Funds  
    June 30,
    December 31,
    June 30,
    December 31,
    June 30,
    December 31,
 
    2008     2007     2008     2007     2008     2007  
    (In millions)  
 
Institutional
                                               
Group life
  $ 3,372     $ 3,326     $ 14,527     $ 13,997     $ 2,653     $ 2,364  
Retirement & savings
    38,134       37,947       56,068       51,586       51       213  
Non-medical health & other
    11,022       10,617       517       501       685       597  
Individual
                                               
Traditional life
    52,714       52,493                   1,438       1,480  
Universal & variable life
    1,067       985       15,142       14,898       1,628       1,572  
Annuities
    3,191       3,063       37,757       37,807       81       76  
Other
                2,568       2,410              
Auto & Home
    3,255       3,273                   60       51  
International
    10,174       9,826       5,645       4,961       1,464       1,296  
Reinsurance
    6,501       6,159       7,165       6,657       2,464       2,297  
Corporate & Other
    4,693       4,573       4,849       4,532       216       230  
                                                 
Total
  $ 134,123     $ 132,262     $ 144,238     $ 137,349     $ 10,740     $ 10,176  
                                                 
 
7.   Junior Subordinated Debentures
 
In April 2008, MetLife Capital Trust X, a VIE consolidated by the Company, issued exchangeable surplus trust securities (the “Trust Securities”) with a face amount of $750 million. The Trust Securities will be exchanged into a like amount of Holding Company junior subordinated debentures on April 8, 2038, the scheduled redemption date; mandatorily under certain circumstances; and at any time upon the Holding Company exercising its option to redeem the securities. The Trust Securities will be exchanged for junior subordinated debentures prior to repayment. The final maturity of the debentures is April 8, 2068. The Holding Company may cause the redemption of the Trust Securities or debentures (i) in whole or in part, at any time on or after April 8, 2033 at their principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to April 8, 2033 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price. Interest on the Trust Securities or debentures is payable semi-annually at a fixed rate of 9.25% up to, but not including, April 8, 2038, the scheduled redemption date. In the event the Trust Securities or debentures are not redeemed on or before the scheduled redemption date, interest will accrue at an annual rate of 3-month LIBOR plus a margin equal to 5.540%, payable quarterly in arrears. The Holding Company has the right to, and in certain circumstances the requirement to, defer interest payments on the Trust Securities or debentures for a period up to ten years. Interest compounds during such periods of deferral. If interest is deferred for more than five consecutive years, the Holding Company may be required to use proceeds from the sale of its common stock or warrants on common stock to satisfy its obligation. In connection with the issuance of the Trust Securities, the Holding Company entered into a replacement capital covenant (“RCC”). As a part of the RCC, the Holding Company agreed that it will not repay, redeem, or purchase the debentures on or before April 8, 2058, unless, subject to certain limitations, it has received proceeds from the sale of specified capital securities. The RCC will terminate upon the occurrence of certain events, including an acceleration of the debentures due to the occurrence of an event of default. The RCC is not intended for the benefit of holders of the


29


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
debentures and may not be enforced by them. The RCC is for the benefit of holders of one or more other designated series of its indebtedness (which will initially be its 5.70% senior notes due June 15, 2035). The Holding Company also entered into a replacement capital obligation which will commence in 2038 and under which the Holding Company must use reasonable commercial efforts to raise replacement capital through the issuance of certain qualifying capital securities.
 
8.   Contingencies, Commitments and Guarantees
 
Contingencies
 
Litigation
 
The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the United States permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrate to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value. Thus, unless stated below, the specific monetary relief sought is not noted.
 
Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be inherently impossible to ascertain with any degree of certainty. Inherent uncertainties can include how fact finders will view individually and in their totality documentary evidence, the credibility and effectiveness of witnesses’ testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
 
On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and contingencies to be reflected in the Company’s consolidated financial statements. The review includes senior legal and financial personnel. Unless stated below, estimates of possible losses or ranges of loss for particular matters cannot in the ordinary course be made with a reasonable degree of certainty. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of June 30, 2008.
 
Demutualization Actions
 
Several lawsuits were brought in 2000 challenging the fairness of the Plan and the adequacy and accuracy of MLIC’s disclosure to policyholders regarding the Plan. The actions discussed below name as defendants some or all of MLIC, the Holding Company, and individual directors. MLIC, the Holding Company, and the individual directors believe they have meritorious defenses to the plaintiffs’ claims and are contesting vigorously all of the plaintiffs’ claims in these actions.
 
Fiala, et al. v. Metropolitan Life Ins. Co., et al. (Sup. Ct., N.Y. County, filed March 17, 2000). The plaintiffs in the consolidated state court class actions seek compensatory relief and punitive damages against MLIC, the Holding Company, and individual directors. On June 5, 2008, the Appellate Division affirmed the order of the trial court certifying a litigation class of present and former policyholders on plaintiffs’ claim that defendants violated section 7312 of the New York Insurance Law, but denying plaintiffs’ motion to certify a litigation class with respect


30


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
to a common law fraud claim. The trial court has directed various forms of class notice. Plaintiffs have begun distributing various forms of class notice. In July 2008, defendants served their motion for summary judgment.
 
In re MetLife Demutualization Litig. (E.D.N.Y., filed April 18, 2000). In this class action against MLIC and the Holding Company, plaintiffs served a second consolidated amended complaint in 2004. Plaintiffs assert violations of the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the Plan, claiming that the Policyholder Information Booklets failed to disclose certain material facts and contained certain material misstatements. They seek rescission and compensatory damages. By orders dated July 19, 2005 and August 29, 2006, the federal trial court certified a litigation class of present and former policyholders. The court has not yet directed the manner and form of class notice. MLIC and the Holding Company have moved for summary judgment, and plaintiffs have moved for partial summary judgment.
 
Asbestos-Related Claims
 
MLIC is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages. MLIC has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has MLIC issued liability or workers’ compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. The lawsuits principally have focused on allegations with respect to certain research, publication and other activities of one or more of MLIC’s employees during the period from the 1920’s through approximately the 1950’s and allege that MLIC 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. MLIC believes that it should not have legal liability in these cases. The outcome of most asbestos litigation matters, however, is uncertain and can be impacted by numerous variables, including differences in legal rulings in various jurisdictions, the nature of the alleged injury, and factors unrelated to the ultimate legal merit of the claims asserted against MLIC. MLIC employs a number of resolution strategies to manage its asbestos loss exposure, including seeking resolution of pending litigation by judicial rulings and settling litigation under appropriate circumstances.
 
Claims asserted against MLIC have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. MLIC’s defenses (beyond denial of certain factual allegations) include that: (i) MLIC owed no duty to the plaintiffs — it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs did not rely on any actions of MLIC; (iii) MLIC’s conduct was not the cause of the plaintiffs’ injuries; (iv) plaintiffs’ exposure occurred after the dangers of asbestos were known; and (v) the applicable time with respect to filing suit has expired. During the course of the litigation, certain trial courts have granted motions dismissing claims against MLIC, while other trial courts have denied MLIC’s motions to dismiss. There can be no assurance that MLIC will receive favorable decisions on motions in the future. While most cases brought to date have settled, MLIC intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
 
As reported in the 2007 Annual Report, MLIC received approximately 7,200 asbestos-related claims in 2007. During the six months ended June 30, 2008 and 2007, MLIC received approximately 2,900 and 2,600 new asbestos-related claims, respectively. See Note 16 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for historical information concerning asbestos claims and MLIC’s increase in its recorded liability at December 31, 2002. The number of asbestos cases that may be brought or the aggregate amount of any liability that MLIC may ultimately incur is uncertain.
 
The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. MLIC’s recorded asbestos liability is based on its estimation of the following elements, as informed by the facts presently known to it, its understanding of current law, and its past experiences: (i) the probable and reasonably estimable liability for asbestos claims already asserted against MLIC, including claims settled but not yet paid; (ii) the probable and reasonably estimable liability


31


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
for asbestos claims not yet asserted against MLIC, but which MLIC believes are reasonably probable of assertion; and (iii) the legal defense costs associated with the foregoing claims. Significant assumptions underlying MLIC’s analysis of the adequacy of its recorded liability with respect to asbestos litigation include: (i) the number of future claims; (ii) the cost to resolve claims; and (iii) the cost to defend claims.
 
MLIC reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants, and the jurisdictions in which claims are pending. MLIC regularly reevaluates its exposure from asbestos litigation and has updated its liability analysis for asbestos-related claims through June 30, 2008.
 
The ability of MLIC to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict with any certainty the numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against MLIC when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts.
 
The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company’s judgment, there is a future point after which losses cease to be probable and reasonably estimable. It is reasonably possible that the Company’s total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on the Company’s financial position.
 
During 1998, MLIC paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1.5 billion, which is in excess of a $400 million self-insured retention. The Company’s initial option to commute the excess insurance policies for asbestos-related claims arises at the end of 2008. Thereafter, the Company will have a commutation right every five years. The excess insurance policies for asbestos-related claims are also subject to annual and per claim sublimits. Amounts exceeding the sublimits during 2007, 2006 and 2005 were approximately $16 million, $8 million and $0, respectively. The Company continues to study per claim averages, and there can be no assurance as to the number and cost of claims resolved in the future, including related defense costs, and the applicability of the sublimits to these costs. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by MLIC in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company’s operating cash flows for the year in which they are paid, 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 provide for payments to MLIC at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to MLIC if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor’s (“S&P”) 500 Index and the Lehman Brothers Aggregate Bond Index. A claim with respect to the prior year was made under the excess insurance policies in each year from 2003 through 2008 for the amounts paid with respect to asbestos litigation in excess of the retention. As the performance of the indices impacts the return in the reference


32


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
fund, it is possible that loss reimbursements to the Company and the recoverable amount with respect to later periods may be less than the amount of the recorded losses. Foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. If at some point in the future, the Company believes the liability for probable and reasonably estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The foregone loss reimbursements were approximately $62.2 million with respect to claims for the period of 2002 through 2007 and are estimated, as of June 30, 2008, to be approximately $100.2 million in the aggregate, including future years.
 
Sales Practices Claims
 
Over the past several years, MLIC; New England Mutual Life Insurance Company, New England Life Insurance Company and New England Securities Corporation (collectively “New England”); General American Life Insurance Company (“GALIC”); Walnut Street Securities, Inc. (“Walnut Street Securities”) and MetLife Securities, Inc. (“MSI”) have faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products.
 
As of June 30, 2008, there were approximately 145 sales practices litigation matters pending against the Company. The Company continues to vigorously defend against the claims in these matters. Some sales practices claims have been resolved through settlement. Other sales practices claims have been won by dispositive motions or have gone to 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, mutual funds or other products may be commenced in the future.
 
Two putative class action lawsuits involving sales practices claims are pending against MLIC in Canada. In Jacynthe Evoy-Larouche v. Metropolitan Life Ins. Co. (Que. Super. Ct., filed March 1998), plaintiff alleges misrepresentations regarding dividends and future payments for life insurance policies and seeks unspecified damages. In Ace Quan v. Metropolitan Life Ins. Co. (Ont. Gen. Div., filed April 1997), plaintiff alleges breach of contract and negligent misrepresentations relating to, among other things, life insurance premium payments and seeks damages, including punitive damages.
 
Regulatory authorities in a small number of states have had investigations or inquiries relating to MLIC’s, New England’s, GALIC’s, MSI’s or Walnut Street Securities’ sales of individual life insurance policies or annuities or other products. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against MLIC, New England, GALIC, MSI and Walnut Street Securities.
 
Property and Casualty Actions
 
Katrina-Related Litigation.  There are a number of lawsuits, including a few putative class actions and “mass” actions, pending in Louisiana and Mississippi against Metropolitan Property and Casualty Insurance Company relating to Hurricane Katrina. The lawsuits include claims by policyholders for coverage for damages stemming from Hurricane Katrina, including for damages resulting from flooding or storm surge. The deadline for filing actions in Louisiana has expired. It is reasonably possible that additional actions will be filed in other states. The Company intends to continue to defend vigorously against these matters, although appropriate matters may be resolved as part of the ordinary claims adjustment process.
 
Shipley v. St. Paul Fire and Marine Ins. Co. and Metropolitan Property and Casualty Ins. Co. (Ill. Cir. Ct., Madison County, filed February 26 and July 2, 2003).  Two putative nationwide class actions have been filed


33


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
against Metropolitan Property and Casualty Insurance Company in Illinois. One suit claims breach of contract and fraud due to the alleged underpayment of medical claims arising from the use of a purportedly biased provider fee pricing system. A motion for class certification has been filed and briefed and is scheduled to be heard in August 2008. The second suit currently alleges breach of contract arising from the alleged use of preferred provider organizations to reduce medical provider fees covered by the medical claims portion of the insurance policy. A motion for class certification has been filed and briefed. A third putative nationwide class action relating to the payment of medical providers, Innovative Physical Therapy, Inc. v. MetLife Auto & Home, et ano (D. N.J., filed November 12, 2007) has been filed against Metropolitan Property and Casualty Insurance Company in federal court in New Jersey. A motion to dismiss has been filed and briefed. The Company is vigorously defending against the claims in these matters.
 
Regulatory Matters
 
The Company receives and responds to subpoenas or other inquiries from state regulators, including state insurance commissioners; state attorneys general or other state governmental authorities; federal regulators, including the SEC; federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority seeking a broad range of information. The issues involved in information requests and regulatory matters vary widely. Certain regulators have requested information and documents regarding contingent commission payments to brokers, the Company’s awareness of any “sham” bids for business, bids and quotes that the Company submitted to potential customers, incentive agreements entered into with brokers, or compensation paid to intermediaries. Regulators also have requested information relating to market timing and late trading of mutual funds and variable insurance products and, generally, the marketing of products. The Company has received a subpoena from the Office of the U.S. Attorney for the Southern District of California asking for documents regarding the insurance broker Universal Life Resources. The Company has been cooperating fully with these inquiries.
 
In 2005, MSI received a notice from the Illinois Department of Securities asserting possible violations of the Illinois Securities Act in connection with sales of a former affiliate’s mutual funds. A response has been submitted and in January 2008, MSI received notice of the commencement of an administrative action by the Illinois Department of Securities. MSI has filed a motion to dismiss the action. MSI intends to vigorously defend against the claims in this matter.
 
In June 2008, the Environmental Protection Agency issued a Notice of Violation (“NOV”) regarding the operations of EME Homer City Generation L.P. (“EME Homer”), an electrical generation facility. The NOV alleges, among other things, that EME Homer is in violation of certain federal and state Clean Air Act requirements. Homer City 0L6 LLC, an entity owned by MLIC, is a passive investor with a minority interest in the electrical generation facility which is solely operated by the lessee, EME Homer. EME Homer has been notified of its obligation to indemnify Homer City 0L6 LLC and MLIC for any claims resulting from the NOV.
 
Other Litigation
 
In Re Ins. Brokerage Antitrust Litig. (D. N.J., filed February 24, 2005).  In this multi-district proceeding, plaintiffs filed a class action complaint consolidating claims from several separate actions that had been filed in or transferred to the District of New Jersey in 2004 and 2005. The consolidated complaint alleged that the Holding Company, MLIC, several non-affiliated insurance companies and several insurance brokers violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), the Employee Retirement Income Security Act of 1974 (“ERISA”), and antitrust laws and committed other misconduct in the context of providing insurance to employee benefit plans and to persons who participate in such employee benefit plans. In August and September 2007, the court issued orders granting defendants’ motions to dismiss with prejudice the federal antitrust and the RICO claims. In January 2008, the court issued an order granting defendants’ summary judgment motion on the ERISA claims, and in February 2008, the court dismissed the remaining state law claims on jurisdictional grounds.


34


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Plaintiffs have filed a notice of appeal of the court’s decisions. A putative class action alleging that the Holding Company and other non-affiliated defendants violated state laws was transferred to the District of New Jersey but was not consolidated with other related actions. Plaintiffs’ motion to remand this action to state court in Florida is pending.
 
The American Dental Association, et al. v. MetLife Inc., et al. (S.D. Fla., filed May 19, 2003).  The American Dental Association and three individual providers have sued the Holding Company, MLIC and other non-affiliated insurance companies in a putative class action lawsuit. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. The district court granted in part and denied in part the Company’s motion to dismiss. The plaintiffs have filed an amended complaint, and the Company has filed another motion to dismiss.
 
Thomas, et al. v. Metropolitan Life Ins. Co., et al. (W.D. Okla., filed January 31, 2007).  A putative class action complaint was filed against MLIC and MSI. Plaintiffs assert legal theories of violations of the federal securities laws and violations of state laws with respect to the sale of certain proprietary products by the Company’s agency distribution group. Plaintiffs seek rescission, compensatory damages, interest, punitive damages and attorneys’ fees and expenses. In January and May 2008, the court issued orders granting the defendants’ motion to dismiss in part, dismissing all of plaintiffs’ claims except for claims under the Investment Advisers Act. The Company is vigorously defending against the remaining claims in this matter.
 
MLIC also has been named as a defendant in a number of welding and mixed dust lawsuits filed in various state and federal courts. The Company is continuing to vigorously defend against these claims.
 
Summary
 
Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
 
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted previously in connection with specific matters. In some of the matters referred to previously, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
 
Commitments
 
Commitments to Fund Partnership Investments
 
The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $4.8 billion and $4.3 billion at June 30, 2008 and December 31, 2007, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years.


35


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Mortgage Loan Commitments
 
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.8 billion and $4.0 billion at June 30, 2008 and December 31, 2007, respectively.
 
Commitments to Fund Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
 
The Company commits to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $1.1 billion and $1.2 billion at June 30, 2008 and December 31, 2007, respectively.
 
Guarantees
 
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $800 million, with a cumulative maximum of $2.4 billion, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future.
 
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
 
The Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future.
 
During the six months ended June 30, 2008, the Company recorded $7 million of additional liabilities for guarantees related to certain investment transactions. The term for these liabilities varies, with a maximum of 18 years. The maximum potential amount of future payments the Company could be required to pay under these guarantees is $225 million. The Company’s recorded liabilities were $13 million and $6 million at June 30, 2008 and December 31, 2007, respectively, for indemnities, guarantees and commitments.
 
In connection with synthetically created investment transactions, the Company writes credit default swap obligations that generally require payment of principal outstanding due in exchange for the referenced credit obligation. If a credit event, as defined by the contract, occurs the Company’s maximum amount at risk, assuming the value of the referenced credits becomes worthless, was $1.9 billion at June 30, 2008. The credit default swaps expire at various times during the next eight years.


36


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
9.   Employee Benefit Plans
 
Pension and Other Postretirement Benefit Plans
 
Certain subsidiaries of the Holding Company (the “Subsidiaries”) sponsor and/or administer various qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits based upon years of credited service and either final average or career average earnings. As of June 30, 2008, virtually all of the Subsidiaries’ obligations have been calculated using the traditional formula. The cash balance formula utilizes hypothetical or notional accounts, which credit participants with benefits equal to a percentage of eligible pay, as well as earnings credits, determined annually based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. The non-qualified pension plans provide supplemental benefits, in excess of amounts permitted by governmental agencies, to certain executive level employees.
 
The Subsidiaries also provide certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Employees of the Subsidiaries who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for one of the Subsidiaries, may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total cost of postretirement medical benefits. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits.
 
The Subsidiaries have issued group annuity and life insurance contracts supporting approximately 98% of all pension and postretirement employee benefit plan assets sponsored by the Subsidiaries.
 
A December 31 measurement date is used for all of the Subsidiaries’ defined benefit pension and other postretirement benefit plans.
 
The components of net periodic benefit cost were as follows:
 
                                                                 
    Pension Benefits     Other Postretirement Benefits  
    Three Months Ended
    Six Months Ended
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,     June 30,     June 30,  
    2008     2007     2008     2007     2008     2007     2008     2007  
    (In millions)  
 
Service cost
  $ 41     $ 42     $ 84     $ 83     $ 5     $ 7     $ 11     $ 14  
Interest cost
    95       88       192       178       26       26       52       52  
Expected return on plan assets
    (131 )     (126 )     (264 )     (254 )     (21 )     (22 )     (44 )     (44 )
Amortization of prior service cost (credit)
    4       3       8       6       (9 )     (9 )     (18 )     (18 )
Amortization of net actuarial (gains) losses
    6       17       11       34                          
                                                 
Net periodic benefit cost
  $ 15     $ 24     $ 31     $ 47     $ 1     $ 2     $ 1     $ 4  
                                                 


37


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The components of net periodic benefit cost amortized from accumulated other comprehensive income (loss) were as follows:
 
                                                                 
    Pension Benefits     Other Postretirement Benefits  
    Three Months Ended
    Six Months Ended
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,     June 30,     June 30,  
    2008     2007     2008     2007     2008     2007     2008     2007  
    (In millions)  
 
Amortization of prior service cost (credit)
  $ 4     $ 3     $ 8     $ 6     $ (9 )   $ (9 )   $ (18 )   $ (18 )
Amortization of net actuarial (gains) losses
    6       17       11       34                          
                                                                 
Subtotal
    10       20       19       40       (9 )     (9 )     (18 )     (18 )
Deferred income tax
    (3 )     (7 )     (7 )     (15 )     3       3       6       6  
                                                                 
Components of net periodic benefit cost amortized from accumulated other comprehensive income (loss), net of income tax
  $ 7     $ 13     $ 12     $ 25     $ (6 )   $ (6 )   $ (12 )   $ (12 )
                                                                 
 
As disclosed in Note 17 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report, the Company expected to make, though no contributions were required to be made, discretionary contributions of up to $150 million to the Subsidiaries’ qualified pension plans during 2008. The Company is evaluating making discretionary contributions of up to $300 million to the Subsidiaries’ qualified pension plans during 2008. As of June 30, 2008, no discretionary contributions have yet been made to those plans. The Company funds benefit payments for its non-qualified pension and other postretirement plans as due through its general assets.
 
10.   Equity
 
Preferred Stock
 
Information on the declaration, record and payment dates, as well as per share and aggregate dividend amounts, for the Company’s Floating Rate Non-Cumulative Preferred Stock, Series A and 6.50% Non-Cumulative Preferred Stock, Series B is as follows for the six months ended June 30, 2008 and 2007:
 
                                         
            Dividend  
            Series A
    Series A
    Series B
    Series B
 
Declaration Date   Record Date   Payment Date   Per Share     Aggregate     Per Share     Aggregate  
            (In millions, except per share data)  
 
May 15, 2008
  May 31, 2008   June 16, 2008   $ 0.2555555     $ 7     $ 0.4062500     $ 24  
March 5, 2008
  February 29, 2008   March 17, 2008   $ 0.3785745       9     $ 0.4062500       24  
                                         
                    $ 16             $ 48  
                                         
May 15, 2007
  May 31, 2007   June 15, 2007   $ 0.4060062     $ 10     $ 0.4062500     $ 24  
March 5, 2007
  February 28, 2007   March 15, 2007   $ 0.3975000       10     $ 0.4062500       24  
                                         
                    $ 20             $ 48  
                                         
 
See Note 18 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for further information.


38


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Common Stock
 
At January 1, 2007, the Company had $216 million remaining under its October 2004 stock repurchase program authorization. In February 2007, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program which began after the completion of the $1 billion common stock repurchase program authorized in October 2004. In September 2007, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program which began after the completion of the February 2007 program. In January 2008, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program, which began after the completion of the September 2007 program. In April 2008, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program, which will begin after the completion of the January 2008 program. Under these authorizations, the Company may purchase its common stock from the MetLife Policyholder Trust, in the open market (including pursuant to the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act) and in privately negotiated transactions.
 
In February 2008, the Company entered into an accelerated common stock repurchase agreement with a major bank. Under the agreement, the Company paid the bank $711 million in cash and the bank delivered an initial amount of 11.2 million shares of the Company’s outstanding common stock that the bank borrowed from third parties. In May 2008, the bank delivered 0.9 million additional shares of the Company’s common stock to the Company resulting in a total of 12.1 million shares being repurchased under the agreement. The Company recorded the shares repurchased as treasury stock.
 
In December 2007, the Company entered into an accelerated common stock repurchase agreement with a major bank. Under the terms of the agreement, the Company paid the bank $450 million in cash in January 2008 in exchange for 6.6 million shares of the Company’s outstanding common stock that the bank borrowed from third parties. Also in January 2008, the bank delivered 1.1 million additional shares of the Company’s common stock to the Company resulting in a total of 7.7 million shares being repurchased under the agreement. At December 31, 2007, the Company recorded the obligation to pay $450 million to the bank as a reduction of additional paid-in capital. Upon settlement with the bank, the Company increased additional paid-in capital and treasury stock.
 
In November 2007, the Company repurchased 11.6 million shares of its outstanding common stock at an initial cost of $750 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the stock sold to the Company from third parties and purchased the common stock in the open market to return to such third parties. Also, in November 2007, the Company received a cash adjustment of $19 million based on the trading prices of the common stock during the repurchase period, for a final purchase price of $731 million. The Company recorded the shares initially repurchased as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock.
 
In March 2007, the Company repurchased 11.9 million shares of its outstanding common stock at an aggregate cost of $750 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the common stock sold to the Company from third parties and purchased common stock in the open market to return to such third parties. In June 2007, the Company paid a cash adjustment of $17 million for a final purchase price of $767 million. The Company recorded the shares initially repurchased as treasury stock and recorded the amount paid as an adjustment to the cost of the treasury stock.
 
In December 2006, the Company repurchased 4.0 million shares of its outstanding common stock at an aggregate cost of $232 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the common stock sold to the Company from third parties and purchased the common stock in the open market to return to such third parties. In February 2007, the Company paid a cash adjustment of $8 million for a final purchase price of $240 million. The Company recorded the shares initially repurchased as treasury stock and recorded the amount paid as an adjustment to the cost of the treasury stock.


39


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The Company repurchased 1.5 million shares through open market purchases for $89 million during the six months ended June 30, 2008. The Company also repurchased 3.1 million shares through open market purchases for $200 million during the year ended December 31, 2007.
 
The Company repurchased 21.3 million and 11.9 million shares of its common stock for $1.3 billion and $767 million during the six months ended June 30, 2008 and 2007, respectively. During the six months ended June 30, 2008 and 2007, 1.8 million and 2.7 million shares of common stock were issued from treasury stock for $93 million and $118 million, respectively. At June 30, 2008, an aggregate of $1.3 billion remains on the Company’s January and April 2008 common stock repurchase programs.
 
Stock-Based Compensation Plans
 
Description of Plans
 
The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the “Stock Incentive Plan”), authorized the granting of awards in the form of options to buy shares of the Company’s common stock (“Stock Options”) that either qualify as incentive Stock Options under Section 422A of the Internal Revenue Code or are non-qualified. The MetLife, Inc. 2000 Directors Stock Plan, as amended (the “Directors Stock Plan”), authorized the granting of awards in the form of the Company’s common stock, non-qualified Stock Options, or a combination of the foregoing to outside Directors of the Company. Under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan, as amended (the “2005 Stock Plan”), awards granted may be in the form of Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Shares or Performance Share Units, Cash-Based Awards, and Stock-Based Awards (each as defined in the 2005 Stock Plan). Under the MetLife, Inc. 2005 Non-Management Director Stock Compensation Plan (the “2005 Directors Stock Plan”), awards granted may be in the form of non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, or Stock-Based Awards (each as defined in the 2005 Directors Stock Plan). The Stock Incentive Plan, Directors Stock Plan, 2005 Stock Plan and the 2005 Directors Stock Plan, are hereinafter collectively referred to as the “Incentive Plans.”
 
As of June 30, 2008, the aggregate number of shares remaining available for issuance pursuant to the 2005 Stock Plan and the 2005 Directors Stock Plan was 55,712,969 and 1,894,876, respectively.
 
Compensation expense of $22 million and $75 million, and income tax benefits of $7 million and $26 million, related to the Incentive Plans was recognized for the three months and six months ended June 30, 2008, respectively. Compensation expense of $35 million and $94 million, and income tax benefits of $12 million and $33 million, related to the Incentive Plans was recognized for the three months and six months ended June 30, 2007, respectively. Compensation expense is principally related to the issuance of Stock Options and Performance Shares. The majority of awards granted by the Company are made in the first quarter of each year. As a result of the Company’s policy of recognizing stock-based compensation over the shorter of the stated requisite service period or period until attainment of retirement eligibility, a greater proportion of the aggregate fair value for awards granted on or after January 1, 2006 is recognized immediately on the grant date.
 
Stock Options
 
All Stock Options granted had an exercise price equal to the closing price of the Company’s common stock as reported on the New York Stock Exchange on the date of grant, and have a maximum term of ten years. Certain Stock Options granted under the Stock Incentive Plan and the 2005 Stock Plan have or will become exercisable over a three year period commencing with the date of grant, while other Stock Options have or will become exercisable three years after the date of grant. Stock Options issued under the Directors Stock Plan were exercisable immediately. The date at which a Stock Option issued under the 2005 Directors Stock Plan becomes exercisable is determined at the time such Stock Option is granted.


40


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
During the six months ended June 30, 2008, the Company granted 3,258,775 Stock Option awards with a weighted average exercise price of $60.50 for which the total fair value on the date of grant was $58 million. The number of Stock Options outstanding as of June 30, 2008 was 26,564,420 with a weighted average exercise price of $41.57.
 
Compensation expense of $10 million and $31 million related to Stock Options was recognized for the three months and six months ended June 30, 2008, respectively, and $10 million and $34 million related to Stock Options was recognized for the three months and six months ended June 30, 2007, respectively.
 
As of June 30, 2008, there was $59 million of total unrecognized compensation costs related to Stock Options. It is expected that these costs will be recognized over a weighted average period of 2.09 years.
 
Performance Shares
 
Beginning in 2005, certain members of management were awarded Performance Shares under (and as defined in) the 2005 Stock Plan. Participants are awarded an initial target number of Performance Shares with the final number of Performance Shares payable being determined by the product of the initial target multiplied by a factor of 0.0 to 2.0. The factor applied is based on measurements of the Company’s performance with respect to: (i) the change in annual net operating earnings per share, as defined; and (ii) the proportionate total shareholder return, as defined, with reference to the three-year performance period relative to other companies in the S&P Insurance Index with reference to the same three-year period. Performance Share awards will normally vest in their entirety at the end of the three-year performance period (subject to certain contingencies) and will be payable entirely in shares of the Company’s common stock.
 
During the six months ended June 30, 2008, the Company granted 926,225 Performance Share awards for which the total fair value on the date of grant was $54 million. The number of Performance Shares outstanding as of June 30, 2008 was 2,605,600 with a weighted average fair value of $55.94. These amounts represent aggregate initial target awards and do not reflect potential increases or decreases resulting from the final performance factor to be determined following the end of the respective performance period. The three-year performance period associated with the Performance Shares awarded for 2005 was completed effective December 31, 2007. The final performance factor applied to the 968,425 Performance Shares associated with the 2005 grant outstanding as of December 31, 2007 were settled in the amount of 1,936,850 shares of the Company’s common stock on April 30, 2008.
 
Compensation expense of $12 million and $44 million related to Performance Shares was recognized for the three months and six months ended June 30, 2008, respectively, and $25 million and $60 million related to Performance Shares was recognized for the three months and six months ended June 30, 2007, respectively.
 
As of June 30, 2008, there was $83 million of total unrecognized compensation costs related to Performance Share awards. It is expected that these costs will be recognized over a weighted average period of 1.96 years.


41


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
Comprehensive Income (Loss)
 
The components of comprehensive income (loss) are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Net income
  $ 946     $ 1,163     $ 1,594     $ 2,180  
Other comprehensive income (loss):
                               
Unrealized gains (losses) on derivative instruments, net of income tax
    27       (13 )     (33 )     (27 )
Unrealized investment gains (losses), net of related offsets and income tax
    (1,436 )     (1,767 )     (3,624 )     (1,502 )
Foreign currency translation adjustments, net of income tax
    (73 )     79       80       106  
Defined benefit plans adjustment, net of income tax
    1       7             13  
                                 
Other comprehensive income (loss):
    (1,481 )     (1,694 )     (3,577 )     (1,410 )
                                 
Comprehensive income (loss)
  $ (535 )   $ (531 )   $ (1,983 )   $ 770  
                                 
 
11.   Other Expenses
 
Information on other expenses is as follows:
 
                                         
    Three Months Ended
    Six Months Ended
       
    June 30,     June 30,        
    2008     2007     2008     2007        
    (In millions)  
 
Compensation
  $ 899     $ 898     $ 1,751     $ 1,764          
Commissions
    1,117       987       2,182       1,912          
Interest and debt issue costs
    298       267       617       519          
Amortization of DAC and VOBA
    641       699       1,056       1,479          
Capitalization of DAC
    (1,009 )     (944 )     (1,820 )     (1,795 )        
Rent, net of sublease income
    93       77       183       151          
Minority interest
    81       53       102       137          
Insurance tax
    196       182       387       363          
Other
    647       615       1,181       1,200          
                                         
Total other expenses
  $ 2,963     $ 2,834     $ 5,639     $ 5,730          
                                         


42


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
12.   Earnings Per Common Share
 
The following table presents the weighted average shares used in calculating basic earnings per common share and those used in calculating diluted earnings per common share for each income category presented below:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions, except share and per share data)  
 
Weighted average common stock outstanding
for basic earnings per common share
    712,837,796       744,491,940       716,011,791       748,444,029  
Incremental common shares from assumed:
                               
Stock purchase contracts underlying common equity units
    4,334,366       7,493,935       3,966,168       6,733,685  
Exercise or issuance of stock-based awards
    9,362,352       11,570,435       8,874,825       10,852,822  
                                 
Weighted average common stock outstanding
for diluted earnings per common share
    726,534,514       763,556,310       728,852,784       766,030,536  
                                 
Earnings per common share:
                               
Income from continuing operations
  $ 945     $ 1,155     $ 1,594     $ 2,181  
Preferred stock dividends
    31       34       64       68  
                                 
Income from continuing operations available to common shareholders
  $ 914     $ 1,121     $ 1,530     $ 2,113  
                                 
Basic
  $ 1.28     $ 1.51     $ 2.14     $ 2.82  
                                 
Diluted
  $ 1.26     $ 1.47     $ 2.10     $ 2.76  
                                 
Net income
  $ 946     $ 1,163     $ 1,594     $ 2,180  
Preferred stock dividends
    31       34       64       68  
                                 
Net income available to common shareholders
  $ 915     $ 1,129     $ 1,530     $ 2,112  
                                 
Basic
  $ 1.28     $ 1.52     $ 2.14     $ 2.82  
                                 
Diluted
  $ 1.26     $ 1.48     $ 2.10     $ 2.76  
                                 
 
The Company distributed and sold 82.8 million 6.375% common equity units for $2,070 million in proceeds in a registered public offering on June 21, 2005. These common equity units include stock purchase contracts issued by the Company. The stock purchase contracts are reflected in diluted earnings per common share using the treasury stock method, and are dilutive when the average closing price of the Company’s common stock for each of the 20 trading days before the close of the accounting period is greater than or equal to the threshold appreciation price of $53.10. During the periods ended June 30, 2008 and 2007, the average closing price for each of the 20 trading days before June 30, 2008 and 2007, was greater than the threshold appreciation price. Accordingly, the stock purchase contracts were included in diluted earnings per common share. See Note 13 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for a description of the common equity units.


43


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
13.   Business Segment Information
 
The Company is a leading provider of insurance and other financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. The Company’s business is divided into five operating segments: Institutional, Individual, Auto & Home, International and Reinsurance, as well as Corporate & Other. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements.
 
Institutional offers a broad range of group insurance and retirement & 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. Individual offers a wide variety of protection and asset accumulation products, including life insurance, annuities and mutual funds. Auto & Home provides personal lines property and casualty insurance, including private passenger automobile, homeowners and personal excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement & savings products to both individuals and groups. Through the Company’s majority-owned subsidiary, RGA, the Reinsurance segment provides reinsurance of life and annuity policies in North America and various international markets. Additionally, reinsurance of critical illness policies is provided in select international markets. As described more fully in Note 2, the Company and RGA have entered into an agreement to execute a tax-free split-off transaction to be effectuated through an exchange offer. As RGA represents the entirety of the Reinsurance segment, a successful exchange offer would eliminate this operating segment.
 
Corporate & Other contains the excess capital not allocated to the business segments, various start-up entities, including MetLife Bank and run-off entities, as well as interest expense related to the majority of the Company’s outstanding debt and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of all intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings, as well as intersegment transactions. Additionally, the Company’s asset management business, including amounts reported as discontinued operations, is included in the results of operations for Corporate & Other. See Note 14 for disclosures regarding discontinued operations, including real estate.
 
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in MetLife’s businesses. As a part of the economic capital process, a portion of net investment income is credited to the segments based on the level of allocated equity.
 
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the three months and six months ended June 30, 2008 and 2007. The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains (losses) from intercompany sales, which are eliminated in consolidation. The Company allocates equity to each segment based upon the economic capital model that allows the Company to effectively manage its capital. The Company evaluates the performance of each segment based upon net income, excluding net investment gains (losses), net of income tax, adjustments related to net investment gains (losses), net of income tax, the impact from the cumulative effect of changes in accounting, net of income tax and discontinued operations, other than discontinued real estate, net of income tax, less preferred stock dividends. The Company allocates certain non-recurring items, such as expenses associated with certain legal proceedings, to Corporate & Other.


44


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
                                                       
                    Auto &
          Corporate &
       
For the Three Months Ended June 30, 2008   Institutional   Individual     International     Home     Reinsurance     Other     Total  
    (In millions)  
 
Statement of Income:
                                                     
Premiums
  $ 3,597   $ 1,071     $ 920     $ 743     $ 1,359     $ 11     $ 7,701  
Universal life and investment-type product policy fees
    210     917       294                         1,421  
Net investment income
    1,972     1,702       356       50       246       258       4,584  
Other revenues
    172     155       6       9       23       6       371  
Net investment gains (losses)
    98     (260 )     (136 )     (13 )     (6 )     (45 )     (362 )
Policyholder benefits and claims
    4,016     1,409       620       539       1,117       14       7,715  
Interest credited to policyholder account balances
    613     500       89             63             1,265  
Policyholder dividends
        442       2       2                   446  
Other expenses
    593     939       471       203       356       401       2,963  
                                                       
Income from continuing operations before provision for income tax
    827     295       258       45       86       (185 )     1,326  
Provision for income tax
    279     96       85       2       31       (112 )     381  
                                                       
Income from continuing operations
    548     199       173       43       55       (73 )     945  
Income from discontinued operations, net of income tax
    1                                   1  
                                                       
Net income
  $ 549   $ 199     $ 173     $ 43     $ 55     $ (73 )   $ 946  
                                                       
 
                                                       
                      Auto &
        Corporate &
       
For the Three Months Ended June 30, 2007   Institutional     Individual     International     Home   Reinsurance     Other     Total  
    (In millions)  
 
Statement of Income:
                                                     
Premiums
  $ 3,074     $ 1,098     $ 777     $ 738   $ 1,208     $ 8     $ 6,903  
Universal life and investment-type product policy fees
    186       880       241                       1,307  
Net investment income
    2,087       1,805       271       49     266       357       4,835  
Other revenues
    177       155       3       8     19       49       411  
Net investment gains (losses)
    (206 )     (78 )     20           (14 )     39       (239 )
Policyholder benefits and claims
    3,385       1,395       639       446     979       11       6,855  
Interest credited to policyholder account balances
    772       495       81           117             1,465  
Policyholder dividends
          432                             432  
Other expenses
    618       981       389       204     329       313       2,834  
                                                       
Income from continuing operations before provision for income tax
    543       557       203       145     54       129       1,631  
Provision for income tax
    183       190       60       36     20       (13 )     476  
                                                       
Income from continuing operations
    360       367       143       109     34       142       1,155  
Income (loss) from discontinued operations, net of income tax
    2             (16 )               22       8  
                                                       
Net income
  $ 362     $ 367     $ 127     $ 109   $ 34     $ 164     $ 1,163  
                                                       
 


45


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
                                                         
                      Auto &
          Corporate &
       
For the Six Months Ended June 30, 2008   Institutional     Individual     International     Home     Reinsurance     Other     Total  
    (In millions)  
 
Statement of Income:
                                                       
Premiums
  $ 7,170     $ 2,138     $ 1,824     $ 1,487     $ 2,657     $ 18     $ 15,294  
Universal life and investment-type product policy fees
    434       1,820       584                         2,838  
Net investment income
    4,001       3,399       625       103       435       528       9,091  
Other revenues
    362       303       13       19       53       16       766  
Net investment gains (losses)
    (633 )     (363 )     (1 )     (24 )     (162 )     (65 )     (1,248 )
Policyholder benefits and claims
    7,928       2,786       1,446       1,017       2,257       24       15,458  
Interest credited to policyholder account balances
    1,297       1,006       136             137             2,576  
Policyholder dividends
          869       4       3                   876  
Other expenses
    1,167       1,927       899       407       485       754       5,639  
                                                         
Income from continuing operations before provision for income tax
    942       709       560       158       104       (281 )     2,192  
Provision for income tax
    310       233       201       24       37       (207 )     598  
                                                         
Income from continuing operations
    632       476       359       134       67       (74 )     1,594  
Income (loss) from discontinued operations, net of income tax
    1       (1 )                              
                                                         
Net income
  $ 633     $ 475     $ 359     $ 134     $ 67     $ (74 )   $ 1,594  
                                                         
 
                                                       
                      Auto &
        Corporate &
       
For the Six Months Ended June 30, 2007   Institutional     Individual     International     Home   Reinsurance     Other     Total  
    (In millions)  
 
Statement of Income:
                                                     
Premiums
  $ 6,199     $ 2,173     $ 1,492     $ 1,454   $ 2,334     $ 16     $ 13,668  
Universal life and investment-type product policy fees
    377       1,733       477                       2,587  
Net investment income
    4,001       3,537       521       97     472       727       9,355  
Other revenues
    367       301       16       19     37       55       795  
Net investment gains (losses)
    (294 )     (63 )     44       12     (20 )     44       (277 )
Policyholder benefits and claims
    6,860       2,758       1,231       876     1,881       22       13,628  
Interest credited to policyholder account balances
    1,498       1,002       159           182             2,841  
Policyholder dividends
          854       1       1                 856  
Other expenses
    1,218       2,030       776       406     654       646       5,730  
                                                       
Income from continuing operations before provision for income tax
    1,074       1,037       383       299     106       174       3,073  
Provision for income tax
    363       355       109       77     38       (50 )     892  
                                                       
Income from continuing operations
    711       682       274       222     68       224       2,181  
Income (loss) from discontinued operations, net of income tax
    7             (47 )               39       (1 )
                                                       
Net income
  $ 718     $ 682     $ 227     $ 222   $ 68     $ 263     $ 2,180  
                                                       

46


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
 
                 
    June 30,
    December 31,
 
    2008     2007  
    (In millions)  
 
Institutional
  $ 204,087     $ 204,005  
Individual
    242,946       250,691  
International
    28,781       26,357  
Auto & Home
    5,646       5,672  
Reinsurance
    22,044       21,331  
Corporate & Other
    52,283       50,506  
                 
Total
  $ 555,787     $ 558,562  
                 
 
Net investment income and net investment gains (losses) are based upon the actual results of each segment’s specifically identifiable asset portfolio adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company’s product pricing.
 
Revenues derived from any customer did not exceed 10% of consolidated revenues for the three months and six months ended June 30, 2008 and 2007. Revenues from U.S. operations were $11.6 billion and $22.3 billion for the three months and six months ended June 30, 2008, respectively, which represented 85% and 83%, respectively, of consolidated revenues. Revenues from U.S. operations were $11.4 billion and $22.6 billion for the three months and six months ended June 30, 2007, respectively, which both represented 86% of consolidated revenues.
 
14.   Discontinued Operations
 
Real Estate
 
The Company actively manages its real estate portfolio with the objective of maximizing earnings through selective acquisitions and dispositions. Income related to real estate classified as held-for-sale or sold is presented in discontinued operations. These assets are carried at the lower of depreciated cost or fair value less expected disposition costs.
 
The following information presents the components of income from discontinued real estate operations:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Investment income
  $ 2     $ 2     $ 3     $ 10  
Investment expense
                (2 )     (4 )
Net investment gains (losses)
                      5  
                                 
Total revenues
    2       2       1       11  
Provision for income tax
    1       1             4  
                                 
Income from discontinued operations, net of income tax
  $ 1     $ 1     $ 1     $ 7  
                                 
 
The carrying value of real estate related to discontinued operations was $34 million at both June 30, 2008 and December 31, 2007.


47


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The following table presents the discontinued real estate operations by segment:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Net investment income
                               
Institutional
  $ 2     $ 3     $ 2     $ 6  
Individual
                (1 )      
Corporate & Other
          (1 )            
                                 
Total net investment income
  $ 2     $ 2     $ 1     $ 6  
                                 
Net investment gains (losses)
                               
Institutional
  $     $     $     $ 5  
Individual
                       
Corporate & Other
                       
                                 
Total net investment gains (losses)
  $     $     $     $ 5  
                                 
 
Operations
 
On August 31, 2007, MetLife Insurance Limited (“MetLife Australia”) completed the sale of its annuities and pension businesses to a third party for $25 million in cash consideration resulting in a gain upon disposal of $41 million, net of income tax. The Company reclassified the assets and liabilities of the annuities and pension businesses within MetLife Australia, which is reported in the International segment, to assets and liabilities of subsidiaries held-for-sale and the operations of the business to discontinued operations for all periods presented. Included within the assets to be sold were certain fixed maturity securities in a loss position for which the Company recognized a net investment loss on a consolidated basis of $7 million and $41 million, net of income tax, for the three months and six months ended June 30, 2007, respectively, because the Company no longer had the intent to hold such securities.
 
The following table presents the amounts related to the operations and financial position of MetLife Australia’s annuities and pension businesses:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2007     June 30, 2007  
    (In millions)  
 
Revenues
  $ 27     $ 52  
Expenses
    26       47  
                 
Income before provision for income tax
    1       5  
Provision for income tax
          1  
                 
Income from discontinued operations, net of income tax
    1       4  
Net investment gain (loss), net of income tax
    6       (28 )
                 
Income (loss) from discontinued operations, net of income tax
  $ 7     $ (24 )
                 
 
On January 31, 2005, the Company completed the sale of SSRM Holdings, Inc. (“SSRM”) to a third party. The Company reported the operations of SSRM in discontinued operations. Under the terms of the sale agreement, MetLife has had an opportunity to receive additional payments based on, among other things, certain revenue retention and growth measures. The purchase price is also subject to reduction over five years, depending on retention of certain MetLife-related business. In the second quarter of 2008, the Company paid $3 million, net of


48


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
income tax, of which $2 million was accrued in the fourth quarter of 2007, related to the termination of certain MetLife-related business. In the first quarter of 2007, the Company received a payment of $16 million, net of income tax, as a result of the revenue retention and growth measure provision in the sales agreement.
 
15.   Fair Value
 
Assets and Liabilities Measured at Fair Value
 
Recurring Fair Value Measurements
 
The fair value of the Company’s financial instruments which are measured at fair value in the consolidated financial statements is estimated as follows:
 
  •  Fixed Maturity, Equity and Trading Securities and Short-Term Investments — When available, the estimated fair value of the Company’s fixed maturity, equity and trading securities as well as certain short-term investments are based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management judgment.
 
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies. The market standard valuation methodologies utilized include: discounted cash flow methodologies, matrix pricing or other similar techniques. The assumptions and inputs in applying these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and management’s assumptions regarding liquidity and estimated future cash flows. Accordingly, the estimated fair values are based on available market information and management’s judgments about financial instruments.
 
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market.
 
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such securities.
 
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
 
  •  Derivatives — The fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives or through the use of pricing models for over-the-counter derivatives. The determination of fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that are assumed to be consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), volatility, liquidity and changes in estimates and assumptions used in the pricing models.


49


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The significant inputs to the pricing models for most over-the-counter derivatives are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Significant inputs that are observable generally include: interest rates, foreign currency exchange rates, interest rate curves, credit curves and volatility. However, certain over-the-counter derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. Significant inputs that are unobservable generally include: broker quotes, credit correlation assumptions, references to emerging market currencies and inputs that are outside the observable portion of the interest rate curve, credit curve, volatility or other relevant market measure. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such instruments.
 
The credit risk of both the counterparty and the Company are considered in determining the fair value for all over-the-counter derivatives after taking into account the effects of netting agreements and collateral arrangements. Most inputs for over-the-counter derivatives are mid market inputs but, in certain cases, bid level inputs are used when they are deemed more representative of exit value.
 
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
 
  •  Embedded Derivatives — Embedded derivatives principally include certain variable annuity riders, certain guaranteed investment contracts with equity or bond indexed crediting rates, assumed reinsurance on equity indexed annuities and those related to funds withheld on assumed reinsurance. Embedded derivatives are recorded in the financial statements at fair value with changes in fair value adjusted through net income.
 
The Company issues certain variable annuity products with guaranteed minimum benefit riders. These include guaranteed minimum withdrawal benefit (“GMWB”) riders, guaranteed minimum accumulation benefit (“GMAB”) riders, and certain guaranteed minimum income benefit (“GMIB”) riders. GMWB, GMAB and certain GMIB riders are embedded derivatives, which are measured at fair value separately from the host variable annuity contract, with changes in fair value reported in net investment gains (losses). These embedded derivatives are classified within policyholder account balances. The fair value for these riders is estimated using the present value of future benefits minus the present value of future fees using actuarial and capital market assumptions related to the projected cash flows over the expected lives of the contracts. A risk neutral valuation methodology is used under which the cash flows from the riders are projected under multiple capital market scenarios using observable risk free rates. Effective January 1, 2008, upon adoption of SFAS 157, the valuation of these riders now includes an adjustment for the Company’s own credit and risk margins for non-capital market inputs. The Company’s own credit adjustment is determined taking into consideration publicly available information relating to the Company’s debt as well as its claims paying ability. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment. These riders may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in the Company’s own credit standing; and variations in actuarial assumptions regarding policyholder behavior and risk margins related to non-capital market inputs may result in significant fluctuations in the fair value of the riders that could materially affect net income.
 
The fair value of the embedded equity and bond indexed derivatives contained in certain guaranteed investment contracts is determined using market standard swap valuation models and observable market inputs, including an adjustment for the Company’s own credit that takes into consideration publicly available information relating to the Company’s debt as well as its claims paying ability. The fair value of these


50


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
embedded derivatives are included, along with their guaranteed investment contract host, within policyholder account balances with changes in fair value recorded in net investment gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net income.
 
The fair value of the embedded derivatives in the assumed reinsurance on equity indexed annuities is determined using a market standard method, which includes an estimate of future equity option purchases and an adjustment for the Company’s own credit that takes into consideration the Company’s claims paying ability. The capital market inputs to the model, such as equity indexes, equity volatility, interest rates and the credit adjustment, are generally observable. However, the valuation models also use inputs requiring certain actuarial assumptions such as future interest margins, policyholder behavior and explicit risk margins related to non-capital market inputs, that are generally not observable and may require use of significant management judgment. The fair value of these embedded derivatives is included within policyholder account balances, along with the reinsurance host contract, with changes in fair value recorded in interest credited to policyholder account balances. The Company also retrocedes reinsurance on equity indexed annuities. The embedded derivatives on such retrocessions are computed in a similar manner and are included within premiums and other receivables with changes in fair value recorded in other expenses. Market conditions including, but not limited to, changes in interest rates, equity indices and equity volatility; changes in the Company’s own credit standing; and variations in actuarial assumptions may result in significant fluctuations in the fair value of these embedded derivatives which could materially affect net income.
 
The fair value of the embedded derivatives within funds withheld at interest related to certain assumed reinsurance is determined based on the change in fair value of the underlying assets in a reference portfolio backing the funds withheld receivable. The fair value of the underlying assets is generally based on observable market data using valuation methods similar to those used for assets held directly by the Company. However, the valuation also requires certain inputs, based on actuarial assumptions regarding policyholder behavior, which are generally not observable and may require use of significant management judgment. The fair value of these embedded derivatives is included, along with their funds withheld hosts, in other invested assets with changes in fair value recorded in net investment gains (losses). Changes in the credit spreads on the underlying assets, interest rates, market volatility or assumptions regarding policyholder behavior may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net income.
 
The accounting for embedded derivatives is complex and interpretations of the primary accounting standards continue to evolve in practice. If interpretations change, there is a risk that features previously not bifurcated may require bifurcation and reporting at fair value in the unaudited interim condensed consolidated financial statements and respective changes in fair value could materially affect net income.
 
  •  Separate Account Assets — Separate account assets are carried at fair value and reported as a summarized total on the consolidated balance sheet in accordance with Statement of Position (“SOP”) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”). The fair value of separate account assets are based on the fair value of the underlying assets owned by the separate account. Assets within the Company’s separate accounts include: mutual funds, fixed maturity securities, equity securities, mortgage loans, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. The fair value of mutual funds is based upon quoted prices or reported net assets values (“NAVs”) provided by the fund manager and are reviewed by management to determine whether such values require adjustment to represent exit value. The fair values of fixed maturity securities, equity securities, derivatives, short-term investments and cash and cash equivalents held by separate accounts are determined on a basis consistent with the methodologies


51


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
  described herein for similar financial instruments held within the general account. The fair value of hedge funds is based upon NAVs provided by the fund manager and are reviewed by management to determine whether such values require adjustment to represent exit value. The fair value of mortgage loans is determined by discounting expected future cash flows, using current interest rates for similar loans with similar credit risk. Other limited partnership interests are valued giving consideration to the value of the underlying holdings of the partnerships and by applying a premium or discount, if appropriate, for factors such as liquidity, bid/ask spreads, the performance record of the fund manager or other relevant variables which may impact the exit value of the particular partnership interest.
 
The fair value of assets and liabilities measured at fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option, and their corresponding fair value hierarchy, are summarized as follows:
 
                                 
    June 30, 2008  
    Fair Value Measurements at Reporting Date Using        
    Quoted Prices in
                   
    Active Markets for
    Significant Other
    Significant
       
    Identical Assets
    Observable
    Unobservable
       
    and Liabilities
    Inputs
    Inputs
    Total
 
    (Level 1)     (Level 2)     (Level 3)     Fair Value  
    (In millions)  
 
Assets
                               
Fixed maturity securities:
                               
U.S. corporate securities
  $     $ 67,975     $ 8,280     $ 76,255  
Residential mortgage-backed securities
    319       52,916       1,273       54,508  
Foreign corporate securities
    2       29,462       8,153       37,617  
U.S. Treasury/agency securities
    5,175       14,923       82       20,180  
Commercial mortgage-backed securities
          17,922       496       18,418  
Foreign government securities
    532       14,189       655       15,376  
Asset-backed securities
          9,110       3,962       13,072  
State and political subdivision securities
    7       5,316       158       5,481  
Other fixed maturity securities
    15             269       284  
                                 
Total fixed maturity securities
    6,050       211,813       23,328       241,191  
                                 
Equity securities:
                               
Common stocks
    1,915       648       188       2,751  
Non-redeemable preferred stocks
    133       655       1,881       2,669  
                                 
Total equity securities
    2,048       1,303       2,069       5,420  
                                 
Trading securities
    268       303       312       883  
Short-term investments (1)
    1,079       589       134       1,802  
Derivative assets (2)
    33       3,475       919       4,427  
Net embedded derivatives within asset host contracts (3)
                (152 )     (152 )
Separate account assets (4)
    115,597       32,410       1,694       149,701  
                                 
Total assets
  $ 125,075     $ 249,893     $ 28,304     $ 403,272  
                                 
Liabilities
                               
Derivative liabilities (2)
  $ 4     $ 2,701     $ 66     $ 2,771  
Net embedded derivatives within liability host contracts (3)
                1,045       1,045  
Trading liabilities (5)
    47                   47  
                                 
Total liabilities
  $ 51     $ 2,701     $ 1,111     $ 3,863  
                                 
 
 
(1) Short-term investments as presented in the table above differ from the amounts presented in the consolidated balance sheet because certain short-term investments are not measured at fair value (e.g. time deposits, money market funds, etc.).


52


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
 
(2) Derivative assets are presented within other invested assets and derivatives liabilities are presented within other liabilities. The amounts are presented gross in the table above to reflect the presentation in the consolidated balance sheet, but are presented net for purposes of the rollforward in the following table.
 
(3) Net embedded derivatives within asset host contracts are principally presented within other invested assets with certain amounts included within premiums and other receivables. Fixed maturity securities also includes embedded derivatives of ($16) million. Net embedded derivatives within liability host contracts are presented within policyholder account balances.
 
(4) Separate account assets are measured at fair value. Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the fair value of separate account assets as prescribed by SOP 03-1.
 
(5) Trading liabilities are presented within other liabilities.
 
The Company has categorized its assets and liabilities into the three-level fair value hierarchy, as defined in Note 1, based upon the priority of the inputs to the respective valuation technique. The following summarizes the types of assets and liabilities included within the three-level fair value hierarchy presented in the preceding table.
 
  Level 1   This category includes certain U.S. Treasury and agency fixed maturity securities; residential mortgage-backed securities, principally to-be-announced securities; exchange-traded common stock; and certain short-term money market securities. As it relates to derivatives, this level includes financial futures including exchange-traded equity and interest rate futures. Separate account assets classified within this level principally include mutual funds. Also included are assets held within separate accounts which are similar in nature to those classified in this level for the general account.
 
  Level 2   This category includes fixed maturity securities priced principally through independent pricing services. These fixed maturity securities include most U.S. Treasury and agency securities as well as the majority of U.S. and foreign corporate securities, residential mortgage-backed securities, commercial mortgage-backed securities, state and political subdivision securities, foreign government securities, and asset-backed securities. Equity securities classified as Level 2 securities consist principally of non-redeemable preferred stock priced principally through independent pricing services and certain equity securities where market quotes are available but are not considered actively traded. Short-term investments and trading securities included within Level 2 are of a similar nature to these fixed maturity and equity securities. As it relates to derivatives, this level includes all types of derivative instruments utilized by the Company with the exception of exchange-traded futures included within Level 1 and those derivative instruments with unobservable inputs as described in Level 3. Separate account assets classified within this level are generally similar to those classified within this level for the general account. Hedge funds owned by separate accounts are also included within this level. Embedded derivatives include embedded equity derivatives contained in certain guaranteed investment contracts.
 
  Level 3   This category includes fixed maturity securities priced principally through independent broker quotes or market standard valuation methodologies. This level consists of less liquid fixed maturity securities with very limited trading activity or where less price transparency exists around the inputs to the valuation methodologies including: U.S. and foreign corporate securities — including below investment grade private placements; residential mortgage-backed securities; asset backed securities — including all of those supported by sub-prime mortgage loans; and other fixed maturity securities such as structured securities. Equity securities classified as Level 3 securities consist principally of common stock of privately held companies and non-redeemable preferred stock where there has been very limited trading activity or where less price transparency exists around the inputs to the valuation. Short-term investments and trading securities included within Level 3 are of a similar nature to these fixed maturity and equity securities. As it relates to


53


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
  derivatives this category includes: financial forwards including swap spread locks with maturities which extend beyond observable periods and equity variance swaps with unobservable volatility inputs; foreign currency swaps which are cancelable and priced through broker quotes; interest rate swaps with maturities which extend beyond the observable portion of the yield curve; credit default swaps based upon baskets of credits having unobservable credit correlations as well as credit default swaps with maturities which extend beyond the observable portion of the credit curves and credit default swaps priced through brokers or with liquidity adjustments; foreign currency forwards priced via broker quotes; equity options with unobservable volatility inputs; and interest rate caps and floors referencing unobservable yield curves and/or which include liquidity and volatility adjustments. Separate account assets classified within this level are generally similar to those classified within this level for the general account; however, they also include mortgage loans, and other limited partnership interests. Embedded derivatives included within this level include embedded derivatives associated with variable annuity riders, assumed reinsurance on equity indexed annuities as well as embedded derivatives related to funds withheld on assumed reinsurance.
 
A rollforward of the fair value measurements for all assets and liabilities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months and six months ended June 30, 2008 is as follows:
 
                                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
                      Total Realized/Unrealized
                   
          Impact of
          Gains (Losses) included in:     Purchases,
             
    Balance,
    SFAS 157 and
    Balance,
          Other
    Sales,
    Transfer In
    Balance,
 
    December 31,
    SFAS 159
    beginning
          Comprehensive
    Issuances and
    and/or Out
    end
 
    2007     Adoption (1)     of period     Earnings (2, 3)     Income (Loss)     Settlements (4)     of Level 3 (5)     of period  
    (In millions)  
 
For the Six Months Ended June 30, 2008:
                                                               
Fixed maturity securities
  $ 24,854     $ (8 )   $ 24,846     $ (88 )   $ (1,088 )   $ (666 )   $ 324     $ 23,328  
Equity securities
    2,385             2,385       (40 )     (200 )     (18 )     (58 )     2,069  
Trading securities
    183       8       191       (2 )     1       131       (9 )     312  
Short-term investments
    179             179       (1 )           (44 )           134  
Net derivatives (6)
    789       (1 )     788       46             18       1       853  
Separate account assets (7)
    1,464             1,464       (49 )           387       (108 )     1,694  
Net embedded derivatives (8)
    (843 )     41       (802 )     (331 )           (64 )           (1,197 )
For the Three Months Ended June 30, 2008:
                                                               
Fixed maturity securities
                    23,811       (35 )     (400 )     88       (136 )     23,328  
Equity securities
                    2,166       (4 )     (25 )     (21 )     (47 )     2,069  
Trading securities
                    179       3       1       129             312  
Short-term investments
                    156       (1 )           (21 )           134  
Net derivatives (6)
                    1,215       (368 )           25       (19 )     853  
Separate account assets (7)
                    1,581       (54 )           375       (208 )     1,694  
Net embedded derivatives (8)
                    (1,505 )     330             (22 )           (1,197 )
 
 
(1) Impact of SFAS 157 adoption represents the amount recognized in earnings as a change in estimate upon the adoption of SFAS 157 associated with Level 3 financial instruments held at January 1, 2008. Such amount was impacted by an increase to DAC of $2 million resulting in a total impact of $42 million. This impact of $42 million along with a $12 million reduction in the fair value of Level 2 freestanding derivatives, results in a total net impact of adoption of SFAS 157 of $30 million.


54


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
 
(2) Amortization of premium/discount is included within net investment income which is reported within the earnings caption of total gains/losses. Impairments are included within net investment gains (losses) which is reported within the earnings caption of total gains/losses. Lapses associated with embedded derivatives are included with the earnings caption of total gains/losses.
 
(3) Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.
 
(4) The amount reported within purchases, sales, issuances and settlements is the purchase/issuance price (for purchases and issuances) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased/issued or sold/settled. Items purchased/issued and sold/settled in the same period are excluded from the rollforward. For embedded derivatives, attributed fees are included within this caption along with settlements, if any.
 
(5) Total gains and losses (in earnings and other comprehensive income (loss)) are calculated assuming transfers in (out) of Level 3 occurred at the beginning of the period. Items transferred in and out in the same period are excluded from the rollforward.
 
(6) Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.
 
(7) Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities.
 
(8) Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
 
(9) Amounts presented do not reflect any associated hedging activities. Actual earnings associated with Level 3, inclusive of hedging activities, could differ materially.
 
The table below summarize both realized and unrealized gains and losses for the three months and six months ended June 30, 2008 due to changes in fair value recorded in earnings for Level 3 assets and liabilities:
 
                                                 
    Total Gains and Losses  
    Classification of Realized/Unrealized Gains (Losses) included in Earnings  
                Interest
                   
    Net
    Net
    Credited to
          Policyholder
       
    Investment
    Investment
    Policyholder
    Other
    Benefits and
       
    Income     Gains (Losses)     Account Balances     Expenses     Claims     Total  
    (In millions)  
 
For the Six Months Ended June 30, 2008:
                                               
Fixed maturity securities
  $ 109     $ (197 )   $     $     $     $ (88 )
Equity securities
          (40 )                       (40 )
Trading securities
    (2 )                             (2 )
Short-term investments
          (1 )                       (1 )
Net derivatives
    9       37                         46  
Net embedded derivatives
          (297 )     (40 )     5       1       (331 )
For the Three Months Ended June 30, 2008:
                                               
Fixed maturity securities
    67       (102 )                       (35 )
Equity securities
          (4 )                       (4 )
Trading securities
    3                               3  
Short-term investments
          (1 )                       (1 )
Net derivatives
    (13 )     (355 )                       (368 )
Net embedded derivatives
          333       (2 )     (2 )     1       330  


55


Table of Contents

 
MetLife, Inc.
 
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
 
The table below summarize the portion of unrealized gains and losses recorded in earnings for the three months and six months ended June 30, 2008 for Level 3 assets and liabilities that are still held at June 30, 2008.
 
                                                 
    Changes in Unrealized Gains (Losses) Relating to Assets Held at June 30, 2008  
                Interest
                   
    Net
    Net
    Credited to
          Policyholder
       
    Investment
    Investment
    Policyholder
    Other
    Benefits and
       
    Income     Gains/Losses     Account Balances     Expenses     Claims     Total  
    (In millions)  
 
For the Six Months Ended June 30, 2008:
                                               
Fixed maturity securities
  $ 99     $ (129 )   $     $     $     $ (30 )
Equity securities
          (30 )                       (30 )
Trading securities
                                   
Short-term investments
          (1 )                       (1 )
Net derivatives
    9       22                         31  
Net embedded derivatives
          (305 )     (73 )     8       2       (368 )
For the Three Months Ended June 30, 2008:
                                               
Fixed maturity securities
    60       (74 )                       (14 )
Equity securities
          (5 )                       (5 )
Trading securities
    2                               2  
Short-term investments
          (1 )                       (1 )
Net derivatives
    (13 )     (299 )                       (312 )
Net embedded derivatives
          328       (20 )           2       310  
 
Nonrecurring Fair Value Measurements
 
Certain non-financial assets are measured at fair value on a non-recurring basis (e.g. goodwill and other intangibles considered impaired).
 
At June 30, 2008, the Company held $159 million in mortgage loans which are carried at fair value based on the value of the underlying collateral or broker quotes, if lower, of which $55 million relate to impaired mortgage loans and $104 million to mortgage loans held-for-sale. These mortgage loans were recorded at fair value and represent a nonrecurring fair value measurement. The fair value is categorized as Level 3. Included within net investment gains (losses) for such mortgage loans are net impairments of $13 million and $42 million for the three months and six months ended June 30, 2008, respectively.
 
At June 30, 2008, the Company held $4 million in cost basis other limited partnership interests which were impaired based on the underlying limited partnership financial statements. These other limited partnership interests were recorded at fair value and represent a nonrecurring fair value measurement. The fair value is categorized as Level 3. Included within net investment gains (losses) for such other limited partnerships are impairments of $12 million and $16 million for the three and six months ended June 30, 2008, respectively.
 


56


Table of Contents

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
For purposes of this discussion, “MetLife” or the “Company” refers to MetLife, Inc., a Delaware corporation incorporated in 1999 (the “Holding Company”), and its subsidiaries, including Metropolitan Life Insurance Company (“MLIC”). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with MetLife, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”), the forward-looking statement information included below and the Company’s unaudited interim condensed consolidated financial statements included elsewhere herein.
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of MetLife, Inc. and its subsidiaries, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance.
 
Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (i) changes in general economic conditions, including the performance of financial markets and interest rates, which may affect the Company’s ability to raise capital and its generation of fee income and market-related revenue; (ii) heightened competition, including with respect to pricing, entry of new competitors, the development of new products by new and existing competitors and for personnel; (iii) investment losses and defaults, and changes to investment valuations; (iv) unanticipated changes in industry trends; (v) catastrophe losses; (vi) ineffectiveness of risk management policies and procedures; (vii) changes in accounting standards, practices and/or policies; (viii) changes in assumptions related to deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”) or goodwill; (ix) discrepancies between actual claims experience and assumptions used in setting prices for the Company’s products and establishing the liabilities for the Company’s obligations for future policy benefits and claims; (x) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (xi) adverse results or other consequences from litigation, arbitration or regulatory investigations; (xii) downgrades in the Company’s and its affiliates’ claims paying ability, financial strength or credit ratings; (xiii) regulatory, legislative or tax changes that may affect the cost of, or demand for, the Company’s products or services; (xiv) MetLife, Inc.’s primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends; (xv) deterioration in the experience of the “closed block” established in connection with the reorganization of MLIC; (xvi) economic, political, currency and other risks relating to the Company’s international operations; (xvii) the effects of business disruption or economic contraction due to terrorism or other hostilities; (xviii) the Company’s ability to identify and consummate on successful terms any future acquisitions, and to successfully integrate acquired businesses with minimal disruption; and (xix) other risks and uncertainties described from time to time in MetLife’s filings with the SEC.
 
The Company specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
 
Executive Summary
 
MetLife is a leading provider of insurance and other financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. Through its domestic and international subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowners insurance, retail banking and other financial services to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions. MetLife is organized into five operating segments: Institutional, Individual, Auto & Home, International and Reinsurance, as well as Corporate & Other. See also “— Acquisitions and Dispositions” and “— Results of Operations — Reinsurance.”


57


Table of Contents

As a result of a strategic review the Company began in 2007, it launched an enterprise initiative called Operational Excellence. This initiative began in April 2008 and is focused on reducing complexity, leveraging scale, increasing productivity, improving the effectiveness of the Company’s operations and providing a foundation for future growth. Within the next two to three years, management anticipates the Operational Excellence initiative will yield both significant revenue enhancements and cost savings. Execution of this initiative will require investment, leadership and discipline. The Company began conducting a diagnostic review of all of its operations in April 2008. As the plans are not complete at this time, management cannot quantify the financial impacts of this initiative as of June 30, 2008; however, management will be able to provide further details when the Company announces its September 30, 2008 results and at the annual Investor Day meeting in December 2008.
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007
 
The Company reported $915 million in net income available to common shareholders and earnings per diluted common share of $1.26 for the three months ended June 30, 2008 compared to $1,129 million in net income available to common shareholders and earnings per diluted common share of $1.48 for the three months ended June 30, 2007. Net income available to common shareholders decreased by $214 million, or 19%, for the three months ended June 30, 2008 compared to the 2007 period.
 
The decrease in net income available to common shareholders was principally due to a decrease in net investment income of $163 million, net of income tax, and an increase in net investment losses of $80 million, net of income tax. The decrease in net investment income was due to a decrease in yields, partially offset by an increase due to growth in the average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, fixed maturity securities, and short term investments, partially offset by improved securities lending results, and higher returns on real estate and equity securities. Management anticipates that investment income and the related yields on other limited partnership interests will continue to decline during 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by income attributable to growth in average invested assets, primarily within other limited partnership interests, mortgage loans, real estate joint ventures, and fixed maturity securities. The decrease in net investment income is also attributable to a reduction in equity option market values relative to certain funds withheld portfolios associated with the reinsurance of equity indexed annuity (“EIA”) products. The increase in net investment losses resulted from increased losses on fixed maturity and equity securities, mortgage loans, other limited partnerships and real estate joint ventures principally attributable to credit related impairments. These increased losses were partially offset by lower net investment losses on derivatives resulting from improved guaranteed minimum benefit rider performance.
 
The net effect of increases in premiums, fees and other revenues of $567 million, net of income tax, across all of the Company’s operating segments and increases in policyholder benefits and claims and policyholder dividends of $568 million, net of income tax, was attributable to overall business growth. Policyholder benefits and claims were adversely impacted by an increase in catastrophe losses in the Auto & Home segment as well as a charge due to a liability adjustment on a large annuity contract and the impact of an unusually high number of claims in the Institutional segment. Also contributing to the increase was unfavorable mortality Individual segment. These increases were partially offset by a decrease in certain policyholder liabilities in the International segment resulting from a decrease in unrealized investment results on the invested assets supporting those liabilities.
 
A decrease in interest credited to policyholder account balances of $130 million, net of income tax, resulted from the decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, offset by an increase from growth in the average policyholder account balance, primarily the result of continued growth in the global guaranteed interest contract (“GIC”) and funding agreement products all of which occurred within the Institutional segment. Interest credited to policyholder account balances decreased in the Reinsurance segment as a result of the decrease in value of the equity linked option associated with assumed EIA products as well as changes in risk free interest rates used in the present value calculation of embedded derivatives associated with such EIAs.
 
The increase in other expenses of $84 million, net of income tax, was due to higher interest expense, higher legal costs, higher corporate expenses and higher minority interest expense. The increase in other expenses was


58


Table of Contents

partially offset by a decrease due to lower DAC amortization primarily relating to net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins and higher DAC amortization in the prior period due to the adoption of Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period.
 
The remainder of the variance is due to the change in effective tax rates between periods.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007
 
The Company reported $1.5 billion in net income available to common shareholders and earnings per diluted common share of $2.10 for the six months ended June 30, 2008 compared to $2.1 billion in net income available to common shareholders and earnings per diluted common share of $2.76 for the six months ended June 30, 2007. Net income available to common shareholders decreased by $582 million, or 28%, for the six months ended June 30, 2008 compared to the 2007 period.
 
The decrease in net income available to common shareholders was principally due to an increase in net investment losses of $631 million, net of income tax, and a decrease in net investment income of $172 million, net of income tax. The decrease in net investment income was due to a decrease in yields, partially offset by an increase due to growth in average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, and short-term investments, partially offset by improved securities lending results. Management anticipates that investment income and the related yields on other limited partnership interests will continue to decline during 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by income attributable to growth in average invested assets, primarily within other limited partnership interests, mortgage loans, real estate joint ventures, and fixed maturity securities. The decrease in net investment income is also attributable to a reduction in equity option market values relative to certain funds withheld portfolios associated with the reinsurance of equity indexed annuity (“EIA”) products. The increase in net investment losses resulted from increased losses on fixed maturity and equity securities, mortgage loans, other limited partnerships and real estate joint ventures principally attributable to credit related impairments as well as increased losses on guaranteed minimum benefit riders due to declines in equity markets slightly offset by improvements from the widening of the Company’s own credit spread. Also contributing to the increase in net investment losses are foreign currency transaction losses.
 
The net effect of increases in premiums, fees and other revenues of $1.2 billion, net of income tax, across all of the Company’s operating segments and increases in policyholder benefits and claims and policyholder dividends of $1.2 billion, net of income tax, was attributable to overall business growth. Policyholder benefits and claims were adversely impacted by an increase in catastrophe losses in the Auto & Home segment as well as a charge due to a liability adjustment on a large annuity contract and the impact of an unusually high number of claims in the Institutional segment. Also contributing to the increase was unfavorable mortality in the Reinsurance and Individual segments. These increases were partially offset by a decrease in certain policyholder liabilities in International resulting from a decrease in unrealized investment results on the invested assets supporting those liabilities.
 
A decrease in interest credited to policyholder account balances of $172 million, net of income tax, resulted from the decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, offset by an increase from growth in the average policyholder account balance, primarily the result of continued growth in the global GIC and funding agreement products all of which occurred within the Institutional segment. Interest credited to policyholder account balances decreased in the Reinsurance segment as a result of the decrease in value of the equity linked option associated with assumed EIA products offset by changes in the risk free interest rates used in the present value calculation of embedded derivatives associated with such EIAs. Additionally, interest credited declined in the International segment as a result of a reduction in interest credited to unit-linked policyholder liabilities resulting from losses in the related trading portfolios.
 
The decrease in other expenses of $59 million, net of income tax, was principally driven by lower DAC amortization resulting from higher net investment losses in both periods and current period revisions to


59


Table of Contents

management’s assumptions used to determine estimated gross profits and margins, higher DAC amortization in the prior period due to the adoption of SOP 05-1, as well as lower DAC amortization in the current period resulting from the change in the value of embedded derivatives associated with funds withheld arrangements primarily as a result of the impact of widening credit spreads in the U.S. debt markets and changes in risk-free rates used in the valuation of the embedded derivatives associated with EIAs. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period. These decreases in other expenses were partially offset by higher interest expense and higher legal costs.
 
The remainder of the variance is due to the change in effective tax rates between periods.
 
Acquisitions and Dispositions
 
During the first quarter of 2008, the Company completed acquisitions which were accounted for using the purchase method of accounting in the Institutional and International segments. As a result of these acquisitions, goodwill and other intangible assets increased by $169 million and $149 million, respectively.
 
During the second quarter of 2008, MetLife Bank, N.A. (“MetLife Bank”), included within the Corporate & Other segment, completed an acquisition which was accounted for using the purchase method of accounting. As a result of this acquisition, goodwill and other intangible assets increased by $68 million and $5 million, respectively. In June 2008, MetLife Bank, entered into an agreement to acquire a residential mortgage origination company. The transaction is expected to be completed during the third quarter of 2008.
 
In June 2008, the Company and Reinsurance Group of America, Inc. (“RGA”) entered into an agreement to execute a tax-free split-off transaction whereby shareholders of the Company will be offered the ability to exchange their MetLife shares for shares in RGA based upon an exchange ratio determined at the time of the exchange offer. The transaction has the effect of the Company exchanging substantially all of its 52% ownership in RGA for shares of its own stock. The transaction is subject to RGA’s shareholders approving a recapitalization, state insurance regulatory approval as well as acceptance of the offer by a sufficient number of MetLife shareholders. See also “ — Results of Operations — Reinsurance.”
 
Industry Trends
 
The Company’s segments continue to be influenced by a variety of trends that affect the industry.
 
Financial and Economic Environment.  The stress experienced by global capital markets that began in the second half of 2007 continued and increased during the first half of 2008. During 2007 and the first half of 2008, the global capital markets reassessed the credit risk inherent in sub-prime mortgage loans, which led to a broad repricing of credit risk assets and strained market liquidity. Global central banks intervened to stabilize market conditions and protect against downside risks to economic growth. The U.S. Federal Reserve intervened to provide emergency funding to the nation’s fifth largest investment bank during the first quarter of 2008 in addition to using new techniques to improve market liquidity. Still, market and economic conditions deteriorated further. The economic community’s consensus outlook is for slow or recessionary U.S. growth and slowing global growth for the remainder of 2008. The global capital markets continue to adjust towards this consensus outlook, with interest rates falling during the first quarter of 2008 and stabilizing during the second quarter of 2008, and equity prices falling and risk spreads widening further during the first half of 2008. In the last quarter, concerns over inflation have emerged among economists, driven by increasing energy and food prices. Slow growth and recessionary periods are often associated with declining asset prices, lower interest rates, credit rating agency downgrades and increasing default losses. The global capital markets are also less liquid now than in more stable environments. Liquidity conditions impact the cost of purchasing and selling assets and, at times, the ability to purchase or sell assets. These adjustments in the global capital markets have also resulted in higher realized and expected volatility.
 
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.


60


Table of Contents

The current mortgage crisis has also raised the possibility of future legislative and regulatory actions. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial condition.
 
Demographics.  In the coming decade, a key driver shaping the actions of the life insurance industry will be the rising income protection, wealth accumulation and needs of the retiring Baby Boomers. As a result of increasing longevity, retirees will need to accumulate sufficient savings to finance retirements that may span 30 or more years. Helping the Baby Boomers to accumulate assets for retirement and subsequently to convert these assets into retirement income represents an opportunity for the life insurance industry.
 
Life insurers are well positioned to address the Baby Boomers’ rapidly increasing need for savings tools and for income protection. The Company believes that, among life insurers, those with strong brands, high financial strength ratings and broad distribution, are best positioned to capitalize on the opportunity to offer income protection products to Baby Boomers.
 
Moreover, the life insurance industry’s products and the needs they are designed to address are complex. The Company believes that individuals approaching retirement age will need to seek information to plan for and manage their retirements and that, in the workplace, as employees take greater responsibility for their benefit options and retirement planning, they will need information about their possible individual needs. One of the challenges for the life insurance industry will be the delivery of this information in a cost effective manner.
 
Competitive Pressures.  The life insurance industry remains highly competitive. The product development and product life-cycles have shortened in many product segments, leading to more intense competition with respect to product features. Larger companies have the ability to invest in brand equity, product development, technology and risk management, which are among the fundamentals for sustained profitable growth in the life insurance industry. In addition, several of the industry’s products can be quite homogeneous and subject to intense price competition. Sufficient scale, financial strength and financial flexibility are becoming prerequisites for sustainable growth in the life insurance industry. Larger market participants tend to have the capacity to invest in additional distribution capability and the information technology needed to offer the superior customer service demanded by an increasingly sophisticated industry client base.
 
Regulatory Changes.  The life insurance industry is regulated at the state level, with some products and services also subject to federal regulation. As life insurers introduce new and often more complex products, regulators refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially impact the reserve and capital requirements of the industry. In addition, regulators have undertaken market and sales practices reviews of several markets or products, including equity indexed annuities, variable annuities and group products.
 
Pension Plans.  On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (“PPA”) into law. The PPA is considered to be the most sweeping pension legislation since the adoption of the Employee Retirement Income Security Act of 1974 on September 2, 1974. The provisions of the PPA may, over time, have a significant impact on demand for pension, retirement savings, and lifestyle protection products in both the institutional and retail markets. The impact of the legislation may have a positive effect on the life insurance and financial services industries in the future.
 
Summary of Critical Accounting Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The most critical estimates include those used in determining:
 
  (i)  the fair value of investments in the absence of quoted market values;
 
  (ii)  investment impairments;
 
  (iii)  the recognition of income on certain investment entities;
 
  (iv)  the application of the consolidation rules to certain investments;
 
  (v)  the existence and fair value of embedded derivatives requiring bifurcation;


61


Table of Contents

 
  (vi)  the fair value of and accounting for derivatives;
 
  (vii)  the capitalization and amortization of DAC and the establishment and amortization of VOBA;
 
  (viii)  the measurement of goodwill and related impairment, if any;
 
  (ix)  the liability for future policyholder benefits;
 
  (x)  accounting for income taxes and the valuation of deferred tax assets;
 
  (xi)  accounting for reinsurance transactions;
 
  (xii)  accounting for employee benefit plans; and
 
  (xiii)  the liability for litigation and regulatory matters.
 
The application of purchase accounting requires the use of estimation techniques in determining the fair values of assets acquired and liabilities assumed — the most significant of which relate to the aforementioned critical estimates. In applying the Company’s accounting policies, which are more fully described in the 2007 Annual Report, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations. Actual results could differ from these estimates.
 
Investments
 
The Company’s principal investments are in fixed maturity, equity and trading securities, mortgage and consumer loans, policy loans, real estate, real estate joint ventures and other limited partnership interests, short-term investments, and other invested assets. The Company’s investments are exposed to three primary sources of risk: credit, interest rate and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of fair values, the recognition of impairments, the recognition of income on certain investments, and the potential consolidation of previously unconsolidated entities.
 
The Company’s investments in fixed maturity and equity securities, which are classified as available-for-sale, investments in trading securities, and certain short-term investments are reported at their estimated fair value. In determining the estimated fair value of these securities, various methodologies, assumptions and inputs are utilized, as described further below.
 
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management judgment.
 
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies. The market standard valuation methodologies utilized include: discounted cash flow methodologies, matrix pricing or other similar techniques. The assumptions and inputs in applying these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and management’s assumptions regarding liquidity and estimated future cash flows. Accordingly, the estimated fair values are based on available market information and management’s judgments about financial instruments.
 
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market.
 
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity.


62


Table of Contents

Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such securities.
 
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
 
One of the significant estimates related to available-for-sale securities is the evaluation of investments for other-than-temporary impairments. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below cost or amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for six months or greater. Additionally, management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to:
 
  (i)  the length of time and the extent to which the market value has been below cost or amortized cost;
 
  (ii)  the potential for impairments of securities when the issuer is experiencing significant financial difficulties;
 
  (iii)  the potential for impairments in an entire industry sector or sub-sector;
 
  (iv)  the potential for impairments in certain economically depressed geographic locations;
 
  (v)  the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources;
 
  (vi)  the Company’s ability and intent to hold the security for a period of time sufficient to allow for the recovery of its value to an amount equal to or greater than cost or amortized cost;
 
  (vii)  unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed securities; and
 
  (viii)  other subjective factors, including concentrations and information obtained from regulators and rating agencies.
 
The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other-than-temporary in the period in which the determination is made. These impairments are included within net investment gains (losses) and the cost basis of the fixed maturity and equity securities is reduced accordingly. The Company does not change the revised cost basis for subsequent recoveries in value.
 
The determination of the amount of allowances and impairments on other invested asset classes is highly subjective and is based upon the Company’s periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised.
 
The recognition of income on certain investments (e.g. loan-backed securities, including mortgage-backed and asset-backed securities, certain structured investment transactions, trading securities, etc.) is dependent upon market conditions, which could result in prepayments and changes in amounts to be earned.
 
Additionally, when the Company enters into certain structured investment transactions, real estate joint ventures and other limited partnerships for which the Company may be deemed to be the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(r), Consolidation of Variable Interest Entities — An Interpretation of Accounting Research Bulletin No. 51 (“FIN 46(r)”), it may be required to consolidate such investments. The accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated with each party involved in the entity, an


63


Table of Contents

estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity.
 
The use of different methodologies and assumptions as to the determination of the fair value of investments, the timing and amount of impairments, the recognition of income, or consolidation of investments may have a material effect on the amounts presented within the consolidated financial statements.
 
Derivative Financial Instruments
 
The Company enters into freestanding derivative transactions including swaps, forwards, futures and option contracts. The Company uses derivatives primarily to manage various risks. The risks being managed are variability in cash flows or changes in fair values related to financial instruments and currency exposure associated with net investments in certain foreign operations. To a lesser extent, the Company uses credit derivatives, such as credit default swaps, to synthetically replicate investment risks and returns which are not readily available in the cash market.
 
The fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives or through the use of pricing models for over-the-counter derivatives. The determination of fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that are assumed to be consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), volatility, liquidity and changes in estimates and assumptions used in the pricing models.
 
The significant inputs to the pricing models for most over-the-counter derivatives are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Significant inputs that are observable generally include: interest rates, foreign currency exchange rates, interest rate curves, credit curves, and volatility. However, certain over-the-counter derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. Significant inputs that are unobservable generally include: broker quotes, credit correlation assumptions, references to emerging market currencies, and inputs that are outside the observable portion of the interest rate curve, credit curve, volatility, or other relevant market measure. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing such instruments.
 
The credit risk of both the counterparty and the Company are considered in determining the fair value for all over-the-counter derivatives after taking into account the effects of netting agreements and collateral arrangements. Most inputs for over-the-counter derivatives are mid market inputs but, in certain cases, bid level inputs are used when they are deemed more representative of exit value.
 
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income. Also, fluctuations in the fair value of derivatives which have not been designated for hedge accounting may result in significant volatility in net income.
 
The accounting for derivatives is complex and interpretations of the primary accounting standards continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under these accounting standards. If it was determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the consolidated financial statements of the Company from that previously reported. Measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in net income.


64


Table of Contents

Embedded Derivatives
 
Embedded derivatives principally include certain variable annuity riders, certain guaranteed investment contracts with equity or bond indexed crediting rates, assumed reinsurance on equity indexed annuities and those related to funds withheld on assumed reinsurance. Embedded derivatives are recorded in the financial statements at fair value with changes in fair value adjusted through net income.
 
The Company issues certain variable annuity products with guaranteed minimum benefit riders. These include guaranteed minimum withdrawal benefit (“GMWB”) riders, guaranteed minimum accumulation benefit (“GMAB”) riders, and certain guaranteed minimum income benefit (“GMIB”) riders. GMWB, GMAB and certain GMIB riders are embedded derivatives, which are measured at fair value separately from the host variable annuity contract, with changes in fair value reported in net investment gains (losses). These embedded derivatives are classified within policyholder account balances. The fair value for these riders is estimated using the present value of future benefits minus the present value of future fees using actuarial and capital market assumptions related to the projected cash flows over the expected lives of the contracts. A risk neutral valuation methodology is used under which the cash flows from the riders are projected under multiple capital market scenarios using observable risk free rates. Effective January 1, 2008, upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), the valuation of these riders now includes an adjustment for the Company’s own credit and risk margins for non-capital market inputs. The Company’s own credit adjustment is determined taking into consideration publicly available information relating to the Company’s debt as well as its claims paying ability. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment. These riders may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in the Company’s own credit standing; and variations in actuarial assumptions regarding policyholder behavior and risk margins related to non-capital market inputs may result in significant fluctuations in the fair value of the riders that could materially affect net income.
 
The fair value of the embedded equity and bond indexed derivatives contained in certain guaranteed investment contracts is determined using market standard swap valuation models and observable market inputs, including an adjustment for the Company’s own credit that takes into consideration publicly available information relating to the Company’s debt as well as its claims paying ability. The fair value of these embedded derivatives are included, along with their guaranteed investment contract host, within policyholder account balances with changes in fair value recorded in net investment gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net income.
 
The fair value of the embedded derivatives in the assumed reinsurance on equity indexed annuities is determined using a market standard method, which includes an estimate of future equity option purchases and an adjustment for the Company’s own credit that takes into consideration the Company’s claims paying ability. The capital market inputs to the model, such as equity indexes, equity volatility, interest rates and the credit adjustment, are generally observable. However, the valuation models also use inputs requiring certain actuarial assumptions such as future interest margins, policyholder behavior and explicit risk margins related to non-capital market inputs, that are generally not observable and may require use of significant management judgment. The fair value of these embedded derivatives is included within policyholder account balances, along with the reinsurance host contract, with changes in fair value recorded in interest credited to policyholder account balances. The Company also retrocedes reinsurance on equity indexed annuities. The embedded derivatives on such retrocessions are computed in a similar manner and are included within premiums and other receivables with changes in fair value recorded in other expenses. Market conditions including, but not limited to, changes in interest rates, equity indices and equity volatility; changes in the Company’s own credit standing; and variations in actuarial assumptions may result in significant fluctuations in the fair value of these embedded derivatives which could materially affect net income.
 
The fair value of the embedded derivatives within funds withheld at interest related to certain assumed reinsurance is determined based on the change in fair value of the underlying assets in a reference portfolio backing


65


Table of Contents

the funds withheld receivable. The fair value of the underlying assets is generally based on observable market data using valuation methods similar to those used for assets held directly by the Company. However, the valuation also requires certain inputs, based on actuarial assumptions regarding policyholder behavior, which are generally not observable and may require use of significant management judgment. The fair value of these embedded derivatives are included, along with their funds withheld hosts, in other invested assets with changes in fair value recorded in net investment gains (losses). Changes in the credit spreads on the underlying assets, interest rates, market volatility or assumptions regarding policyholder behavior may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net income.
 
The accounting for embedded derivatives is complex and interpretations of the primary accounting standards continue to evolve in practice. If interpretations change, there is a risk that features previously not bifurcated may require bifurcation and reporting at fair value in the unaudited interim condensed consolidated financial statements and respective changes in fair value could materially affect net income.
 
Deferred Policy Acquisition Costs and Value of Business Acquired
 
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that vary with and relate to the production of new business are deferred as DAC. Such costs consist principally of commissions and agency and policy issue expenses. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in-force at the acquisition date. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the financial statements for reporting purposes.
 
DAC for property and casualty insurance contracts, which is primarily composed of commissions and certain underwriting expenses, is amortized on a pro rata basis over the applicable contract term or reinsurance treaty.
 
DAC and VOBA on life insurance or investment-type contracts are amortized in proportion to gross premiums, gross margins or gross profits, depending on the type of contract as described below.
 
The Company amortizes DAC and VOBA related to non-participating and non-dividend-paying traditional contracts (term insurance, non-participating whole life insurance, non-medical health insurance, and traditional group life insurance) over the entire premium paying period in proportion to the present value of actual historic and expected future gross premiums. The present value of expected premiums is based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency, and investment returns at policy issuance, or policy acquisition, as it relates to VOBA, that include provisions for adverse deviation and are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
 
The Company amortizes DAC and VOBA related to participating, dividend-paying traditional contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties, and certain economic variables, such as inflation. For participating contracts (dividend paying traditional contracts within the closed block) future gross margins are also dependent upon changes in the policyholder dividend obligation. Of these factors, the Company anticipates that investment returns, expenses, persistency, and other factor changes and policyholder dividend scales are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to


66


Table of Contents

earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins.
 
The Company amortizes DAC and VOBA related to fixed and variable universal life contracts and fixed and variable deferred annuity contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties, the effect of any hedges used, and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns, expenses, and persistency are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits.
 
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period. Returns that are higher than the Company’s long-term expectation produce higher account balances, which increases the Company’s future fee expectations and decreases future benefit payment expectations on minimum death benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company’s long-term expectation. The Company’s practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. The Company monitors these changes and only changes the assumption when its long-term expectation changes. The effect of an increase/(decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease/(increase) in the DAC and VOBA balances of approximately $100 million with an offset to the Company’s unearned revenue liability of approximately $25 million for this factor.
 
The Company also reviews periodically other long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
 
Over the past two years, the Company’s most significant assumption updates resulting in a change to expected future gross margins and profits and the amortization of DAC and VOBA have been updated due to revisions to expected future investment returns, expenses, in-force or persistency assumptions and policyholder dividends on contracts included within the Individual segment. The Company expects these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can be offsetting and the Company is unable to predict their movement or offsetting impact over time.
 
Goodwill
 
Goodwill is the excess of cost over the fair value of net assets acquired. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test.
 
Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level.


67


Table of Contents

For purposes of goodwill impairment testing, goodwill within Corporate & Other is allocated to reporting units within the Company’s business segments. If the carrying value of a reporting unit’s goodwill exceeds its fair value, the excess is recognized as an impairment and recorded as a charge against net income. The fair values of the reporting units are determined using a market multiple, a discounted cash flow model, or a cost approach. The critical estimates necessary in determining fair value are projected earnings, comparative market multiples and the discount rate.
 
Liability for Future Policy Benefits
 
The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional annuities and non-medical health insurance. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of expected future benefits to be paid, reduced by the present value of expected future premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of business basis. If experience is less favorable than assumptions, additional liabilities may be required, resulting in a charge to policyholder benefits and claims.
 
Liabilities for future policy benefits for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
 
Liabilities for unpaid claims and claim expenses for property and casualty insurance are included in future policyholder benefits and represent the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Other policyholder funds include claims that have been reported but not settled and claims incurred but not reported on life and non-medical health insurance. 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, reduced for anticipated salvage and subrogation. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur.
 
Future policy benefit liabilities for minimum death and certain income benefit guarantees relating to certain annuity contracts and secondary and paid up guarantees relating to certain life policies are based on estimates of the expected value of benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. Liabilities for universal and variable life secondary guarantees and paid-up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The assumptions used in estimating these liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk.
 
The Company periodically reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees in the establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur.
 
Income Taxes
 
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. The Company’s accounting for income taxes represents management’s best estimate of various events and transactions.
 
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to


68


Table of Contents

taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:
 
  (i)  future taxable income exclusive of reversing temporary differences and carryforwards;
 
  (ii)  future reversals of existing taxable temporary differences;
 
  (iii)  taxable income in prior carryback years; and
 
  (iv)  tax planning strategies.
 
The Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The Company may be required to change its provision for income taxes when the ultimate deductibility of certain items is challenged by taxing authorities or when estimates used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the period these changes occur.
 
Reinsurance
 
The Company enters into reinsurance transactions as both a provider and a purchaser of reinsurance for its life and property and casualty insurance products. Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed previously. Additionally, for each of its reinsurance contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting.
 
Employee Benefit Plans
 
Certain subsidiaries of the Holding Company sponsor and/or administer pension and other postretirement plans covering employees who meet specified eligibility requirements. The obligations and expenses associated with these plans require an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases, healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirements, withdrawal rates and mortality. Management, in consultation with its external consulting actuarial firm, determines these assumptions based upon a variety of factors such as historical performance of the plan and its assets, currently available market and industry data and expected benefit payout streams. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant effect on the Company’s consolidated financial statements and liquidity.
 
Litigation Contingencies
 
The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company’s financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can


69


Table of Contents

be reasonably estimated. Liabilities related to certain lawsuits, including the Company’s asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables that can affect liability estimates. The data and variables that impact the assumptions used to estimate the Company’s asbestos-related liability include the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against the Company when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in the Company’s consolidated financial statements. It is possible that an adverse outcome in certain of the Company’s litigation and regulatory investigations, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
 
Economic Capital
 
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in MetLife’s businesses. As a part of the economic capital process, a portion of net investment income is credited to the segments based on the level of allocated equity. This is in contrast to the standardized regulatory risk-based capital (“RBC”) formula, which is not as refined in its risk calculations with respect to the nuances of the Company’s businesses.


70


Table of Contents

Results of Operations
 
Discussion of Results
 
The following table presents consolidated financial information for the Company for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 7,701     $ 6,903     $ 15,294     $ 13,668  
Universal life and investment-type product policy fees
    1,421       1,307       2,838       2,587  
Net investment income
    4,584       4,835       9,091       9,355  
Other revenues
    371       411       766       795  
Net investment gains (losses)
    (362 )     (239 )     (1,248 )     (277 )
                                 
Total revenues
    13,715       13,217       26,741       26,128  
                                 
Expenses
                               
Policyholder benefits and claims
    7,715       6,855       15,458       13,628  
Interest credited to policyholder account balances
    1,265       1,465       2,576       2,841  
Policyholder dividends
    446       432       876       856  
Other expenses
    2,963       2,834       5,639       5,730  
                                 
Total expenses
    12,389       11,586       24,549       23,055  
                                 
Income from continuing operations before provision for income tax
    1,326       1,631       2,192       3,073  
Provision for income tax
    381       476       598       892  
                                 
Income from continuing operations
    945       1,155       1,594       2,181  
Income (loss) from discontinued operations, net of income tax
    1       8             (1 )
                                 
Net income
    946       1,163       1,594       2,180  
Preferred stock dividends
    31       34       64       68  
                                 
Net income available to common shareholders
  $ 915     $ 1,129     $ 1,530     $ 2,112  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — The Company
 
Income from Continuing Operations
 
Income from continuing operations decreased by $210 million, or 18%, to $945 million for the three months ended June 30, 2008 from $1,155 million for the comparable 2007 period.
 
The following table provides the change from the prior period in income from continuing operations by segment:
 
         
    $ Change  
    (In millions)  
 
Corporate & Other
  $     (215 )
Individual
    (168 )
Auto & Home
    (66 )
Institutional
    188  
International
    30  
Reinsurance
    21  
         
Total change
  $ (210 )
         
 
Corporate & Other’s income from continuing operations decreased primarily due to an increase in net investment losses, lower net investment income, higher interest expense, higher legal costs, lower other revenues,


71


Table of Contents

higher corporate expenses, and a decrease in tax benefits partially offset by lower interest credited to bankholder deposits and lower interest on uncertain tax positions.
 
The Individual segment’s income from continuing operations decreased primarily due to an increase in net investment losses, a decrease in interest margins, higher annuity benefits, an increase in interest credited to policyholder account balances, unfavorable underwriting results in life products and an increase in policyholder dividends. These decreases in income from continuing operations were partially offset by lower DAC amortization, higher net investment income on blocks of business not driven by interest margins and higher universal life and investment-type product policy fees combined with other revenues primarily resulting from business growth, partially offset by unfavorable equity market performance.
 
The Auto & Home segment’s income from continuing operations decreased primarily due to an increase in policyholder benefits and claims, and policyholder dividends, comprised primarily of an increase in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states, and of increases from higher claim frequencies, higher earned exposures, and policyholder dividends. This decrease in income from continuing operations was partially offset by a decrease in non-catastrophe policyholder benefits and claims which resulted from lower losses due to severity and from additional favorable development of prior year losses. Also offsetting the decrease in income from continuing operations was an increase in premiums driven by increased exposures and a decrease in catastrophe reinsurance costs, offset by a reduction in average earned premium per policy. Further offsetting the decrease in income from continuing operations was an increase in net investment income primarily due to a realignment of economic capital offset by the impact of a smaller asset base, and favorable changes to both other revenues and other expenses. Also, a greater proportion of tax advantaged investment income resulted in a decline in the segment’s effective tax rate.
 
The Institutional segment’s income from continuing operations increased primarily due to higher net investment gains, an increase in interest margins, and lower expenses related to DAC amortization due to the impact of the implementation of SOP 05-1 in the prior period and lower expenses related to the impact of a charge in the prior period. These increases in income were partially offset by a decrease in underwriting results.
 
The increase in the International segment’s income from continuing operations was primarily attributable to net investment losses, marginally offset by the impact of changes in foreign currency exchange rates, and to strong performance in the Latin America and Asia Pacific regions. Mexico’s income from continuing operations increased primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, higher net investment income due to an increase in invested assets as well as the impact of higher inflation rates on indexed securities, and lower claims, partially offset by higher expenses related to business growth and infrastructure costs. Income from the Company’s investment in Japan increased due to a decrease in the cost of guaranteed annuity benefits, the impact of a refinement in assumptions for the guaranteed annuity business, and the favorable impact from the utilization of the fair value option for certain fixed annuities, and an increase in fees from assumed reinsurance, offset by a decrease from hedging activities associated with Japan’s guaranteed annuity benefits. Taiwan’s income from continuing operations increased primarily due to an increase in invested assets and a refinement in DAC capitalization. Contributions from the other countries accounted for the remainder of the change in income from continuing operations.
 
The Reinsurance segment’s income from continuing operations increased primarily due to an increase in premiums due to growth across RGA’s operations, an increase in other revenues, a decrease in interest credited to policyholder account balances and a decrease in net investment losses which was due to a decrease in the fair value of embedded derivatives associated with the reinsurance of annuity products on a funds withheld basis. The increase in income from continuing operations due to these items was offset by an increase in policyholder benefits and claims, an increase in other expense, and a decrease in net investment income.
 
Revenues and Expenses
 
Premiums, Fees and Other Revenues
 
Premiums, fees and other revenues increased by $872 million, or 10%, to $9,493 million for the three months ended June 30, 2008 from $8,621 million for the comparable 2007 period.


72


Table of Contents

The following table provides the change from the prior period in premiums, fees and other revenues by segment:
 
                 
          % of Total
 
    $ Change     $ Change  
    (In millions)        
 
Institutional
  $     542       62 %
International
    199       23  
Reinsurance
    155       18  
Individual
    10       1  
Auto & Home
    6       1  
Corporate & Other
    (40 )     (5 )
                 
Total change
  $ 872       100 %
                 
 
The growth in the Institutional segment was due to increases in the retirement & savings, non-medical health & other and group life businesses. The increase in the retirement & savings business was primarily due to an increase in premium in the group institutional annuity business primarily due to higher domestic sales, partially offset by lower premiums from the income annuity and structured settlement businesses largely due to lower sales. The non-medical health & other business increased primarily due to growth in the dental, disability, individual disability insurance (“IDI”) and accidental death & dismemberment (“AD&D”) businesses, and an acquisition that impacted the dental business. Partially offsetting the increase in the non-medical health & other business is a decrease in the long-term care (“LTC”) business, primarily attributable to a shift to deposit liability-type contracts in the latter part of the prior year, partially offset by growth in the business. The group life business increased primarily due to business growth in term life and increases in universal life products and corporate-owned life insurance, partially offset by a decrease in assumed reinsurance.
 
The increase in the International segment was primarily due to business growth in the Latin America and Asia Pacific regions, as well as the impact of an acquisition in the latter, and the impact of foreign currency exchange rates. Chile’s premiums, fees and other revenues increased primarily due to higher annuity sales, as well as higher institutional premiums from its traditional and bank distribution channels. Premiums, fees and other revenues increased in Hong Kong primarily due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007. Australia’s premiums, fees and other revenues increased primarily due to growth in the institutional business and an increase in retention levels. These increases in premiums, fees and other revenues were partially offset by a decrease in Argentina primarily due to pension reform, partially offset by growth in its institutional and bancassurance businesses. Contributions from the other countries account for the remainder of the change.
 
The growth in the Reinsurance segment was primarily attributable to premiums from new facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA’s operating segments. In addition, other revenues increased due to an increase in surrender charges on asset-intensive business reinsured and an increase in fees associated with financial reinsurance.
 
The growth in the Individual segment was primarily due to higher fee income from universal life and investment-type products and growth in premiums from other life products, partially offset by unfavorable equity market performance in the current period, a decrease in premiums associated with the Company’s closed block business and a decrease in immediate annuity premiums.
 
The growth in the Auto & Home segment was primarily due to an increase in premiums related to increased exposures, a decrease in catastrophe reinsurance costs, partially offset by a reduction in average earned premium per policy.
 
The decrease in Corporate & Other was primarily due a favorable impact in the prior year from the resolution of an indemnification claim associated with the 2000 acquisition of General American Life Insurance Company (“GALIC”).


73


Table of Contents

Net Investment Income
 
Net investment income decreased by $251 million to $4,584 million for the three months ended June 30, 2008 from $4,835 million for the comparable 2007 period. Management attributes $596 million of this change to a decrease in yields partially offset by an increase of $345 million due to growth in the average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, fixed maturity securities, and short term investments, partially offset by improved securities lending results, and higher returns on real estate and equity securities. Management anticipates that investment income and the related yields on other limited partnership interests will continue to decline during 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by income attributable to growth in the average invested assets, primarily within other limited partnership interests, mortgage loans, real estate joint ventures, and fixed maturity securities. The decrease in net investment income is also attributable to a reduction in equity option market values relative to certain funds withheld portfolios associated with the reinsurance of equity indexed annuity (“EIA”) products.
 
Interest Margin
 
Interest margin, which represents the difference between interest earned and interest credited to policyholder account balances decreased in the Individual segment for the three months ended June 30, 2008 as compared to the prior year. Interest margins increased in the group life business, partially offset by decreases in the non-medical health & other and retirement & savings businesses, all within the Institutional segment. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits and claims, and the amount credited to policyholder account balances for investment-type products, recorded in interest credited to policyholder account balances. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
 
Net Investment Gains (Losses)
 
Net investment losses increased by $123 million to a loss of $362 million for the three months ended June 30, 2008 from a loss of $239 million for the comparable 2007 period. The increase in net investment losses is primarily due to increased losses on fixed maturity and equity securities, mortgage loans, other limited partnerships and real estate joint ventures principally attributable to credit-related impairments. These increased losses were partially offset by lower net investment losses on derivatives resulting from improved guarantee minimum benefit rider performance.
 
Underwriting
 
Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs, less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the three months ended June 30, 2008, as the combined ratio, excluding catastrophes, decreased to 81.9% from 84.3% for the three months ended June 30, 2007. Underwriting results were unfavorable in the retirement & savings, group life and non-medical health & other businesses in the Institutional segment. Underwriting results were also unfavorable in the life products in the Individual segment.
 
Other Expenses
 
Other expenses increased by $129 million, or 5%, to $2,963 million for the three months ended June 30, 2008 from $2,834 million for the comparable 2007 period.


74


Table of Contents

The following table provides the change from the prior period in other expenses by segment:
 
         
    $ Change  
    (In millions)  
 
Corporate & Other
  $ 88  
International
    82  
Reinsurance
    27  
Individual
    (42 )
Institutional
    (25 )
Auto & Home
    (1 )
         
Total change
  $  129  
         
 
The increase in other expenses was driven by an increase in Corporate & Other primarily due to higher interest expense, higher legal costs, and higher corporate expenses, including incentive compensation, rent, start-up costs and information technology costs partially offset by a reduction in deferred compensation expenses. The increases were also partially offset by decreases in interest credited on bankholder deposits and on uncertain tax positions.
 
International segment’s other expenses increase was driven mainly by business growth in the Latin America and Asia Pacific regions, and the impact of foreign currency exchange rates. South Korea’s other expenses increased primarily due to business growth, as well as an increase in DAC amortization related to market performance. Mexico’s other expenses increased due to higher expenses related to infrastructure costs as well as business growth. The United Kingdom’s other expenses increased due to business growth. Other expenses increased in India primarily due to increased staffing and growth initiatives. Contributions from the other countries accounted for the remainder of the change.
 
The Reinsurance segment contributed to the year over year increase in other expenses primarily due to an increase in minority interest expense, an increase in compensation and overhead-related expenses primarily associated with RGA’s international expansion and general growth in operations, and an increase in expenses associated with DAC. These decreases were partially offset by a decrease in interest expense due primarily to a decrease in interest rates on variable rate debt.
 
These increases in other expenses were offset by a decrease in the Individual segment primarily due to lower DAC amortization primarily relating to net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period.
 
The Institutional segment also contributed an offset due to higher DAC amortization associated with the implementation of SOP 05-1 in the prior period and a charge in the prior period related to the reimbursement of certain dental claims. These were offset by increases in non-deferrable volume-related expenses and corporate support expenses.
 
The Auto & Home segment had a marginal decrease in other expenses, with no single expense category contributing significantly to the fluctuation.
 
Net Income
 
Income tax expense for the three months ended June 30, 2008 was $381 million, or 28.7% of income from continuing operations before provision for income tax, compared with $476 million, or 29.2% of such income, for the comparable 2007 period. The 2008 and 2007 effective tax rates differ from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income and tax credits for investments in low income housing. In addition, the decrease in the effective tax rate is primarily attributable to changes in the ratio of permanent differences in income before income taxes.


75


Table of Contents

Income from discontinued operations, net of income tax, decreased by $7 million, or 88%, to $1 million for the three months ended June 30, 2008 from $8 million for the comparable 2007 period. This decrease is primarily due to a net investment gain of $6 million, net of income tax, that the Company recognized during the three months ended June 30, 2007, with no similar amount recognized during the three months ended June 30, 2008, related to MetLife Australia annuities and pensions business which was sold to a third party in the third quarter of 2007.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — The Company
 
Income from Continuing Operations
 
Income from continuing operations decreased by $587 million, or 27%, to $1,594 million for the six months ended June 30, 2008 from $2,181 million for the comparable 2007 period.
 
The following table provides the change from the prior period in income from continuing operations by segment:
 
                 
          % of Total
 
    $ Change     $ Change  
    (In millions)        
 
Corporate & Other
  $  (298 )     51 %
Individual
    (206 )     35  
Auto & Home
    (88 )     15  
Institutional
    (79 )     13  
Reinsurance
    (1 )      
International
    85       (14 )
                 
Total change
  $ (587 )     100 %
                 
 
Corporate & Other’s income from continuing operations decreased primarily due to lower net investment income, higher interest expense, higher legal costs, lower other revenues and an increase in net investment losses. This decrease was partially offset by lower corporate expenses, lower interest credited to bankholder deposits, and lower interest on uncertain tax positions. Tax benefits were flat over the comparable 2007 period.
 
The Individual segment’s income from continuing operations decreased due to an increase in net investment losses, a decrease in interest margins relating primarily to the general account portion of its investment-type products. There were also unfavorable underwriting results in life products, an increase in interest credited to policyholder account balances due primarily to lower amortization of the excess interest reserves on acquired annuity and universal life blocks of business and an increase in policyholder dividends due to growth in the business. These decreases were partially offset by lower DAC amortization, higher universal life and investment-type product policy fees, higher net investment income on blocks of business not driven by interest margins, lower expenses driven by the write off of a receivable in the prior year and lower annuity benefits, partially offset by higher amortization of sales inducements.
 
The Auto & Home segment’s income from continuing operations decreased primarily due to an increase in policyholder benefits and claims, and policyholder dividends, comprised primarily of an increase in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states. Also increasing policyholder benefits and claims was an increase from higher non-catastrophe claim frequencies, an increase related to higher earned exposures, an increase related to less favorable development of prior year non-catastrophe losses and the unfavorable impact of net investment gains (losses). These decreases were partially offset by an increase in premiums related to increased exposures, a decrease in catastrophe reinsurance costs and an increase resulting from the change in estimate in the prior year on auto rate refunds due to a regulatory examination. Offsetting this increase in premiums was a decrease in premiums for the reduction in average earned premium per policy and a decrease in premiums from various involuntary programs. In addition, increases in continuing operations were favorably impacted by an increase in net investment income.
 
The Institutional segment’s income from continuing operations decreased primarily due to higher net investment losses and lower underwriting results compared to the prior period. This was partially offset by a


76


Table of Contents

decrease in policyholder benefits and claims related to net investment gains (losses) and an increase in interest margins compared to the prior period. In addition, there was a decrease in other expenses due in part to lower expenses related to DAC amortization primarily due to the impact of a charge due to the implementation of SOP 05-1 in the prior period. Also contributing to lower expenses was the impact of a charge in the prior period.
 
The Reinsurance segment’s decrease in income from continuing operations was due to an increase in net investment losses, an increase in policyholder benefit and claims, and a decrease in net investment income. This was substantially offset by an increase in other revenue, an increase in premiums, and a decrease in the interest credited to policyholder account balances. There was also a decrease in other expenses related to the reduction of expenses associated with DAC, including reinsurance allowances paid, resulting from the change in the value of embedded derivatives, a decrease in minority interest and interest expense, partially offset by increases in compensation and overhead-related expenses associated with RGA’s international expansion and general growth in operations.
 
Partially offsetting these decreases was an increase in the International segment’s income from continuing operations which includes the impact of net investment losses and a favorable impact of foreign currency exchange rates and the impact of strong performance in the Latin America and Asia Pacific regions. Mexico’s increase in income from continuing operations was primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, higher net investment income due to an increase in invested assets as well as the impact of higher inflation rates on indexed securities, and business growth offset by the favorable impact in the prior year from a decrease in experience refunds on Mexico’s institutional business and from a lower increase in litigation liabilities. Argentina’s increase in income from continuing operations was primarily due to a reduction in the liability for pension servicing obligations resulting from a refinement of assumptions, a decrease in claims and market-indexed policyholder liabilities resulting from pension reform, partially offset by a decrease in death and disability premiums due to pension reform. Argentina also benefited more significantly in the prior year from the utilization of deferred tax assets against which valuation allowances had previously been established. Partially offsetting these increases is a decrease in Japan resulting from an increase in the costs of guaranteed annuity benefits, partially offset by the favorable impact from the utilization of the fair value option for certain fixed annuities, the impact of a refinement in assumptions for the guaranteed annuity business from hedging activities associated with Japan’s guaranteed annuity benefits and an increase in fees from assumed reinsurance. Contributions from the other countries accounted for the remainder of the change.
 
Revenues and Expenses
 
Premiums, Fees and Other Revenues
 
Premiums, fees and other revenues increased by $1,848 million, or 11%, to $18,898 million for the six months ended June 30, 2008 from $17,050 million for the comparable 2007 period.
 
The following table provides the change from the prior period in premiums, fees and other revenues by segment:
 
                 
          % of Total
 
    $ Change     $ Change  
    (In millions)        
 
Institutional
  $ 1,023       55 %
International
    436       24  
Reinsurance
    339       18  
Individual
    54       3  
Auto & Home
    33       2  
Corporate & Other
    (37 )     (2 )
                 
Total change
  $ 1,848       100 %
                 
 
The Institutional segment’s premiums, fees and other revenues increased largely due to increases in retirement & savings, non-medical health & other and group life businesses. The increase in the retirement &


77


Table of Contents

savings business was primarily due to increases in premium in the group institutional annuity and structured settlement businesses primarily due to higher sales. The increase in the group institutional annuity business was primarily due to large domestic sales and the first significant sale in the United Kingdom business in the current period. Partially offsetting these increases are lower sales in the income annuity business. The growth in the non-medical health & other business was largely due to increases in the dental, disability, AD&D, and IDI businesses. The increase in the dental business was primarily due to organic growth in the business and the impact of an acquisition that closed in the first quarter of 2008. The increases in the disability, AD&D, and IDI businesses are primarily due to continued growth in the business. Partially offsetting these increases was a decline in the LTC business, primarily attributable to a shift to deposit liability-type contracts during the latter part of the prior year, partially offset by growth in the business. The remaining increase in the non-medical health & other business was attributed to business growth across several products. The increase in the group life business can primarily be attributed to business growth in term life, and to increases in universal life and corporate-owned life insurance products, partially offset by decreases in assumed reinsurance and life insurance sold to postretirement benefit plans.
 
The International segment’s premiums, fees and other revenues increased due to business growth in the Latin America and Asia Pacific regions, as well as the impact of an acquisition in the latter, and the impact of foreign currency exchange rates. Chile’s premiums, fees and other revenues increased primarily due to higher annuity sales as well as higher institutional premiums from its traditional and bank distribution channels. Hong Kong’s premiums, fees and other revenues increased due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, as well as business growth. Mexico’s premiums, fees and other revenues increased due to growth in its individual and institutional businesses, as well as the reinstatement of premiums from prior periods partially offset by a decrease in experience refunds in the prior year on Mexico’s institutional business. Partially offsetting these increases in the International segment’s premiums, fees and other revenues is a decrease in Argentina’s premiums, fees and other revenue primarily due to a decrease in premiums resulting from pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants, partially offset by growth in its institutional and bancassurance business. Contributions from the other countries accounted for the remainder of the change.
 
The Reinsurance segment’s increase in premiums, fees, and other revenue was primarily associated with growth in premiums from new facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA operating segments. There was also an increase in other revenues primarily due to an increase in surrender charges on asset-intensive business reinsured and an increase in fees associated with financial reinsurance.
 
The Individual segment’s premiums, fees, and other revenues increased primarily due to an increase in universal life and investment-type product policy fees combined with other revenues related to slightly higher average account balances resulting from business growth over the prior period, partially offset by unfavorable equity market performance during the current period. These increases were partially offset by a decrease in premiums primarily due to a decrease in immediate annuity premiums and decline in premiums associated with the Company’s closed block of business in line with expectations. These decreases were partially offset by growth in premiums from other life products driven by increased renewals of traditional life business.
 
The Auto & Home segment’s premiums, fees, and other revenues increased primarily due to a premiums increase related to increased exposures, a decrease in catastrophe reinsurance costs and an increase resulting from the change in estimate in the prior year on auto rate refunds due to a regulatory examination. These increases were partially offset by a decrease related to a reduction in average earned premium per policy and a decrease in premiums from various involuntary programs.
 
Partially offsetting these increases was a decrease in Corporate & Other’s other revenues primarily related to the prior year resolution of an indemnification claim associated with the 2000 acquisition of GALIC.


78


Table of Contents

Net Investment Income
 
Net investment income decreased by $264 million to $9,091 million for the six months ended June 30, 2008 from $9,355 million for the comparable 2007 period. Management attributes $955 million of this change to a decrease in yields, partially offset by an increase of $691 million due to growth in average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, and short term investments, partially offset by improved securities lending results. Management anticipates that investment income and the related yields on other limited partnership interests will continue to decline during 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by income attributable to growth in average invested assets, primarily within other limited partnership interests, mortgage loans, real estate joint ventures, and fixed maturity securities. The decrease in net investment income is also attributable to a reduction in equity option market values relative to certain funds withheld portfolios associated with the reinsurance of equity indexed annuity (“EIA”) products.
 
Interest Margin
 
Interest margin, which represents the difference between interest earned and interest credited to policyholder account balances decreased in the Individual segment for the six months ended June 30, 2008 as compared to the prior year. Interest margins increased in the retirement & savings and group life businesses, partially offset by a decrease in the non-medical health & other business, all within the Institutional segment. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits and claims, and the amount credited to policyholder account balances for investment-type products, recorded in interest credited to policyholder account balances. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
 
Net Investment Gains (Losses)
 
Net investment losses increased by $971 million to a loss of $1,248 million for the six months ended June 30, 2008 from a loss of $277 million for the comparable 2007 period. The increase in net investment losses resulted from increased losses on fixed maturity and equity securities, mortgage loans, other limited partnerships and real estate joint ventures principally attributable to credit related impairments as well as increased losses on guaranteed minimum benefit riders due to declines in equity markets slightly offset by improvements from the widening of the Company’s own credit spread. Also contributing to the increase in net investment losses are foreign currency transaction losses.
 
Underwriting
 
Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs, less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the six months ended June 30, 2008, as the combined ratio, excluding catastrophes, decreased to 84.9% from 85.6% for the six months ended June 30, 2007. Underwriting results were unfavorable in the retirement & savings and the group life businesses and favorable in the non-medical health & other business in the Institutional segment. Underwriting results were unfavorable in the life products in the Individual segment. Adverse mortality in the Reinsurance segment also decreased underwriting results.


79


Table of Contents

Other Expenses
 
Other expenses decreased by $91 million, or 2%, to $5,639 million for the six months ended June 30, 2008 from $5,730 million for the comparable 2007 period.
 
The following table provides the change from the prior period in other expenses by segment:
 
         
    $ Change  
    (In millions)  
 
Reinsurance
  $  (169 )
Individual
    (103 )
Institutional
    (51 )
International
    123  
Corporate & Other
    108  
Auto & Home
    1  
         
Total change
  $ (91 )
         
 
The Reinsurance segment’s other expenses decreased due to a reduction of DAC amortization due to the change in the value of embedded derivatives associated with funds withheld arrangements, primarily a result of the impact of widening spreads in the U.S. debt markets and changes in risk free rates used in the valuation of embedded derivatives associated with EIAs. There was also a decrease in interest expense due primarily to a decrease in interest rates on variable rate debt and a decrease in minority interest expense. Partially offsetting this decrease was an increase in compensation and overhead-related expenses associated with RGA’s international expansion and general growth in operations.
 
The Individual segment’s other expenses decreased due to lower DAC amortization primarily relating to higher net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period. The remaining decrease was driven by the write off of a receivable in the prior period partially offset by an increase in non-deferrable volume-related expenses, which includes those expenses associated with information technology, compensation and direct departmental spending.
 
The Institutional segment’s other expenses decreased due to a reduction in DAC amortization primarily due to a charge associated with the impact of DAC and VOBA amortization from the implementation of SOP 05-1 in the prior year. Also contributing to the decrease in other expenses was the impact of a charge in the prior period related to the reimbursement of certain dental claims. Non-deferrable volume related expenses and corporate support expenses remained relatively flat.
 
Partially offsetting these decreases was an increase in the International segment’s other expenses mainly due to business growth in the Asia Pacific and Latin America regions, and the impact of foreign currency exchange rates. South Korea’s other expenses increased due to business growth, as well as an increase in DAC amortization related to market performance. Mexico’s other expenses increased primarily due to higher expenses related to business growth and infrastructure costs, as well as a lower increase in litigation liabilities in the prior year. India’s other expenses increased primarily due to increased staffing and growth initiatives. Partially offsetting these increases in other expenses for International was a decrease in Argentina’s other expenses primarily due to a reduction in the liability for pension servicing obligations resulting from a refinement of assumptions and methodology, as well as the availability of government statistics regarding the number of participants transferring to the government-sponsored plan under the pension reform plan which was effective January 1, 2008. Partially offsetting this decrease are higher commissions from growth in the institutional and bancassurance businesses discussed above. Contributions from the other countries accounted for the remainder of the change.
 
Corporate & Other’s other expenses increased due to higher interest expense due to the issuances of junior subordinated debt in December 2007 and April 2008 and collateral financing arrangements in May 2007 and December 2007, partially offset by the prepayment of shares subject to mandatory redemption in October 2007 and


80


Table of Contents

the reduction of commercial paper outstanding. Legal costs were higher primarily due to a decrease in the prior year for legal liabilities resulting from the settlement of certain cases, higher amortization and valuation of an asbestos insurance recoverable. Corporate expenses were lower primarily due to a reduction in deferred compensation expenses and lower corporate support expenses, which included incentive compensation, rent, start-up costs, and information technology costs. Interest credited on bankholder deposits decreased at MetLife Bank due to lower interest rates, partially offset by higher bankholder deposits. Interest on uncertain tax positions was lower as a result of a settlement payment to the Internal Revenue Service (“IRS”) in December 2007 and a decrease in published IRS interest rates.
 
The Auto & Home segment had a marginal increase in other expenses, as a result of higher compensation costs offset by minor fluctuations in other expense categories.
 
Net Income
 
Income tax expense for the six months ended June 30, 2008 was $598 million, or 27% of income from continuing operations before provision for income tax, compared with $892 million, or 29% of such income, for the comparable 2007 period. The 2008 and 2007 effective tax rates differ from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income and tax credits for investments in low income housing. In addition, the decrease in the effective tax rate is primarily attributable to changes in the ratio of permanent differences in income before income taxes.
 
Income from discontinued operations, net of income tax, increased by $1 million for the six months ended June 30, 2008 from ($1) million for the comparable 2007 period. The increase is primarily due to a $24 million, net of income tax, loss recognized from discontinued operations for the six months ended June 30, 2007, for reclassification of the operations of MetLife Australia to discontinued operations. Partially offsetting the loss was a gain of $16 million, related to additional proceeds from the sale of SSRM and a $7 million gain from discontinued operations, net of income tax, related to real estate properties sold or held-for-sale during the six months ended June 30, 2007. There was no similar amount recognized in discontinued operations during the six months ended June 30, 2008.


81


Table of Contents

Institutional
 
The Company’s Institutional segment offers a broad range of group insurance and retirement & savings products and services to corporations and other institutions and their respective employees. Group insurance products and services include group life insurance, non-medical health insurance products and related administrative services, as well as other benefits, such as employer-sponsored auto and homeowners insurance provided through the Auto & Home segment and prepaid legal services plans. The Company’s Institutional segment also offers group insurance products as employer-paid benefits or as voluntary benefits where all or a portion of the premiums are paid by the employee. Retirement & savings products and services include an array of annuity and investment products, including defined contribution plans, guaranteed interest products and other stable value products, accumulation and income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets.
 
The following table presents consolidated financial information for the Institutional segment for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 3,597     $ 3,074     $ 7,170     $ 6,199  
Universal life and investment-type product policy fees
    210       186       434       377  
Net investment income
    1,972       2,087       4,001       4,001  
Other revenues
    172       177       362       367  
Net investment gains (losses)
    98       (206 )     (633 )     (294 )
                                 
Total revenues
    6,049       5,318       11,334       10,650  
                                 
Expenses
                               
Policyholder benefits and claims
    4,016       3,385       7,928       6,860  
Interest credited to policyholder account balances
    613       772       1,297       1,498  
Other expenses
    593       618       1,167       1,218  
                                 
Total expenses
    5,222       4,775       10,392       9,576  
                                 
Income from continuing operations before provision for income tax
    827       543       942       1,074  
Provision for income tax
    279       183       310       363  
Income from continuing operations
    548       360       632       711  
Income from discontinued operations, net of income tax
    1       2       1       7  
                                 
Net income
  $ 549     $ 362     $ 633     $ 718  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — Institutional
 
Income from Continuing Operations
 
Income from continuing operations increased by $188 million, or 52%, to $548 million for the three months ended June 30, 2008 from $360 million for the comparable 2007 period.
 
Included in this increase were higher earnings of $197 million, net of income tax, from higher net investment gains. In addition, an increase of $13 million, net of income tax, the result of an increase in policyholder benefits and claims related to net investment gains (losses), contributed to higher earnings. Excluding the impact from net investment gains (losses), income from continuing operations decreased by $22 million, net of income tax, compared to the prior period.


82


Table of Contents

A decrease in underwriting results of $95 million, net of income tax, compared to the prior period, contributed to the decrease in income from continuing operations. Management attributed this decrease to the retirement & savings, group life and non-medical health & other businesses of $48 million, $44 million and $3 million, all net of income tax, respectively. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity, or other insurance costs less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period.
 
An increase in interest margins of $28 million, net of income tax, compared to the prior period, partially offset the decrease in income from continuing operations. Management attributed this increase primarily to the group life business, which contributed $46 million, net of income tax, to the increase, partially offset by decreases in non-medical health & other and retirement & savings businesses of $16 million and $2 million, net of income tax, respectively. Interest margin is the difference between interest earned and interest credited to policyholder account balances. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits and claims, and the amount credited to policyholder account balances for investment-type products, recorded in interest credited to policyholder account balances. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements, and may reflect actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
 
In addition, a decrease in other expenses partially offset the decrease in income from continuing operations, due in part to lower expenses related to DAC amortization of $8 million, net of income tax, which was largely due to the impact of a $12 million charge, net of income tax, due to the impact of the implementation of SOP 05-1 in the prior period. Also contributing to lower expenses was the impact of a charge in the prior period of $9 million, net of income tax. The remaining increase in operating expenses was more than offset by the remaining increase in premiums, fees, and other revenues.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $427 million, or 8%, to $5,951 million for the three months ended June 30, 2008 from $5,524 million for the comparable 2007 period.
 
The increase of $542 million in premiums, fees and other revenues was largely due to increases in the retirement & savings, non-medical health & other and group life businesses of $218 million, $186 million and $138 million, respectively.
 
The increase in the retirement & savings business was primarily due to an increase in premium in the group institutional annuity business of $239 million, primarily due to higher domestic sales. Partially offsetting this increase, were lower premiums from the income annuity and structured settlement businesses of $13 million and $6 million, respectively, largely due to lower sales. Premiums, fees and other revenues from retirement & savings products are significantly influenced by large transactions and, as a result, can fluctuate from period to period.
 
The growth in the non-medical health & other business was largely due to increases in the dental, disability, IDI and AD&D businesses of $206 million. The increase in the dental business was primarily due to organic growth in the business and the impact of an acquisition that closed in the first quarter of 2008. The increases in disability, IDI and AD&D are primarily due to growth in the business. Partially offsetting these increases was a decline in the LTC business of $25 million, primarily attributable to a $37 million decrease, which management attributed to a shift to deposit liability-type contracts during the latter part of the prior year, partially offset by growth in the business. The remaining increase in the non-medical health and other business was attributed to business growth across several products.
 
The group life business increased $138 million, which management primarily attributed to a $101 million increase in term life, largely due to the net impact of an increase in sales, partially offset by a decrease in assumed


83


Table of Contents

reinsurance. In addition, universal life and corporate-owned life insurance products increased $24 million and $11 million, respectively. The increase in universal life products was largely attributable to lower experience rated refunds in the current period. The increase in corporate-owned life insurance was largely attributable to an increase in fee income, which was mainly generated from new customers acquired in the second half of the prior year.
 
Partially offsetting the increase in premium, fees and other revenues was a decrease in net investment income of $115 million. Management attributed $292 million of this decrease to a decrease in yields, primarily due to lower returns on other limited partnership interests including hedge funds, real estate joint ventures, and fixed maturity securities, partially offset by improved securities lending results. This decrease in yields was partially offset by an increase of $177 million, which management attributed to a growth in average invested assets, primarily within other limited partnership interests including hedge funds, mortgage loans, and real estate joint ventures, driven by continued business growth, particularly in the funding agreements and global GIC businesses.
 
Expenses
 
Total expenses increased by $447 million, or 9%, to $5,222 million for the three months ended June 30, 2008 from $4,775 million for the comparable 2007 period. The increase in expenses was primarily attributable to policyholder benefits and claims of $631 million, partially offset by lower interest credited to policyholder account balances of $159 million and lower other expenses of $25 million.
 
The increase in policyholder benefits and claims of $631 million included a $20 million decrease related to net investment gains (losses). Excluding the decrease related to net investment gains (losses), policyholder benefits and claims increased by $651 million.
 
Retirement & savings’ policyholder benefits increased $296 million, which was primarily attributable to the group institutional annuity business of $299 million. The increase in the group institutional annuity business was primarily due to the aforementioned increase in premiums and the impact of a charge of $64 million in the current period due to a liability adjustment on a large annuity contract. The increase in the group institutional annuity business was slightly offset by favorable mortality in the current period. Structured settlements increased $4 million, primarily due to an increase in interest credited on future policyholder benefits, the impact of a favorable liability refinement in the prior period of $12 million, partially offset by less unfavorable mortality in the current period and the aforementioned decrease in premiums, fees and other revenues. Partially offsetting these increases in policyholder benefits, was a decrease in the income annuity business of $6 million, primarily due to the aforementioned decrease in premiums, fees and other revenues, partially offset by unfavorable mortality and higher interest credited on future policyholder benefits.
 
Group life’s policyholder benefits and claims increased $187 million, mostly due to increases in the term life, universal life, corporate-owned life insurance and in life insurance sold to postretirement benefit plans products of $117 million, $51 million, $16 million and $3 million, respectively. The increases in term life, universal life and corporate owned life insurance were primarily due to the aforementioned increase in premiums, fees and other revenues and included the impact of less favorable mortality experience in the current period. The current period mortality experience was negatively impacted by an unusually high number of large claims in the specialty product areas. Included in the term life increase is the net impact of favorable liability refinements in the prior period of $20 million.
 
Non-medical health & other’s policyholder benefits and claims increased by $168 million. An increase of $181 million was largely due to the aforementioned growth in the dental, disability, IDI and AD&D businesses, higher claims in the AD&D and disability businesses, partially offset by favorable morbidity in IDI. These increases were partially offset by a decline in LTC of $15 million. This decline was primarily attributable to the aforementioned $37 million shift to deposit-type liability contracts, partially offset by business growth, an increase in interest credited on future policyholder benefits, and unfavorable claim experience in the current period. Included in the overall increase in non-medical health & other’s policyholder benefits and claims is a $29 million favorable impact related to certain prior period liability refinements in the LTC and disability businesses.


84


Table of Contents

Management attributed the decrease of $159 million in interest credited to policyholder account balances to a $248 million decrease from a decrease in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, partially offset by an $89 million increase, solely from growth in the average policyholder account balances, primarily the result of continued growth in the global GIC and funding agreement products.
 
Lower other expenses of $25 million included a decrease in DAC amortization of $13 million, primarily due to an $18 million charge associated with the impact of DAC and VOBA amortization from the implementation of SOP 05-1 in the prior period. Also contributing to the decrease in other expenses was the impact of a $14 million charge in the prior period related to the reimbursement of certain dental claims. Partially offsetting the decrease in other expenses, non-deferrable volume related expenses and corporate support expenses increased $2 million. Non-deferrable volume related expenses include those expenses associated with information technology, compensation, and direct departmental spending. Direct departmental spending includes expenses associated with advertising, consultants, travel, printing and postage.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — Institutional
 
Income from Continuing Operations
 
Income from continuing operations decreased by $79 million, or 11%, to $632 million for the six months ended June 30, 2008 from $711 million for the comparable 2007 period.
 
Included in this decrease was lower earnings of $221 million, net of income tax, from higher net investment losses, partially offset by an increase of $30 million, net of income tax, resulting from a decrease in policyholder benefits and claims related to net investment gains (losses). Excluding the impact from net investment gains (losses), income from continuing operations increased by $112 million, net of income tax, compared to the prior period.
 
An increase in interest margins of $113 million, net of income tax, compared to the prior period, contributed to the increase in income from continuing operations. Management attributed this increase to the group life and retirement & savings businesses of $82 million and $43 million, net of income tax, respectively. Partially offsetting these increases was a decrease in the non-medical health & other business of $12 million, net of income tax. Interest margin is the difference between interest earned and interest credited to policyholder account balances. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits and claims, and the amount credited to policyholder account balances for investment-type products, recorded in interest credited to policyholder account balances. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements, and may reflect actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
 
In addition, a decrease in other expenses contributed to the increase in income from continuing operations, due in part to lower expenses related to DAC amortization of $24 million, net of income tax, primarily due to the impact of a $29 million, net of income tax, charge due to the impact of the implementation of SOP 05-1 in the prior period. Also contributing to lower expenses was the impact of a charge in the prior period of $9 million, net of income tax.
 
The remaining increase in premiums, fees, and other revenues also contributed to the increase in income from continuing operations.
 
Lower underwriting results of $79 million, net of income tax, compared to the prior period, partially offset the increase in income from continuing operations. Management attributed this decrease primarily to the group life and retirement & savings businesses of $59 million and $24 million, both net of income tax, respectively. Partially offsetting these decreases was an increase of $4 million, net of income tax, in the non-medical health & other business. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity, or other insurance costs less claims incurred, and the change in insurance-related


85


Table of Contents

liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $1,023 million, or 9%, to $11,967 million for the six months ended June 30, 2008 from $10,944 million for the comparable 2007 period.
 
The increase of $1,023 million in premiums, fees and other revenues was largely due to increases in the retirement & savings, non-medical health & other and group life businesses of $443 million, $355 million and $225 million, respectively.
 
The increase in the retirement & savings business was primarily due to increases in premium in the group institutional annuity and structured settlement businesses of $430 million and $31 million, respectively, both primarily due to higher sales. The increase in the group institutional annuity business was primarily due to large domestic sales and the first significant sale in the United Kingdom business in the current period. Partially offsetting these increases are lower sales in the income annuity business of $15 million. Premiums, fees and other revenues from retirement & savings products are significantly influenced by large transactions and, as a result, can fluctuate from period to period.
 
The growth in the non-medical health & other business was largely due to increases in the dental, disability, AD&D, and IDI businesses of $384 million. The increase in the dental business was primarily due to organic growth in the business and the impact of an acquisition that closed in the first quarter of 2008. The increases in the disability, AD&D, and IDI businesses are primarily due to continued growth in the business. Partially offsetting these increases was a decline in the LTC business of $40 million, primarily attributable to a $74 million decrease, which management attributed to a shift to deposit liability-type contracts during the latter part of the prior year, partially offset by growth in the business. The remaining increase in non-medical health & other was attributed to business growth across several products.
 
The group life business increased $225 million, which management primarily attributed to a $191 million increase in term life, mainly due to the net impact of an increase in sales, partially offset by a decrease in assumed reinsurance. In addition, universal life and corporate-owned life insurance products increased $28 million and $24 million, respectively. The increase in universal life products was primarily attributable to lower experience rated refunds in the current period. The increase in corporate-owned life insurance was largely attributable to higher experience rated refunds in the prior period, as well as an increase in fee income which was mainly generated from new customers acquired in the second half of the prior year. Partially offsetting these increases was a decrease in life insurance sold to postretirement benefit plans of $18 million, primarily the result of the impact of a large sale in the prior period.
 
Net investment income was flat to the prior year period. Management attributed a $373 million increase to growth in the average asset base, primarily within other limited partnership interests including hedge funds, mortgage loans, and real estate joint ventures, principally driven by continued business growth, particularly in the funding agreement, global GIC, and the non-medical health and other businesses. Management attributed a $373 million reduction in net investment income to a decrease in yields, primarily due to lower returns on other limited partnership interests including hedge funds, real estate joint ventures, and fixed maturity securities, partially offset by improved securities lending results.
 
Expenses
 
Total expenses increased by $816 million, or 9%, to $10,392 million for the six months ended June 30, 2008 from $9,576 million for the comparable 2007 period. The increase in expenses was primarily attributable to policyholder benefits and claims of $1,068 million, partially offset by lower interest credited to policyholder account balances of $201 million and lower other expenses of $51 million.


86


Table of Contents

The increase in policyholder benefits and claims of $1,068 million included a $46 million decrease related to net investment gains (losses). Excluding the decrease related to net investment gains (losses), policyholder benefits and claims increased by $1,114 million.
 
Retirement & savings’ policyholder benefits increased $512 million, which was primarily attributable to the group institutional annuity and structured settlement businesses of $469 million and $44 million, respectively. The increase in the group institutional annuity business was primarily due to the aforementioned increase in premiums and the net impact of unfavorable liability adjustments in both periods of $61 million, which was largely due to a charge of $64 million in the current period due to a liability adjustment on a large annuity contract. In addition, the increase in the group institutional annuity business was partially offset by favorable mortality in the current period. The increase in structured settlements was largely due to the aforementioned increase in premiums, an increase in interest credited on future policyholder benefits and the impact of a favorable liability refinement in the prior year period of $12 million, partially offset by favorable mortality in the current period. Partially offsetting these increases was a decrease of $4 million in the income annuity business, primarily attributable to the aforementioned decrease in premiums, fees and other revenues, partially offset by an increase in interest credited to future policyholder benefits and the impact of a $5 million favorable liability refinement in the prior period.
 
Non-medical health & other’s policyholder benefits and claims increased by $306 million. An increase of $311 million was largely due to the aforementioned growth in the dental, disability, IDI and AD&D businesses and higher claims in the AD&D business. These increases were partially offset by favorable claim experience in disability, favorable morbidity in IDI, and a decline in LTC of $7 million. The LTC decrease was primarily attributable to the aforementioned $74 million shift to deposit liability-type contracts, partially offset by an increase in interest credited on future policyholder benefits and business growth. Included in the overall increase in non-medical health & other’s policyholder benefits and claims was a $29 million favorable impact related to certain prior period liability refinements in the LTC and disability businesses.
 
Group life’s policyholder benefits and claims increased $296 million, mostly due to increases in the term life, universal life and corporate owned life insurance products of $223 million, $69 million and $26 million, respectively, partially offset by a decrease of $22 million in life insurance sold to postretirement benefit plans. The increases in term life and universal life were primarily due to the aforementioned increase in premiums, fees and other revenues and included the impact of less favorable mortality experience in the current period. The current period mortality experience was negatively impacted by an unusually high number of large claims in the specialty product areas. Included in the term life increase was the net impact of favorable liability refinements in the prior period of $20 million. The decrease in life insurance sold to postretirement benefit plans was primarily due to the aforementioned decrease in premiums and more favorable mortality in the current period.
 
Management attributed the decrease of $201 million in interest credited to policyholder account balances to a $384 million decrease from a decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, partially offset by a $183 million increase, solely from growth in the average policyholder account balances, primarily the result of continued growth in the global GIC and funding agreement products.
 
Lower other expenses of $51 million include a decrease in DAC amortization of $37 million, primarily due to a $45 million charge associated with the impact of DAC and VOBA amortization from the implementation of SOP 05-1 in the prior year. Also contributing to the decrease in other expenses was the impact of a $14 million charge in the prior period related to the reimbursement of certain dental claims. Non-deferrable volume related expenses and corporate support expenses remained relatively flat. Non-deferrable volume related expenses include those expenses associated with information technology, compensation, and direct departmental spending. Direct departmental spending includes expenses associated with advertising, consultants, travel, printing and postage.


87


Table of Contents

Individual
 
The Company’s Individual segment offers a wide variety of protection and asset accumulation products aimed at serving the financial needs of its customers throughout their entire life cycle. Products offered by Individual include insurance products, such as traditional, variable and universal life insurance, and variable and fixed annuities. In addition, Individual sales representatives distribute disability insurance and LTC insurance products offered through the Institutional segment, investment products such as mutual funds, as well as other products offered by the Company’s other businesses.
 
The following table presents consolidated financial information for the Individual segment for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 1,071     $ 1,098     $ 2,138     $ 2,173  
Universal life and investment-type product policy fees
    917       880       1,820       1,733  
Net investment income
    1,702       1,805       3,399       3,537  
Other revenues
    155       155       303       301  
Net investment gains (losses)
    (260 )     (78 )     (363 )     (63 )
                                 
Total revenues
    3,585       3,860       7,297       7,681  
                                 
Expenses
                               
Policyholder benefits and claims
    1,409       1,395       2,786       2,758  
Interest credited to policyholder account balances
    500       495       1,006       1,002  
Policyholder dividends
    442       432       869       854  
Other expenses
    939       981       1,927       2,030  
                                 
Total expenses
    3,290       3,303       6,588       6,644  
                                 
Income from continuing operations before provision for income tax
    295       557       709       1,037  
Provision for income tax
    96       190       233       355  
                                 
Income from continuing operations
    199       367       476       682  
Income (loss) from discontinued operations, net of income tax
                (1 )      
                                 
Net income
  $ 199     $ 367     $ 475     $ 682  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — Individual
 
Income from Continuing Operations
 
Income from continuing operations decreased by $168 million, or 46%, to $199 million for the three months ended June 30, 2008 from $367 million for the comparable 2007 period. Included in this decrease was an increase in net investment losses of $118 million, net of income tax. Excluding the impact of net investment gains (losses), income from continuing operations decreased by $50 million from the comparable 2007 period.
 
The decrease in income from continuing operations was driven by the following items:
 
  •  A decrease in interest margins of $81 million, net of income tax. Interest margins relate primarily to the general account portion of investment-type products. Management attributed a $75 million decrease to the deferred annuity business and a $6 million decrease to other investment-type products, both net of income tax. Interest margin is the difference between interest earned and interest credited to policyholder account balances related to the general account on these businesses. Interest earned approximates net investment income on invested assets attributed to these businesses with net adjustments for other non-policyholder elements. Interest credited approximates the amount recorded in interest credited to policyholder account


88


Table of Contents

  balances. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees, and may reflect actions by management to respond to competitive pressures. Interest credited to policyholder account balances tends to move gradually over time to reflect market interest rate movements, subject to any minimum guarantees and, therefore, generally does not introduce volatility in expense.
 
  •  Higher annuity benefits of $17 million, net of income tax, primarily due to higher guaranteed annuity benefit rider costs net of related hedging results and higher amortization of sales inducements.
 
  •  An increase in interest credited to policyholder account balances of $15 million, net of income tax, due primarily to lower amortization of the excess interest reserves on acquired annuity and universal life blocks of business.
 
  •  Unfavorable underwriting results in life products of $9 million, net of income tax. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period.
 
  •  An increase in policyholder dividends of $7 million, net of income tax, due to growth in the business.
 
These aforementioned decreases in income from continuing operations were partially offset by the following items:
 
  •  Lower DAC amortization of $28 million, net of income tax, primarily resulting from net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period.
 
  •  Higher net investment income on blocks of business not driven by interest margins of $26 million, net of income tax.
 
  •  Higher universal life and investment-type product policy fees combined with other revenues of $25 million, net of income tax, primarily resulting from business growth over the prior period, partially offset by the impact of lower average account balances due to unfavorable equity market performance during the current period.
 
Revenues
 
Total revenues, excluding net investment gains (losses), decreased by $93 million, or 2%, to $3,845 million for the three months ended June 30, 2008 from $3,938 million for the comparable 2007 period.
 
Premiums decreased by $27 million primarily due to a decrease in immediate annuity premiums of $7 million and a $21 million decline in premiums associated with the Company’s closed block of business, in line with expectations. These decreases were partially offset by growth in premiums from other life products of $1 million driven by increased renewals of traditional life business.
 
Universal life and investment-type product policy fees combined with other revenues increased by $37 million primarily resulting from business growth over the prior period, partially offset by the impact of lower average account balances due to unfavorable equity market performance during the current period. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance.
 
Net investment income decreased by $103 million. Net investment income from the general account portion of investment-type products decreased by $152 million, while other businesses increased by $49 million. Management attributes $1 million of the decrease to a lower average asset base across various investment types. Additionally, management attributes $102 million to a decrease in yields primarily due to lower returns on other limited partnership interests, real estate joint ventures and fixed maturity securities, partially offset by higher securities lending results.


89


Table of Contents

Expenses
 
Total expenses decreased by $13 million, or less than 1%, to $3,290 million for the three months ended June 30, 2008 from $3,303 million for the comparable 2007 period.
 
Policyholder benefits and claims increased by $14 million primarily due to unfavorable mortality in the life products, including the closed block, of $14 million. Higher guaranteed annuity benefit rider costs net of related hedging results of $15 million, and higher amortization of sales inducements of $12 million also contributed to the increase in policyholder benefits and claims. Additionally, policyholder benefits and claims decreased by $27 million commensurate with the decrease in premiums discussed above.
 
Interest credited to policyholder account balances increased by $5 million. Interest credited on the general account portion of investment-type products decreased by $25 million, while other businesses increased by $7 million. Of the $25 million decrease on the general account portion of investment-type products, management attributed $5 million to lower average policyholder account balances resulting from a decrease in cash flows from annuities and $20 million to lower crediting rates. Partially offsetting these decreases was lower amortization of the excess interest reserves on acquired annuity and universal life blocks of business of $23 million primarily driven by lower lapses in the current year.
 
Policyholder dividends increased by $10 million due to growth in the business.
 
Lower other expenses of $42 million include lower DAC amortization of $43 million primarily relating to net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period. The remaining increase in other expenses of $1 million is due to an increase in non-deferrable volume related expenses, which include those expenses associated with information technology, compensation and direct departmental spending. Direct departmental spending includes expenses associated with consultants, travel, printing and postage.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — Individual
 
Income from Continuing Operations
 
Income from continuing operations decreased by $206 million, or 30%, to $476 million for the six months ended June 30, 2008 from $682 million for the comparable 2007 period. Included in this decrease was an increase in net investment losses of $195 million, net of income tax. Excluding the impact of net investment gains (losses), income from continuing operations decreased by $11 million from the comparable 2007 period.
 
The decrease in income from continuing operations was driven by the following items:
 
  •  A decrease in interest margins of $102 million, net of income tax. Interest margins relate primarily to the general account portion of investment-type products. Management attributed a $104 million decrease to the deferred annuity business offset by a $2 million increase to other investment-type products, both net of income tax. Interest margin is the difference between interest earned and interest credited to policyholder account balances related to the general account on these businesses. Interest earned approximates net investment income on invested assets attributed to these businesses with net adjustments for other non-policyholder elements. Interest credited approximates the amount recorded in interest credited to policyholder account balances. Interest credited to policyholder account balances is subject to contractual terms, including some minimum guarantees, and may reflect actions by management to respond to competitive pressures. Interest credited to policyholder account balances tends to move gradually over time to reflect market interest rate movements, subject to any minimum guarantees and, therefore, generally does not introduce volatility in expense.
 
  •  Unfavorable underwriting results in life products of $42 million, net of income tax. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related


90


Table of Contents

  experience trends, as well as the reinsurance activity related to certain blocks of business. Consequently, results can fluctuate from period to period.
 
  •  An increase in interest credited to policyholder account balances of $28 million, net of income tax, due primarily to lower amortization of the excess interest reserves on acquired annuity and universal life blocks of business.
 
  •  An increase in policyholder dividends of $10 million, net of income tax, due to growth in the business.
 
These aforementioned decreases in income from continuing operations were partially offset by the following items:
 
  •  Lower DAC amortization of $59 million, net of income tax, primarily resulting from net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period.
 
  •  Higher universal life and investment-type product policy fees combined with other revenues of $56 million, net of income tax, primarily related to slightly higher average account balances resulting from business growth over the prior period, partially offset by unfavorable equity market performance during the current period.
 
  •  Higher net investment income on blocks of business not driven by interest margins of $38 million, net of income tax.
 
  •  Lower expenses of $8 million, net of income tax, primarily due to a write-off of a receivable from one of the Company’s joint venture partners in the prior period, partially offset by higher non-deferrable volume related expenses.
 
  •  Lower annuity benefits of $4 million, net of income tax, primarily due to lower guaranteed annuity benefit rider costs net of related hedging results, partially offset by higher amortization of sales inducements.
 
The change in effective tax rates between periods accounts for the remainder of the increase in income from continuing operations.
 
Revenues
 
Total revenues, excluding net investment gains (losses), decreased by $84 million, or 1%, to $7,660 million for the six months ended June 30, 2008 from $7,744 million for the comparable 2007 period.
 
Premiums decreased by $35 million primarily due to a decrease in immediate annuity premiums of $10 million and a $46 million decline in premiums associated with the Company’s closed block of business in line with expectations. These decreases were partially offset by growth in premiums from other life products of $21 million driven by increased renewals of traditional life business.
 
Universal life and investment-type product policy fees combined with other revenues increased by $89 million primarily related to slightly higher average account balances resulting from business growth over the prior period, partially offset by unfavorable equity market performance during the current period. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance.
 
Net investment income decreased by $138 million. Net investment income from the general account portion of investment-type products decreased by $188 million, while other businesses increased by $50 million. Management attributes $16 million of the decrease to a lower average asset base across various investment types. Additionally, management attributes $122 million to a decrease in yields primarily due to lower returns on other limited partnership interests and real estate joint ventures, partially offset by higher securities lending results and higher returns on fixed maturity securities.


91


Table of Contents

Expenses
 
Total expenses decreased by $56 million, or 1%, to $6,588 million for the six months ended June 30, 2008 from $6,644 million for the comparable 2007 period.
 
Policyholder benefits and claims increased by $28 million primarily due to unfavorable mortality in the life products, including the closed block, of $69 million. Lower net guaranteed annuity benefit rider costs net of related hedging results of $16 million were partially offset by higher amortization of sales inducements of $10 million. Additionally, policyholder benefits and claims decreased by $35 million commensurate with the decrease in premiums discussed above.
 
Interest credited to policyholder account balances increased by $4 million. Interest credited on the general account portion of investment-type products decreased by $46 million, while other businesses increased by $7 million. Of the $46 million decrease on the general account portion of investment-type products, management attributed $18 million to lower average policyholder account balances resulting from a decrease in cash flows from annuities and $28 million to lower crediting rates. Partially offsetting these decreases was lower amortization of the excess interest reserves on acquired annuity and universal life blocks of business of $43 million primarily driven by lower lapses in the current year.
 
Policyholder dividends increased by $15 million due to growth in the business.
 
Lower other expenses of $103 million include lower DAC amortization of $91 million primarily relating to net investment losses in both periods and current period revisions to management’s assumptions used to determine estimated gross profits and margins. These decreases were partially offset by business growth and an increase in amortization resulting from changes in management’s assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period. The remaining decrease in other expenses of $12 million is driven by a $24 million decrease associated with a write-off of a receivable from one of the Company’s joint venture partners in the prior period partially offset by an increase in non-deferrable volume related expenses of $12 million, which include those expenses associated with information technology, compensation and direct departmental spending. Direct departmental spending includes expenses associated with consultants, travel, printing and postage.


92


Table of Contents

International
 
International provides life insurance, accident and health insurance, credit insurance, annuities and retirement & savings products to both individuals and groups. The Company focuses on emerging markets primarily within the Latin America, Europe and Asia Pacific regions.
 
The following table presents consolidated financial information for the International segment for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 920     $ 777     $ 1,824     $ 1,492  
Universal life and investment-type product policy fees
    294       241       584       477  
Net investment income
    356       271       625       521  
Other revenues
    6       3       13       16  
Net investment gains (losses)
    (136 )     20       (1 )     44  
                                 
Total revenues
    1,440       1,312       3,045       2,550  
                                 
Expenses
                               
Policyholder benefits and claims
    620       639       1,446       1,231  
Interest credited to policyholder account balances
    89       81       136       159  
Policyholder dividends
    2             4       1  
Other expenses
    471       389       899       776  
                                 
Total expenses
    1,182       1,109       2,485       2,167  
                                 
Income from continuing operations before provision for income tax
    258       203       560       383  
Provision for income tax
    85       60       201       109  
                                 
Income from continuing operations
    173       143       359       274  
Income (loss) from discontinued operations, net of income tax
          (16 )           (47 )
                                 
Net income
  $ 173     $ 127     $ 359     $ 227  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — International
 
Income from Continuing Operations
 
Income from continuing operations increased by $30 million, or 21%, to $173 million for the three months ended June 30, 2008 from $143 million for the comparable 2007 period. This increase includes the impact of net investment losses of $109 million, net of income tax, and favorable impact of changes in foreign currency exchange rates of $4 million, net of income tax.
 
Excluding the impact of net investment losses and of changes in foreign currency exchange rates, income from continuing operations increased by $135 million from the comparable 2007 period.
 
Income from continuing operations increased in:
 
  •  Mexico by $129 million, net of income tax, primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, higher net investment income due to an increase in invested assets as well as the impact of higher inflation rates on indexed securities, and lower claims experience, partially offset by higher expenses related to business growth and infrastructure costs.
 
  •  Japan by $10 million due to an increase of $23 million, net of income tax, in the Company’s earnings from its investment in Japan due to a decrease in the costs of guaranteed annuity benefits, the impact of a refinement


93


Table of Contents

  in assumptions for the guaranteed annuity business, and the favorable impact from the utilization of the fair value option for certain fixed annuities, and an increase of $3 million, net of income tax, in fees from assumed reinsurance, partially offset by a decrease of $16 million, net of income tax, from hedging activities associated with Japan’s guaranteed annuity benefits.
 
  •  Taiwan by $4 million, net of income tax, primarily due to an increase in invested assets and a refinement in DAC capitalization.
 
  •  Australia and the United Kingdom by $3 million and $2 million, respectively, primarily due to business growth.
 
These increases were partially offset by decreases in:
 
  •  South Korea by $8 million, net of income tax, primarily due to higher claims and operating expenses, including an increase in DAC amortization related to market performance, partially offset by higher revenues from business growth.
 
  •  The home office by $2 million primarily due to an increase in the amount charged for economic capital.
 
Contributions from the other countries account for the remainder of the change in income from continuing operations.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $284 million, or 22%, to $1,576 million for the three months ended June 30, 2008 from $1,292 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $50 million, total revenues increased by $234 million, or 17%, from the comparable 2007 period.
 
Premiums, fees and other revenues increased by $199 million, or 19%, to $1,220 million for the three months ended June 30, 2008 from $1,021 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $36 million, premiums, fees and other revenues increased by $163 million, or 15%, from the comparable 2007 period.
 
Premiums, fees and other revenues increased in:
 
  •  Chile by $69 million primarily due to higher annuity sales as well as higher institutional premiums from its traditional and bank distribution channels.
 
  •  Hong Kong by $42 million primarily due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007.
 
  •  Australia by $14 million as a result of growth in the institutional business and an increase in retention levels.
 
  •  South Korea by $12 million due to growth in its traditional business, guaranteed annuity and variable universal life businesses.
 
  •  The United Kingdom, India, Brazil, Belgium and Ireland by $11 million, $10 million, $6 million, $4 million and $2 million, respectively, due to business growth.
 
  •  The Company’s Japan operation by $5 million due to an increase in fees from assumed reinsurance.
 
  •  Mexico by $3 million due to an increase in fees from growth in its individual business, partially offset by a decrease in renewals in its institutional business.
 
Partially offsetting these increases, premiums, fees and other revenues decreased in Argentina by $16 million primarily due to a decrease in premiums resulting from pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants, partially offset by growth in its institutional and bancassurance business.
 
Contributions from the other countries account for the remainder of the change in premiums, fees and other revenues.
 
Net investment income increased by $85 million, or 31%, to $356 million for the three months ended June 30, 2008 from $271 million for the comparable 2007 period. Excluding the impact of changes in foreign currency


94


Table of Contents

exchange rates of $14 million, net investment income increased by $71 million, or 25% from the comparable 2007 period.
 
Net investment income increased in:
 
  •  Chile by $33 million due to the impact of higher inflation rates on indexed securities, the valuations and returns of which are linked to inflation rates, as well as an increase in invested assets.
 
  •  Mexico by $22 million due to an increase in invested assets as well as the impact of higher inflation rates on indexed securities.
 
  •  Brazil by $7 million due to gains in the trading portfolio, as well as an increase in invested assets resulting from growth and a capital contribution in the first quarter of 2008.
 
  •  South Korea and Taiwan by $4 million and $3 million, respectively, due to increases in invested assets.
 
  •  Hong Kong by $3 million due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, which reflects losses in the current period on the trading securities portfolio which supports unit-linked policyholder liabilities.
 
  •  Ireland by $2 million due to higher invested assets resulting from capital contributions in the prior year.
 
Partially offsetting these increases, net investment income decreased in:
 
  •  The home office by $3 million primarily due to an increase in the amount charged for economic capital.
 
  •  Japan by $1 million due to a decrease of $24 million from hedging activities associated with Japan’s guaranteed annuity, offset by an increase of $23 million, net of income tax, in the Company’s earnings from its investment in Japan due to a decrease in the costs of guaranteed annuity benefits, the impact of a refinement in assumptions for the guaranteed annuity business, and the favorable impact from the utilization of the fair value option for certain fixed annuities.
 
Contributions from the other countries account for the remainder of the change in net investment income.
 
Expenses
 
Total expenses increased by $73 million, or 7%, to $1,182 million for the three months ended June 30, 2008 from $1,109 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $43 million, total expenses increased by $30 million, or 3%, from the comparable 2007 period.
 
Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances decreased by $9 million, or 1%, to $711 million for the three months ended June 30, 2008 from $720 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $31 million, policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances decreased by $40 million, or 5%, from the comparable 2007 period.
 
Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances decreased in:
 
  •  Mexico by $187 million, primarily due to a decrease in certain policyholder liabilities of $194 million caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, as well as lower claims experience, partially offset by increases in reserves from business growth and an increase in interest credited to policyholder account balances of $10 million commensurate with the growth in investment income discussed above.
 
  •  Argentina by $18 million primarily due to a decrease in claims and market-indexed policyholder liabilities resulting from pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants.


95


Table of Contents

 
Partially offsetting these decreases in policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased in:
 
  •  Chile by $98 million primarily due to an increase in the annuity and institutional business mentioned above, as well as an increase in inflation indexed policyholder liabilities commensurate with the increase in net investment income from inflation-indexed assets.
 
  •  Hong Kong by $40 million due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, which includes negative interest credited to unit-linked policyholder liabilities reflecting the losses of the trading portfolio backing these liabilities as discussed in the net investment income section above.
 
  •  South Korea by $9 million primarily due to higher claims from business growth.
 
  •  Brazil by $7 million primarily due to an increase in interest credited to unit-linked policyholder liabilities reflecting the gains in the trading portfolio discussed above.
 
  •  Australia by $6 million due to growth in the institutional business and an increase in retention levels.
 
  •  India by $4 million due to business growth.
 
Contributions from the other countries account for the remainder of the change.
 
Other expenses increased by $82 million, or 21%, to $471 million for the three months ended June 30, 2008 from $389 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $12 million, total expenses increased by $70 million, or 17%, from the comparable 2007 period.
 
Other expenses increased in:
 
  •  South Korea by $17 million due to business growth, as well as an increase in DAC amortization related to market performance.
 
  •  Mexico by $13 million primarily due to higher expenses related to infrastructure costs as well as business growth.
 
  •  The United Kingdom by $9 million due to business growth.
 
  •  India by $6 million primarily due to increased staffing and growth initiatives.
 
  •  Hong Kong by $5 million due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007.
 
  •  Australia, Brazil, Belgium and Chile by $5 million, $4 million, $4 million and $3 million, respectively, primarily due to higher commissions related to business growth.
 
  •  Ireland by $3 million due to expenses related to growth initiatives.
 
Partially offsetting these increases in other expenses was a decrease in Taiwan by $3 million due to a refinement in DAC capitalization.
 
Contributions from the other countries account for the remainder of the change.


96


Table of Contents

Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — International
 
Income from Continuing Operations
 
Income from continuing operations increased by $85 million, or 31%, to $359 million for the six months ended June 30, 2008 from $274 million for the comparable 2007 period. This increase includes the impact of net investment losses of $37 million, net of income tax, and favorable impact of foreign currency exchange rates of $10 million, net of income tax.
 
Excluding the impact of net investment losses and of changes in foreign currency exchange rates, income from continuing operations increased by $112 million from the comparable 2007 period.
 
Income from continuing operations increased in:
 
  •  Mexico by $96 million, net of income tax, primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, the reinstatement of premiums from prior periods, growth in the individual and institutional businesses, higher net investment income due to an increase in invested assets as well as the impact of higher inflation rates on indexed securities, and lower claims experience, partially offset by higher expenses related to business growth and infrastructure costs, the favorable impact in the prior year of a decrease in experience refunds on Mexico’s institutional business, a lower increase in litigation liabilities in the prior year, as well as a valuation allowance established against net operating losses.
 
  •  Argentina by $15 million, net of income tax, primarily due to a reduction in the liability for pension servicing obligations of $23 million, net of income tax, resulting from a refinement of assumptions and the availability of statistics from the government regarding the number of participants transferring to the government-sponsored plan under pension reform which was effective January 1, 2008, a decrease in claims and market-indexed policyholder liabilities resulting from pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants, partially offset by a decrease in death and disability premiums due to pension reform. Argentina also benefited more significantly in the prior year from the utilization of deferred tax assets against which valuation allowances had previously been established.
 
  •  Ireland by $10 million, net of income tax, due to foreign currency transaction gains and a tax benefit in the current period, partially offset by the utilization in the prior year of net operating losses for which a valuation allowance had been previously established.
 
  •  Hong Kong by $9 million, net of income tax, due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, as well as business growth.
 
  •  Taiwan by $2 million, net of income tax, primarily due to an increase in invested assets and a refinement in DAC capitalization, offset by an increase in liabilities resulting from a refinement of methodologies related to the estimation of profit emergence on certain blocks of business.
 
  •  Australia and the United Kingdom by $5 million and $4 million, respectively, primarily due to business growth.
 
Partially offsetting these increases, income from continuing operations decreased in:
 
  •  Japan by $13 million, net of income tax, due to a decrease of $30 million, net of income tax, in the Company’s earnings from its investment in Japan resulting from an increase in the costs of guaranteed annuity benefits, partially offset by the favorable impact from the utilization of the fair value option for certain fixed annuities, the impact of a refinement in assumptions for the guaranteed annuity business, an increase of $10 million, net of income tax, from hedging activities associated with Japan’s guaranteed annuity benefits and an increase of $7 million, net of income tax, in fees from assumed reinsurance.
 
  •  South Korea by $9 million, net of income tax, primarily due to higher claims and operating expenses, including an increase in DAC amortization related to market performance, partially offset by higher revenues from business growth and higher investment yields.


97


Table of Contents

 
  •  The home office by $6 million, net of income tax, due to higher economic capital charges and higher spending on growth and infrastructure initiatives.
 
Contributions from the other countries account for the remainder of the change in income from continuing operations.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $540 million, or 22%, to $3,046 million for the six months ended June 30, 2008 from $2,506 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $111 million, total revenues increased by $429 million, or 16%, from the comparable 2007 period.
 
Premiums, fees and other revenues increased by $436 million, or 22%, to $2,421 million for the six months ended June 30, 2008 from $1,985 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $83 million, premiums, fees and other revenues increased by $353 million, or 17%, from the comparable 2007 period.
 
Premiums, fees and other revenues increased in:
 
  •  Chile by $135 million primarily due to higher annuity sales as well as higher institutional premiums from its traditional and bank distribution channels.
 
  •  Hong Kong by $83 million primarily due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, as well as business growth.
 
  •  Mexico by $41 million due to growth in its individual and institutional businesses, as well as the reinstatement of $8 million of premiums from prior periods partially offset by a decrease of $13 million in experience refunds in the prior year on Mexico’s institutional business.
 
  •  South Korea by $36 million due to growth in its traditional business as well as in its guaranteed annuity and variable universal life businesses.
 
  •  Australia by $29 million as a result of growth in the institutional business and an increase in retention levels.
 
  •  India, the United Kingdom, Brazil, Belgium and Ireland by $17 million, $17 million, $8 million, $7 million and $2 million, respectively, due to business growth.
 
  •  The Company’s Japan operation by $11 million due to an increase in fees from assumed reinsurance.
 
Partially offsetting these increases, premiums, fees and other revenues decreased in Argentina by $33 million primarily due to a decrease in premiums due to pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants, partially offset by growth in its institutional and bancassurance business.
 
Net investment income increased by $104 million, or 20%, to $625 million for the six months ended June 30, 2008 from $521 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $28 million, net investment income increased by $76 million, or 14% from the comparable 2007 period.
 
Net investment income increased in:
 
  •  Chile by $59 million due to the impact of higher inflation rates on indexed securities, the valuations and returns of which are linked to inflation rates, as well as an increase in invested assets.
 
  •  Mexico by $38 million due to an increase in invested assets, the impact of higher inflation rates on indexed securities as well as the lengthening of the duration of the portfolio, partially offset by a decrease in short-term yields.
 
  •  Brazil by $8 million due to gains in the trading portfolio, as well as an increase in invested assets resulting from growth and a capital contribution in the first quarter of 2008.
 
  •  Ireland by $3 million due to higher invested assets resulting from capital contributions in the prior year.
 
  •  South Korea by $8 million due to increases in invested assets and higher investment yields.


98


Table of Contents

 
  •  Taiwan by $4 million due to increases in invested assets.
 
Partially offsetting these increases, net investment income decreased in:
 
  •  Hong Kong by $28 million despite the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, because of the negative investment income for the period due to the losses on the trading securities portfolio which supports unit-linked policyholder liabilities.
 
  •  Japan by $14 million due to a decrease of $30 million, net of income tax, in the Company’s earnings from its investment in Japan due to an increase in the costs of guaranteed annuity benefits and the impact of a refinement in assumptions for the guaranteed annuity business, partially offset by the favorable impact from the utilization of the fair value option for certain fixed annuities and an increase of $16 million from hedging activities associated with Japan’s guaranteed annuity.
 
  •  The home office of $7 million primarily due to an increase in the amount charged for economic capital.
 
Contributions from the other countries account for the remainder of the change in net investment income.
 
Expenses
 
Total expenses increased by $318 million, or 15%, to $2,485 million for the six months ended June 30, 2008 from $2,167 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $96 million, total expenses increased by $222 million, or 10%, from the comparable 2007 period.
 
Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased by $195 million, or 14%, to $1,586 million for the six months ended June 30, 2008 from $1,391 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $65 million, policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased by $130 million, or 9%, from the comparable 2007 period.
 
Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased in:
 
  •  Chile by $185 million primarily due to an increase in the annuity and institutional business mentioned above, as well as an increase in inflation indexed policyholder liabilities commensurate with the increase in net investment income from inflation-indexed assets.
 
  •  Hong Kong by $33 million due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007, which includes negative interest credited to unit-linked policyholder liabilities reflecting the losses of the trading portfolio backing these liabilities as discussed in the net investment income section above.
 
  •  Australia by $16 million due to growth in the institutional business and an increase in retention levels.
 
  •  South Korea by $13 million primarily due to higher claims from business growth.
 
  •  Brazil by $10 million primarily due to an increase in interest credited to unit-linked policyholder liabilities reflecting the gains in the trading portfolio discussed above.
 
  •  India by $6 million due to business growth.
 
  •  Taiwan by $4 million primarily due to an increase in liabilities resulting from a refinement of methodologies related to the estimation of profit emergence on a certain block of business.
 
Partially offsetting these increases in policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances were decreases in:
 
  •  Mexico by $109 million, primarily due to a decrease in certain policyholder liabilities of $138 million caused by a decrease in the unrealized investment results on the invested assets supporting those liabilities relative to the prior period, as well as lower claims experience partially offset by increases in reserves and other policyholder benefits of $9 million commensurate with the growth in premiums discussed above, and an increase in interest credited to policyholder account balances of $20 million commensurate with the growth in investment income discussed above.


99


Table of Contents

 
  •  Argentina by $30 million primarily due to a decrease in claims and market-indexed policyholder liabilities resulting from pension reform, under which fund administrators no longer provide death and disability coverage to the plan participants.
 
Contributions from the other countries account for the remainder of the change.
 
Other expenses increased by $123 million, or 16%, to $899 million for the six months ended June 30, 2008 from $776 million for the comparable 2007 period. Excluding the impact of changes in foreign currency exchange rates of $31 million, total expenses increased by $92 million, or 11%, from the comparable 2007 period.
 
Other expenses increased in:
 
  •  South Korea by $44 million due to business growth, as well as an increase in DAC amortization related to market performance.
 
  •  Mexico by $26 million primarily due to higher expenses related to business growth and infrastructure costs, as well as a lower increase in litigation liabilities in the prior year.
 
  •  India by $12 million primarily due to increased staffing and growth initiatives.
 
  •  The United Kingdom by $12 million due to business growth, partially offset by foreign currency transaction gains.
 
  •  Hong Kong by $12 million due to the acquisition of the remaining 50% interest in MetLife Fubon in the second quarter of 2007 and the resulting consolidation of the operation beginning in the third quarter of 2007.
 
  •  Chile by $9 million primarily due to the business growth discussed above as well as higher compensation costs and higher spending on infrastructure and marketing programs.
 
  •  Australia, Belgium and Brazil by $7 million, $7 million and $4 million, respectively, primarily due to higher commissions related to business growth.
 
  •  The home office of $5 million primarily due to higher spending on growth and infrastructure initiatives.
 
Partially offsetting these increases in other expenses were decreases in:
 
  •  Argentina by $33 million, primarily due to a reduction in the liability for pension servicing obligations resulting from a refinement of assumptions and methodology, as well as the availability of government statistics regarding the number of participants transferring to the government-sponsored plan under the pension reform plan which was effective January 1, 2008. Under the pension reform plan, the Company retains the obligation for administering certain existing and future participants’ accounts for which they receive no revenue. Partially offsetting this decrease are higher commissions from growth in the institutional and bancassurance businesses discussed above.
 
  •  Ireland by $11 million due to foreign currency transaction gains, partially offset by higher expenses related to growth initiatives.
 
  •  Taiwan by $4 million due to a refinement in DAC capitalization.
 
Contributions from the other countries account for the remainder of the change.


100


Table of Contents

Auto & Home
 
Auto & Home, operating through Metropolitan Property and Casualty Insurance Company and its subsidiaries, offers personal lines property and casualty insurance directly to employees at their employer’s worksite, as well as to individuals through a variety of retail distribution channels, including the agency distribution group, independent agents, property and casualty specialists and direct response marketing. Auto & Home primarily sells auto insurance and homeowners insurance.
 
The following table presents consolidated financial information for the Auto & Home segment for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 743     $ 738     $ 1,487     $ 1,454  
Net investment income
    50       49       103       97  
Other revenues
    9       8       19       19  
Net investment gains (losses)
    (13 )           (24 )     12  
                                 
Total revenues
    789       795       1,585       1,582  
                                 
Expenses
                               
Policyholder benefits and claims
    539       446       1,017       876  
Policyholder dividends
    2             3       1  
Other expenses
    203       204       407       406  
                                 
Total expenses
    744       650       1,427       1,283  
                                 
Income before provision for income tax
    45       145       158       299  
Provision for income tax
    2       36       24       77  
                                 
Net income
  $ 43     $ 109     $ 134     $ 222  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — Auto & Home
 
Net Income
 
Net income decreased by $66 million, or 61%, to $43 million for the three months ended June 30, 2008 from $109 million for the comparable 2007 period.
 
The decrease in net income was primarily attributable to an increase in policyholder benefits and claims, and policyholder dividends, of $62 million, net of income tax, comprised primarily of an increase of $71 million, net of income tax, in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states. A decrease in non-catastrophe policyholder benefits and claims improved net income by $9 million, net of income taxes. The decrease in non-catastrophe policyholder benefits resulted from $17 million, net of income tax, of lower losses due to severity and $3 million, net of income tax, of additional favorable development of prior year losses offset by an increase of $7 million, net of income tax, from higher claim frequencies, a $3 million, net of income tax, increase related to higher earned exposures, and a $1 million, net of income tax, increase in policyholder dividends.
 
Offsetting this decrease in net income was an increase in premiums of $3 million, net of income tax, comprised of an increase of $5 million, net of income tax, related to increased exposures and a decrease of $5 million, net of income tax, in catastrophe reinsurance costs. Offsetting these increases in premiums was a decrease of $7 million, net of income tax, related to a reduction in average earned premium per policy.


101


Table of Contents

In addition, net investment income increased by $1 million, net of income tax, primarily due to an increase in net investment income related to a realignment of economic capital offset by a decrease in net investment income from a smaller asset base.
 
Also impacting net income was an increase of $1 million, net of income tax, in other revenues and a decrease of $1 million, net of income tax, in other expenses. In addition, net investment losses increased by $10 million, net of income tax. A greater proportion of tax advantaged investment income resulted in a decline in the segment’s effective tax rate.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $7 million, or 1%, to $802 million for the three months ended June 30, 2008 from $795 million for the comparable 2007 period.
 
Premiums increased by $5 million due to an increase of $7 million related to increased exposures and a decrease of $7 million in catastrophe reinsurance costs, offset by a decrease of $9 million related to a reduction in average earned premium per policy.
 
Net investment income increased by $1 million primarily due to a realignment of economic capital, offset by a decrease in net investment income from a smaller asset base and other revenues increased $1 million primarily due to an increase in prepayment fees.
 
Expenses
 
Total expenses increased by $94 million, or 14%, to $744 million for the three months ended June 30, 2008 from $650 million for the comparable 2007 period.
 
Policyholder benefits and claims, and policyholder dividends, increased by $95 million due primarily to an increase of $109 million in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states. Non-catastrophe policyholder benefits and claims decreased $14 million resulting from $26 million of lower losses due to severity and $4 million of additional favorable development of prior year losses offset by an increase of $10 million from higher claim frequencies, a $4 million increase related to higher earned exposures and a $2 million increase in policyholder dividends.
 
Other expenses decreased by $1 million with no single expense category contributing significantly to the fluctuation.
 
Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the three months ended June 30, 2008 as the combined ratio, excluding catastrophes, decreased to 81.9% from 84.3% for the three months ended June 30, 2007.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — Auto & Home
 
Net Income
 
Net income decreased by $88 million, or 40%, to $134 million for the six months ended June 30, 2008 from $222 million for the comparable 2007 period.
 
The decrease in net income was primarily attributable to an increase in policyholder benefits and claims, and policyholder dividends, of $93 million, net of income tax, comprised primarily of an increase of $80 million, net of income tax, in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states. Also increasing policyholder benefits and claims was an increase of $22 million, net of income tax, from higher non-catastrophe claim frequencies, a $9 million, net of income tax, increase related to higher earned exposures, $4 million, net of income tax, of less favorable development of prior year non-catastrophe losses, $2 million, net of income tax, in unallocated claims adjusting expenses, primarily resulting from an increase in claims-related compensation costs negatively impacting net income and a $1 million, net of income tax, increase in policyholder dividends. Offsetting these increases was $25 million, net of income tax, from lower losses due to severity.


102


Table of Contents

Offsetting this decrease in net income was an increase in premiums of $21 million, net of income tax, comprised of an increase of $17 million, net of income tax, related to increased exposures, a decrease of $10 million, net of income tax, in catastrophe reinsurance costs and an increase of $8 million, net of income tax, resulting from the change in estimate in the prior year on auto rate refunds due to a regulatory examination. Offsetting these increases in premiums was a decrease of $12 million, net of income tax, related to a reduction in average earned premium per policy and a decrease of $2 million, net of income tax, in premiums from various involuntary programs.
 
In addition, net investment income increased by $4 million, net of income tax, primarily due to an increase in net investment income related to a realignment of economic capital offset by a decrease in net investment income from a smaller asset base.
 
In addition, net investment gains (losses) decreased by $24 million, net of income tax.
 
Also, income taxes contributed $4 million to net income, over the expected amount, due to favorable resolution of a prior year audit. A greater proportion of tax advantaged investment income resulted in a decline in the segment’s effective tax rate.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $39 million, or 2%, to $1,609 million for the six months ended June 30, 2008 from $1,570 million for the comparable 2007 period.
 
Premiums increased by $33 million due to an increase of $25 million related to increased exposures, a decrease of $15 million in catastrophe reinsurance costs and an increase of $13 million resulting from the change in estimate in the prior year on auto rate refunds due to a regulatory examination. These increases were offset by a decrease of $17 million related to a reduction in average earned premium per policy and a decrease of $3 million in premiums from various involuntary programs.
 
Net investment income increased by $6 million primarily due to a realignment of economic capital, offset by a decrease in net investment income from a smaller asset base.
 
Expenses
 
Total expenses increased by $144 million, or 11%, to $1,427 million for the six months ended June 30, 2008 from $1,283 million for the comparable 2007 period.
 
Policyholder benefits and claims, and policyholder dividends, increased by $143 million due primarily to an increase of $123 million in catastrophe losses resulting from severe thunderstorms and tornadoes in the Midwestern and Southern states. Also increasing policyholder benefits and claims was an increase of $33 million from higher non-catastrophe claim frequencies, a $14 million increase related to higher earned exposures, $7 million less of favorable development of prior year non-catastrophe losses and $3 million in unallocated loss adjustment expenses, primarily resulting from an increase in claims-related compensation costs and a $2 million increase in policyholder dividends. Offsetting these increases was $39 million from lower losses due to severity.
 
Other expenses increased by $1 million primarily as a result of higher compensation costs offset by minor fluctuations in other expense categories.
 
Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the six months ended June 30, 2008 as the combined ratio, excluding catastrophes, decreased to 84.9% from 85.6% for the six months ended June 30, 2007.


103


Table of Contents

Reinsurance
 
The Company’s Reinsurance segment is comprised of the life reinsurance business of RGA, a publicly traded company. At June 30, 2008, the Company’s ownership in RGA was 52%. As described more fully in “— Acquisitions and Dispositions,” the Company and RGA have entered into an agreement to execute a tax-free split-off transaction to be effectuated through an exchange offer. As RGA represents the entirety of the Reinsurance segment, a successful exchange offer would eliminate this operating segment. RGA’s operations in North America are its largest and include operations of its Canadian and U.S. subsidiaries. In addition to these operations, RGA has subsidiary companies, branch offices or representative offices in Australia, Barbados, Bermuda, China, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Mexico, Poland, South Africa, South Korea, Spain, Taiwan and the United Kingdom.
 
The following table presents consolidated financial information for the Reinsurance segment for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 1,359     $ 1,208     $ 2,657     $ 2,334  
Net investment income
    246       266       435       472  
Other revenues
    23       19       53       37  
Net investment gains (losses)
    (6 )     (14 )     (162 )     (20 )
                                 
Total revenues
    1,622       1,479       2,983       2,823  
                                 
Expenses
                               
Policyholder benefits and claims
    1,117       979       2,257       1,881  
Interest credited to policyholder account balances
    63       117       137       182  
Other expenses
    356       329       485       654  
                                 
Total expenses
    1,536       1,425       2,879       2,717  
                                 
Income before provision for income tax
    86       54       104       106  
Provision for income tax
    31       20       37       38  
                                 
Net income
  $ 55     $ 34     $ 67     $ 68  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — Reinsurance
 
Net Income
 
Net income increased by $21 million, or 62%, to $55 million for the three months ended June 30, 2008 from $34 million for the comparable 2007 period.
 
The increase in net income was attributable to a 13% increase in premiums, a 46% decrease in interest credited to policyholder account balances, a 21% increase in other revenues, a 57% decrease in net investment losses, offset by a 14% increase in policyholder benefits and claims, an 8% increase in other expenses, and an 8% decrease in net investment income. The increase in premiums, net of the increase in policyholder benefits and claims, was an $8 million addition to net income, which was primarily due to premium growth across RGA’s operations, while claims experience was primarily at expected levels. Policyholder benefits and claims as a percentage of premiums were 82% compared to 81% in the prior year. The decrease in net investment income, net of the greater decrease in interest credited to policyholder account balances, increased net income by $22 million and was primarily due to an after-tax non-cash decrease in interest credited from changes in risk free interest rates used in the present value calculations of embedded derivatives associated with EIAs and growth in the asset base and slightly higher yields,


104


Table of Contents

partially offset by a reduction in the equity option market value within certain funds withheld portfolios associated with the reinsurance of equity indexed annuity products.
 
The decrease in net investment losses increased net income by $5 million, primarily due to a decrease in the fair value of embedded derivatives associated with the reinsurance of annuity products on a funds withheld basis. The increase in other revenues added $3 million to net income and was primarily related to an increase in investment product fees on asset-intensive business and financial reinsurance fees during 2008.
 
These increases in net income were partially offset by an $18 million increase in other expenses, net of income tax. The increase in other expenses was primarily related to an increase in minority interest expense and overhead-related expenses associated with RGA’s international expansion, partially offset by a decrease in interest expense.
 
Additionally, a component of the increase in net income was a $2 million, net of income tax, increase associated with foreign currency exchange rate movements.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $135 million, or 9%, to $1,628 million for the three months ended June 30, 2008 from $1,493 million for the comparable 2007 period.
 
The increase in revenues was primarily associated with growth in premiums of $151 million from new facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA operating segments, including Asia Pacific, which contributed $79 million; the U.S., which contributed $34 million; Europe and South Africa, which contributed $21 million; and Canada, which contributed $17 million. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period.
 
Net investment income decreased by $20 million primarily due to a decrease in the net investment income of approximately $45 million related to a reduction in equity option market values relative to the comparable period within certain funds withheld portfolios associated with the reinsurance of equity indexed annuity products, which is generally offset by an adjustment to interest credited. This decrease is partially offset by the effect of an increase in average invested assets outstanding, primarily due to positive operating cash flows, additional deposits on asset intensive products, and higher yields in the current period.
 
Other revenues increased by $4 million primarily due to an increase in surrender charges on asset-intensive business reinsured and an increase in fees associated with financial reinsurance.
 
Additionally, a component of the increase in total revenues, excluding net investment gains (losses), was a $26 million increase associated with foreign currency exchange rate movements.
 
Expenses
 
Total expenses increased by $111 million, or 8%, to $1,536 million for the three months ended June 30, 2008 from $1,425 million for the comparable 2007 period.
 
This increase in total expenses was primarily attributable to an increase of $138 million in policyholder benefits and claims, primarily associated with growth in insurance in-force of $197 billion and a slight increase in policyholder benefits and claims as a percentage of premiums. Additionally, other expenses increased by $27 million due to a $26 million increase in minority interest expense, a $7 million increase in compensation and overhead-related expenses primarily associated with RGA’s international expansion and general growth in operations, and a $2 million increase in expenses associated with DAC, including reinsurance allowances paid, offset in part by an $8 million decrease in interest expense due primarily to a decrease in interest rates on variable rate debt.
 
Interest credited to policyholder account balances decreased by $54 million, primarily due to a reduction in interest credited to policyholder account balances associated with the aforementioned equity option market value decreases within certain funds withheld portfolios and a $9 million decrease in the current period related to changes in risk free rates used in the present value calculations of embedded derivatives associated with EIAs.


105


Table of Contents

Additionally, a component of the increase in total expenses was a $23 million increase associated with foreign currency exchange rate movements.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — Reinsurance
 
Net Income
 
Net income decreased by $1 million, or 1%, to $67 million for the six months ended June 30, 2008 from $68 million for the comparable 2007 period.
 
The decrease in net income was attributable to a 20% increase in policyholder benefits and claims, an 8% decrease in net investment income, offset by a 43% increase in other revenues, a 14% increase in premium, a 25% decrease in interest credited to policyholder account balances and a 26% decrease in other expenses. The increase in premiums, net of the greater increase in policyholder benefits and claims, was a $34 million reduction to net income, which was primarily due to adverse claims experience in the U.S. and the United Kingdom, primarily in the first quarter of 2008, which more than offset the growth in premiums. Policyholder benefits and claims as a percentage of premiums were 85% compared to 81% in the prior year.
 
The decrease in net investment income, net of the greater decrease in interest credited to policyholder account balances, increased net income by $5 million and was primarily due to growth in asset base and slightly higher yields, offset in part by an after-tax non-cash increase in interest credited from changes in the risk free rates used in the present value calculations of embedded derivatives associated with EIAs.
 
The increase in other revenues added $10 million to net income and was primarily related to an increase in surrender charges on asset-intensive business and fees associated with financial reinsurance.
 
The decrease in other expenses contributed $110 million to net income, net of income tax, primarily related to a reduction of expenses associated with DAC, including reinsurance allowances paid resulting from the change in value of embedded derivatives included within net investment losses and interest credited to policyholder account balances, a decrease in minority interest and interest expense, partially offset by an increase in compensation and overhead-related expenses associated with RGA’s international expansion and general growth in operations.
 
These increases in net income were partially offset by a $92 million increase in net investment losses, net of income tax, primarily due to a decrease in the fair value of embedded derivatives associated with the reinsurance of annuity products on a funds withheld basis, a result of the impact of widening spreads in the U.S. debt markets.
 
Additionally, a component of the increase in net income was a $4 million increase associated with foreign currency exchange rate movements.
 
Revenues
 
Total revenues, excluding net investment gains (losses), increased by $302 million, or 11%, to $3,145 million for the six months ended June 30, 2008 from $2,843 million for the comparable 2007 period.
 
The increase in revenues was primarily associated with growth in premiums of $323 million from new facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA operating segments, including the U.S., which contributed $90 million; Asia Pacific, which contributed $133 million; Canada, which contributed $57 million; Europe and South Africa, which contributed $42 million; and Corporate, which contributed $2 million. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period.
 
Net investment income decreased by $37 million primarily due to a decrease of $102 million related to a reduction in equity option market values relative to the comparable period within certain funds withheld portfolios associated with the reinsurance of equity indexed annuity products, which is generally offset by an adjustment to interest credited to policyholder account balances. This decrease is substantially offset by an increase in the asset base, primarily due to positive operating cash flows, and slightly higher yields.
 
Other revenues increased by $16 million primarily due to an increase in surrender charges on asset-intensive business reinsured and an increase in fees associated with financial reinsurance.


106


Table of Contents

Additionally, a component of the increase in total revenues, excluding net investment gains (losses), was a $79 million increase associated with foreign currency exchange rate movements.
 
Expenses
 
Total expenses increased by $162 million, or 6%, to $2,879 million for the six months ended June 30, 2008 from $2,717 million for the comparable 2007 period.
 
This increase in total expenses was primarily attributable to an increase of $376 million in policyholder benefits and claims, primarily associated with adverse claims experience in the U.S. and the United Kingdom primarily in the first quarter of 2008, our two largest mortality markets, and growth in insurance in-force of $197 billion.
 
Interest credited to policyholder account balances decreased by $45 million, primarily due to a reduction in interest credited to policyholder account balances associated with the aforementioned equity option market value decreases within certain funds withheld portfolios, offset in part by a $55 million increase in the current period related to changes in risk free rates used in the present value calculations of embedded derivatives associated with EIAs.
 
Other expenses decreased by $169 million due to a $156 million decrease in expenses associated with DAC, a $10 million decrease in interest expense due primarily to a decrease in interest rates on variable rate debt and a $7 million decrease in minority interest expense. Included in the $156 million decrease in expenses associated with DAC was a $159 million reduction of DAC amortization due to the change in the value of embedded derivatives associated with funds withheld arrangements, primarily a result of the impact of widening spreads in the U.S. debt markets and changes in risk free rates used in the valuation of embedded derivatives associated with EIAs. An offsetting increase of $5 million was primarily due to compensation and overhead-related expenses associated with RGA’s international expansion and general growth in operations.
 
Additionally, a component of the increase in total expenses was a $73 million increase associated with foreign currency exchange rate movements.


107


Table of Contents

Corporate & Other
 
Corporate & Other contains the excess capital not allocated to the business segments, various start-up entities, including MetLife Bank, and run-off entities, as well as interest expense related to the majority of the Company’s outstanding debt and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of all intersegment amounts, which generally relate to intersegment loans, which bear interest at rates commensurate with related borrowings, as well as intersegment transactions.
 
The following table presents consolidated financial information for Corporate & Other for the periods indicated:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Revenues
                               
Premiums
  $ 11     $ 8     $ 18     $ 16  
Net investment income
    258       357       528       727  
Other revenues
    6       49       16       55  
Net investment gains (losses)
    (45 )     39       (65 )     44  
                                 
Total revenues
    230       453       497       842  
                                 
Expenses
                               
Policyholder benefits and claims
    14       11       24       22  
Other expenses
    401       313       754       646  
                                 
Total expenses
    415       324       778       668  
                                 
Income (loss) from continuing operations before benefit for income tax
    (185 )     129       (281 )     174  
Provision (benefit) for income tax
    (112 )     (13 )     (207 )     (50 )
                                 
Income from continuing operations
    (73 )     142       (74 )     224  
Income from discontinued operations, net of income tax
          22             39  
                                 
Net income
    (73 )     164       (74 )     263  
Preferred stock dividends
    31       34       64       68  
                                 
Net income (loss) available to common shareholders
  $ (104 )   $ 130     $ (138 )   $ 195  
                                 
 
Three Months Ended June 30, 2008 compared with the Three Months Ended June 30, 2007 — Corporate & Other
 
Income from Continuing Operations
 
Income from continuing operations decreased by $215 million, to a loss of $73 million for the three months ended June 30, 2008 from $142 million for the comparable 2007 period. Included in this decrease was an increase in net investment losses of $55 million, net of income tax. Excluding the impact of net investment gains (losses), income from continuing operations decreased by $160 million.
 
The decrease in income from continuing operations was primarily attributable to lower net investment income, higher interest expense, higher legal costs, lower other revenues, and higher corporate expenses of $65 million, $35 million, $28 million, $28 million, $4 million respectively, each of which were net of income tax. This decrease was partially offset by lower interest credited to bankholder deposits and lower interest on uncertain tax positions of $7 million and $2 million respectively, each of which were net of income tax. Tax benefits decreased by $9 million over the comparable 2007 period due to the actual and the estimated tax rate allocated to the various segments.


108


Table of Contents

Revenues
 
Total revenues, excluding net investment gains (losses), decreased by $139 million, or 34%, to $275 million for the three months ended June 30, 2008 from $414 million for the comparable 2007 period.
 
This decrease was primarily due to a decrease in net investment income of $99 million, mainly due to reduced yields on other limited partnerships including hedge funds and real estate and real estate joint ventures partially offset by higher securities lending results. This decrease in yields was partially offset by a higher asset base related to the investment of proceeds from issuances of junior subordinated debt in December 2007 and April 2008 and collateral financing arrangements to support statutory reserves in May 2007 and December 2007 partially offset by repurchases of outstanding common stock, the prepayment of shares subject to mandatory redemption in October 2007 and the reduction of commercial paper outstanding. A fractional repositioning of the portfolio from short-term investments resulted in higher leveraged lease income. Other revenues decreased $43 million primarily related to the prior year resolution of an indemnification claim associated with the 2000 acquisition of GALIC. Also included as a component of total revenues was the elimination of intersegment amounts which was offset within total expenses.
 
Expenses
 
Total expenses increased by $91 million, or 28%, to $415 million for the three months ended June 30, 2008 from $324 million for the comparable 2007 period.
 
Interest expense was higher by $54 million due to the issuances of junior subordinated debt in December 2007 and April 2008 and collateral financing arrangements in May 2007 and December 2007, partially offset by the prepayment of shares subject to mandatory redemption in October 2007 and the reduction of commercial paper outstanding. Legal costs were higher by $42 million primarily due to a decrease in the prior year of $31 million of legal liabilities resulting from the settlement of certain cases, higher amortization and valuation of an asbestos insurance recoverable of $10 million, and higher other legal cost of $1 million. Corporate expenses were higher by $7 million primarily due to higher corporate support expenses of $13 million, which included incentive compensation, rent, start-up costs, and information technology costs and partially offset by a reduction in deferred compensation expenses of $6 million. Interest credited on bankholder deposits decreased by $11 million at MetLife Bank due to lower interest rates, partially offset by higher bankholder deposits. Interest on uncertain tax positions was lower by $4 million as a result of a settlement payment to the IRS in December 2007 and a decrease in published IRS interest rates. Also included as a component of total expenses was the elimination of intersegment amounts which were offset within total revenues.
 
Six Months Ended June 30, 2008 compared with the Six Months Ended June 30, 2007 — Corporate & Other
 
Income from Continuing Operations
 
Income from continuing operations decreased by $298 million, to a loss of $74 million for the six months ended June 30, 2008 from $224 million for the comparable 2007 period. Included in this decrease was an increase in net investment losses of $71 million, net of income tax. Excluding the impact of net investment gains (losses), income from continuing operations decreased by $227 million.
 
The decrease in income from continuing operations was primarily attributable to lower net investment income, higher interest expense, higher legal costs, and lower other revenues of $130 million, $86 million, $30 million and $26 million respectively, each of which were net of income tax. This decrease was partially offset by lower corporate expenses, lower interest credited to bankholder deposits, and lower interest on uncertain tax positions of $29 million, $11 million, and $5 million respectively, each of which were net of income tax. Tax benefits were flat over the comparable 2007 period.
 
Revenues
 
Total revenues, excluding net investment gains (losses), decreased by $236 million, or 30%, to $562 million for the six months ended June 30, 2008 from $798 million for the comparable 2007 period.
 
This decrease was primarily due to a decrease in net investment income of $199 million, mainly due to reduced yields on other limited partnerships including hedge funds and real estate and real estate joint ventures partially


109


Table of Contents

offset by higher securities lending results. This decrease in yields was partially offset by a higher asset base related to the investment of proceeds from issuances of junior subordinated debt in December 2007 and April 2008 and collateral financing arrangements to support statutory reserves in May 2007 and December 2007 partially offset by repurchases of outstanding common stock, the prepayment of shares subject to mandatory redemption in October 2007 and the reduction of commercial paper outstanding. A fractional repositioning of the portfolio from short-term investments resulted in higher leveraged lease income. Other revenues decreased $39 million primarily related to the prior year resolution of an indemnification claim associated with the 2000 acquisition of GALIC. Also included as a component of total revenues was the elimination of intersegment amounts which was offset within total expenses.
 
Expenses
 
Total expenses increased by $110 million, or 16%, to $778 million for the six months ended June 30, 2008 from $668 million for the comparable 2007 period.
 
Interest expense was higher by $132 million due to the issuances of junior subordinated debt in December 2007 and April 2008 and collateral financing arrangements in May 2007 and December 2007, partially offset by the prepayment of shares subject to mandatory redemption in October 2007 and the reduction of commercial paper outstanding. Legal costs were higher by $45 million primarily due to a decrease in the prior year of $38 million of legal liabilities resulting from the settlement of certain cases, higher amortization and valuation of an asbestos insurance recoverable of $6 million, and higher other legal cost of $1 million. Corporate expenses were lower by $44 million primarily due to a reduction in deferred compensation expenses of $39 million and lower corporate support expenses of $5 million, which included incentive compensation, rent, start-up costs, and information technology costs. Interest credited on bankholder deposits decreased by $17 million at MetLife Bank due to lower interest rates, partially offset by higher bankholder deposits. Interest on uncertain tax positions was lower by $8 million as a result of a settlement payment to the IRS in December 2007 and a decrease in published IRS interest rates. Also included as a component of total expenses was the elimination of intersegment amounts which were offset within total revenues.
 
Liquidity and Capital Resources
 
The Company
 
Capital
 
RBC requirements are used as minimum capital requirements by the National Association of Insurance Commissioners (“NAIC”) and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium 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 and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to each of the Holding Company’s domestic insurance subsidiaries. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital of each of these subsidiaries was in excess of each of those RBC levels.
 
Asset/Liability Management
 
The Company actively manages its assets using an approach that balances quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize, net of income tax, risk-adjusted investment income and risk-adjusted total return while ensuring that the assets and liabilities are managed on a cash flow and duration basis. The asset/liability management process is the shared responsibility of the Portfolio Management Unit, the Financial Management and Oversight Asset/Liability Management Unit, and the operating business segments under the supervision of the various product line specific Asset/Liability Management Committees (“ALM Committees”). The ALM Committees’ duties include reviewing and approving target portfolios on a periodic basis, establishing investment guidelines and limits and


110


Table of Contents

providing oversight of the asset/liability 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 ALM Committees.
 
The Company establishes target asset portfolios for each major insurance product, which represent the investment strategies used to profitably fund its liabilities within acceptable levels of risk. These strategies are monitored through regular review of portfolio metrics, such as effective duration, yield curve sensitivity, convexity, liquidity, asset sector concentration and credit quality. In executing these asset/liability matching strategies, management regularly reevaluates the estimates used in determining the approximate amounts and timing of payments to or on behalf of policyholders for insurance liabilities. Many of these estimates are inherently subjective and could impact the Company’s ability to achieve its asset/liability management goals and objectives.
 
Liquidity
 
Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. The Company’s liquidity position (cash and cash equivalents and short-term investments, excluding securities lending) was $14.1 billion and $12.3 billion at June 30, 2008 and December 31, 2007, respectively. Liquidity needs are determined from a rolling 12-month forecast by portfolio and are monitored daily. Asset mix and maturities are adjusted based on forecast. Cash flow testing and stress testing provide additional perspectives on liquidity. The Company believes that it has sufficient liquidity to fund its cash needs under various scenarios that include the potential risk of early contractholder and policyholder withdrawal. The Company includes provisions limiting withdrawal rights on many of its products, including general account institutional pension products (generally group annuities, including GICs, and certain deposit fund liabilities) sold to employee benefit plan sponsors. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product.
 
In the event of significant unanticipated cash requirements beyond normal liquidity, the Company has multiple alternatives available based on market conditions and the amount and timing of the liquidity need. These options include cash flows from operations, the sale of liquid assets, global funding sources and various credit facilities.
 
The Company’s ability to sell investment assets could be limited by accounting rules, including rules relating to the intent and ability to hold impaired securities until the market value of those securities recovers. Under stressful market and economic conditions, liquidity broadly deteriorates which could negatively impact the Company’s ability to sell investment assets. If the Company requires significant amounts of cash on a short notice in excess of normal cash requirements, the Company may have difficulty selling investment assets in a timely manner, be forced to sell them for less than the Company otherwise would have been able to realize, or both.
 
In extreme circumstances, all general account assets within a statutory legal entity are available to fund any obligation of the general account within that legal entity.
 
A disruption in the financial markets could limit the Holding Company’s access to or cost of liquidity.
 
Liquidity Sources
 
Cash Flows from Operations.  The Company’s principal cash inflows from its insurance activities come from insurance premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contractholder and policyholder withdrawal.
 
The Company’s principal cash inflows from its investment activities come from repayments of principal, proceeds from maturities and sales of invested assets and investment income. The primary liquidity concerns with respect to these cash inflows are the risk of default by debtors and market volatilities. The Company closely monitors and manages these risks through its credit risk management process.
 
Liquid Assets.  An integral part of the Company’s liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments, and marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending activities. At June 30, 2008 and December 31, 2007, the Company had $184.9 billion and $188.4 billion in liquid assets, respectively.


111


Table of Contents

Global Funding Sources.  Liquidity is also provided by a variety of both short-term and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, junior subordinated debt securities, shares subject to mandatory redemption, capital securities and stockholders’ equity. The diversity of the Company’s funding sources enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds.
 
At June 30, 2008 and December 31, 2007, the Company had outstanding $623 million and $667 million in short-term debt, respectively, and $9.7 billion and $9.6 billion in long-term debt, respectively. At June 30, 2008 and December 31, 2007, the Company had outstanding $5.8 billion and $5.7 billion in collateral financing arrangements, respectively, and $5.2 billion and $4.5 billion in junior subordinated debt, respectively. At both June 30, 2008 and December 31, 2007, the Company had outstanding $159 million in shares subject to mandatory redemption.
 
Debt Issuances.  In April 2008, MetLife Capital Trust X (“Trust X”), a variable interest entity (“VIE”) consolidated by the Company, issued exchangeable surplus trust securities (the “Trust Securities”) with a face amount of $750 million. The Trust Securities will be exchanged into a like amount of Holding Company junior subordinated debentures on April 8, 2038, the scheduled redemption date; mandatorily under certain circumstances; and at any time upon the Holding Company exercising its option to redeem the securities. The Trust Securities will be exchanged for junior subordinated debentures prior to repayment. The final maturity of the debentures is April 8, 2068. The Holding Company may cause the redemption of the Trust Securities or debentures (i) in whole or in part, at any time on or after April 8, 2033 at their principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to April 8, 2033 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price. Interest on the Trust Securities or debentures is payable semi-annually at a fixed rate of 9.25% up to, but not including, April 8, 2038, the scheduled redemption date. In the event the Trust Securities or debentures are not redeemed on or before the scheduled redemption date, interest will accrue at an annual rate of 3-month LIBOR plus a margin equal to 5.540%, payable quarterly in arrears. The Holding Company has the right to, and in certain circumstances the requirement to, defer interest payments on the Trust Securities or debentures for a period up to ten years. Interest compounds during such periods of deferral. If interest is deferred for more than five consecutive years, the Holding Company may be required to use proceeds from the sale of its common stock or warrants on common stock to satisfy its obligation. In connection with the issuance of the Trust Securities, the Holding Company entered into a replacement capital covenant (“RCC”). As a part of the RCC, the Holding Company agreed that it will not repay, redeem, or purchase the debentures on or before April 8, 2058, unless, subject to certain limitations, it has received proceeds from the sale of specified capital securities. The RCC will terminate upon the occurrence of certain events, including an acceleration of the debentures due to the occurrence of an event of default. The RCC is not intended for the benefit of holders of the debentures and may not be enforced by them. The RCC is for the benefit of holders of one or more other designated series of its indebtedness (which will initially be its 5.70% senior notes due June 15, 2035). The Holding Company also entered into a replacement capital obligation which will commence in 2038 and under which the Holding Company must use reasonable commercial efforts to raise replacement capital through the issuance of certain qualifying capital securities.
 
Credit Facilities.  The Company maintains committed and unsecured credit facilities aggregating $4.0 billion as of June 30, 2008. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. The facilities can be used for general corporate purposes and, at June 30, 2008, $3.0 billion of the facilities also served as back-up lines of credit for the Company’s commercial paper programs.


112


Table of Contents

Information on these credit facilities as of June 30, 2008 is as follows:
 
                                     
              Letter of
             
              Credit
          Unused
 
Borrower(s)   Expiration   Capacity     Issuances     Drawdowns     Commitments  
        (In millions)  
 
MetLife, Inc. and MetLife Funding, Inc. 
  June 2012 (1)   $  3,000     $  2,156     $   —     $   844  
MetLife Bank, N.A
  July 2008     200                   200  
Reinsurance Group of America, Incorporated
  May 2010     30             30        
Reinsurance Group of America, Incorporated
  March 2011     48                   48  
Reinsurance Group of America, Incorporated
  September 2012 (2)     750       427             323  
                                     
Total
      $ 4,028     $ 2,583     $ 30     $ 1,415  
                                     
 
 
(1) Proceeds are available to be used for general corporate purposes, to support their commercial paper programs and for the issuance of letters of credit. All borrowings under the credit agreement must be repaid by June 2012, except that letters of credit outstanding upon termination may remain outstanding until June 2013. The borrowers and the lenders under this facility may agree to extend the term of all or part of the facility to no later than June 2014, except that letters of credit outstanding upon termination may remain outstanding until June 2015.
 
(2) Under the credit agreement, RGA may borrow and obtain letters of credit for general corporate purposes for its own account or for the account of its subsidiaries.
 
Committed Facilities.  Information on committed facilities as of June 30, 2008 is as follows:
 
                                             
                    Letter of
             
                    Credit
    Unused
    Maturity
 
Account Party/Borrower(s)   Expiration   Capacity     Drawdowns     Issuances     Commitments     (Years)  
        (In millions)        
 
Exeter Reassurance Company Ltd., MetLife, Inc., & Missouri Reinsurance (Barbados), Inc. 
  June 2016 (1)   $   500     $     —     $   490     $     10       8  
Exeter Reassurance Company Ltd. 
  December 2027 (2)     650             410       240       19  
Timberlake Financial L.L.C. 
  June 2036     1,000       850             150       28  
MetLife Reinsurance Company of South Carolina & MetLife, Inc. 
  June 2037     3,500       2,497             1,003       29  
MetLife Reinsurance Company of Vermont & MetLife, Inc. 
  December 2037 (2)     2,896             1,297       1,599       29  
                                             
Total
      $ 8,546     $ 3,347     $ 2,197     $ 3,002          
                                             
 
 
(1) Letters of credit and replacements or renewals thereof issued under this facility of $280 million, $10 million and $200 million are set to expire no later than December 2015, March 2016 and June 2016, respectively.
 
(2) The Holding Company is a guarantor under this agreement.
 
Letters of Credit.  At June 30, 2008, the Company had outstanding $4.9 billion in letters of credit from various financial institutions, of which $2.2 billion and $2.6 billion were part of committed and credit facilities, respectively. As commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the Company’s actual future cash funding requirements.
 
Remarketing of Securities and Settlement of Stock Purchase Contracts Underlying Common Equity Units.  The Holding Company distributed and sold 82.8 million 6.375% common equity units for $2.1 billion in proceeds in a registered public offering on June 21, 2005. These common equity units are comprised of trust preferred securities issued by MetLife Capital Trust II and MetLife Capital Trust III, which hold junior subordinated debentures of the Holding Company, and stock purchase contracts issued by the Holding Company. See Note 13 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for a description of the common equity units.
 
On July 7, 2008, the Holding Company provided notice that MetLife Capital Trust II will be dissolved on August 6, 2008. Upon the dissolution, the junior subordinated debentures held by the trust will be distributed to holders of the trust preferred securities.


113


Table of Contents

On July 11, 2008, the Holding Company entered into an agreement with respect to the initial remarketing of the junior subordinated debentures on behalf of the holders of common equity units, who will receive the junior subordinated debentures upon the dissolution of MetLife Capital Trust II. The initial remarketing is expected to close on August 15, 2008, and will yield approximately $1 billion in proceeds, which holders of common equity units will use to settle their payment obligations under the applicable stock purchase contract. The Holding Company has elected, as permitted by the terms of the junior subordinated debentures, to modify certain terms of the remarketed debentures effective upon the successful completion of the remarketing. A second remarketing transaction involving the trust preferred securities issued by MetLife Capital Trust III or the junior subordinated debentures issued by the Holding Company and held as assets of the trust, is expected to be completed on February 15, 2009, with approximately $1 billion of additional proceeds, which holders of common equity units will use to settle their payment obligations under the applicable stock purchase contract.
 
The initial and subsequent settlements of the stock purchase contracts are expected to close on August 15, 2008 and February 15, 2009, respectively, providing proceeds to the Holding Company of approximately $1 billion at the time of each settlement in exchange for shares of the Holding Company’s common stock. The Holding Company expects that between 39 million and 48 million shares of common stock will be delivered by the Holding Company to settle the stock purchase contracts.
 
Liquidity Uses
 
Insurance Liabilities.  The Company’s principal cash outflows primarily relate to the liabilities associated with its various life insurance, property and casualty, annuity and group pension products, operating expenses and income tax, as well as principal and interest on its outstanding debt obligations. Liabilities arising from its insurance activities primarily relate to benefit payments under the aforementioned products, as well as payments for policy surrenders, withdrawals and loans.
 
Investment and Other.  Additional cash outflows include those related to obligations of securities lending activities, investments in real estate, limited partnerships and joint ventures, as well as litigation-related liabilities.
 
Contractual Obligations.  The following table summarizes the Company’s major contractual obligations as of June 30, 2008:
 
                                                 
                      More Than
    More Than
       
                      One Year and
    Three Years and
       
                Less Than
    Less Than
    Less Than
    More Than
 
Contractual Obligations         Total     One Year     Three Years     Five Years     Five Years  
    (In millions)        
 
Future policy benefits
    (1 )   $ 306,871     $ 6,037     $ 9,041     $ 9,609     $ 282,184  
Policyholder account balances
    (2 )     205,173       27,138       29,569       27,239       121,227  
Other policyholder liabilities
    (3 )     9,529       8,813       26       32       658  
Short-term debt
    (4 )     623       623                    
Long-term debt
    (4 )     16,652       962       1,707       2,471       11,512  
Collateral financing arrangements
    (4 )     12,941       308       615       676       11,342  
Junior subordinated debt securities
    (4 )     11,441       2,405       463       463       8,110  
Shares subject to mandatory redemption
    (4 )     778       13       26       26       713  
Payables for collateral under securities loaned and other transactions
    (5 )     45,979       45,979                    
Commitments to lend funds
    (6 )     9,741       7,108       1,638       468       527  
Operating leases
    (7 )     2,141       262       452       318       1,109  
Other
    (8 )     9,300       8,865       6       5       424  
                                                 
Total
          $ 631,169     $ 108,513     $ 43,543     $ 41,307     $ 437,806  
                                                 
 
 
(1) Future policyholder benefits include liabilities related to traditional whole life policies, term life policies, closeout and other group annuity contracts, structured settlements, master terminal funding agreements, single premium immediate annuities, long-term disability policies, individual disability income policies, LTC policies and property and casualty contracts.


114


Table of Contents

 
Included within future policyholder benefits are contracts where the Company is currently making payments and will continue to do so until the occurrence of a specific event such as death as well as those where the timing of a portion of the payments has been determined by the contract. Also included are contracts where the Company is not currently making payments and will not make payments until the occurrence of an insurable event, such as death or illness, or where the occurrence of the payment triggering event, such as a surrender of a policy or contract, is outside the control of the Company. The Company has estimated the timing of the cash flows related to these contracts based on historical experience as well as its expectation of future payment patterns.
 
Liabilities related to accounting conventions, or which are not contractually due, such as shadow liabilities, excess interest reserves and property and casualty loss adjustment expenses, of $663 million have been excluded from amounts presented in the table above.
 
Amounts presented in the table above, excluding those related to property and casualty contracts, represent the estimated cash payments for benefits under such contracts including assumptions related to the receipt of future premiums and assumptions related to mortality, morbidity, policy lapse, renewal, retirement, inflation, disability incidence, disability terminations, policy loans and other contingent events as appropriate to the respective product type. Payments for case reserve liabilities and incurred but not reported liabilities associated with property and casualty contracts of $1.6 billion have been included using an estimate of the ultimate amount to be settled under the policies based upon historical payment patterns. The ultimate amount to be paid under property and casualty contracts is not determined until the Company reaches a settlement with the claimant, which may vary significantly from the liability or contractual obligation presented above especially as it relates to incurred but not reported liabilities. All estimated cash payments presented in the table above are undiscounted as to interest, net of estimated future premiums on policies currently in-force and gross of any reinsurance recoverable. The more than five years category displays estimated payments due for periods extending for more than 100 years from the present date.
 
The sum of the estimated cash flows shown for all years in the table of $306.9 billion exceeds the liability amount of $134.1 billion included on the consolidated balance sheet principally due to the time value of money, which accounts for at least 80% of the difference, as well as differences in assumptions, most significantly mortality, between the date the liabilities were initially established and the current date.
 
For the majority of the Company’s insurance operations, estimated contractual obligations for future policyholder benefits and policyholder account balance liabilities as presented in the table above are derived from the annual asset adequacy analysis used to develop actuarial opinions of statutory reserve adequacy for state regulatory purposes. These cash flows are materially representative of the cash flows under generally accepted accounting principles.
 
Actual cash payments to policyholders may differ significantly from the liabilities as presented in the consolidated balance sheet and the estimated cash payments as presented in the table above due to differences between actual experience and the assumptions used in the establishment of these liabilities and the estimation of these cash payments. See “— Liquidity and Capital Resources — The Company — Asset/Liability Management.”
 
(2) Policyholder account balances include liabilities related to conventional guaranteed investment contracts, guaranteed investment contracts associated with formal offering programs, funding agreements, individual and group annuities, total control accounts, bank deposits, individual and group universal life, variable universal life and company-owned life insurance.
 
Included within policyholder account balances are contracts where the amount and timing of the payment is essentially fixed and determinable. These amounts relate to policies where the Company is currently making payments and will continue to do so, as well as those where the timing of the payments has been determined by the contract. Other contracts involve payment obligations where the timing of future payments is uncertain and where the Company is not currently making payments and will not make payments until the occurrence of an insurable event, such as death, or where the occurrence of the payment triggering event, such as a surrender of or partial withdrawal on a policy or deposit contract, is outside the control of the Company. The Company has estimated the timing of the cash flows related to these contracts based on historical experience as well as its expectation of future payment patterns.


115


Table of Contents

 
Excess interest reserves representing purchase accounting adjustments of $781 million have been excluded from amounts presented in the table above as they represent an accounting convention and not a contractual obligation.
 
Amounts presented in the table above represent the estimated cash payments to be made to policyholders undiscounted as to interest and including assumptions related to the receipt of future premiums and deposits; withdrawals, including unscheduled or partial withdrawals; policy lapses; surrender charges; annuitization; mortality; future interest credited; policy loans and other contingent events as appropriate to the respective product type. Such estimated cash payments are also presented net of estimated future premiums on policies currently in-force and gross of any reinsurance recoverable. For obligations denominated in foreign currencies, cash payments have been estimated using current spot rates.
 
The sum of the estimated cash flows shown for all years in the table of $205.2 billion exceeds the liability amount of $144.2 billion included on the consolidated balance sheet principally due to the time value of money, which accounts for at least 80% of the difference, as well as differences in assumptions between the date the liabilities were initially established and the current date. See also comments under footnote 1 regarding the source and uncertainties associated with the estimation of the contractual obligations related to future policyholder benefits and policyholder account balances.
 
(3) Other policyholder liabilities is comprised of other policyholder funds, policyholder dividends payable and the policyholder dividend obligation. Amounts included in the table above related to these liabilities are as follows:
 
(a) Other policyholder funds includes liabilities for incurred but not reported claims and claims payable on group term life, long-term disability, LTC and dental; policyholder dividends left on deposit and policyholder dividends due and unpaid related primarily to traditional life and group life and health; and premiums received in advance. Liabilities related to unearned revenue of $2.1 billion have been excluded from the cash payments presented in the table above because they reflect an accounting convention and not a contractual obligation. With the exception of policyholder dividends left on deposit, and those items excluded as noted in the preceding sentence, the contractual obligation presented in the table above related to other policyholder funds is equal to the liability reflected in the consolidated balance sheet. Such amounts are reported in the less than one year category due to the short-term nature of the liabilities. Contractual obligations on policyholder dividends left on deposit are projected based on assumptions of policyholder withdrawal activity.
 
(b) Policyholder dividends payable consists of liabilities related to dividends payable in the following calendar year on participating policies. As such, the contractual obligation related to policyholder dividends payable is presented in the table above in the less than one year category at the amount of the liability presented in the consolidated balance sheet.
 
(c) The nature of the policyholder dividend obligation is described in Note 9 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report. Because the exact timing and amount of the ultimate policyholder dividend obligation is subject to significant uncertainty and the amount of the policyholder dividend obligation is based upon a long-term projection of the performance of the closed block, management has reflected the obligation at the amount of the liability presented in the consolidated balance sheet in the more than five years category. This was done to reflect the long-duration of the liability and the uncertainty of the ultimate cash payment.
 
(4) Amounts presented in the table above for short-term debt, long-term debt, collateral financing arrangements, junior subordinated debt securities and shares subject to mandatory redemption differ from the balances presented on the consolidated balance sheet as the amounts presented in the table above do not include premiums or discounts upon issuance or purchase accounting fair value adjustments. The amounts presented above also include interest on such obligations as described below.
 
Short-term debt consists principally of 90-day commercial paper, with a remaining maturity of 28 days, and carries a variable rate of interest. The contractual obligation for short-term debt presented in the table above represents the amounts due upon maturity of the commercial paper plus the related variable interest which is calculated using the prevailing rates at June 30, 2008 through the date of maturity without consideration of any further issuances of commercial paper upon maturity of the amounts outstanding at June 30, 2008.


116


Table of Contents

 
Long-term debt bears interest at fixed and variable interest rates through their respective maturity dates. Interest on fixed rate debt was computed using the stated rate on the obligations through maturity. Interest on variable rate debt is computed using prevailing rates at June 30, 2008 and, as such, does not consider the impact of future rate movements.
 
Collateral financing arrangements bear interest at fixed and variable interest rates through their respective maturity dates. Interest on fixed rate debt was computed using the stated rate on the obligations through maturity. Interest on variable rate debt is computed using prevailing rates at June 30, 2008 and, as such, does not consider the impact of future rate movements.
 
Junior subordinated debt bears interest at fixed interest rates through their respective redemption dates. Interest was computed using the stated rate on the obligation through the scheduled redemption date as it is the Company’s expectation that the debt will be redeemed at that time. Inclusion of interest payments on junior subordinated debt through the final maturity date would increase the contractual obligation by $6.2 billion.
 
Shares subject to mandatory redemption bear interest at fixed interest rates through their respective mandatory redemption dates. Interest on shares subject to mandatory redemption was computed using the stated fixed rate on the obligation through maturity.
 
Long-term debt also includes payments under capital lease obligations of $20 million, $6 million, $3 million and $23 million, in the less than one year, one to three years, three to five years and more than five years categories, respectively.
 
(5) The Company has accepted cash collateral in connection with securities lending and derivative transactions. As the securities lending transactions expire within the next year or the timing of the return of the collateral is uncertain, the return of the collateral has been included in the less than one year category in the table above. The Company also holds non-cash collateral, which is not reflected as a liability in the consolidated balance sheet, of $677 million as of June 30, 2008.
 
(6) The Company commits to lend funds under mortgage loans, partnerships, bank credit facilities, bridge loans and private corporate bond investments. In the table above, the timing of the funding of mortgage loans and private corporate bond investments is based on the expiration date of the commitment. As it relates to commitments to lend funds to partnerships and under bank credit facilities, the Company anticipates that these amounts could be invested any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations are presented in the less than one year category in the table above. Commitments to fund bridge loans are short-term obligations and, as a result, are presented in the less than one year category in the table above. See “— Off-Balance Sheet Arrangements.”
 
(7) As a lessee, the Company has various operating leases, primarily for office space. Contractual provisions exist that could increase or accelerate those leases obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to the Company’s financial position or results of operations. See “— Off-Balance Sheet Arrangements.”
 
(8) Other includes those other liability balances which represent contractual obligations, as well as other miscellaneous contractual obligations of $14 million not included elsewhere in the table above. Other liabilities presented in the table above is principally comprised of amounts due under reinsurance arrangements, payables related to securities purchased but not yet settled, securities sold short, accrued interest on debt obligations, fair value of derivative obligations, deferred compensation arrangements, guaranty liabilities, the fair value of forward stock purchase contracts, as well as general accruals and accounts payable due under contractual obligations. If the timing of any of the other liabilities is sufficiently uncertain, the amounts are included within the less than one year category.
 
The other liabilities presented in the table above differs from the amount presented in the consolidated balance sheet by $5.6 billion due primarily to the exclusion of items such as minority interests, legal liabilities, pension and postretirement benefit obligations, taxes due other than income tax, unrecognized tax benefits and related accrued interest, accrued severance and employee incentive compensation and other liabilities such as deferred gains and losses. Such items have been excluded from the table above as they represent accounting conventions or are not liabilities due under contractual obligations.


117


Table of Contents

 
The net funded status of the Company’s pension and other postretirement liabilities included within other liabilities has been excluded from the amounts presented in the table above. Rather, the amounts presented represent the discretionary contributions of $300 million expected to be made by the Company to the pension plan in 2008 and the discretionary contributions of $59 million, based on the current year’s expected gross benefit payments to participants, to be made by the Company to the postretirement benefit plans during 2008. Virtually all contributions to the pension and postretirement benefit plans are made by the insurance subsidiaries of the Holding Company with little impact on the Holding Company’s cash flows.
 
Excluded from the table above are deferred income tax liabilities, unrecognized tax benefits, and accrued interest of $1.0 billion, $1.1 billion, and $292 million, respectively, for which the Company cannot reliably determine the timing of payment. Current income tax payable is also excluded from the table.
 
See also “— Off-Balance Sheet Arrangements.”
 
Separate account liabilities are excluded from the table above. Separate account liabilities represent the fair market value of the funds that are separately administered by the Company. Separate account liabilities are set equal to the fair value of separate account assets as prescribed by SOP 03-1. Generally, the separate account owner, rather than the Company, bears the investment risk of these funds. The separate account assets are legally segregated and are not subject to the claims that arise out of any other business of the Company. Net deposits, net investment income and realized and unrealized capital gains and losses on the separate accounts are not reflected in the consolidated statements of income. The separate account liabilities will be fully funded by cash flows from the separate account assets.
 
The Company also enters into agreements to purchase goods and services in the normal course of business; however, these purchase obligations are not material to its consolidated results of operations or financial position as of June 30, 2008.
 
Additionally, the Company has agreements in place for services it conducts, generally at cost, between subsidiaries relating to insurance, reinsurance, loans, and capitalization. Intercompany transactions have appropriately been eliminated in consolidation. Intercompany transactions among insurance subsidiaries and affiliates have been approved by the appropriate departments of insurance as required.
 
Support Agreements.  The Holding Company and several of its subsidiaries (each, an “Obligor”) are parties to various capital support commitments, guarantees and contingent reinsurance agreements with certain subsidiaries of the Holding Company and a corporation in which the Holding Company owns approximately 50% of the equity. Under these arrangements, each Obligor, with respect to the applicable entity, has agreed to cause such entity to meet specified capital and surplus levels, has guaranteed certain contractual obligations or has agreed to provide, upon the occurrence of certain contingencies, reinsurance for such entity’s insurance liabilities or for certain policies reinsured by such entity. Management does not anticipate that these arrangements will place any significant demands upon the Company’s liquidity resources.
 
Litigation.  Putative or certified class action litigation and other litigation, and claims and assessments against the Company, in addition to those discussed elsewhere herein 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 make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
 
It is not possible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses except as noted elsewhere herein in connection with specific matters. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcome of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s net income or cash flows in particular quarterly or annual periods.


118


Table of Contents

Fair Value.  Management does not believe increases and decreases in the aggregate fair value of our assets and liabilities will adversely impact our liquidity and capital resources. See also “— Quantitative and Qualitative Disclosures About Market Risk.”
 
Other.  Based on management’s analysis of its expected cash inflows from operating activities, the dividends it receives from subsidiaries, including MLIC, that are permitted to be paid without prior insurance regulatory approval and its portfolio of liquid assets and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Company to make payments on debt, make cash dividend payments on its common and preferred stock, pay all operating expenses, and meet its cash needs. The nature of the Company’s diverse product portfolio and customer base lessens the likelihood that normal operations will result in any significant strain on liquidity.
 
Consolidated Cash Flows.  Net cash provided by operating activities increased by $1.4 billion to $5.5 billion for the six months ended June 30, 2008 as compared to $4.1 billion for the six months ended June 30, 2007 primarily due to higher premiums and fees.
 
Net cash provided by financing activities was $7.5 billion and $10.0 billion for the six months ended June 30, 2008 and 2007, respectively. Accordingly, net cash provided by financing activities decreased by $2.5 billion for the six months ended June 30, 2008 as compared to the same period in the prior year. Net cash provided by financing activities decreased primarily as a result of a $2.9 billion decrease in the amount of securities lending cash collateral received in connection with the Company’s securities lending program, a $2.1 billion decrease in the issuance of collateral financing arrangements, a $0.5 billion increase in shares acquired under the Company’s common stock repurchase program and a $0.1 billion decrease in the net issuance of long-term debt. These decreases were partially offset by an increase in net cash provided by policyholder account balances of $2.6 billion and the issuance of $0.8 billion of junior subordinated debt securities in the current period.
 
Net cash used in investing activities was $9.5 billion and $14.7 billion for the six months ended June 30, 2008 and 2007, respectively. Accordingly, net cash used in investing activities decreased by $5.2 billion for the six months ended June 30, 2008 as compared to the same period in the prior year. In the current year, cash available for the purchase of invested assets decreased by $2.5 billion as a result of the reduction in cash provided by financing activities discussed above. Partially offsetting this decrease in cash available for the purchase of invested assets was an increase of $1.4 billion in net cash provided by operating activities discussed above. The net decrease in the amount of cash available for investing activities resulted in a decrease in net purchases of fixed maturity and equity securities of $6.5 billion and $0.9 billion, respectively, as well as a decrease in the net purchases of real estate and real estate joint ventures of $0.3 billion. In addition, there was a decrease in cash invested in short-term investments of $0.8 billion. These decreases in net cash used in investing activities were partially offset by an increase in other invested assets of $1.5 billion, an increase in the net origination of mortgage and consumer loans of $0.7 billion, an increase in net purchases of other limited partnership interests of $0.4 billion and an increase in policy loans of $0.3 billion. In addition, the 2008 period includes an increase of $0.3 billion of cash used to purchase businesses.
 
The Holding Company
 
Capital
 
Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies — Capital.  The Holding Company and its insured depository institution subsidiary, MetLife Bank, are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. As of their most recently filed reports with the federal banking regulatory agencies, MetLife, Inc. and MetLife Bank met the minimum capital standards as per federal banking regulatory agencies with all of MetLife Bank’s risk-based and leverage capital ratios meeting the federal banking regulatory agencies’ “well capitalized” standards and all of MetLife, Inc.’s risk-based and leverage capital ratios meeting the “adequately capitalized” standards.
 
Liquidity
 
Liquidity is managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and is provided by a variety of sources, including a portfolio of liquid assets, a


119


Table of Contents

diversified mix of short- and long-term funding sources from the wholesale financial markets and the ability to borrow through committed credit facilities. The Holding Company is an active participant in the global financial markets through which it obtains a significant amount of funding. These markets, which serve as cost-effective sources of funds, are critical components of the Holding Company’s liquidity management. Decisions to access these markets are based upon relative costs, prospective views of balance sheet growth and a targeted liquidity profile. A disruption in the financial markets could limit the Holding Company’s access to liquidity.
 
The Holding Company’s ability to maintain regular access to competitively priced wholesale funds is fostered by its current high credit ratings from the major credit rating agencies. Management views its capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and its liquidity monitoring procedures as critical to retaining high credit ratings.
 
Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and debt transactions and exposure to contingent draws on the Holding Company’s liquidity.
 
Liquidity Sources
 
Dividends.  The primary source of the Holding Company’s liquidity is dividends it receives from its insurance subsidiaries. The Holding Company’s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. The dividend limitation for U.S. insurance subsidiaries is based on the surplus to policyholders as of the immediately preceding calendar year and statutory net gain from operations for the immediately preceding calendar year. Statutory accounting practices, as prescribed by insurance regulators of various states in which the Company conducts business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of DAC, certain deferred income tax, required investment reserves, reserve calculation assumptions, goodwill and surplus notes. Management of the Holding Company cannot provide assurances that the Holding Company’s insurance subsidiaries will have statutory earnings to support payment of dividends to the Holding Company in an amount sufficient to fund its cash requirements and pay cash dividends and that the applicable insurance departments will not disapprove any dividends that such insurance subsidiaries must submit for approval.
 
The table below sets forth the dividends permitted to be paid by the respective insurance subsidiary without insurance regulatory approval:
 
         
    2008  
    Permitted w/o
 
Company   Approval (1)  
    (In millions)  
 
Metropolitan Life Insurance Company
  $ 1,299 (2)
MetLife Insurance Company of Connecticut
  $ 1,026  
Metropolitan Tower Life Insurance Company
  $ 113 (3)
Metropolitan Property and Casualty Insurance Company
  $  
 
 
(1) Reflects dividend amounts that may be paid during 2008 without prior regulatory approval. However, if paid before a specified date during 2008, some or all of such dividends may require regulatory approval.
 
(2) As part of the split-off transaction described under “— Acquisitions and Dispositions”, MLIC would be distributing shares of RGA stock to the Holding Company as an in-kind dividend. In such event, based on the market value of these shares at the time of the dividend, all or substantially all of the $1,299 million amount would be used to effectuate the split-off transaction and would not be available to the Holding Company.
 
(3) On July 1, 2008, following regulatory approval, Metropolitan Tower Life Insurance Company distributed all of the common stock of one of its subsidiaries to the Holding Company as an in-kind dividend in an amount in excess of $113 million. As a result, the entire $113 million amount was used for this purpose.
 
During the six months ended June 30, 2008, dividends of $25 million were paid to the Holding Company.


120


Table of Contents

Liquid Assets.  An integral part of the Holding Company’s liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments and marketable fixed maturity securities. Liquid assets exclude assets relating to securities lending activities. At June 30, 2008 and December 31, 2007, the Holding Company had $1.4 billion and $2.3 billion in liquid assets, respectively.
 
Global Funding Sources.  Liquidity is also provided by a variety of short-term and long-term instruments, commercial paper, medium- and long-term debt, junior subordinated debt securities, collateral financing arrangements, capital securities and stockholders’ equity. The diversity of the Holding Company’s funding sources enhances funding flexibility and limits dependence on any one source of funds and generally lowers the cost of funds. Other sources of the Holding Company’s liquidity include programs for short- and long-term borrowing, as needed.
 
At June 30, 2008 and December 31, 2007, the Holding Company had $315 million and $310 million in short-term debt outstanding, respectively. At both June 30, 2008 and December 31, 2007, the Holding Company had outstanding $7.0 billion, of unaffiliated long-term debt, $500 million of affiliated long-term debt and $3.4 billion of junior subordinated debt securities. At June 30, 2008 and December 31, 2007, the Holding Company had outstanding $2.5 billion and $2.4 billion, respectively, of collateral financing arrangements.
 
Debt Issuances.  As described more fully in “— Liquidity and Capital Resources — The Company — Liquidity Sources — Debt Issuances”, during April 2008, Trust X issued Trust Securities with a face amount of $750 million, and a fixed rate of interest of 9.25% up to, but not including, April 8, 2038, the scheduled redemption date. The beneficial interest of Trust X held by the Holding Company is not represented by an investment in Trust X but rather by a financing agreement between the Holding Company and Trust X. The assets of Trust X are $750 million of 8.595% surplus notes of MetLife Insurance Company of Connecticut (“MICC”), which are scheduled to mature April 8, 2038, and rights under the financing agreement. Under the financing agreement, the Holding Company has the obligation to make payments (i) semiannually at a fixed rate of 0.655% of the surplus notes outstanding and owned by Trust X or if greater (ii) equal to the difference between the Trust Securities interest payment and the interest received by Trust X on the surplus notes. The ability of MICC to make interest and principal payments on the surplus notes to the Holding Company is contingent upon regulatory approval. The Trust Securities will be exchanged into a like amount of Holding Company junior subordinated debentures on April 8, 2038, the scheduled redemption date; mandatorily under certain circumstances; and at any time upon the Holding Company exercising its option to redeem the securities. The Trust Securities will be exchanged for junior subordinated debentures prior to repayment and the Holding Company is ultimately responsible for repayment of the junior subordinated debentures. The Holding Company’s other rights and obligations as they relate to the deferral of interest, redemption, replacement capital obligation and RCC associated with the issuance of the Trust Securities are more fully described in “— Liquidity and Capital Resources — The Company — Liquidity Sources — Debt Issuances.”
 
Preferred Stock.  During the six months ended June 30, 2008, the Holding Company issued no new preferred stock.
 
See “— Liquidity and Capital Resources — The Holding Company — Liquidity Uses — Dividends” for dividends paid on the Company’s preferred stock.
 
Credit Facilities.  The Holding Company and MetLife Funding entered into a $3.0 billion credit agreement with various financial institutions, the proceeds of which are available to be used for general corporate purposes, to support their commercial paper programs and for the issuance of letters of credit. All borrowings under the credit agreement must be repaid by June 2012, except that letters of credit outstanding upon termination may remain outstanding until June 2013. The borrowers and the lenders under this facility may agree to extend the term of all or part of the facility to no later than June 2014, except that letters of credit outstanding upon termination may remain outstanding until June 2015.
 
At June 30, 2008, $2.2 billion of letters of credit have been issued under these unsecured credit facilities on behalf of the Holding Company.


121


Table of Contents

Committed Facilities.  Information on committed facilities as of June 30, 2008 is as follows:
 
                                             
                    Letter of
             
                    Credit
    Unused
    Maturity
 
Account Party/Borrower(s)   Expiration   Capacity     Drawdowns     Issuances     Commitments     (Years)  
        (In millions)  
 
Exeter Reassurance Company Ltd., MetLife, Inc., & Missouri Reinsurance (Barbados), Inc. 
  June 2016 (1)   $ 500     $     $ 490     $ 10       8  
Exeter Reassurance Company Ltd. 
  December 2027(2)     650             410       240       19  
MetLife Reinsurance Company of South Carolina & MetLife, Inc. 
  June 2037     3,500       2,497             1,003       29  
MetLife Reinsurance Company of Vermont & MetLife, Inc. 
  December 2037(2)     2,896             1,297       1,599       29  
                                             
Total
      $ 7,546     $ 2,497     $ 2,197     $ 2,852          
                                             
 
 
(1) Letters of credit and replacements or renewals thereof issued under this facility of $280 million, $10 million and $200 million are set to expire no later than December 2015, March 2016 and June 2016, respectively.
 
(2) The Holding Company is a guarantor under this agreement.
 
Letters of Credit.  At June 30, 2008, the Holding Company had $2.2 billion in outstanding letters of credit, all of which are associated with the aforementioned credit facilities, from various financial institutions. As commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the Holding Company’s actual future cash funding requirements.
 
Remarketing of Securities and Settlement of Stock Purchase Contracts Underlying Common Equity Units.  The Holding Company distributed and sold 82.8 million 6.375% common equity units for $2.1 billion in proceeds in a registered public offering on June 21, 2005. These common equity units are comprised of trust preferred securities issued by MetLife Capital Trust II and MetLife Capital Trust III, which hold junior subordinated debentures of the Holding Company, and stock purchase contracts issued by the Holding Company. See Note 13 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for a description of the common equity units.
 
On July 7, 2008, the Holding Company provided notice that MetLife Capital Trust II will be dissolved on August 6, 2008. Upon the dissolution, the junior subordinated debentures held by the trust will be distributed to holders of the trust preferred securities.
 
On July 11, 2008, the Holding Company entered into an agreement with respect to the initial remarketing of the junior subordinated debentures on behalf of the holders of common equity units, who will receive the junior subordinated debentures upon the dissolution of MetLife Capital Trust II. The initial remarketing is expected to close on August 15, 2008, and will yield approximately $1 billion in proceeds, which holders of common equity units will use to settle their payment obligations under the applicable stock purchase contract. The Holding Company has elected, as permitted by the terms of the junior subordinated debentures, to modify certain terms of the remarketed debentures effective upon the successful completion of the remarketing. A second remarketing transaction involving the trust preferred securities issued by MetLife Capital Trust III or the junior subordinated debentures issued by the Holding Company and held as assets of the trust, is expected to be completed on February 15, 2009, with approximately $1 billion of additional proceeds, which holders of common equity units will use to settle their payment obligations under the applicable stock purchase contract.
 
The initial and subsequent settlements of the stock purchase contracts are expected to close on August 15, 2008 and February 15, 2009, respectively, providing proceeds to the Holding Company of approximately $1 billion at the time of each settlement in exchange for shares of the Holding Company’s common stock. The Holding Company expects that between 39 million and 48 million shares of common stock will be delivered by the Holding Company to settle the stock purchase contracts.


122


Table of Contents

Liquidity Uses
 
The primary uses of liquidity of the Holding Company include debt service, cash dividends on common and preferred stock, capital contributions to subsidiaries, payment of general operating expenses, acquisitions and the repurchase of the Holding Company’s common stock.
 
Dividends.  Information on the declaration, record and payment dates, as well as per share and aggregate dividend amounts, for the Company’s Floating Rate Non-Cumulative Preferred Stock, Series A and 6.50% Non-Cumulative Preferred Stock, Series B is as follows for the six months ended June 30, 2008 and 2007:
 
                                         
            Dividend  
            Series A
    Series A
    Series B
    Series B
 
Declaration Date   Record Date   Payment Date   Per Share     Aggregate     Per Share     Aggregate  
            (In millions, except per share data)  
 
May 15, 2008
  May 31, 2008   June 16, 2008   $ 0.2555555     $ 7     $ 0.4062500     $ 24  
March 5, 2008
  February 29, 2008   March 17, 2008   $ 0.3785745       9     $ 0.4062500       24  
                                         
                    $ 16             $ 48  
                                         
May 15, 2007
  May 31, 2007   June 15, 2007   $ 0.4060062     $ 10     $ 0.4062500     $ 24  
March 5, 2007
  February 28, 2007   March 15, 2007   $ 0.3975000       10     $ 0.4062500       24  
                                         
                    $ 20             $ 48  
                                         
 
Affiliated Capital Transactions.  During the six months ended June 30, 2008, the Holding Company invested an aggregate of $788 million in various affiliates.
 
Share Repurchase.  At December 31, 2007, the Company had $511 million remaining under its cumulative stock repurchase program authorizations. The $511 million authorization was reduced by $450 million to $61 million upon settlement of the accelerated stock repurchase agreement executed during December 2007 but for which no settlement occurred until January 2008. Under the terms of the agreement, the Company paid the bank $450 million in cash in January 2008 in exchange for 6.6 million shares of the Company’s outstanding common stock that the bank borrowed from third parties. Also in January 2008, the bank delivered 1.1 million additional shares of the Company’s common stock to the Company resulting in a total of 7.7 million shares being repurchased under the agreement. Upon settlement with the bank in January 2008, the Company increased additional paid-in capital and treasury stock. In January 2008, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program which began after the completion of the September 2007 program. Under these authorizations, the Holding Company may purchase its common stock from the MetLife Policyholder Trust, in the open market (including pursuant to the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and in privately negotiated transactions.
 
In February 2008, the Company entered into an accelerated common stock repurchase agreement with a major bank. Under the agreement, the Company paid the bank $711 million in cash and the bank delivered an initial amount of 11.2 million shares of the Company’s outstanding common stock that the bank borrowed from third parties. In May 2008, the bank delivered an additional 0.9 million shares of the Company’s common stock to the Company resulting in a total of 12.1 million shares being repurchased under the agreement. Upon settlement with the bank in May 2008, the Company increased additional paid-in capital and treasury stock.
 
The Company also repurchased 1.5 million shares through open market purchases for $89 million during the six months ended June 30, 2008.
 
The Company repurchased 21.3 million shares of its common stock for $1.3 billion during the six months ended June 30, 2008. During the six months ended June 30, 2008, 1.8 million shares of common stock were issued from treasury stock for $93 million.
 
In April 2008, the Holding Company’s Board of Directors authorized an additional $1 billion common stock repurchase program which will begin after the completion of the January 2008 program. The amount remaining under these repurchase programs was $1,261 million at June 30, 2008.


123


Table of Contents

Future common stock repurchases will be dependent upon several factors, including the Company’s capital position, its financial strength and credit ratings, general market conditions and the price of MetLife, Inc.’s common stock.
 
Support Agreements.  The Holding Company is party to various capital support commitments with certain of its subsidiaries and a corporation in which it owns 50% of the equity. Under these arrangements, the Holding Company has agreed to cause each such entity to meet specified capital and surplus levels. Management does not anticipate that these arrangements will place any significant demands upon the Holding Company’s liquidity resources.
 
Based on management’s analysis and comparison of its current and future cash inflows from the dividends it receives from subsidiaries that are permitted to be paid without prior insurance regulatory approval, its portfolio of liquid assets, anticipated securities issuances and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Holding Company to make payments on debt, make cash dividend payments on its common and preferred stock, contribute capital to its subsidiaries, pay all operating expenses and meet its cash needs.
 
Off-Balance Sheet Arrangements
 
Commitments to Fund Partnership Investments
 
The Company makes commitments to fund partnership investments in the normal course of business for the purpose of enhancing the Company’s total return on its investment portfolio. The amounts of these unfunded commitments were $4.8 billion and $4.3 billion at June 30, 2008 and December 31, 2007, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
 
Mortgage Loan Commitments
 
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.8 billion and $4.0 billion at June 30, 2008 and December 31, 2007, respectively. The purpose of these loans is to enhance the Company’s total return on its investment portfolio. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
 
Commitments to Fund Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
 
The Company commits to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $1.1 billion and $1.2 billion at June 30, 2008 and December 31, 2007, respectively. The purpose of these commitments and any related fundings is to enhance the Company’s total return on its investment portfolio. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
 
Lease Commitments
 
The Company, as lessee, has entered into various lease and sublease agreements for office space, data processing and other equipment. There have been no material changes in the Company’s commitments under such lease agreements from that reported at December 31, 2007, included in the 2007 Annual Report.
 
Credit Facilities and Letters of Credit
 
The Company maintains committed and unsecured credit facilities and letters of credit with various financial institutions. See “— Liquidity and Capital Resources — The Company — Liquidity Sources — Credit Facilities” and ‘‘— Letters of Credit” for further descriptions of such arrangements.
 
Share-Based Arrangements
 
In connection with the issuance of common equity units, the Holding Company issued forward stock purchase contracts under which the Holding Company will issue, in 2008 and 2009, between 39 and 48 million shares of its common stock, depending upon whether the share price is greater than $43.35 and less than $53.10. See


124


Table of Contents

“— Liquidity and Capital Resources — The Company — Liquidity Sources — Remarketing of Securities and Settlement of Stock Purchase Contracts Underlying Common Equity Units” for further information.
 
Guarantees
 
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $800 million, with a cumulative maximum of $2.4 billion, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future.
 
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
 
The Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future.
 
During the six months ended June 30, 2008, the Company recorded $7 million of additional liabilities for guarantees related to certain investment transactions. The term for these liabilities varies, with a maximum of 18 years. The maximum potential amount of future payments the Company could be required to pay under these guarantees is $225 million. The Company’s recorded liabilities were $13 million and $6 million at June 30, 2008 and December 31, 2007, respectively, for indemnities, guarantees and commitments.
 
In connection with synthetically created investment transactions, the Company writes credit default swap obligations that generally require payment of principal outstanding due in exchange for the referenced credit obligation. If a credit event, as defined by the contract, occurs the Company’s maximum amount at risk, assuming the value of the referenced credits becomes worthless, was $1.9 billion at June 30, 2008. The credit default swaps expire at various times during the next eight years.
 
Collateral for Securities Lending
 
The Company has non-cash collateral for securities lending on deposit from customers, which cannot be sold or repledged, and which has not been recorded on its consolidated balance sheets. The amount of this collateral was $19 million and $40 million at June 30, 2008 and December 31, 2007, respectively.
 
Adoption of New Accounting Pronouncements
 
Fair Value
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a consistent framework for measuring fair value, establishes a fair value hierarchy based on the observability of inputs used to measure fair value, and requires enhanced disclosures about fair value measurements.
 
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between


125


Table of Contents

market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Prior to SFAS 157, the fair value of a liability was often based on a settlement price concept, which assumed the liability was extinguished. Under SFAS 157, fair value is based on the amount that would be paid to transfer a liability to a third party with the same credit standing. SFAS 157 requires that fair value be a market-based measurement in which the fair value is determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant. Accordingly, fair value is no longer determined based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, SFAS 157 requires consideration of three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The approaches are not new but SFAS 157 requires that entities determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. SFAS 157 prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that observable inputs are not available. The Company has categorized its assets and liabilities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. SFAS 157 defines the input levels as follows:
 
  Level 1  Unadjusted quoted prices in active markets for identical assets or liabilities.
 
  Level 2  Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
  Level 3  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
Effective January 1, 2008, the Company adopted SFAS 157 and applied the provisions of the statement prospectively to assets and liabilities measured at fair value. The adoption of SFAS 157 changed the valuation of certain freestanding derivatives by moving from a mid to bid pricing convention as it relates to certain volatility inputs as well as the addition of liquidity adjustments and adjustments for risks inherent in a particular input or valuation technique. The adoption of SFAS 157 also changed the valuation of the Company’s embedded derivatives, most significantly the valuation of embedded derivatives associated with certain riders on variable annuity contracts. The change in valuation of embedded derivatives associated with riders on annuity contracts resulted from the incorporation of risk margins associated with non capital market inputs and the inclusion of the Company’s own credit standing in their valuation. At January 1, 2008, the impact of adopting SFAS 157 on assets and liabilities measured at fair value was $30 million ($19 million, net of income tax) and was recognized as a change in estimate in the accompanying unaudited condensed consolidated statement of income where it was presented in the respective income statement caption to which the item measured at fair value is presented. There were no significant changes in fair value of items measured at fair value and reflected in accumulated other comprehensive income (loss). The addition of risk margins and the Company’s own credit spread in the valuation of embedded derivatives associated with annuity contracts may result in significant volatility in the Company’s consolidated net income in future periods. The impact of adopting SFAS 157 also changed the fair value measurement for assets and liabilities which are not measured at fair value in the financial statements but for which disclosures of fair value are required under SFAS No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS 107”).
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities the option to measure most financial instruments and certain other items at fair value at specified election dates and to recognize related unrealized gains and losses in earnings. The fair value option is applied on an instrument-by-instrument basis upon adoption of the standard, upon the


126


Table of Contents

acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election is an irrevocable election. Effective January 1, 2008, the Company elected the fair value option on fixed maturity and equity securities backing certain pension products sold in Brazil. Such securities will now be presented as trading securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”) on the consolidated balance sheet with subsequent changes in fair value recognized in net investment income. Previously, these securities were accounted for as available-for-sale securities in accordance with SFAS 115 and unrealized gains and losses on these securities were recorded as a separate component of accumulated other comprehensive income (loss). The Company’s insurance joint venture in Japan also elected the fair value option for certain of its existing single premium deferred annuities and the assets supporting such liabilities. The fair value option was elected to achieve improved reporting of the asset/liability matching associated with these products. Adoption of SFAS 159 by the Company and its Japanese joint venture resulted in an increase in retained earnings of $27 million, net of income tax, at January 1, 2008. The election of the fair value option resulted in the reclassification of $10 million, net of income tax, of net unrealized gains from accumulated other comprehensive income (loss) to retained earnings on January 1, 2008.
 
Effective January 1, 2008, the Company adopted FASB Staff Position (“FSP”) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”). FSP 157-1 amends SFAS 157 to provide a scope out exception for lease classification and measurement under SFAS No. 13, Accounting for Leases. The Company also adopted FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 which delays the effective date of SFAS 157 for certain nonfinancial assets and liabilities that are recorded at fair value on a nonrecurring basis. The effective date is delayed until January 1, 2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business combination and the impairment testing of goodwill and long-lived assets.
 
Other
 
Effective January 1, 2008, the Company adopted FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP 39-1”). FSP 39-1 amends FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts (“FIN 39”), to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with FIN 39. FSP 39-1 also amends FIN 39 for certain terminology modifications. Upon adoption of FSP 39-1, the Company did not change its accounting policy of not offsetting fair value amounts recognized for derivative instruments under master netting arrangements. The adoption of FSP 39-1 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.
 
Effective January 1, 2008, the Company adopted SEC Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”), which amends SAB No. 105, Application of Accounting Principles to Loan Commitments. SAB 109 provides guidance on (i) incorporating expected net future cash flows when related to the associated servicing of a loan when measuring fair value; and (ii) broadening the SEC staff’s view that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment or to written loan commitments that are accounted for at fair value through earnings. Internally-developed intangible assets are not considered a component of the related instruments. The adoption of SAB 109 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.
 
Effective January 1, 2008, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) Implementation Issue E-23, Clarification of the Application of the Shortcut Method (“Issue E-23”). Issue E-23 amended SFAS 133 by permitting interest rate swaps to have a non-zero fair value at inception when applying the shortcut method of assessing hedge effectiveness, as long as the difference between the transaction price (zero) and the fair value (exit price), as defined by SFAS 157, is solely attributable to a bid-ask spread. In addition, entities are not precluded from applying the shortcut method of assessing hedge effectiveness in a hedging relationship of interest rate risk involving an interest bearing asset or liability in situations where the hedged item is not recognized for accounting purposes until settlement date as long as the period between trade date and settlement date of the hedged item is consistent with generally established conventions in the


127


Table of Contents

marketplace. The adoption of Issue E-23 did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.
 
Future Adoption of New Accounting Pronouncements
 
Business Combinations
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations — A Replacement of FASB Statement No. 141 (“SFAS 141(r)”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). Under SFAS 141(r) and SFAS 160:
 
  •  All business combinations (whether full, partial or “step” acquisitions) result in all assets and liabilities of an acquired business being recorded at fair value, with limited exceptions.
 
  •  Acquisition costs are generally expensed as incurred; restructuring costs associated with a business combination are generally expensed as incurred subsequent to the acquisition date.
 
  •  The fair value of the purchase price, including the issuance of equity securities, is determined on the acquisition date.
 
  •  Certain acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies.
 
  •  Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.
 
  •  Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date and are presented as equity rather than liabilities.
 
  •  When control is attained on previously noncontrolling interests, the previously held equity interests are remeasured at fair value and a gain or loss is recognized.
 
  •  Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions.
 
  •  When control is lost in a partial disposition, realized gains or losses are recorded on equity ownership sold and the remaining ownership interest is remeasured and holding gains or losses are recognized.
 
The pronouncements are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied. The Company is currently evaluating the impact of SFAS 141(r) on its accounting for future acquisitions and the impact of SFAS 160 on its consolidated financial statements.
 
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(r) and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
 
Derivatives
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods


128


Table of Contents

beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements.
 
Other
 
In June 2008, the FASB ratified as final the consensus on Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides a framework for evaluating the terms of a particular instrument and whether such terms qualify the instrument as being indexed to an entity’s own stock. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied by recording a cumulative effect adjustment to the opening balance of retained earnings at the date of adoption. The Company is currently evaluating the impact of EITF 07-5 on its consolidated financial statements.
 
In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP 140-3”). FSP 140-3 provides guidance for evaluating whether to account for a transfer of a financial asset and repurchase financing as a single transaction or as two separate transactions. FSP 140-3 is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of FSP 140-3 on its consolidated financial statements.
 
In December 2007, the FASB ratified as final the consensus on EITF Issue No. 07-6, Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause (“EITF 07-6”). EITF 07-6 addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus concludes that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under current guidance. EITF 07-6 applies prospectively to new arrangements entered into and assessments on existing transactions performed in fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 07-6 to have a material impact on its consolidated financial statements.
 
Investments
 
The Company’s primary investment objective is to optimize, net of income tax, risk-adjusted investment income and risk-adjusted total return while ensuring that assets and liabilities are managed on a cash flow and duration basis. The Company is 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.
 
The Company manages risk through in-house fundamental analysis of the underlying obligors, issuers, transaction structures and real estate properties. The Company also manages credit risk and market valuation risk through industry and issuer diversification and asset allocation. For real estate and agricultural assets, the Company manages credit risk and market valuation risk through geographic, property type and product type diversification and asset allocation. The Company manages interest rate risk as part of its 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 its products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. The Company also uses certain derivative instruments in the management of credit and interest rate risks.


129


Table of Contents

Composition of Investment Portfolio Results
 
The following table illustrates the net investment income, net investment gains (losses), annualized yields on average ending assets and ending carrying value for each of the components of the Company’s investment portfolio:
 
                                 
    At or For the Three Months Ended June 30,     At or For the Six Months Ended June 30,  
    2008     2007     2008     2007  
    (In millions)  
 
Fixed Maturity Securities
                               
Yield (1)
    6.48 %     6.23 %     6.47 %     6.19 %
Investment income (2)
  $ 3,331     $ 3,163     $ 6,609     $ 6,228  
Investment gains (losses)
  $ (300 )   $ (236 )   $ (504 )   $ (328 )
Ending carrying value (2)
  $ 242,074     $ 251,963     $ 242,074     $ 251,963  
Mortgage and Consumer Loans
                               
Yield (1)
    6.11 %     6.46 %     6.14 %     6.41 %
Investment income (3)
  $ 688     $ 654     $ 1,377     $ 1,286  
Investment gains (losses)
  $ (35 )   $ 13     $ (62 )   $ 13  
Ending carrying value
  $ 48,999     $ 43,755     $ 48,999     $ 43,755  
Real Estate and Real Estate Joint Ventures (4)
                               
Yield (1)
    6.77 %     11.54 %     5.94 %     11.57 %
Investment income
  $ 121     $ 164     $ 208     $ 315  
Investment gains (losses)
  $ 4     $ 37     $ 2     $ 44  
Ending carrying value
  $ 7,328     $ 5,933     $ 7,328     $ 5,933  
Policy Loans
                               
Yield (1)
    6.24 %     6.20 %     6.23 %     6.18 %
Investment income
  $ 167     $ 158     $ 332     $ 315  
Ending carrying value
  $ 10,764     $ 10,251     $ 10,764     $ 10,251  
Equity Securities and Other Limited Partnership Interests
                               
Yield (1)
    5.29 %     20.85 %     6.15 %     18.17 %
Investment income
  $ 154     $ 512     $ 354     $ 857  
Investment gains (losses)
  $ (15 )   $ 28     $ (28 )   $ 92  
Ending carrying value
  $ 12,127     $ 11,157     $ 12,127     $ 11,157  
Cash and Short-Term Investments
                               
Yield (1)
    2.61 %     4.67 %     2.83 %     5.40 %
Investment income
  $ 87     $ 99     $ 183     $ 222  
Investment gains (losses)
  $     $     $ 1     $  
Ending carrying value
  $ 15,795     $ 9,267     $ 15,795     $ 9,267  
Other Invested Assets (5)
                               
Yield (1)
    3.69 %     11.13 %     3.54 %     10.05 %
Investment income
  $ 119     $ 257     $ 225     $ 469  
Investment gains (losses)
  $ 8     $ (151 )   $ (640 )   $ (225 )
Ending carrying value
  $ 13,335     $ 10,302     $ 13,335     $ 10,302  
Total Investments
                               
Gross investment income yield (1)
    6.09 %     6.98 %     6.11 %     6.83 %
Investment fees and expenses yield
    (0.16 )%     (0.15 )%     (0.16 )%     (0.15 )%
                                 
Net Investment Income Yield
    5.93 %     6.83 %     5.95 %     6.68 %
                                 
Gross investment income
  $ 4,667     $ 5,007     $ 9,288     $ 9,692  
Investment fees and expenses
    (119 )     (105 )     (241 )     (208 )
                                 
Net Investment Income
  $ 4,548     $ 4,902     $ 9,047     $ 9,484  
                                 
Ending carrying value
  $ 350,422     $ 342,628     $ 350,422     $ 342,628  
                                 
Gross investment gains
  $ 286     $ 315     $ 691     $ 623  
Gross investment losses
    (346 )     (494 )     (878 )     (783 )
Writedowns
    (262 )     (22 )     (448 )     (25 )
                                 
Subtotal
  $ (322 )   $ (201 )   $ (635 )   $ (185 )
Derivative and other instruments not qualifying for hedge accounting
    (16 )     (108 )     (596 )     (219 )
                                 
Investment Gains (Losses)
  $ (338 )   $ (309 )   $ (1,231 )   $ (404 )
Minority interest — investment gains (losses)
    (2 )     4       23       8  
Investment gains (losses) tax benefit (provision)
    107       112       415       145  
                                 
Investment Gains (Losses), Net of Income Tax
  $ (233 )   $ (193 )   $ (793 )   $ (251 )
                                 


130


Table of Contents

 
(1) Yields are based on quarterly average asset carrying values, excluding recognized and unrealized investment gains (losses), and for yield calculation purposes, average assets exclude collateral associated with the Company’s securities lending program.
 
(2) Fixed maturity securities include $883 million and $919 million in ending carrying value related to trading securities at June 30, 2008 and 2007, respectively. Fixed maturity securities include $9 million and ($42) million of investment income related to trading securities for the three months and six months ended June 30, 2008, respectively. Fixed maturity securities include $16 million and $31 million of investment income related to trading securities for the three months and six months ended June 30, 2007, respectively.
 
(3) Investment income from mortgage and consumer loans includes prepayment fees.
 
(4) Included in net investment income from real estate and real estate joint ventures is $2 million and $1 million related to discontinued operations for the three months and six months ended June 30, 2008, respectively, and $2 million and $6 million related to discontinued operations for the three months and six months ended June 30, 2007, respectively. Included in net investment gains (losses) from real estate and real estate joint ventures is $0 of gains related to discontinued operations for both the three months and six months ended June 30, 2008, and $0 and $5 million of gains related to discontinued operations for the three months and six months ended June 30, 2007, respectively.
 
(5) Included in investment income from other invested assets are scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS 133, of ($38) million and ($45) million for the three months and six months ended June 30, 2008, respectively, and $65 million and $123 million for the three months and six months ended June 30, 2007, respectively. These amounts are excluded from investment gains (losses). Additionally, excluded from investment gains (losses) is $14 million and $28 million for the three months and six months ended June 30, 2008, respectively, and $5 million and $9 million for the three months and six months ended June 30, 2007, respectively, related to settlement payments on derivatives used to hedge interest rate and currency risk on policyholder account balances that do not qualify for hedge accounting. Such amounts are included within interest credited to policyholder account balances.
 
Fixed Maturity and Equity Securities Available-for-Sale
 
Fixed maturity securities consisted principally of publicly traded and privately placed fixed maturity securities, and represented 69% and 70% of total cash and invested assets at June 30, 2008 and December 31, 2007, respectively. Based on estimated fair value, public fixed maturity securities represented $204.1 billion, or 85%, and $205.4 billion, or 85%, of total fixed maturity securities at June 30, 2008 and December 31, 2007, respectively. Based on estimated fair value, private fixed maturity securities represented $37.1 billion, or 15%, and $36.8 billion, or 15%, of total fixed maturity securities at June 30, 2008 and December 31, 2007, respectively.
 
The Company determines the estimated fair value of its publicly traded fixed maturity, equity, and trading securities as well as its short-term investments generally through the use of independent pricing services. Independent pricing services that value these instruments use quoted market prices in active markets or market standard valuation methodologies. The market standard valuation methodologies utilized include: discounted cash flow methodologies, matrix pricing or similar techniques. The assumptions and inputs in applying these market standard valuation methodologies include, but are not limited to, interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration, and management’s assumptions regarding liquidity and estimated future cash flows. When a price is not available from an independent pricing service, the Company will value the security primarily using independent broker quotations.
 
For privately placed fixed maturity securities, the Company determines the estimated fair value through independent pricing services or discounted cash flow techniques. The discounted cash flow valuations rely upon the estimated future cash flows of the security, credit spreads of comparable public securities, secondary transactions, and takes into account, among other factors, the credit quality of the issuer and the reduced liquidity associated with privately placed debt securities.


131


Table of Contents

The Company has reviewed the significance and observability of inputs used in the valuation methodologies to determine the appropriate SFAS 157 fair value hierarchy level for each of its securities. Based on the results of this review and investment class analyses, each instrument is categorized as Level 1, 2, or 3 based on the priority of the inputs to the respective valuation methodologies. While prices for U.S. Treasury fixed maturity securities, exchange-traded common stock, and certain short-term money market securities have been classified into Level 1, most securities valued by independent pricing services have been classified into Level 2 because the significant inputs used in pricing these securities are market observable or can be corroborated using market observable information. Most investment grade privately placed fixed maturity securities have been classified within Level 2, while below investment grade or distressed privately placed fixed maturity securities have been classified within Level 3. Where estimated fair values are determined by independent broker quotations, these instruments have been classified as Level 3 due to the general lack of transparency in the process that independent brokers use to develop these price quotations.
 
Senior management, independent of the trading and investing functions, is responsible for the oversight of control systems and valuation policies, including reviewing and approving new transaction types and markets, for ensuring that observable market prices and market-based parameters are used for valuation wherever possible and for determining that judgmental valuation adjustments, if any, are based upon established policies and are applied consistently over time. Management reviews its valuation methodologies on an ongoing basis and ensures that any changes to valuation methodologies are justified. Management employs control systems and procedures that include confirmation that independent pricing services use market-based parameters for valuation wherever possible, comparisons with similar observable positions, comparisons with actual trade data, and discussions with senior business leaders familiar with the similar investments and the markets in which they trade.
 
The Securities Valuation Office of the NAIC evaluates the fixed maturity investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called “NAIC designations.” The NAIC ratings are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations (“NRSROs”) for marketable bonds. NAIC ratings 1 and 2 include bonds generally considered investment grade (rated “Baa3” or higher by Moody’s Investors Services (“Moody’s”), or rated “BBB — ” or higher by Standard & Poor’s (“S&P”) and Fitch Ratings Insurance Group (“Fitch”)), by such rating organizations. NAIC ratings 3 through 6 include bonds generally considered below investment grade (rated “Ba1” or lower by Moody’s, or rated “BB+” or lower by S&P and Fitch).
 
The following table presents the Company’s total fixed maturity securities by NRSRO designation and the equivalent ratings of the NAIC, as well as the percentage, based on estimated fair value, that each designation is comprised of at:
 
                                                     
        June 30, 2008     December 31, 2007  
        Cost or
                Cost or
             
NAIC
  Rating Agency
  Amortized
    Estimated
    % of
    Amortized
    Estimated
    % of
 
Rating
  Designation (1)   Cost     Fair Value     Total     Cost     Fair Value     Total  
        (In millions)  
 
1
  Aaa/Aa/A   $ 180,482     $ 178,248       73.9 %   $ 172,711     $ 175,651       72.5 %
2
  Baa     47,867       47,181       19.6       48,265       48,914       20.2  
3
  Ba     9,896       9,636       4.0       10,676       10,738       4.4  
4
  B     5,804       5,474       2.3       6,632       6,481       2.7  
5
  Caa and lower     692       621       0.2       476       445       0.2  
6
  In or near default     25       31             1       13        
                                                     
    Total fixed maturity securities   $ 244,766     $ 241,191       100.0 %   $ 238,761     $ 242,242       100.0 %
                                                     
 
 
(1) Amounts presented are based on rating agency designations. Comparisons between NAIC ratings and rating agency designations are published by the NAIC. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then the MetLife rating is used.


132


Table of Contents

 
The Company held fixed maturity securities at estimated fair values that were below investment grade or not rated by an independent rating agency that totaled $15.8 billion and $17.7 billion at June 30, 2008 and December 31, 2007, respectively. These securities had net unrealized losses of $655 million and $108 million at June 30, 2008 and December 31, 2007, respectively. Non-income producing fixed maturity securities were $31 million and $13 million at June 30, 2008 and December 31, 2007, respectively. Net unrealized gains associated with non-income producing fixed maturity securities were $6 million and $12 million at June 30, 2008 and December 31, 2007, respectively.
 
The following tables present the cost or amortized cost, gross unrealized gain and loss, and estimated fair value of the Company’s fixed maturity and equity securities, the percentage that each sector represents by the respective total holdings at:
 
                                         
    June 30, 2008  
    Cost or
                         
    Amortized
    Gross Unrealized     Estimated
    % of
 
    Cost     Gain     Loss     Fair Value     Total  
    (In millions)  
 
U.S. corporate securities
  $ 79,131     $ 1,126     $ 4,002     $ 76,255       31.6 %
Residential mortgage-backed securities
    55,551       487       1,530       54,508       22.6  
Foreign corporate securities
    37,516       1,444       1,343       37,617       15.6  
U.S. Treasury/agency securities
    19,108       1,178       106       20,180       8.4  
Commercial mortgage-backed securities
    19,234       73       889       18,418       7.6  
Foreign government securities
    14,075       1,693       392       15,376       6.4  
Asset-backed securities
    14,185       54       1,167       13,072       5.4  
State and political subdivision securities
    5,653       100       272       5,481       2.3  
Other fixed maturity securities
    313       5       34       284       0.1  
                                         
Total fixed maturity securities
  $ 244,766     $ 6,160     $ 9,735     $ 241,191       100.0 %
                                         
Common stock
  $ 2,576     $ 369     $ 194     $ 2,751       50.8 %
Non-redeemable preferred stock
    3,226       30       587       2,669       49.2  
                                         
Total equity securities (1)
  $ 5,802     $ 399     $ 781     $ 5,420       100.0 %
                                         
 
                                         
    December 31, 2007  
    Cost or
                         
    Amortized
    Gross Unrealized     Estimated
    % of
 
    Cost     Gain     Loss     Fair Value     Total  
    (In millions)  
 
U.S. corporate securities
  $ 77,875     $ 1,725     $ 2,174     $ 77,426       32.0 %
Residential mortgage-backed securities
    56,267       611       389       56,489       23.3  
Foreign corporate securities
    37,359       1,740       794       38,305       15.8  
U.S. Treasury/agency securities
    19,771       1,487       13       21,245       8.8  
Commercial mortgage-backed securities
    17,676       251       199       17,728       7.3  
Foreign government securities
    13,535       1,924       188       15,271       6.3  
Asset-backed securities
    11,549       41       549       11,041       4.6  
State and political subdivision securities
    4,394       140       115       4,419       1.8  
Other fixed maturity securities
    335       13       30       318       0.1  
                                         
Total fixed maturity securities
  $ 238,761     $ 7,932     $ 4,451     $ 242,242       100.0 %
                                         
Common stock
  $ 2,488     $ 568     $ 108     $ 2,948       48.7 %
Non-redeemable preferred stock
    3,403       61       362       3,102       51.3  
                                         
Total equity securities (1)
  $ 5,891     $ 629     $ 470     $ 6,050       100.0 %
                                         


133


Table of Contents

 
(1) Equity securities primarily consist of investments in common and preferred stocks and mutual fund interests. Such securities include private equity securities with an estimated fair value of $676 million and $599 million at June 30, 2008 and December 31, 2007, respectively.
 
The Company is not exposed to any significant concentrations of credit risk in its equity securities portfolio. The Company is exposed to concentrations of credit risk related to U.S. Treasury securities and obligations of U.S. government and agencies. Additionally, at June 30, 2008 and December 31, 2007, the Company had exposure to fixed maturity securities backed by sub-prime mortgage loans with estimated fair values of $1.8 billion and $2.2 billion, respectively, and unrealized losses of $560 million and $219 million, respectively. These securities are classified within asset-backed securities in the immediately preceding tables. At June 30, 2008, 33% of the asset-backed securities backed by sub-prime mortgage loans have been guaranteed by financial guarantee insurers, of which 11%, 38% and 7% were guaranteed by financial guarantee insurers who were Aaa, Aa and A rated, respectively.
 
Overall, at June 30, 2008, $6.5 billion of the estimated fair value of the Company’s fixed maturity securities were credit enhanced by financial guarantee insurers of which $2.8 billion, $2.4 billion, $1.1 billion and $0.2 billion, are included within state and political subdivision securities, U.S. corporate securities, asset-backed securities and mortgage-backed securities, respectively, and 12%, 29% and 40% were guaranteed by financial guarantee insurers who were Aaa, Aa and A rated, respectively.
 
The fair value of fixed maturity securities and equity securities measured at fair value on a recurring basis and their corresponding fair value hierarchy, are summarized as follows:
 
                                 
    June 30, 2008  
    Fixed Maturity
    Equity
 
    Securities     Securities  
    (In millions)  
 
Quoted prices in active markets for identical assets (Level 1)
  $ 6,050       2 %   $ 2,048       38 %
Significant other observable inputs (Level 2)
    211,813       88       1,303       24  
Significant unobservable inputs (Level 3)
    23,328       10       2,069       38  
                                 
Total fair value
  $  241,191        100 %   $  5,420        100 %
                                 
 


134


Table of Contents

                                 
    June 30, 2008  
    Fair Value Measurements at Reporting Date Using        
    Quoted Prices
                   
    in Active
    Significant
             
    Markets for
    Other
    Significant
       
    Identical Assets
    Observable
    Unobservable
       
    and Liabilities
    Inputs
    Inputs
    Total
 
    (Level 1)     (Level 2)     (Level 3)     Fair Value  
    (In millions)  
 
Fixed maturity securities:
                               
U.S. corporate securities
  $     $ 67,975     $ 8,280     $ 76,255  
Residential mortgage-backed securities
    319       52,916       1,273       54,508  
Foreign corporate securities
    2       29,462       8,153       37,617  
U.S. Treasury/agency securities
    5,175       14,923       82       20,180  
Commercial mortgage-backed securities
          17,922       496       18,418  
Foreign government securities
    532       14,189       655       15,376  
Asset-backed securities
          9,110       3,962       13,072  
State and political subdivision securities
    7       5,316       158       5,481  
Other fixed maturity securities
    15             269       284  
                                 
Total fixed maturity securities
  $  6,050     $  211,813     $  23,328     $  241,191  
                                 
Equity securities:
                               
Common stock
  $ 1,915     $ 648     $ 188     $ 2,751  
Non-redeemable preferred stock
    133       655       1,881       2,669  
                                 
Total equity securities
  $ 2,048     $ 1,303     $ 2,069     $ 5,420  
                                 
 
A rollforward of the fair value measurements for fixed maturity securities and equity securities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months and six months ended June 30, 2008 is as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2008     June 30, 2008  
    Fixed Maturity
    Equity
    Fixed Maturity
    Equity
 
    Securities     Securities     Securities     Securities  
    (In millions)  
 
Balance, December 31, 2007
                  $ 24,854     $ 2,385  
Impact of SFAS 157 and SFAS 159 adoption
                    (8 )      
                                 
Balance, beginning of period
  $ 23,811     $ 2,166       24,846       2,385  
Total realized/unrealized gains (losses) included in:
                               
Earnings
    (35 )     (4 )     (88 )     (40 )
Other comprehensive income (loss)
    (400 )     (25 )     (1,088 )     (200 )
Purchases, sales, issuances and settlements
    88       (21 )     (666 )     (18 )
Transfer in and/or out of Level 3
    (136 )     (47 )     324       (58 )
                                 
Balance, end of period
  $ 23,328     $ 2,069     $ 23,328     $ 2,069  
                                 
 
See “— Summary of Critical Accounting Estimates — Investments” for further information on the estimates and assumptions that affect the amounts reported above.
 
Fixed Maturity and Equity Security Impairment.  The Company classifies all of its fixed maturity and equity securities as available-for-sale and marks them to market through other comprehensive income, except for non-marketable private equities, which are generally carried at cost and trading securities which are carried at fair value with subsequent changes in fair value recognized in net investment income. All securities with gross unrealized

135


Table of Contents

losses at the consolidated balance sheet date are subjected to the Company’s process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be so impaired. The assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described in “— Summary of Critical Accounting Estimates — Investments,” about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
 
The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below cost or amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for six months or greater. While all of these securities are monitored for potential impairment, the Company’s experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve.
 
The Company records impairments as investment losses and adjusts the cost basis of the fixed maturity and equity securities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Impairments of fixed maturity and equity securities were $196 million and $336 million for the three months and six months ended June 30, 2008, respectively, and $21 million and $24 million for the three months and six months ended June 30, 2007, respectively. The Company’s three largest impairments totaled $69 million and $96 million for the three months and six months ended June 30, 2008, respectively, and $12 million for both the three months and six months ended June 30, 2007. The circumstances that gave rise to these impairments were financial restructurings, bankruptcy filings or difficult underlying operating environments for the entities concerned. The Company’s credit-related impairments of fixed maturity and trust preferred securities, included in non-redeemable preferred stock were $139 million and $218 million for the three months and six months ended June 30, 2008, respectively, and $21 million and $24 million for the three months and six months ended June 30, 2007, respectively. The Company sold or disposed of fixed maturity and equity securities at a loss that had a fair value of $7.8 billion and $13.4 billion during the three months and six months ended June 30, 2008, respectively, and $14.1 billion and $26.2 billion during the three months and six months ended June 30, 2007, respectively. Gross losses excluding impairments for fixed maturity and equity securities were $316 million and $635 million for the three months and six months ended June 30, 2008, respectively, and $321 million and $570 million for the three months and six months ended June 30, 2007, respectively.
 
The following tables present the cost or amortized cost, gross unrealized loss and number of securities for fixed maturity and equity securities, where the estimated fair value had declined and remained below cost or amortized cost by less than 20%, or 20% or more at:
 
                                                 
    June 30, 2008  
    Cost or Amortized Cost     Gross Unrealized Loss     Number of Securities  
    Less than
    20% or
    Less than
    20% or
    Less than
    20% or
 
    20%     more     20%     more     20%     more  
    (In millions, except number of securities)  
 
Less than six months
  $ 86,859     $ 10,144     $ 2,748     $ 2,666       8,067       1,498  
Six months or greater but less than nine months
    11,896       799       807       296       1,260       159  
Nine months or greater but less than twelve months
    11,286       141       820       66       1,188       28  
Twelve months or greater
    36,106       86       3,087       26       2,921       34  
                                                 
Total
  $ 146,147     $ 11,170     $ 7,462     $ 3,054                  
                                                 
 


136


Table of Contents

                                                 
    December 31, 2007  
    Cost or Amortized Cost     Gross Unrealized Loss     Number of Securities  
    Less than
    20% or
    Less than
    20% or
    Less than
    20% or
 
    20%     more     20%     more     20%     more  
    (In millions, except number of securities)  
 
Less than six months
  $ 49,463     $ 1,943     $ 1,670     $ 555       6,339       644  
Six months or greater but less than nine months
    17,353       23       844       7       1,461       31  
Nine months or greater but less than twelve months
    9,410       7       568       2       791       1  
Twelve months or greater
    31,731       50       1,262       13       3,192       32  
                                                 
Total
  $ 107,957     $ 2,023     $ 4,344     $ 577                  
                                                 
 
At June 30, 2008 and December 31, 2007, $7.3 billion and $4.0 billion, respectively, of unrealized losses related to fixed maturity securities with an unrealized loss position of less than 20% of cost or amortized cost, which represented 5% and 4%, respectively, of the cost or amortized cost of such securities. At June 30, 2008 and December 31, 2007, $182 million and $322 million, respectively, of unrealized losses related to equity securities with an unrealized loss position of less than 20% of cost, which represented 9% and 10%, respectively, of the cost of such securities.
 
At June 30, 2008, $2.5 billion and $599 million of unrealized losses related to fixed maturity securities and equity securities, respectively, with an unrealized loss position of 20% or more of cost or amortized cost, which represented 27% and 28% of the cost or amortized cost of such fixed maturity securities and equity securities, respectively. Of such unrealized losses of $2.5 billion and $599 million, $2.1 billion and $589 million related to fixed maturity securities and equity securities, respectively, that were in an unrealized loss position for a period of less than six months. At December 31, 2007, $429 million and $148 million of unrealized losses related to fixed maturity securities and equity securities, respectively, with an unrealized loss position of 20% or more of cost or amortized cost, which represented 28% and 31% of the cost or amortized cost of such fixed maturity securities and equity securities, respectively. Of such unrealized losses of $429 million and $148 million, $407 million and $148 million related to fixed maturity securities and equity securities, respectively, that were in an unrealized loss position for a period of less than six months.
 
The Company held 115 fixed maturity securities and 16 equity securities, each with a gross unrealized loss at June 30, 2008 of greater than $10 million. These 115 fixed maturity securities represented 19%, or $1.8 billion in the aggregate, of the gross unrealized loss on fixed maturity securities. These 16 equity securities represented 33%, or $260 million in the aggregate, of the gross unrealized loss on equity securities. The Company held 23 fixed maturity securities and 7 equity securities, each with a gross unrealized loss at December 31, 2007 of greater than $10 million. These 23 fixed maturity securities represented 8%, or $358 million in the aggregate, of the gross unrealized loss on fixed maturity securities. These 7 equity securities represented 21%, or $101 million in the aggregate, of the gross unrealized loss on equity securities.
 
In the Company’s impairment review process, the duration of, and severity of, an unrealized loss position, such as unrealized losses of 20% or more for equity securities, which was $599 million at June 30, 2008 and $148 million at December 31, 2007, is given greater weight and consideration, than for fixed maturity securities. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows, as well as the Company’s ability and intent to be hold the security, including holding the security until the earlier of a recovery in value, or until maturity. Whereas for an equity security, greater weight and consideration is given by the Company to a decline in market value and the likelihood such market value decline will recover.

137


Table of Contents

At June 30, 2008 and December 31, 2007, the Company had $10.5 billion and $4.9 billion, respectively, of gross unrealized losses related to its fixed maturity and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized loss, as follows:
 
                 
    June 30,
    December 31,
 
    2008     2007  
 
Sector:
               
U.S. corporate securities
    38 %     44 %
Foreign corporate securities
    13       16  
Asset-backed securities
    11       11  
Residential mortgage-backed securities
    15       8  
Foreign government securities
    4       4  
Commercial mortgage-backed securities
    8       4  
Other
    11       13  
                 
Total
    100 %     100 %
                 
Industry:
               
Finance
    30 %     34 %
Industrial
    2       18  
Mortgage-backed
    23       12  
Asset-backed
    11       11  
Utility
    7       8  
Government
    5       4  
Consumer
    8       3  
Communication
    5       2  
Other
    9       8  
                 
Total
    100 %     100 %
                 
 
As described previously, the Company performs a regular evaluation, on a security-by-security basis, of its investment holdings in accordance with its impairment policy in order to evaluate whether such securities are other-than-temporarily impaired. One of the criteria which the Company considers in its other-than-temporary impairment analysis is its intent and ability to hold securities for a period of time sufficient to allow for the recovery of their value to an amount equal to or greater than cost or amortized cost. The Company’s intent and ability to hold securities considers broad portfolio management objectives such as asset/liability duration management, issuer and industry segment exposures, interest rate views and the overall total return focus. In following these portfolio management objectives, changes in facts and circumstances that were present in past reporting periods may trigger a decision to sell securities that were held in prior reporting periods. Decisions to sell are based on current conditions or the Company’s need to shift the portfolio to maintain its portfolio management objectives including liquidity needs or duration targets on asset/liability managed portfolios. The Company attempts to anticipate these types of changes and if a sale decision has been made on an impaired security and that security is not expected to recover prior to the expected time of sale, the security will be deemed other-than-temporarily impaired in the period that the sale decision was made and an other-than-temporary impairment loss will be recognized.
 
Based upon the Company’s current evaluation of the securities in accordance with its impairment policy, the cause of the decline being attributable to a rise in market yields caused principally by a current widening of credit spreads which resulted from a lack of market liquidity and a short-term market dislocation versus a long-term deterioration in credit quality, and the Company’s current intent and ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover, the Company has concluded that the aforementioned securities are not other-than-temporarily impaired.


138


Table of Contents

Corporate Fixed Maturity Securities.  The table below shows the major industry types that comprise the corporate fixed maturity holdings at:
 
                                 
    June 30, 2008     December 31, 2007  
    Estimated
    % of
    Estimated
    % of
 
    Fair Value     Total     Fair Value     Total  
    (In millions)  
 
Industrial
  $ 37,858       33.3 %   $ 40,399       34.9 %
Foreign (1)
    37,617       33.0       38,305       33.1  
Finance
    20,637       18.1       22,013       19.0  
Utility
    14,277       12.5       13,780       11.9  
Other
    3,483       3.1       1,234       1.1  
                                 
Total
  $ 113,872       100.0 %   $ 115,731       100.0 %
                                 
 
 
(1) Includes U.S. dollar-denominated debt obligations of foreign obligors, and other fixed maturity foreign investments.
 
The Company maintains a diversified corporate fixed maturity portfolio across industries and issuers. The portfolio does not have exposure to any single issuer in excess of 1% of the total invested assets of the portfolio. At June 30, 2008 and December 31, 2007, the Company’s combined holdings in the ten issuers to which it had the greatest exposure totaled $9.5 billion and $7.8 billion, respectively, each less than 3% of the Company’s total invested assets at such dates. The exposure to the largest single issuer of corporate fixed maturity securities held at June 30, 2008 and December 31, 2007 was $1.7 billion and $1.2 billion, respectively.
 
The Company has hedged all of its material exposure to foreign currency risk in its corporate fixed maturity portfolio. In the Company’s international insurance operations, both its assets and liabilities are generally denominated in local currencies.
 
Structured Securities.  The following table shows the types of structured securities the Company held at:
 
                                 
    June 30, 2008     December 31, 2007  
    Estimated
    % of
    Estimated
    % of
 
    Fair Value     Total     Fair Value     Total  
    (In millions)  
 
Residential mortgage-backed securities:
                               
Collateralized mortgage obligations
  $ 33,914       39.5 %   $ 37,372       43.8 %
Pass-through securities
    20,594       23.9       19,117       22.4  
                                 
Total residential mortgage-backed securities
    54,508       63.4       56,489       66.2  
Commercial mortgage-backed securities
    18,418       21.4       17,728       20.8  
Asset-backed securities
    13,072       15.2       11,041       13.0  
                                 
Total
  $  85,998        100.0 %   $  85,258        100.0 %
                                 
 
The majority of the residential mortgage-backed securities are guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. Alternative residential mortgage loans (“Alt-A”) are a classification of mortgage loans where the risk profile of the borrower falls between prime and sub-prime. At June 30, 2008 and December 31, 2007, $54.1 billion and $56.2 billion, respectively, or 99% for both, of the residential mortgage-backed securities were rated Aaa/AAA by Moody’s, S&P or Fitch. At June 30, 2008 and December 31, 2007, the Company’s Alt-A residential mortgage-backed securities exposure was $4.8 billion and $6.4 billion, respectively, with an unrealized loss of $738 million and $143 million, respectively.
 
At June 30, 2008 and December 31, 2007, $16.4 billion and $15.5 billion, respectively, or 89% and 87%, respectively, of the commercial mortgage-backed securities were rated Aaa/AAA by Moody’s, S&P or Fitch.


139


Table of Contents

The Company’s asset-backed securities are diversified both by sector and by issuer. At June 30, 2008, the largest exposures in the Company’s asset-backed securities portfolio were credit card receivables and automobile receivables of 47% and 12% of the total holdings, respectively. At June 30, 2008 and December 31, 2007, $8.6 billion and $6.0 billion, respectively, or 66% and 54%, respectively, of total asset-backed securities were rated Aaa/AAA by Moody’s, S&P or Fitch.
 
The Company’s asset-backed securities included in the structured securities table above include exposure to residential mortgage-backed securities backed by sub-prime mortgage loans. Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. The Company’s exposure exists through investment in asset-backed securities which are supported by sub-prime mortgage loans. The slowing U.S. housing market, greater use of affordable mortgage products, and relaxed underwriting standards for some originators of below-prime loans have recently led to higher delinquency and loss rates, especially within the 2006 vintage year. Vintage year refers to the year of origination and not to the year of purchase. These factors have caused a pull-back in market liquidity and repricing of risk, which has led to an increase in unrealized losses from June 30, 2007 to June 30, 2008. Based upon the analysis of the Company’s exposure to sub-prime mortgage loans through its investment in asset-backed securities, the Company expects to receive payments in accordance with the contractual terms of the securities.
 
The following table shows the Company’s exposure to asset-backed securities supported by sub-prime mortgage loans by credit quality and by vintage year:
 
                                                                                                 
    June 30, 2008  
    Aaa     Aa     A     Baa     Below Investment Grade     Total  
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
 
    Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value  
 
2003 & Prior
  $ 117     $ 101     $ 196     $ 164     $ 23     $ 19     $ 17     $ 13     $ 4     $ 3     $ 357     $ 300  
2004
    223       121       423       314       21       17       38       28       13       11       718       491  
2005
    471       394       336       263       8       7       6       6       15       12       836       682  
2006
    186       157       98       61       5       4       4       4       15       6       308       232  
2007
    119       95       37       18       11       9                   8       7       175       129  
2008
                                                                       
                                                                                                 
Total
  $ 1,116     $ 868     $ 1,090     $ 820     $ 68     $ 56     $ 65     $ 51     $ 55     $ 39     $ 2,394     $ 1,834  
                                                                                                 
 
                                                                                                 
    December 31, 2007  
    Aaa     Aa     A     Baa     Below Investment Grade     Total  
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
    Cost or
    Fair
 
    Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value     Amortized Cost     Value  
 
2003 & Prior
  $ 234     $ 223     $ 132     $ 125     $ 19     $ 17     $ 14     $ 13     $ 4     $ 2     $ 403     $ 380  
2004
    212       195       446       414       27       24                   1             686       633  
2005
    551       502       278       252       22       18       5       4                   856       776  
2006
    258       235       69       47                                           327       282  
2007
    152       142       17       9                                           169       151  
                                                                                                 
Total
  $ 1,407     $ 1,297     $ 942     $ 847     $ 68     $ 59     $ 19     $ 17     $ 5     $ 2     $ 2,441     $ 2,222  
                                                                                                 
 
At June 30, 2008 and December 31, 2007, the Company had $1.8 billion and $2.2 billion, respectively, of asset-backed securities supported by sub-prime mortgage loans as outlined in the tables above. At June 30, 2008, approximately 92% of the portfolio is rated Aa or better of which 80% was in vintage year 2005 and prior. At December 31, 2007, approximately 96% of the portfolio was rated Aa or better of which 80% was in vintage year 2005 and prior. These older vintages benefit from better underwriting, improved enhancement levels and higher residential property price appreciation. At June 30, 2008, all of the $1.8 billion of asset-backed securities supported by sub-prime mortgage loans were classified as Level 3 securities.
 
Asset-backed securities also include collateralized debt obligations backed by sub-prime mortgage loans at an aggregate cost of $34 million with a fair value of $22 million at June 30, 2008 and an aggregate cost of $64 million with a fair value of $48 million at December 31, 2007, which are not included in the tables above.


140


Table of Contents

Assets on Deposit and Held in Trust and Assets Pledged as Collateral
 
The Company had investment assets on deposit with regulatory agencies with a fair market value of $2.4 billion and $1.8 billion at June 30, 2008 and December 31, 2007, respectively, consisting primarily of fixed maturity and equity securities. Company securities held in trust to satisfy collateral requirements had a cost or amortized cost of $9.2 billion and $7.1 billion at June 30, 2008 and December 31, 2007, respectively, consisting primarily of fixed maturity and equity securities.
 
Certain of the Company’s fixed maturity securities are pledged as collateral for various transactions as described in “— Composition of Investment Portfolio Results — Derivative Financial Instruments — Credit Risk.”
 
Trading Securities
 
The Company has a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities, the execution of short sale agreements and asset and liability matching strategies for certain insurance products. Trading securities and short sale agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income related to fixed maturity securities.
 
At June 30, 2008 and December 31, 2007, trading securities were $883 million and $779 million, respectively, and liabilities associated with the short sale agreements in the trading securities portfolio, which were included in other liabilities, were $47 million and $107 million, respectively. The Company had pledged $300 million and $407 million of its assets, primarily consisting of trading securities, as collateral to secure the liabilities associated with the short sale agreements in the trading securities portfolio at June 30, 2008 and December 31, 2007, respectively.
 
The fair value of trading securities measured at fair value on a recurring basis and their corresponding fair value hierarchy, are summarized as follows:
 
                                 
    June 30, 2008  
    Trading
    Trading
 
    Securities     Liabilities  
    (In millions)  
 
Quoted prices in active markets for identical assets and liabilities (Level 1)
  $ 268       30 %   $ 47       100 %
Significant other observable inputs (Level 2)
    303       34              
Significant unobservable inputs (Level 3)
    312       36              
                                 
Total fair value
  $ 883       100 %   $ 47       100 %
                                 
 
A rollforward of the fair value measurements for trading securities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months and six months ended June 30, 2008 is as follows:
 
                 
    Three Months Ended     Six Months Ended  
    June 30, 2008  
    (In millions)  
 
Balance, December 31, 2007
          $ 183  
Impact of SFAS 157 and SFAS 159 adoption
            8  
                 
Balance, beginning of period
  $ 179       191  
Total realized/unrealized gains (losses) included in:
               
Earnings
    3       (2 )
Other comprehensive income (loss)
    1       1  
Purchases, sales, issuances and settlements
    129       131  
Transfer in and/or out of Level 3
          (9 )
                 
Balance, end of period
  $ 312     $ 312  
                 


141


Table of Contents

Interest and dividends earned on trading securities in addition to the net realized and unrealized gains (losses) recognized on the trading securities and the related short sale agreement liabilities included within net investment income totaled $9 million and ($42) million for the three months and six months ended June 30, 2008, respectively, and $16 million and $31 million for the three months and six months ended June 30, 2007, respectively. Included within unrealized gains (losses) on such trading securities and short sale agreement liabilities are changes in fair value of ($4) million and ($47) million for the three months and six months ended June 30, 2008, respectively, and $4 million and $15 million for the three months and six months ended June 30, 2007, respectively.
 
See “— Summary of Critical Accounting Estimates — Investments” for further information on the estimates and assumptions that affect the amounts reported above.
 
Mortgage and Consumer Loans
 
The Company’s mortgage and consumer loans are principally collateralized by commercial, agricultural and residential properties, as well as automobiles. Mortgage and consumer loans comprised 14.0% and 13.6% of the Company’s total cash and invested assets at June 30, 2008 and December 31, 2007, respectively. The carrying value of mortgage and consumer loans is stated at original cost net of repayments, amortization of premiums, accretion of discounts and valuation allowances. The following table shows the carrying value of the Company’s mortgage and consumer loans by type at:
 
                                 
    June 30, 2008     December 31, 2007  
    Carrying
    % of
    Carrying
    % of
 
    Value     Total     Value     Total  
    (In millions)  
 
Commercial mortgage loans
  $ 36,113       73.7 %   $ 35,501       75.5 %
Agricultural mortgage loans
    11,620       23.7       10,484       22.3  
Consumer loans
    1,266       2.6       1,045       2.2  
                                 
Total
  $ 48,999       100.0 %   $ 47,030       100.0 %
                                 
 
At June 30, 2008 and December 31, 2007, $179 million and $5 million, or less than 1%, of the Company’s mortgage and consumer loans were held-for-sale, an increase of $174 million, which included a $71 million increase in residential mortgages held-for-sale to $76 million from $5 million. Mortgage and consumer loans held-for-sale are carried at the lower of amortized cost or fair value. At June 30, 2008, the Company held $159 million in mortgage loans which are carried at fair value based on the value of the underlying collateral or broker quotes, if lower, of which $55 million relate to impaired mortgage loans and $104 million to mortgage loans held-for-sale. These impaired mortgage loans were recorded at fair value and represent a nonrecurring fair value measurement. The fair value is categorized as Level 3. Included within net investment gains (losses) for such impaired mortgage loans are net impairments of $13 million and $42 million for the three months and six months ended June 30, 2008, respectively.


142


Table of Contents

Commercial Mortgage Loans.  The Company diversifies its commercial mortgage loans by both geographic region and property type. The following table presents the distribution across geographic regions and property types for commercial mortgage loans at:
 
                                 
    June 30, 2008     December 31, 2007  
    Carrying
    % of
    Carrying
    % of
 
    Value     Total     Value     Total  
    (In millions)  
 
Region
                               
Pacific
  $ 8,834       24.5 %   $ 8,620       24.3 %
South Atlantic
    8,163       22.6       8,021       22.6  
Middle Atlantic
    5,353       14.8       5,110       14.4  
International
    3,903       10.8       3,642       10.3  
East North Central
    2,663       7.4       2,957       8.3  
West South Central
    2,890       8.0       2,925       8.2  
New England
    1,549       4.3       1,499       4.2  
Mountain
    1,160       3.2       1,086       3.1  
West North Central
    849       2.3       1,046       2.9  
East South Central
    492       1.4       503       1.4  
Other
    257       0.7       92       0.3  
                                 
Total
  $ 36,113       100.0 %   $ 35,501       100.0 %
                                 
Property Type
                               
Office
  $ 15,302       42.4 %   $ 15,471       43.6 %
Retail
    8,438       23.3       7,557       21.3  
Apartments
    4,111       11.4       4,437       12.5  
Hotel
    3,198       8.9       3,282       9.2  
Industrial
    3,140       8.7       2,880       8.1  
Other
    1,924       5.3       1,874       5.3  
                                 
Total
  $ 36,113       100.0 %   $ 35,501       100.0 %
                                 
 
Restructured, Potentially Delinquent, Delinquent or Under Foreclosure.  The Company monitors its mortgage loan investments on an ongoing basis, including reviewing loans that are restructured, potentially delinquent, delinquent or under foreclosure. These loan classifications are consistent with those used in industry practice.
 
The Company defines restructured mortgage loans as loans in which the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company defines potentially delinquent loans as loans that, in management’s opinion, have a high probability of becoming delinquent. The Company defines delinquent mortgage loans, consistent with industry practice, as loans in which two or more interest or principal payments are past due. The Company defines mortgage loans under foreclosure as loans in which foreclosure proceedings have formally commenced.
 
The Company reviews all mortgage loans on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis and tenant creditworthiness.
 
The Company records valuation allowances for certain of the loans that it deems impaired. The Company’s valuation allowances are established both on a loan specific basis for those loans where a property or market specific risk has been identified that could likely result in a future default, as well as for pools of loans with similar high risk characteristics where a property specific or market risk has not been identified. Loan specific valuation allowances are established for the excess carrying value of the mortgage loan over the present value of expected future cash


143


Table of Contents

flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral, or the loan’s market value if the loan is being sold. Valuation allowances for pools of loans are established based on property types and loan to value risk factors. The Company records valuation allowances as investment losses. The Company records subsequent adjustments to allowances as investment gains (losses).
 
The following table presents the amortized cost and valuation allowance for commercial mortgage loans distributed by loan classification at:
 
                                                                 
    June 30, 2008     December 31, 2007  
                      % of
                      % of
 
    Amortized
    % of
    Valuation
    Amortized
    Amortized
    % of
    Valuation
    Amortized
 
    Cost (1)     Total     Allowance     Cost     Cost (1)     Total     Allowance     Cost  
    (In millions)  
 
Performing
  $ 36,280       100.0 %   $ 172       0.5 %   $ 35,665       100.0 %   $ 168       0.5 %
Restructured
                      %                       %
Potentially delinquent
    1                   %     3                   %
Delinquent or under foreclosure
    4                   %     1                   %
                                                                 
Total
  $ 36,285       100.0 %   $ 172       0.5 %   $ 35,669       100.0 %   $ 168       0.5 %
                                                                 
 
 
(1) Amortized cost is equal to carrying value before valuation allowances.
 
The following table presents the changes in valuation allowances for commercial mortgage loans held-for-investment for the:
 
         
    Six Months Ended
 
    June 30, 2008  
    (In millions)  
 
Balance, beginning of period
  $ 168  
Additions
    57  
Deductions
    (53 )
         
Balance, end of period
  $ 172  
         
 
Agricultural Mortgage Loans.  The Company diversifies its agricultural mortgage loans by both geographic region and product type.
 
Of the $11.7 billion of agricultural mortgage loans outstanding at June 30, 2008, 55%, were subject to rate resets prior to maturity. A substantial portion of these loans has been successfully renegotiated and remain outstanding to maturity. The process and policies for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial loans.
 
The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
 
                                                                 
    June 30, 2008     December 31, 2007  
                      % of
                      % of
 
    Amortized
    % of
    Valuation
    Amortized
    Amortized
    % of
    Valuation
    Amortized
 
    Cost (1)     Total     Allowance     Cost     Cost (1)     Total     Allowance     Cost  
    (In millions)  
 
Performing
  $ 11,570       99.3 %   $ 15       0.1 %   $ 10,440       99.4 %   $ 12       0.1 %
Restructured
    2                   %     2                   %
Potentially delinquent
    44       0.4       4       9.1 %     47       0.4       4       8.5 %
Delinquent or under foreclosure
    38       0.3       15       39.5 %     19       0.2       8       42.1 %
                                                                 
Total
  $ 11,654       100.0 %   $ 34       0.3 %   $ 10,508       100.0 %   $ 24       0.2 %
                                                                 
 
 
(1) Amortized cost is equal to carrying value before valuation allowances.


144


Table of Contents

 
The following table presents the changes in valuation allowances for agricultural mortgage loans for the:
 
         
    Six Months Ended
 
    June 30, 2008  
    (In millions)  
 
Balance, beginning of period
  $ 24  
Additions
    15  
Deductions
    (5 )
         
Balance, end of period
  $ 34  
         
 
Consumer Loans.  Consumer loans consist of residential mortgages and auto loans.
 
The following table presents the amortized cost and valuation allowances for consumer loans distributed by loan classification at:
 
                                                                 
    June 30, 2008     December 31, 2007  
                      % of
                      % of
 
    Amortized
    % of
    Valuation
    Amortized
    Amortized
    % of
    Valuation
    Amortized
 
    Cost (1)     Total     Allowance     Cost     Cost (1)     Total     Allowance     Cost  
    (In millions)  
 
Performing
  $ 1,232       96.7 %   $ 7       0.6 %   $ 1,006       95.7 %   $ 5       0.5 %
Restructured
                        %                       %
Potentially delinquent
    15       1.2             %     19       1.8             %
Delinquent or under foreclosure
    27       2.1       1       3.7 %     26       2.5       1       4.0 %
                                                                 
Total
  $ 1,274       100.0 %   $ 8       0.6 %   $ 1,051       100.0 %   $ 6       0.6 %
                                                                 
 
 
(1) Amortized cost is equal to carrying value before valuation allowances.
 
The following table presents the changes in valuation allowances for consumer loans for the:
 
         
    Six Months Ended
 
    June 30, 2008  
    (In millions)  
 
Balance, beginning of period
  $ 6  
Additions
    2  
Deductions
     
         
Balance, end of period
  $ 8  
         
 
Real Estate Holdings
 
The Company’s real estate holdings consist of commercial properties located primarily in the United States. At June 30, 2008 and December 31, 2007, the carrying value of the Company’s real estate, real estate joint ventures and real estate held-for-sale was $7.3 billion and $6.8 billion, respectively, or 2.1% and 2.0%, respectively, of total cash and invested assets. The carrying value of real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at the Company’s equity in the real estate joint ventures net of impairments and valuation allowances.


145


Table of Contents

The following table presents the carrying value of the Company’s real estate holdings at:
 
                                 
    June 30, 2008     December 31, 2007  
    Carrying
    % of
    Carrying
    % of
 
Type   Value     Total     Value     Total  
    (In millions)  
 
Real estate
  $ 3,983       54.4 %   $ 3,961       58.5 %
Real estate joint ventures
    3,308       45.1       2,771       41.0  
Foreclosed real estate
    3             3        
                                 
      7,294       99.5       6,735       99.5  
Real estate held-for-sale
    34       0.5       34       0.5  
                                 
Total real estate holdings
  $ 7,328       100.0 %   $ 6,769       100.0 %
                                 
 
The Company’s carrying value of real estate held-for-sale of $34 million at both June 30, 2008 and December 31, 2007 have been reduced by impairments of $1 million at both June 30, 2008 and December 31, 2007.
 
The Company records 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.
 
Certain of the Company’s investments in real estate joint ventures meet the definition of a VIE under FIN 46(r). See “— Variable Interest Entities.”
 
Other Limited Partnership Interests
 
The carrying value of other limited partnership interests (which primarily represent ownership interests in pooled investment funds that principally make private equity investments in companies in the United States and overseas) was $6.7 billion and $6.2 billion at June 30, 2008 and December 31, 2007, respectively. Included within other limited partnership interests at June 30, 2008 and December 31, 2007 are $1.7 billion and $1.6 billion, respectively, of hedge funds. The Company uses the equity method of accounting for investments in limited partnership interests in which it has more than a minor interest, has influence over the partnership’s operating and financial policies, but does not have a controlling interest and is not the primary beneficiary. The Company uses the cost method for minor interest investments and when it has virtually no influence over the partnership’s operating and financial policies. For equity method limited partnership interests, the Company reports the equity in earnings based on the availability of financial statements and other periodic financial information that are substantially the same as financial statements. The Company’s investments in other limited partnership interests represented 1.9% and 1.8% of cash and invested assets at June 30, 2008 and December 31, 2007, respectively.
 
Management anticipates that investment income and the related yields on other limited partnership interests will decline further during 2008 due to increased volatility in the equity and credit markets.
 
Some of the Company’s investments in other limited partnership interests meet the definition of a VIE under FIN 46(r). See “— Variable Interest Entities.”
 
At June 30, 2008, the Company held $4 million in cost basis other limited partnership interests which were impaired based on the underlying limited partnership financial statements. These other limited partnership interests were recorded at fair value and represent a nonrecurring fair value measurement. The fair value is categorized as Level 3. Included within net investment gains (losses) for such other limited partnerships are impairments of $12 million and $16 million for the three and six months ended June 30, 2008, respectively.


146


Table of Contents

Other Invested Assets
 
The following table presents the carrying value of the Company’s other invested assets at:
 
                                 
    June 30, 2008     December 31, 2007  
    Carrying
    % of
    Carrying
    % of
 
Type   Value     Total     Value     Total  
    (In billions)  
 
Funds withheld at interest (1)
  $ 4.6       34.6 %   $ 4.5       35.7 %
Derivatives
    4.4       33.1       4.0       31.7  
Leveraged leases, net of non-recourse debt (2)
    2.3       17.3       2.2       17.5  
Other
    2.0       15.0       1.9       15.1  
                                 
Total (3)
  $ 13.3       100.0 %   $ 12.6       100.0 %
                                 
 
 
(1) Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies equal to the net statutory reserves are withheld and continue to be legally owned by the ceding company. Interest accrues on these funds withheld at rates defined by the treaty terms and may be contractually specified or directly related to the investment portfolio.
 
(2) The Company participates in lease transactions, which are diversified by industry, asset type and geographic area. The Company regularly reviews residual values and writes down residuals to expected values as needed.
 
(3) Total other invested assets represents 3.8% and 3.7% of cash and invested assets at June 30, 2008 and December 31, 2007, respectively.
 
Derivative Financial Instruments
 
Derivatives.  The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage its various risks. Additionally, the Company uses derivatives to synthetically create investments as permitted by its insurance subsidiaries’ Derivatives Use Plans approved by the applicable state insurance departments.
 
The following table presents the notional amount and current market or fair value of derivative financial instruments, excluding embedded derivatives, held at:
 
                                                 
    June 30, 2008     December 31, 2007  
          Current Market
          Current Market
 
    Notional
    or Fair Value     Notional
    or Fair Value  
    Amount     Assets     Liabilities     Amount     Assets     Liabilities  
    (In millions)  
 
Interest rate swaps
  $ 36,542     $ 899     $ 591     $ 62,519     $ 785     $ 768  
Interest rate floors
    48,517       565             48,937       621        
Interest rate caps
    25,651       90             45,498       50        
Financial futures
    6,180       33       4       10,817       89       57  
Foreign currency swaps
    20,756       1,733       2,026       21,399       1,480       1,724  
Foreign currency forwards
    5,570       43       100       4,185       76       16  
Options
    2,409       938             2,043       713       1  
Financial forwards
    2,480       68       12       4,600       122       2  
Credit default swaps
    4,260       58       33       6,850       58       35  
Synthetic GICs
    3,934                   3,670              
Other
    250             5       250       43        
                                                 
Total
  $ 156,549     $ 4,427     $ 2,771     $ 210,768     $ 4,037     $ 2,603  
                                                 


147


Table of Contents

The above table does not include notional amounts for equity futures, equity variance swaps, and equity options. At June 30, 2008 and December 31, 2007, the Company owned 8,354 and 4,658 equity future contracts, respectively. Fair values of equity futures are included in financial futures in the preceding table. At June 30, 2008 and December 31, 2007, the Company owned 865,427 and 695,485 equity variance swaps, respectively. Fair values of equity variance swaps are included in financial forwards in the preceding table. At June 30, 2008 and December 31, 2007, the Company owned 170,450,122 and 77,374,937 equity options, respectively. Fair values of equity options are included in options in the preceding table.
 
The fair value of derivatives measured at fair value on a recurring basis and their corresponding fair value hierarchy, are summarized as follows:
 
                                 
    June 30, 2008  
    Derivative Assets     Derivative Liabilities  
    (In millions)  
 
Quoted prices in active markets for identical assets and liabilities (Level 1)
  $ 33       1 %   $ 4       %
Significant other observable inputs (Level 2)
    3,475       78       2,701       97  
Significant unobservable inputs (Level 3)
    919       21       66       3  
                                 
Total fair value
  $ 4,427       100 %   $ 2,771       100 %
                                 
 
A rollforward of the fair value measurements for derivatives measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months and six months ended June 30, 2008 is as follows:
 
                 
    Three Months Ended     Six Months Ended  
    June 30, 2008  
    (In millions)  
 
Balance, December 31, 2007
          $ 789  
Impact of SFAS 157 and SFAS 159 adoption
            (1 )
                 
Balance, beginning of period
  $ 1,215       788  
Total realized/unrealized gains (losses) included in:
               
Earnings
    (368 )     46  
Other comprehensive income (loss)
             
Purchases, sales, issuances and settlements
    25       18  
Transfer in and/or out of Level 3
    (19 )     1  
                 
Balance, end of period
  $ 853     $ 853  
                 
 
See “— Summary of Critical Accounting Estimates — Derivative Financial Instruments” for further information on the estimates and assumptions that affect the amounts reported above.
 
Credit Risk.  The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company’s derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date.
 
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange traded futures are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.
 
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of June 30, 2008 and December 31, 2007, the Company was obligated to return cash collateral under its control of $1.1 billion and $833 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in


148


Table of Contents

payables for collateral under securities loaned and other transactions in the consolidated balance sheets. As of June 30, 2008 and December 31, 2007, the Company had also accepted collateral consisting of various securities with a fair market value of $658 million and $678 million, respectively, which are held in separate custodial accounts. The Company is permitted by contract to sell or repledge this collateral, but as of June 30, 2008 and December 31, 2007, none of the collateral had been sold or repledged.
 
As of June 30, 2008 and December 31, 2007, the Company provided collateral of $284 million and $162 million, respectively, which is included in fixed maturity securities in the consolidated balance sheets. In addition, the Company has exchange traded futures, which require the pledging of collateral. As of June 30, 2008 and December 31, 2007, the Company pledged collateral of $123 million and $167 million, respectively, which is included in fixed maturity securities. The counterparties are permitted by contract to sell or repledge this collateral. As of June 30, 2008 and December 31, 2007, the Company provided cash collateral of $76 million and $102 million, respectively, which is included in premiums and other receivables in the consolidated balance sheet.
 
Embedded Derivatives.  The fair value of embedded derivatives measured at fair value on a recurring basis and their corresponding fair value hierarchy, are summarized as follows:
 
                                 
    June 30, 2008  
    Net Embedded Derivatives Within  
    Asset Host Contracts     Liability Host Contracts  
    (In millions)  
 
Quoted prices in active markets for identical assets and liabilities (Level 1)
  $       %   $       %
Significant other observable inputs (Level 2)
                       
Significant unobservable inputs (Level 3)
    (152 )     100       1,045       100  
                                 
Total fair value
  $ (152 )     100 %   $ 1,045       100 %
                                 
 
A rollforward of the fair value measurements for embedded derivatives measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months and six months ended June 30, 2008 is as follows:
 
                 
    Three Months Ended     Six Months Ended  
    June 30, 2008  
    (In millions)  
 
Balance, December 31, 2007
          $ (843 )
Impact of SFAS 157 and SFAS 159 adoption
            41  
                 
Balance, beginning of period
  $ (1,505 )     (802 )
Total realized/unrealized gains (losses) included in:
               
Earnings
    330       (331 )
Other comprehensive income (loss)
           
Purchases, sales, issuances and settlements
    (22 )     (64 )
Transfer in and/or out of Level 3
           
                 
Balance, end of period
  $ (1,197 )   $ (1,197 )
                 
 
See “— Summary of Critical Accounting Estimates — Embedded Derivatives” for further information on the estimates and assumptions that affect the amounts reported above.
 
Variable Interest Entities
 
The following table presents as of June 30, 2008: (i) the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated in the Company’s consolidated financial statements, and (ii) the maximum exposure to loss relating to VIEs that the Company holds significant variable interests but has concluded that it is not the primary beneficiary and therefore,


149


Table of Contents

have not been consolidated. When the Company concludes that it is not the primary beneficiary of the VIE, the fair value of the Company’s investment in the VIE is recorded in the Company’s financial statements.
 
                         
    June 30, 2008  
    Primary Beneficiary     Not Primary Beneficiary  
          Maximum
    Maximum
 
    Total
    Exposure to
    Exposure to
 
    Assets (1)     Loss (2)     Loss (2)  
    (In millions)  
 
Asset-backed securitizations and collateralized debt obligations
  $ 1,328     $ 1,328     $ 96  
Real estate joint ventures (3)
    45       24       33  
Other limited partnership interests (4)
    2       1       3,923  
Trust preferred securities (5)
    106       106       3,828  
Other investments (6)
    1,357       1,357       213  
                         
Total
  $ 2,838     $ 2,816     $ 8,093  
                         
 
 
(1) The assets of the asset-backed securitizations and collateralized debt obligations are reflected at fair value. The assets of the real estate joint ventures, other limited partnership interests, trust preferred securities and other investments are reflected at the carrying amounts at which such assets would have been reflected on the Company’s consolidated balance sheet had the Company consolidated the VIE from the date of its initial investment in the entity.
 
(2) The maximum exposure to loss relating to the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. In addition, the Company provides collateral management services for certain of these structures for which it collects a management fee. The maximum exposure to loss relating to real estate joint ventures, other limited partnership interests, trust preferred securities and other investments is equal to the carrying amounts plus any unfunded commitments, reduced by amounts guaranteed by other partners. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee.
 
(3) Real estate joint ventures include partnerships and other ventures which engage in the acquisition, development, management and disposal of real estate investments.
 
(4) Other limited partnership interests include partnerships established for the purpose of investing in public and private debt and equity securities.
 
(5) Trust preferred securities are complex, uniquely structured investments which contain features of both equity and debt, may have an extended or no stated maturity, and may be callable at the issuer’s option after a defined period of time.
 
(6) Other investments include securities that are not trust preferred securities, asset-backed securitizations or collateralized debt obligations.
 
Securities Lending
 
The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity and equity securities, 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 $43.6 billion and $41.1 billion and an estimated fair value of $43.7 billion and $42.1 billion were on loan under the program at June 30, 2008 and December 31, 2007, respectively. Securities loaned under such transactions may be sold or repledged by the transferee. The Company was liable for cash collateral under its control of $44.9 billion and $43.3 billion at June 30, 2008 and December 31, 2007, respectively. Security collateral of $19 million and $40 million, on deposit from customers in connection with the securities lending transactions at June 30, 2008 and December 31, 2007, respectively, may not be sold or repledged and is not reflected in the unaudited interim condensed consolidated financial statements.


150


Table of Contents

Separate Accounts
 
The Company had $149.7 billion and $160.2 billion held in its separate accounts, for which the Company does not bear investment risk, as of June 30, 2008 and December 31, 2007, respectively. The Company manages each separate account’s assets in accordance with the prescribed investment policy that applies to that specific separate account. The Company establishes separate accounts on a single client and multi-client commingled basis in compliance with insurance laws. Effective with the adoption of SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, on January 1, 2004, the Company reported separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if:
 
  •  such separate accounts are legally recognized;
 
  •  assets supporting the contract liabilities are legally insulated from the Company’s general account liabilities;
 
  •  investments are directed by the contractholder; and
 
  •  all investment performance, net of contract fees and assessments, is passed through to the contractholder.
 
The Company reports separate account assets meeting such criteria at their fair value. Investment performance (including net investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line in the consolidated statements of income.
 
The Company’s revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Separate accounts not meeting the above criteria are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses.
 
The fair value of separate accounts measured at fair value on a recurring basis and their corresponding fair value hierarchy, are summarized as follows:
 
                 
    June 30, 2008  
    (In millions)  
 
Quoted prices in active markets for identical assets (Level 1)
  $ 115,597       77 %
Significant other observable inputs (Level 2)
    32,410       22  
Significant unobservable inputs (Level 3)
    1,694       1  
                 
Total fair value
  $ 149,701       100 %
                 
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
The Company regularly analyzes its exposure to interest rate, equity market and foreign currency exchange risks. As a result of that analysis, the Company has determined that the fair value of its interest rate sensitive invested assets is materially exposed to changes in interest rates, and that the amount of that risk has decreased from that reported at December 31, 2007 in the 2007 Annual Report. The equity and foreign currency portfolios do not expose the Company to material market risks, nor has the Company’s exposure to those risks materially changed from that reported on December 31, 2007 in the 2007 Annual Report.
 
The Company analyzes interest rate risk using various models including multi-scenario cash flow projection models that forecast cash flows of certain liabilities and their supporting investments, including derivative instruments. As disclosed in the 2007 Annual Report, the Company uses a variety of strategies to manage interest rate, equity market, and foreign currency exchange risk, including the use of derivative instruments.
 
The Company’s management processes for measuring, managing and monitoring market risk remain as described in the 2007 Annual Report. Some of those processes utilize interim manual reporting and estimation techniques when the Company integrates newly acquired operations.


151


Table of Contents

Risk Measurement: Sensitivity Analysis
 
The Company measures market risk related to its holdings of invested assets and other financial instruments, including certain market risk sensitive insurance contracts, based on changes in interest rates, equity market prices and currency exchange rates, utilizing a sensitivity analysis. This analysis estimates the potential changes in fair value based on a hypothetical 10% change (increase or decrease) in interest rates, equity market prices and currency exchange rates. The Company believes that a 10% change (increase or decrease) in these market rates and prices is reasonably possible in the near-term. In performing this analysis, the Company used market rates at June 30, 2008 to re-price its invested assets and other financial instruments. The sensitivity analysis separately calculated each of MetLife’s market risk exposures (interest rate, equity market price and foreign currency exchange rate) related to its trading and non-trading invested assets and other financial instruments. The sensitivity analysis performed included the market risk sensitive holdings described above. The Company modeled the impact of changes in market rates and prices on the fair values of its invested assets as follows:
 
  •  the net present values of its interest rate sensitive exposures resulting from a 10% change (increase or decrease) in interest rates;
 
  •  the market value of its equity positions due to a 10% change (increase or decrease) in equity prices; and
 
  •  the U.S. dollar equivalent balances of the Company’s currency exposures due to a 10% change (increase or decrease) in currency exchange rates.
 
The sensitivity analysis is an estimate and should not be viewed as predictive of the Company’s future financial performance. The Company cannot assure that its 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;
 
  •  for derivatives that qualify as hedges, the impact on reported earnings may be materially different from the change in market values;
 
  •  the analysis excludes other significant real estate holdings and liabilities pursuant to insurance contracts; and
 
  •  the model assumes that the composition of assets and liabilities remains unchanged throughout the year.
 
Accordingly, the Company uses such models as tools and not substitutes for the experience and judgment of its investments, asset/liability management and corporate risk personnel. Based on its analysis of the impact of a 10% change (increase or decrease) in market rates and prices, MetLife has determined that such a change could have a material adverse effect on the fair value of its interest rate sensitive invested assets. Based upon its analysis of the impact of a 10% change (increase or decrease) in equity markets or in currency exchange rates, the equity and foreign currency portfolios do not expose the Company to material market risk.
 
The table below illustrates the potential loss in fair value of the Company’s interest rate sensitive financial instruments at June 30, 2008. In addition, the potential loss with respect to the fair value of currency exchange rates and the Company’s equity price sensitive positions at June 30, 2008 is set forth in the table below.
 
The potential loss in fair value for each market risk exposure of the Company’s portfolio at June 30, 2008 was:
 
         
    June 30, 2008  
    (In millions)  
 
Non-trading:
       
Interest rate risk
  $ 4,768  
Equity price risk
  $ 229  
Foreign currency exchange rate risk
  $ 450  
Trading:
       
Interest rate risk
  $ 12  


152


Table of Contents

The table below provides additional detail regarding the potential loss in fair value of the Company’s non-trading interest sensitive financial instruments at June 30, 2008 by type of asset or liability.
 
                         
    As of June 30, 2008  
                Assuming a
 
                10% Increase
 
    Notional
    Estimated
    in the Yield
 
    Amount     Fair Value     Curve  
    (In millions)  
 
Assets:
                       
Fixed maturities
          $ 241,191     $ (5,378 )
Equity securities
            5,420        
Mortgage and consumer loans
            48,818       (494 )
Policy loans
            11,894       (239 )
Short-term investments
            1,980       (3 )
Cash and cash equivalents
            13,815        
Mortgage loan commitments
  $ 3,758       (76 )     (18 )
Commitments to fund bank credit facilities, bridge loans and private corporate bond investments
    1,138       (69 )      
Commitments to fund partnership investments
    4,844              
                         
Total assets
                  $ (6,132 )
                         
Liabilities:
                       
Policyholder account balances
          $ 104,120     $ 1,380  
Short-term debt
            623        
Long-term debt
            9,192       292  
Collateral financing agreements
            4,030       72  
Junior subordinated debt securities
            4,951       130  
Shares subject to mandatory redemption
            186       7  
Payables for collateral under securities loaned and other transactions
            45,979        
                         
Total liabilities
                  $ 1,881  
                         
Other:
                       
Derivative instruments (designated hedges or otherwise)
                       
Interest rate swaps
  $ 36,542     $ 308     $ (279 )
Interest rate floors
    48,517       565       (37 )
Interest rate caps
    25,651       90       40  
Financial futures
    6,180       29       (49 )
Foreign currency swaps
    20,756       (293 )     (88 )
Foreign currency forwards
    5,570       (57 )     1  
Options
    2,409       938       (100 )
Financial forwards
    2,480       56       (5 )
Credit default swaps
    4,260       25        
Synthetic GICs
    3,934              
Other
    250       (5 )      
                         
Total other
                    (517 )
                         
Net change
                  $ (4,768 )
                         


153


Table of Contents

 
This quantitative measure of risk has decreased by $402 million, or 8%, to $4,768 million at June 30, 2008 from $5,170 million at December 31, 2007. From December 31, 2007 to June 30, 2008 there was a relatively parallel shift in the yield curve which resulted in an immaterial change to the interest rate risk presented above. The most significant movement in the yield curve occurred at the short end which did not result in a material movement in the aforementioned interest rate risk. Additionally, there was no material restructuring of the Company’s investment portfolio. The decrease in interest rate risk was primarily driven by a $540 million change in the method of estimating the fair value of liabilities in connection with the adoption of SFAS 157. Partially offsetting this decline was an increase in interest rate risk of $147 million resulting from a decrease in the amount of interest rate sensitive derivatives employed by the Company.
 
Item 4.   Controls and Procedures
 
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
 
There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the three months ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II — Other Information
 
Item 1.   Legal Proceedings
 
The following should be read in conjunction with (i) Part I, Item 3, of the 2007 Annual Report and (ii) Note 8 to the unaudited interim condensed consolidated financial statements in Part I of this report.
 
Demutualization Actions
 
Several lawsuits were brought in 2000 challenging the fairness of MLIC’s plan of reorganization, as amended (the “Plan”) and the adequacy and accuracy of MLIC’s disclosure to policyholders regarding the Plan. The actions discussed below name as defendants some or all of MLIC, the Holding Company, and individual directors. MLIC, the Holding Company, and the individual directors believe they have meritorious defenses to the plaintiffs’ claims and are contesting vigorously all of the plaintiffs’ claims in these actions.
 
Fiala, et al. v. Metropolitan Life Ins. Co., et al. (Sup. Ct., N.Y. County, filed March 17, 2000).  The plaintiffs in the consolidated state court class actions seek compensatory relief and punitive damages against MLIC, the Holding Company, and individual directors. On June 5, 2008, the Appellate Division affirmed the order of the trial court certifying a litigation class of present and former policyholders on plaintiffs’ claim that defendants violated section 7312 of the New York Insurance Law, but denying plaintiffs’ motion to certify a litigation class with respect to a common law fraud claim. The trial court has directed various forms of class notice. Plaintiffs have begun distributing various forms of class notice. In July 2008, defendants served their motion for summary judgment.
 
Asbestos-Related Claims
 
MLIC is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages.
 
As reported in the 2007 Annual Report, MLIC received approximately 7,200 asbestos-related claims in 2007. During the six months ended June 30, 2008 and 2007, MLIC received approximately 2,900 and 2,600 new asbestos-related claims, respectively. See Note 16 of the Notes to Consolidated Financial Statements included in the 2007 Annual Report for historical information concerning asbestos claims and MLIC’s increase in its recorded liability at December 31, 2002. The number of asbestos cases that may be brought or the aggregate amount of any liability that MLIC may ultimately incur is uncertain.


154


Table of Contents

MLIC reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants, and the jurisdictions in which claims are pending. MLIC regularly reevaluates its exposure from asbestos litigation and has updated its liability analysis for asbestos-related claims through June 30, 2008.
 
Sales Practices Claims
 
Over the past several years, MLIC; New England Mutual Life Insurance Company, New England Life Insurance Company and New England Securities Corporation (collectively “New England”); GALIC; Walnut Street Securities, Inc. (“Walnut Street Securities”) and MetLife Securities, Inc. (“MSI”) have faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products.
 
As of June 30, 2008, there were approximately 145 sales practices litigation matters pending against the Company. The Company continues to vigorously defend against the claims in these matters. Some sales practices claims have been resolved through settlement. Other sales practices claims have been won by dispositive motions or have gone to 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, mutual funds or other products may be commenced in the future.
 
Regulatory Matters
 
In June 2008, the Environmental Protection Agency issued a Notice of Violation (“NOV”) regarding the operations of EME Homer City Generation L.P. (“EME Homer”), an electrical generation facility. The NOV alleges, among other things, that EME Homer is in violation of certain federal and state Clean Air Act requirements. Homer City 0L6 LLC, an entity owned by MLIC, is a passive investor with a minority interest in the electrical generation facility which is solely operated by the lessee, EME Homer. EME Homer has been notified of its obligation to indemnify Homer City 0L6 LLC and MLIC for any claims resulting from the NOV.
 
Summary
 
Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
 
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted previously in connection with specific matters. In some of the matters referred to previously, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.


155


Table of Contents

Item 1A.   Risk Factors
 
The following should be read in conjunction with and supplements and amends the factors that may affect the Company’s business or operations described under “Risk Factors” in Part I, Item 1A, of the 2007 Annual Report.
 
Adverse Credit Market Conditions May Significantly Affect Our Access to Capital, Cost of Capital and Ability to Meet Liquidity Needs
 
Disruptions, uncertainty or volatility in the credit markets may limit our access to capital which is required to operate our business, most significantly our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter tenors than we prefer, or pay unattractive interest rates; thereby, increasing our interest expense, decreasing our profitability and significantly reducing our financial flexibility. Overall, our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities
 
Purchases of common stock made by or on behalf of the Company or its affiliates during the quarter ended June 30, 2008 are set forth below:
 
                                 
                      (d) Maximum Number
 
                (c) Total Number of
    (or Approximate Dollar
 
                Shares Purchased as
    Value) of Shares
 
    (a) Total Number
    (b) Average
    Part of Publicly
    that May Yet Be
 
    of Shares
    Price Paid
    Announced
    Purchased Under the Plans
 
Period   Purchased (1)     per Share (2)     Plans or Programs     of Programs (3)  
 
April 1 — April 30, 2008
    673     $ 61.64           $     1,260,735,127  
May 1 — May 31, 2008
    868,646     $ 0.28       864,646     $ 1,260,735,127  
June 1 — June 30, 2008
    1,653     $ 57.44           $ 1,260,735,127  
                                 
Total
    870,972     $ 0.44       864,646     $ 1,260,735,127  
                                 
 
 
(1) During the periods April 1 — April 30, 2008, May 1 — May 31, 2008 and June 1 — June 30, 2008, separate account affiliates of the Company purchased 673 shares, 4,000 shares and 1,653 shares, respectively, of common stock on the open market in nondiscretionary transactions to rebalance index funds. Except as disclosed above, there were no shares of common stock which were repurchased by the Company other than through a publicly announced plan or program.
 
In February 2008, the Company entered into an accelerated common stock repurchase agreement with a major bank. Under the agreement, the Company paid the bank $711 million in cash and the bank delivered an initial amount of 11,161,550 shares of the Company’s outstanding common stock that the bank borrowed from third parties. In May 2008, the bank delivered an additional 864,646 shares of the Company’s common stock to the Company resulting in a total of 12,026,196 million shares being repurchased under the agreement. Upon settlement with the bank in May 2008, the Company increased additional paid-in capital and treasury stock.
 
(2) Except for the period from May 1 — May 31, the separate account affiliates of the Company purchased shares in the amounts and at the prices indicated in the table above. During the period from May 1 — May 31, the Company’s separate account affiliates acquired 4,000 shares at an effective price per share of $60.98. The settlement of the accelerated stock repurchase agreement described in footnote 1 whereby the Company received 864,646 shares during the period from May 1 — May 31 but did not remit additional proceeds resulted in an average price paid per share in the table above of $0.28. The actual price paid per share for all of the shares repurchased under the February 2008 accelerated stock repurchase agreement was $59.10.


156


Table of Contents

 
(3) In April 2008, the Company’s Board of Directors authorized an additional $1 billion common stock repurchase program.
 
Furthermore, the payment of dividends and other distributions to the Holding Company by its insurance subsidiaries is regulated by insurance laws and regulations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — The Holding Company — Liquidity Sources — Dividends.”
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
The information called for by Part II, Item 4 is incorporated herein by reference to Part II, Item 4, “Submission of Matters to a Vote of Security Holders,” in MetLife’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.


157


Table of Contents

Item 6.   Exhibits
 
         
Exhibit
   
No.
  Description
 
  4 .1   Replacement Capital Covenant, dated as of April 8, 2008 (Incorporated by reference to Exhibit 4.2 to MetLife, Inc.’s Current Report on Form 8-K dated April 8, 2008)
  10 .1   Amendment Number 17 to the MetLife Plan for Transition Assistance for Officers, dated June 3, 2008
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32 .2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


158


Table of Contents

 
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
METLIFE, INC.
 
  By 
/s/  Joseph J. Prochaska, Jr.
Name: Joseph J. Prochaska, Jr.
  Title:   Executive Vice President, Finance Operations and
Chief Accounting Officer (Authorized Signatory and
Principal Accounting Officer)
 
Date: August 4, 2008


159


Table of Contents

 
Exhibit Index
 
         
Exhibit
   
No.
  Description
 
  4 .1   Replacement Capital Covenant, dated as of April 8, 2008 (Incorporated by reference to Exhibit 4.2 to MetLife, Inc.’s Current Report on Form 8-K dated April 8, 2008)
  10 .1   Amendment Number 17 to the MetLife Plan for Transition Assistance for Officers, dated June 3, 2008
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32 .2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


E-1

EX-10.1 2 y63995exv10w1.htm EX-10.1: AMENDMENT NO. 17 TO THE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS EX-10.1
Exhibit 10.1
AMENDMENT NUMBER SEVENTEEN TO
THE METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS
THE METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS (the “Plan”) is hereby amended as follows:
  1.   The Plan is hereby amended by restating subsection 1.4.05(b)(4) in its entirety to read as follows:
 
      “(4) the termination of employment of an Employee who has entered into a written employment contract or severance agreement with the Company or a MetLife Enterprise Affiliate.”
 
  2.   The Plan is hereby amended by adding the following to subsection 1.4.09:
 
      “(i) is an Employee but is not eligible to participate in or receive benefits under the 2008 MetLife Dental Integration Severance Plan.”
 
  3.   This amendment shall be effective as of June 1, 2008.
IN WITNESS WHEREOF, the Company has caused this amendment to be executed by an officer thereunto duly authorized on the date noted below the officer’s signature.
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ Debra Capolarello                    
Date: 6/3/08                                         
Witness: /s/ Lucida Bullard                 

 

EX-31.1 3 y63995exv31w1.htm EX-31.1: CERTIFICATION EX-31.1
Exhibit 31.1
CERTIFICATIONS
     I, C. Robert Henrikson, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  August 4, 2008
         
 
  /s/ C. Robert Henrikson
 
C. Robert Henrikson
   
 
  Chairman, President and    
 
  Chief Executive Officer    

 

EX-31.2 4 y63995exv31w2.htm EX-31.2: CERTIFICATION EX-31.2
Exhibit 31.2
CERTIFICATIONS
     I, William J. Wheeler, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 4, 2008
         
 
  /s/ William J. Wheeler
 
William J. Wheeler
   
 
  Executive Vice President and    
 
  Chief Financial Officer    

 

EX-32.1 5 y63995exv32w1.htm EX-32.1: CERTIFICATION EX-32.1
Exhibit 32.1
SECTION 906 CERTIFICATION
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
     I, C. Robert Henrikson, certify that (i) MetLife, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of MetLife, Inc.
Date: August 4, 2008
         
 
  /s/ C. Robert Henrikson
 
C. Robert Henrikson
   
 
  Chairman, President and    
 
  Chief Executive Officer    
     A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

EX-32.2 6 y63995exv32w2.htm EX-32.2: CERTIFICATION EX-32.2
Exhibit 32.2
SECTION 906 CERTIFICATION
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
     I, William J. Wheeler, certify that (i) MetLife, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of MetLife, Inc.
Date: August 4, 2008
         
 
  /s/ William J. Wheeler
 
William J. Wheeler
   
 
  Executive Vice President and    
 
  Chief Financial Officer    
     A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

-----END PRIVACY-ENHANCED MESSAGE-----