10-K 1 mlic-12312018x10k.htm 10-K Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨
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 000-55029
Metropolitan Life Insurance Company
(Exact name of registrant as specified in its charter)

New York
 
13-5581829
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 Park Avenue, New York, N.Y.
 
10166-0188
(Address of principal
executive offices)
 
(Zip Code)
(212) 578-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨    No þ
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 ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨

Accelerated filer
¨

Non-accelerated filer
þ
Smaller reporting company
¨

 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No þ
At March 18, 2019, 494,466,664 shares of the registrant’s common stock, $0.01 par value per share, were outstanding, all of which were owned directly by MetLife, Inc.    
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE: NONE
 


Table of Contents
 
 
 
 
Page
Part I
Item 1.
 
 
Item 1A.
 
 
Item 1B.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II
Item 5.
 
 
Item 6.
 
 
Item 7.
 
 
Item 7A.
 
 
Item 8.
 
 
Item 9.
 
 
Item 9A.
 
 
Item 9B.
 
 
 
Part III
Item 10.
 
 
Item 11.
 
 
Item 12.
 
 
Item 13.
 
 
Item 14.
 
 
 
Part IV
Item 15.
 
 
Item 16.
 
 
 
 
 
 
 
 
 
 


As used in this Form 10-K, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”).
Note Regarding Forward-Looking Statements
This Annual Report on Form 10‑K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words and terms such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Many factors will be important in determining the results of Metropolitan Life Insurance Company, its subsidiaries and affiliates. Forward-looking statements are based on our assumptions and current expectations, which may be inaccurate, and on the current economic environment, which may change. These statements are not guarantees of future performance. They involve a number of risks and uncertainties that are difficult to predict. Results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in Metropolitan Life Insurance Company’s filings with the U.S. Securities and Exchange Commission. These factors include: (1) difficult economic conditions, including risks relating to interest rates, credit spreads, equity, real estate, obligors and counterparties, and derivatives; (2) adverse global capital and credit market conditions, which may affect our ability to meet liquidity needs and access capital, including through credit facilities; (3) downgrades in our claims paying ability, financial strength or credit ratings; (4) availability and effectiveness of reinsurance, hedging or indemnification arrangements; (5) the impact on us of changes to and implementation of the wide variety of laws and regulations to which we are subject; (6) regulatory, legislative or tax changes relating to our operations that may affect the cost of, or demand for, our products or services; (7) adverse results or other consequences from litigation, arbitration or regulatory investigations; (8) investment losses, defaults and volatility; (9) potential liquidity and other risks resulting from our participation in a securities lending program and other transactions; (10) differences between actual claims experience and underwriting and reserving assumptions; (11) the impact of technological changes on our businesses; (12) catastrophe losses; (13) a deterioration in the experience of the closed block established in connection with the reorganization of Metropolitan Life Insurance Company; (14) changes in assumptions related to deferred policy acquisition costs, deferred sales inducements or value of business acquired; (15) exposure to losses related to guarantees in certain products; (16) ineffectiveness of risk management policies and procedures or models; (17) a failure in MetLife’s cybersecurity systems or other information security systems or MetLife’s disaster recovery plans; (18) any failure to protect the confidentiality of client information; (26) changes in accounting standards; (19) MetLife associates taking excessive risks; (20) difficulties in marketing and distributing products through our distribution channels; (21) difficulties, unforeseen liabilities, asset impairments, or rating agency actions arising from business acquisitions and dispositions, joint ventures, or other legal entity reorganizations; and (22) other risks and uncertainties described from time to time in Metropolitan Life Insurance Company’s filings with the U.S. Securities and Exchange Commission.
Metropolitan Life Insurance Company does not undertake any obligation to publicly correct or update any forward-looking statement if Metropolitan Life Insurance Company later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures Metropolitan Life Insurance Company makes on related subjects in reports to the U.S. Securities and Exchange Commission.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements included as exhibits to this Annual Report on Form 10-K.

1

Part I
Item 1. Business
Index to Business

2

Business Overview
As used in this Form 10-K, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”).
The Company is a provider of insurance, annuities, employee benefits and asset management. We are also one of the largest institutional investors in the United States with a $264.3 billion general account portfolio invested primarily in investment grade corporate bonds, structured finance securities, mortgage loans and U.S. Treasury and agency securities, as well as real estate and corporate equity, at December 31, 2018.
Our well-recognized brand, competitive and innovative product offerings and financial strength and expertise should help drive future growth building on a long history of fairness, honesty and integrity. We continue to pursue our refreshed enterprise strategy, focusing on transforming the Company to become more digital, driving efficiencies and innovation to achieve competitive advantage, and simplified, decreasing the costs and risks associated with our highly complex industry to customers. One MetLife remains at the center of everything we do: collaborating, sharing best practices, and putting the enterprise first. Digital and simplified are the key enablers of our strategic cornerstones, all of which satisfy the criteria of our Accelerating Value strategic initiative by offering customers truly differentiated value propositions that allow us to establish clear competitive advantages:
 
●
 
Optimize value and risk
 
–
 
Focus on in-force and new business opportunities using Accelerating Value analysis
 
–
 
Optimize cash and value
 
–
 
Balance risk across MetLife
 
●
 
Drive operational excellence
 
–
 
Become a more efficient, high performance organization
 
–
 
Focus on the customer with a disciplined approach to unit cost improvement
 
●
 
Strengthen distribution advantage
 
–
 
Transform our distribution channels to drive productivity and efficiency through digital enablement, improved customer persistency and deeper customer relationships
 
●
 
Deliver the right solutions for the right customers
 
–
 
Use customer insights to deliver differentiated value propositions - products, services and experiences to win the right customers and earn their loyalty
MLIC is organized into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. See “— Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability.

3

Revenues derived from FedEx Corporation were $6.0 billion for the year ended December 31, 2018, which represented 20% of consolidated premiums, universal life and investment-type product policy fees and other revenues. The revenue was from a single premium received for a pension risk transfer. Revenues derived from an agreement with the U.S. Office of Personnel Management for the Federal Employees’ Group Life Insurance program were $3.1 billion and $2.8 billion for the years ended December 31, 2018 and 2017, respectively, which represented 10% and 11%, respectively, of consolidated premiums, universal life and investment-type product policy fees and other revenues. Revenues derived from any other customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2018 and 2017.
Segments and Corporate & Other
U.S.
Product Overview
Our businesses in the U.S. segment offer a broad range of protection products and services aimed at serving the financial needs of our customers throughout their lives. These products are sold to corporations and their respective employees, other institutions and their respective members, as well as individuals. Our U.S. segment is organized into two businesses: Group Benefits and Retirement and Income Solutions (“RIS”).
Group Benefits
We have built a leading position in the United States group insurance market through long-standing relationships with many of the largest corporate employers in the United States.
Our Group Benefits business offers life, dental, group short- and long-term disability, individual disability, accidental death and dismemberment, vision and accident & health coverages, as well as prepaid legal plans. We also sell administrative services-only (“ASO”) arrangements to some employers.
Major Products
Term Life Insurance
Provides a guaranteed benefit upon the death of the insured for a specified time period in return for the periodic payment of premiums. Premiums may be guaranteed at a level amount for the coverage period or may be non-level and non-guaranteed. Term contracts expire without value at the end of the coverage period when the insured party is still living.

Variable Life Insurance
Provides insurance coverage through a contract that gives the policyholder flexibility in investment choices and, depending on the product, in premium payments and coverage amounts, with certain guarantees. Premiums and account balances can be directed by the policyholder into a variety of separate account investment options or directed to the Company’s general account. In the separate account investment options, the policyholder bears the entire risk of the investment results. With some products, by maintaining certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.

Universal Life Insurance
Provides insurance coverage on the same basis as variable life, except that premiums, and the resulting accumulated balances, are allocated only to the Company’s general account. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.

Dental Insurance
Provides insurance and ASO arrangements that assist employees, retirees and their families in maintaining oral health while reducing out-of-pocket expenses.

Disability
For groups and individuals, benefits such as income replacement, payment of business overhead expenses or mortgage protection, in the event of the disability of the insured.

Accident & Health Insurance
Provides accident, critical illness or hospital indemnity coverage to the insured.


4

Retirement and Income Solutions
Our RIS business provides funding and financing solutions that help institutional customers mitigate and manage liabilities primarily associated with their qualified, nonqualified and welfare employee benefit programs using a spectrum of life and annuity-based insurance and investment products.
Major Products
Stable Value Products
• General account guaranteed interest contracts (“GICs”) are designed to provide stable value investment options within tax-qualified defined contribution plans by offering a fixed maturity investment with a guarantee of liquidity at contract value for participant transactions.
 
• Separate account GICs are available to defined contribution plan sponsors by offering market value returns on separate account investments with a general account guarantee of liquidity at contract value.

• Private floating rate funding agreements are generally privately-placed, unregistered investment contracts issued as general account obligations with interest credited based on the three-month London Interbank Offered Rate (“LIBOR”). These agreements are used for money market funds, securities lending cash collateral portfolios and short-term investment funds.

Pension Risk Transfers
General account and separate account annuities are offered in connection with defined benefit pension plans which include single premium buyouts allowing for full or partial transfers of pension liabilities.

• General account annuities include nonparticipating group contract benefits purchased for retired employees or active employees covered under terminating or ongoing pension plans.
 
• Separate account annuities include both participating and non-participating group contract benefits. Participating contract benefits are purchased for retired, terminated, or active employees covered under active or terminated pension plans. The assets supporting the guaranteed benefits for each contract are held in a separate account, however, the Company fully guarantees all benefit payments. Non-participating contracts have economic features similar to our general account product, but offer the added protection of an insulated separate account. Under accounting principles generally accepted in the United States of America (“GAAP”), these annuity contracts are treated as general account products.
Institutional Income Annuities
General account contracts that are guaranteed payout annuities purchased for employees upon retirement or termination of employment. They can be life or non-life contingent non-participating contracts which do not provide for any loan or cash surrender value and, with few exceptions, do not permit future considerations.
Tort Settlements
• Structured settlement annuities are customized annuities designed to serve as an alternative to a lump sum payment in a lawsuit initiated because of personal injury, wrongful death, or a workers’ compensation claim or other claim for damages. Surrenders are generally not allowed, although commutations are permitted in certain circumstances. Guaranteed payments consist of life contingent annuities, term certain annuities and lump sums.

5

Capital Markets Investment Products
• Funding agreement-backed notes are part of a medium term note program, under which funding agreements are issued to a special-purpose trust that issues marketable notes in U.S. dollars or foreign currencies. The proceeds of these note issuances are used to acquire a funding agreement with matching interest and maturity payment terms from Metropolitan Life Insurance Company. The notes are underwritten and marketed by major investment banks’ broker-dealer operations and are sold to institutional investors.

• Funding agreement-backed commercial paper is issued by a special purpose limited liability company which deposits the proceeds under a master funding agreement issued to it by Metropolitan Life Insurance Company. The commercial paper is issued in U.S. dollars or foreign currencies, receives the same short-term credit rating as Metropolitan Life Insurance Company and is marketed by major investment banks’ broker-dealer operations.

• Through the Federal Home Loan Bank of New York (“FHLB of New York”) advance program, Metropolitan Life Insurance Company issues funding agreements to the FHLB of New York. Through the Federal Agricultural Mortgage Corporation (“Farmer Mac”) program, Metropolitan Life Insurance Company has issued funding agreements to a subsidiary of Farmer Mac.

Other Products and Services
Specialized life insurance products and funding agreements designed specifically to provide solutions for funding postretirement benefits and company-, bank- or trust-owned life insurance used to finance nonqualified benefit programs for executives.

Sales Distribution
Group Benefits Distribution
We distribute Group Benefits products and services through a sales force primarily comprised of MetLife employees that is segmented by the size of the target customer. Marketing representatives sell either directly to corporate and other group customers or through an intermediary, such as a broker or consultant. In addition, voluntary products are sold by specialists. Employers have been emphasizing voluntary products and, as a result, we have increased our focus on communicating and marketing to employees in order to further foster sales of those products.
We have entered into several operating joint ventures and other arrangements with third parties to expand opportunities to market and distribute Group Benefits products and services. We also sell our Group Benefits products and services through sponsoring organizations and affinity groups and provide life and dental coverage to certain employees of the U.S. Government.
Retirement and Income Solutions Distribution
We distribute RIS products and services through dedicated sales teams and relationship managers primarily comprised of MetLife employees. We may sell products directly to benefit plan sponsors and advisors or through brokers, consultants or other intermediaries. In addition, these sales professionals work with individual and group distribution areas to better reach and service customers, brokers, consultants and other intermediaries.
MetLife Holdings
Product Overview
Our MetLife Holdings segment consists of operations relating to products and businesses that we no longer actively market, such as variable, universal, term and whole life insurance, variable, fixed and index-linked annuities, and long-term care insurance.

6

Major Products
Variable, Universal and Term Life Insurance
These life products are similar to those offered by our Group Benefits business, except that these products were historically marketed to individuals through various retail distribution channels. For a description of these products, see “— U.S. — Product Overview — Group Benefits.”

Whole Life Insurance
Provides a benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Whole life insurance includes policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash, or apply them to increase death benefits, increase cash values available upon surrender or reduce the premiums required to maintain the contract in-force.

Variable Annuities
Provides for both asset accumulation and asset distribution needs. Variable annuities allow the contractholder to allocate deposits into various investment options in a separate account, as determined by the contractholder. In certain variable annuity products, contractholders may also choose to allocate all or a portion of their account to the Company’s general account and are credited with interest at rates we determine, subject to specified minimums. Contractholders may also elect certain minimum death benefit and minimum living benefit guarantees for which additional fees are charged and where asset allocation restrictions may apply.

Fixed and Indexed-Linked Annuities

Fixed annuities provide for both asset accumulation and asset distribution needs. Deposits made into deferred annuity contracts are allocated to the Company’s general account and are credited with interest at rates we determine, subject to specified minimums. Fixed income annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant. Additionally, the Company has issued indexed-linked annuities which allow the contractholder to participate in returns from equity indices.

Long-term Care
Provides protection against the potentially high costs of long-term health care services. Generally pay benefits to insureds who need assistance with activities of daily living or have a cognitive impairment.

Corporate & Other
Overview
Corporate & Other contains the excess capital, as well as certain charges and activities, not allocated to the segments, including enterprise-wide strategic initiative restructuring charges and various start-up businesses. Additionally, Corporate & Other includes run-off businesses. Corporate & Other also includes the Company’s ancillary international operations, interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. In addition, Corporate & Other includes the elimination of intersegment amounts, which generally relate to affiliated reinsurance and intersegment loans, which bear interest rates commensurate with related borrowings.
Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Our liabilities for future policy benefits and claims are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. For life insurance and annuity products, we calculate these liabilities based on assumptions and estimates, including estimated premiums to be received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the investments we make with the premiums we receive. We establish liabilities for claims and benefits based on assumptions and estimates of losses and liabilities incurred. Amounts for actuarial liabilities are computed and reported on the consolidated financial statements in conformity with GAAP. For more details on policyholder liabilities see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Liability for Future Policy Benefits.”
Pursuant to applicable insurance laws and regulations, we, as well as a captive reinsurance subsidiary, establish statutory reserves, reported as liabilities, to meet our obligations on our respective policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves and actuarial liabilities for future policy benefits generally differ based on accounting guidance.

7

State insurance laws and regulations, including New York Insurance Law and regulations, require certain MLIC entities to submit to superintendents of insurance, including the New York Superintendent of Financial Services, with each annual report, an opinion and memorandum of a qualified actuary that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for their statutory liabilities with respect to these obligations. See “— Regulation — Insurance Regulation — Policy and Contract Reserve Adequacy Analysis.”
Underwriting and Pricing
MetLife’s Global Risk Management Department (“GRM”) contains a dedicated unit, the primary responsibility of which is the development of product pricing standards and independent pricing and underwriting oversight for MetLife’s insurance businesses. Further important controls around management of underwriting and pricing processes include regular experience studies to monitor assumptions against expectations, formal new product approval processes, periodic updates to product profitability studies and the use of reinsurance to manage our exposures, as appropriate. See “— Reinsurance Activity.”
Underwriting
Underwriting generally involves an evaluation of applications by a professional staff of underwriters and actuaries, who determine the type and the amount of insurance risk that we are willing to accept. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify such risks before issuing policies to qualified applicants or groups.
Insurance underwriting considers not only an applicant’s medical history, but also other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Group underwriting generally evaluates the risk characteristics of each prospective insured group, although with certain voluntary products and for certain coverages, members of a group may be underwritten on an individual basis. We generally perform our own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and a policy is not issued unless the particular risk or group has been examined and approved in accordance with our underwriting guidelines.
The underwriting conducted by our remote underwriting offices and intermediaries, as well as our corporate underwriting office, is subject to periodic quality assurance reviews to maintain high standards of underwriting and consistency. Such offices are also subject to periodic external audits by reinsurers with whom we do business.
We have established oversight of the underwriting process that facilitates quality sales and serves the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent and us.
We continually review our underwriting guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Pricing
Product pricing reflects our pricing standards. GRM, as well as regional finance and product teams, are responsible for pricing and oversight for all of our insurance businesses. Product pricing is based on the expected payout of benefits calculated through the use of assumptions for mortality, morbidity, expenses, persistency and investment returns, as well as certain macroeconomic factors, such as inflation. Investment-oriented products are priced based on various factors, which may include investment returns, expenses, persistency and optionality and possible variability of results. For certain products, pricing may include prospective and retrospective experience rating features. Prospective experience rating involves the evaluation of past experience for the purpose of determining future premium rates and we bear all prior year gains and losses. Retrospective experience rating also involves the evaluation of past experience for the purpose of determining the actual cost of providing insurance for the customer; however, the contract includes certain features that allow us to recoup certain losses or distribute certain gains back to the policyholder based on actual prior years’ experience.
Rates for group benefit products are based on anticipated earnings and expenses for the book of business being underwritten. Renewals are generally reevaluated annually or biannually and are re-priced to reflect actual experience on such products. Products offered by RIS are priced on demand. Pricing reflects expected investment returns, as well as mortality, longevity and expense assumptions appropriate for each product. This business is generally nonparticipating and illiquid, as policyholders have few or no options or contractual rights to cash values.

8

Rates for individual life insurance products are highly regulated and generally must be approved by the regulators of the jurisdictions in which the product is sold.
We continually review our pricing guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Reinsurance Activity
We enter into reinsurance agreements primarily as a purchaser of reinsurance for our various insurance products and also as a provider of reinsurance for some insurance products issued by third parties and related parties. We participate in reinsurance activities in order to limit losses, minimize exposure to significant risks, and provide additional capacity for future growth. We enter into various agreements with reinsurers that cover individual risks, group risks or defined blocks of business, primarily on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics of coverages. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we reinsure other risks, as well as specific coverages. We obtain reinsurance for capital requirement purposes and also when the economic impact of the reinsurance agreement makes it appropriate to do so.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible.
We reinsure our business through a diversified group of well-capitalized reinsurers. We analyze recent trends in arbitration and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. Additionally, we enter into reinsurance agreements for risk and capital management purposes with other affiliates and several affiliated captive reinsurers. Captive reinsurers are affiliated insurance companies licensed under specific provisions of insurance law of their respective jurisdictions, such as the Special Purpose Financial Captive law adopted by several states including Vermont and South Carolina, and have a very narrow business plan that specifically restricts the majority or all of their activity to reinsuring business from their affiliates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions.”
U.S.
For certain policies within our Group Benefits business, we generally retain most of the risk and only cede particular risk on certain client arrangements. The majority of our reinsurance activity within this business relates to the following client agreements:
•
Employer sponsored captive programs: through these programs, employers buy a group life insurance policy with the condition that a portion of the risk is reinsured back to a captive insurer sponsored by the client.
•
Risk-sharing agreements: through these programs, clients require that we reinsure a portion of the risk back to third parties, such as minority-owned reinsurers.
•
Multinational pooling: through these agreements, employers buy many group insurance policies which are aggregated in a single insurer via reinsurance.
The risks ceded under these agreements are generally quota shares of group life and disability policies. The cessions vary from 50% to 90% of all the risks of the policies.
For our RIS business, we have periodically engaged in reinsurance activities on an opportunistic basis. There were no such transactions during the periods presented. In April 1996 and December 1997, the Company entered into two long-term transactions representing approximately $1.5 billion of reserve transfers on structured settlement policies. Through these transactions, 100% of certain risks were transferred, such as payments contingent upon the beneficiary living at the time payment is owed, beginning in 2019 for certain policies, and non-contingent payments guaranteed for a certain minimum number of years, for other policies.

9

MetLife Holdings
For our life products, we have historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. In addition to reinsuring mortality risk as described above, we reinsure other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics.
Catastrophe Coverage
We have exposure to catastrophes which could contribute to significant fluctuations in our results of operations. We purchase catastrophe coverage to reinsure risks issued within territories that we believe are subject to the greatest catastrophic risks. We use excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks. Excess of retention reinsurance agreements provide for a portion of a risk to remain with the direct writing company and quota share reinsurance agreements provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies.
Reinsurance Recoverables
For information regarding ceded reinsurance recoverable balances, included in premiums, reinsurance and other receivables on the consolidated balance sheets, see Note 6 of the Notes to the Consolidated Financial Statements.
Regulation
Overview
The U.S. insurance industry is regulated primarily at the state level by state insurance regulators, with some products and services also subject to federal regulation. We are also subject to regulation under the insurance holding company laws of New York. Furthermore, some of our operations, products and services are subject to consumer protection laws, securities regulation, environmental and unclaimed property laws and regulations, and the Employee Retirement Income Security Act of 1974 (“ERISA”).
We expect the scope and extent of regulation and regulatory oversight generally to continue to increase. The regulatory environment and changes in laws in the jurisdictions in which we operate could have a material adverse effect on our results of operations.
Insurance Regulation
Insurance regulation generally aims at supervising and regulating insurers, with the goal of protecting policyholders and ensuring that insurance companies remain solvent. Insurance regulators have increasingly sought information about the potential impact of activities in holding company systems as a whole, and some jurisdictions have adopted laws and regulations enhancing “group-wide” supervision, including as developed through the National Association of Insurance Commissioners’ (“NAIC”) Solvency Modernization Initiative. See “— NAIC” for information regarding group-wide supervision.

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Metropolitan Life Insurance Company has all material licenses to transact its business in, and is subject to regulation and supervision by, all 50 states, the District of Columbia, Guam, Puerto Rico, the U.S. Virgin Islands and the Northern Mariana Islands. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects and business conduct of insurers. State laws in the United States grant insurance regulatory authorities broad administrative powers with respect to, among other things:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with statutory requirements;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving certain policy forms, including required policyholder disclosures;
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regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements, and identifying and paying to the states or local authorities benefits and other property that is not claimed by the owners;
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regulating advertising;
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protecting privacy;
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establishing statutory capital and reserve requirements and solvency standards;
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specifying the conditions under which a ceding company can take credit for reinsurance in its statutory financial statements (i.e., reduce its reserves by the amount of reserves ceded to a reinsurer);
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fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts;
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adopting and enforcing suitability standards with respect to the sale of annuities and other insurance products;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions between affiliates; and
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regulating the types and amounts of investments.
We are required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which we do business, and our operations and accounts are subject to periodic examination by such authorities. We must also file, and in many jurisdictions and in some lines of insurance obtain regulatory approval for, rules, rates and forms relating to the insurance written in the jurisdictions in which we operate.
Insurance and securities regulatory authorities and other law enforcement agencies and attorneys general from time to time make inquiries regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our insurance and securities businesses. We cooperate with such inquiries and take corrective action when warranted. See Note 16 of the Notes to the Consolidated Financial Statements.
Federal Initiatives
Although the insurance business in the United States is primarily regulated by the states, federal initiatives often have an impact on our business in a variety of ways. From time to time, federal measures are proposed that may significantly affect the insurance business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) effected the most far-reaching overhaul of financial regulation in the United States in decades, including the creation of the Financial Stability Oversight Council, which was given the authority to designate certain financial companies as non-bank systemically important financial institutions subject to supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and the Federal Reserve Bank of New York (collectively with the Federal Reserve Board, the “Federal Reserve”). We are not able to predict with certainty whether or what changes may be made to Dodd-Frank in the future or whether such changes would have a material effect on our business operations. As such, we cannot currently identify all of the risks or opportunities, if any, that may be posed to our businesses as a result of changes to, or legislative replacements for, Dodd-Frank.

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Dodd-Frank includes provisions that may impact our investments and investment activities, including the federal regulation of such activities. Until the various final regulations are promulgated pursuant to Dodd-Frank, and perhaps for some time thereafter, the full impact of Dodd-Frank on such activities will remain unclear.
Guaranty Associations and Similar Arrangements
Many jurisdictions in which we are admitted to transact business require life and health insurers doing business within the jurisdiction to participate in guaranty associations or similar arrangements in order to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers, or those that may become impaired, insolvent or fail. We have established liabilities for guaranty fund assessments that we consider adequate. See Note 16 of the Notes to the Consolidated Financial Statements for additional information on the guaranty association assessments.
Insurance Regulatory Examinations and Other Activities
As part of their regulatory oversight process, U.S. state insurance departments conduct periodic detailed examinations of the books, records, accounts, and business practices of insurers domiciled in their states. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. Except as otherwise disclosed below regarding the consent order and in Note 16 of the Notes to the Consolidated Financial Statements, during the years ended December 31, 2018, 2017 and 2016, we did not receive any material adverse findings resulting from state insurance department examinations of its insurance subsidiaries. On October 15, 2018, MetLife received notice that insurance regulators for the states of Pennsylvania, California, Florida, North Dakota and New Hampshire have scheduled a multistate market conduct re-examination of MetLife and its affiliates relating to compliance with the Regulatory Settlement Agreement on unclaimed proceeds. On January 28, 2019, MetLife entered into a consent order with the New York State Department of Financial Services (“NYDFS”) relating to the open quinquennial exam and agreed to pay a $19.75 million fine, an additional $1.5 million in customer restitution and submit remediation plans for approval within 60 days.
Regulatory authorities in a number of states, the Financial Industry Regulatory Authority and, occasionally, the U.S. Securities and Exchange Commission (the “SEC”) have had investigations or inquiries relating to sales of individual life insurance policies or annuities or other products issued by Metropolitan Life Insurance Company. These investigations often focus on the conduct of particular financial services representatives, the sale of unregistered or unsuitable products, or misuse of client assets. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including restitution payments. We may continue to receive, and may resolve, further investigations and actions on these matters in a similar manner.
Insurance standard-setting and regulatory support organizations, including the NAIC, encourage insurance supervisors to establish Supervisory Colleges for U.S.-based insurance groups with international operations to facilitate cooperation and coordination among the insurance groups’ supervisors and to enhance the member regulators’ understanding of an insurance group’s risk profile. MetLife’s regulators, such as the NYDFS, regularly chair Supervisory College meetings that are attended by MetLife’s key U.S. and non-U.S. regulators.
In addition, claims payment practices by insurance companies have received increased scrutiny from regulators. See Note 16 of the Notes to the Consolidated Financial Statements for further information regarding retained asset accounts and unclaimed property inquiries, including pension benefits.
Policy and Contract Reserve Adequacy Analysis
Annually, we, as well as our captive reinsurance subsidiary, are required to conduct an analysis of the adequacy of all statutory reserves. In each case, a qualified actuary must submit an opinion that states that the statutory reserves make adequate provision, according to accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the insurance company. The adequacy of the statutory reserves is considered in light of the assets held by the insurer with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the consideration anticipated to be received and retained under the related policies and contracts. We may increase reserves in order to submit an opinion without qualification. Since the inception of this requirement, we, as well as our captive reinsurance subsidiary, have provided these opinions, as required, without qualifications.

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NAIC
The NAIC assists state insurance regulatory authorities in serving the public interest and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. State insurance regulators may act independently or adopt regulations proposed by the NAIC. State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”), which states have largely adopted by regulation. However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices, which may differ from the Manual. Changes to the Manual or modifications by the various state insurance departments may impact our statutory capital and surplus.
State insurance holding company laws and regulations are generally based on the Model Holding Company Act and Regulation. These insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (i.e., insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
The Model Holding Company Act and Regulation include a requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. To date, all of the states where MetLife has domestic insurers have enacted a version of the revised Model Holding Company Act, including the enterprise risk reporting requirement. The Model Holding Company Act also authorizes state insurance commissioners to act as global group-wide supervisors for internationally active insurance groups, as well as other insurers that choose to opt in for the group-wide supervision. The Model Holding Company Act creates a selection process for the group-wide supervisor, extends confidentiality protection to communications with the group-wide supervisor, and outlines the duties of the group-wide supervisor. To date, a number of jurisdictions have adopted laws and regulations enhancing group-wide supervision.
The NAIC has concluded its “Solvency Modernization Initiative,” which was designed to review the U.S. financial regulatory system and all aspects of financial regulation affecting insurance companies. Though broad in scope, the NAIC’s Solvency Modernization Initiative focused on: (i) capital requirements; (ii) corporate governance and risk management; (iii) group supervision; (iv) statutory accounting and financial reporting; and (v) reinsurance. In furtherance of this initiative, the NAIC adopted the Corporate Governance Annual Disclosure Model Act and Regulation. The model act, which requires insurers to make an annual confidential filing regarding their corporate governance policies, has been adopted in twenty-seven states as of February 2019, including certain of our insurance subsidiaries’ domiciliary states. In addition, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA Model Act”), which has been enacted by New York, our domiciliary state. The ORSA Model Act requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment must be documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. MetLife, Inc. has submitted on behalf of the enterprise an Own Risk and Solvency Assessment summary report to the NYDFS annually since this requirement became effective.
The NAIC has approved a new valuation manual containing a principle-based approach to the calculation of life insurance reserves. Principle-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principle-based approach became effective on January 1, 2017 in the states where it had been adopted, to be followed by a three-year phase-in period (at the option of insurance companies on a product-by-product basis) for new business since it was enacted into law by the required number of state legislatures. New York has enacted legislation which will allow principle-based reserving no later than January 1, 2020. New York’s implementing regulation establishes that the reserving standard in New York will be consistent with the reserve standards, valuation methods and related requirements of the NAIC Valuation Manual (the “Valuation Manual”), while also authorizing the NYDFS to deviate from the Valuation Manual, by regulation, if it determines that an alternative requirement would be in the best interest of the policyholders of New York.

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In 2015, the NAIC commenced an initiative to study variable annuity solvency regulations, with the goal of curtailing the use of variable annuity captives. In connection with this initiative, the NAIC engaged a third-party consultant to develop recommendations regarding reserve and capital requirements. Following several public exposures of the consultant’s recommendations, the NAIC adopted a new variable annuity framework, which is designed to reduce the level and volatility of the non-economic aspect of reserve and risk-based capital (“RBC”) requirements for variable annuity products. The NAIC is now preparing technical language to be included in various NAIC manuals and guidelines to implement the new framework. We cannot predict the impact of this framework on our business until such technical requirements of the framework are completed, and we cannot predict whether the NYDFS or other state insurance regulators will adopt standards different from the NAIC framework.
In August 2017, the NAIC released a paper on macro-prudential initiatives, in which they proposed potential enhancements in supervisory practices related to liquidity, recovery and resolution, capital stress testing and exposure concentrations. The NAIC has adopted extensive changes to Statutory Annual Statement reporting, effective for year-end 2019, which it believes will improve liquidity risk monitoring.
We currently utilize capital markets solutions to finance a portion of our statutory reserve requirements for several products, including, but not limited to, our level premium term life subject to the NAIC Model Regulation Valuation of Life Insurance Policies (commonly referred to as XXX), and universal and variable life policies with secondary guarantees subject to NAIC Actuarial Guideline 38 (commonly referred to as AXXX), as well as our closed block. Future capacity for these statutory reserve funding structures in the marketplace is not guaranteed. In 2014, the NAIC approved a new regulatory framework applicable to the use of captive insurers in connection with Regulation XXX and Guideline AXXX transactions. Among other things, the framework called for more disclosure of an insurer’s use of captives in its statutory financial statements, and narrows the types of assets permitted to back statutory reserves that are required to support the insurer’s future obligations. In 2014, the NAIC implemented the framework through an actuarial guideline (“AG 48”), which requires the actuary of the ceding insurer that opines on the insurer’s reserves to issue a qualified opinion if the framework is not followed. The requirements of AG 48 became effective as of January 1, 2015 in all states without any further action necessary by state legislatures or insurance regulators to implement them, and apply prospectively to new policies issued and new reinsurance transactions entered into on or after January 1, 2015. In late 2016, the NAIC adopted an update to AG 48 and a model regulation that contains the same substantive requirements as the updated AG 48. The states have started to adopt the model regulation.
We cannot predict the capital and reserve impacts or compliance costs, if any, that may result from the above initiatives, or what impact these initiatives will have on our business, financial condition or results of operations.
Surplus and Capital
Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators generally have discretionary authority, in connection with the continued licensing of an insurer, to limit or prohibit the insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates. Dividends in excess of prescribed limits and transactions above a specified size between an insurer and its affiliates require the approval of the insurance regulator in the insurer’s state of domicile. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Statutory Capital and Dividends.” See also “Dividend Restrictions” in Note 12 of the Notes to the Consolidated Financial Statements for further information regarding such limitations.
Risk-Based Capital
Metropolitan Life Insurance Company is subject to RBC requirements that were developed by the NAIC and adopted by New York. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer and is calculated on an annual basis. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. 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. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. See “Statutory Equity and Income” in Note 12 of the Notes to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Statutory Capital and Dividends.”

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In December 2017, President Trump signed into law H.R.1, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). Following the reduction in the federal corporate income tax rate pursuant to U.S. Tax Reform, the NAIC adopted revisions to certain factors used to calculate Life RBC, which is the denominator of the RBC ratio. These revisions to the NAIC’s Life RBC calculation have resulted in increases in RBC charges and a reduction in our RBC ratio. The NAIC is also studying RBC revisions for bonds, real estate, and longevity risk, but it is premature to project the impact of any potential regulatory changes resulting from such proposals.
The NAIC is continuing to develop a group capital calculation tool using an RBC aggregation methodology for all entities within the insurance holding company system, including non-U.S. entities. The goal is to provide U.S. regulators with a method to aggregate the available capital and the minimum capital of each entity in a group in a way that applies to all groups regardless of their structure. The NAIC expects to conduct field testing in the first half of 2019. The NAIC has stated that the calculation will be a regulatory tool and will not constitute a requirement or standard. Nonetheless, any new group capital calculation methodology may incorporate existing RBC concepts. It is not possible to predict what impact any such regulatory tool may have on our business.
With the exception of changes related to the NAIC’s principle-based reserving framework, discussed above under “— NAIC,” we are not aware of any upcoming NAIC adoptions or state insurance department regulation changes that would have a material impact on the RBC ratio of Metropolitan Life Insurance Company.
Investments Regulation
Metropolitan Life Insurance Company is subject to state laws and regulations that require diversification of investment portfolios and limit the amount of investments that an insurer may have in certain asset categories, such as below investment grade fixed income securities, real estate equity, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus and, in some instances, would require divestiture of such non-qualifying investments. We believe that the investments made by Metropolitan Life Insurance Company complied, in all material respects, with such regulations at December 31, 2018.
New York Insurance Regulation 210
Insurance Regulation 210 went into effect in New York on March 19, 2018. Insurance Regulation 210 establishes standards for the determination and any readjustment of non-guaranteed elements (“NGEs”) that may vary at the insurer's discretion for life insurance policies and annuity contracts delivered or issued for delivery in New York. Examples of NGEs include cost of insurance for universal life insurance policies, as well as interest crediting rates for annuities and universal life insurance policies. The regulation requires insurers to notify policyholders at least 60 days in advance of any change in NGEs that is adverse to policyholders and, with respect to life insurance, to notify the NYDFS at least 120 days prior to any such changes. Additionally, the regulation requires insurers to file annually with NYDFS to inform the NYDFS of any changes adverse to policyholders made in the prior year. The regulation generally prohibits insurers from increasing profit margins for in-force policies or adjusting NGEs in order to recoup past losses.
Cybersecurity and Privacy Regulation
Pursuant to U.S. federal and state laws, and laws of other jurisdictions in which we operate, various government agencies have established rules protecting the privacy and security of personal information. In addition, most U.S. states have enacted laws, which vary significantly from jurisdiction to jurisdiction, to safeguard the privacy and security of personal information. The area of cybersecurity has also come under increased scrutiny by insurance and other regulators.
New York’s cybersecurity regulation for financial services institutions, including banking and insurance entities under its jurisdiction, requires these entities to establish and maintain a cybersecurity program designed to protect consumers’ private data. The regulation specifically provides for: (i) controls relating to the governance framework for a cybersecurity program; (ii) risk-based minimum standards for technology systems for data protection; (iii) minimum standards for cyber breach responses, including notice to NYDFS of material events; and (iv) identification and documentation of material deficiencies, remediation plans and annual certifications of regulatory compliance to the NYDFS.

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In addition, on October 24, 2017, the NAIC adopted the Insurance Data Security Model Law (the “Cybersecurity Model Law”), which establishes standards for data security and for the investigation of and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. To date, the Cybersecurity Model Law has only been adopted by South Carolina. As adopted by South Carolina, and if adopted as state legislation elsewhere, the Cybersecurity Model Law would impose significant new regulatory burdens intended to protect the confidentiality, integrity and availability of information systems. A drafting note in the Cybersecurity Model Law states that a licensee’s compliance with the New York cybersecurity regulation is intended to constitute compliance with the Cybersecurity Model Law.
The California Consumer Privacy Act of 2018 (the “CCPA”) grants all California residents the right to know what information a business has collected from them and the sourcing and sharing of that information, as well as a right to have a business delete their personal information (with some exceptions). Its definition of “personal information” is more expansive than those found in other privacy laws applicable to us in the United States. Failure to comply with the CCPA could result in regulatory fines, and the law grants a private right of action for any unauthorized disclosure of personal information as a result of failure to maintain reasonable security procedures. We expect that exceptions to the CCPA will apply to a significant portion of our business. The CCPA is expected to become operational on January 1, 2020, but California’s Attorney General is expected to delay enforcement actions until six months after a final regulation is promulgated or July 1, 2020, whichever is sooner.
ERISA and Fiduciary Considerations
We provide products and services to certain employee benefit plans that are subject to ERISA and the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor (“DOL”), the Internal Revenue Service (“IRS”) and the Pension Benefit Guaranty Corporation.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA plans and participants and Individual Retirement Accounts (“IRAs”) if the investment recommendation results in fees paid to an individual advisor, the firm that employs the advisor or their affiliates that vary according to the investment recommendation chosen, unless an exemption or exception is available. Similarly, without an exemption or exception, fiduciary advisors are prohibited from receiving compensation from third parties in connection with their advice. ERISA also affects certain of our in-force insurance policies and annuity contracts, as well as insurance policies and annuity contracts we may sell in the future.
The DOL issued regulations that largely were applicable in 2017 that expanded the definition of “investment advice” and required an advisor to meet an impartial or “best interests” standard, but the regulations were formally vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018. The Court of Appeals decision also vacated certain DOL amendments to prohibited transaction exemptions. The DOL has announced that it plans to issue revised fiduciary investment advice regulations in September 2019. At this time, we cannot predict what form those regulations may take or their potential impact on us.
Separately, on April 18, 2018, the SEC proposed and opened for public comment a package of the rule proposals and interpretations regarding Regulation Best Interest, which would require broker-dealers to act in the best interest of “retail” customers including participants in ERISA-covered plans and IRAs when making a recommendation of any securities transaction or investment strategy involving securities. The comment period for these proposals has closed. We cannot predict the timing of any final rules or interpretations.
On December 14, 2017, the DOL released its semiannual regulatory agenda, which proposed revisions to Form 5500, the form used for ERISA annual reporting, proposed jointly with the IRS and the Pension Benefit Guaranty Corporation in 2016. The revisions affect employee pension and welfare benefit plans, including our ERISA plans, and require audits of information, self-directed brokerage account disclosure and additional extensive disclosure. We cannot predict the effect these proposals will have on our business, if enacted, or what other proposals may be made, what legislation may be introduced or enacted, or what impact any such legislation may have on our results of operations and financial condition.

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In addition, the DOL has issued a number of regulations that increase the level of disclosure that must be provided to plan sponsors and participants. The participant disclosure regulations and the regulations that require service providers to disclose fee and other information to plan sponsors took effect in 2012. In John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank (1993), the U.S. Supreme Court held that certain assets in excess of amounts necessary to satisfy guaranteed obligations under a participating group annuity general account contract are “plan assets.” Therefore, these assets are subject to certain fiduciary obligations under ERISA, which requires fiduciaries to perform their duties solely in the interest of ERISA plan participants and beneficiaries. On January 5, 2000, the Secretary of Labor issued final regulations indicating, in cases where an insurer has issued a policy backed by the insurer’s general account to or for an employee benefit plan, the extent to which assets of the insurer constitute plan assets for purposes of ERISA and the Code. The regulations apply only with respect to a policy issued by an insurer on or before December 31, 1998 (“Transition Policy”). No person will generally be liable under ERISA or the Code for conduct occurring prior to July 5, 2001, where the basis of a claim is that insurance company general account assets constitute plan assets. An insurer issuing a new policy that is backed by its general account and is issued to or for an employee benefit plan after December 31, 1998 will generally be subject to fiduciary obligations under ERISA, unless the policy is a guaranteed benefit policy.
The regulations indicate the requirements that must be met so that assets supporting a Transition Policy will not be considered plan assets for purposes of ERISA and the Code. These requirements include detailed disclosures to be made to the employee benefits plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 days’ notice and receive without penalty, at the policyholder’s option, either (i) the unallocated accumulated fund balance (which may be subject to market value adjustment) or (ii) a book value payment of such amount in annual installments with interest. We have taken and continue to take steps designed to ensure compliance with these regulations.
Several other regulatory organizations have also proposed various “best interest” standards. The NAIC has been discussing proposed revisions to the Suitability in Annuity Transactions Model Regulation throughout 2018. The revisions are intended to elevate the standard of care in existing suitability standards for the sale of annuities and to make consumers aware of any material conflicts of interest. A further updated draft of the Suitability in Annuity Transactions Model Regulation was exposed for public comment through mid-February 2019. The NAIC intends to finalize the revisions to the Suitability in Annuity Transactions Model Regulation in 2019. In addition, on December 27, 2017, the NYDFS proposed initial revisions to Insurance Regulation 187, which not only incorporate the “best interest” standard but also would expand the scope of the regulation beyond annuity transactions to include sales of life insurance policies to consumers. On July 22, 2018, the NYDFS issued the final version of revised Insurance Regulation 187, which takes effect on August 1, 2019 for annuity products and on February 1, 2020 for life insurance products.
Derivatives Regulation
Dodd-Frank includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets which requires clearing of certain types of transactions currently traded OTC and which imposes additional costs, including reporting and margin requirements. Our costs of risk mitigation are increasing under Dodd-Frank. For example, Dodd-Frank imposes requirements to pledge variation and/or initial margin (i) for “OTC-cleared” transactions (OTC derivatives that are cleared and settled through central clearing counterparties), and (ii) for “OTC-bilateral” transactions (OTC derivatives that are bilateral contracts between two counterparties); the margin requirements for OTC-cleared transactions and the variation margin requirements for OTC-bilateral derivatives are already in effect, while the initial margin requirements for OTC-bilateral transactions will likely be applicable to us in September 2020. These increased margin requirements, combined with increased capital charges for our counterparties and central clearinghouses with respect to non-cash collateral, will likely require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income and less favorable pricing for OTC-cleared and OTC-bilateral transactions. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of increased benefit exposures from certain of our annuity products that offer guaranteed benefits. We have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the implementation of Dodd-Frank and comparable international derivatives regulations.

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Dodd-Frank also expanded the definition of “swap” and mandated the SEC and U.S. Commodity Futures Trading Commission (“CFTC”) to study whether “stable value contracts” should be treated as swaps. Pursuant to the new definition and the SEC’s and CFTC’s interpretive regulations, products offered by our insurance subsidiaries other than stable value contracts might also be treated as swaps, even though we believe otherwise. Should such products become regulated as swaps, we cannot predict how the rules would be applied to them or the effect on such products’ profitability or attractiveness to our clients. Federal banking regulators have recently adopted new rules that will apply to certain qualified financial contracts, including many derivatives contracts, securities lending agreements and repurchase agreements, with certain banking institutions and certain of their affiliates. These new rules, which went into effect on January 1, 2019, will generally require the banking institutions and their applicable affiliates to include contractual provisions in their qualified financial contracts that limit or delay certain rights of their counterparties including counterparties’ default rights (such as the right to terminate the contracts or foreclose on collateral) and restrictions on assignments and transfers of credit enhancements (such as guarantees) arising in connection with the banking institution or an applicable affiliate becoming subject to a bankruptcy, insolvency, resolution or similar proceeding. To the extent that any of the derivatives, securities lending agreements or repurchase agreements that we enter into are subject to these new rules, it could limit our recovery in the event of a default and increase our counterparty risk.
The amount of collateral we are required to pledge and the payments we are required to make under our derivatives transactions are expected to increase as a result of the requirement to pledge initial margin for OTC-cleared transactions and for OTC-bilateral transactions entered into after the phase-in period, which will likely be applicable to us in September 2020 as a result of adoption by the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”), the Farm Credit Administration and the Federal Housing Finance Agency (collectively, the “Prudential Regulators”) and the CFTC of final margin requirements for non-centrally cleared derivatives.
Securities Regulation
Federal and state securities laws and regulations apply to insurance products that are also “securities,” including variable annuity contracts and variable life insurance policies, as well as certain fixed interest rate or index-linked contracts with features that require them to be registered as securities (such as “registered fixed contracts”) or sold through private placement issuances. As a result, some of our activities in offering and selling variable insurance contracts and policies are subject to extensive regulation under these securities laws.
Federal and state securities laws and regulations generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to adopt new rules impacting new or existing products, regulate the issuance, sale and distribution of our products and limit or restrict the conduct of business for failure to comply with such laws and regulations.
Some of our activities in offering and selling variable insurance products and certain fixed interest rate or index-linked contracts are subject to extensive regulation under the federal securities laws and regulations administered by the SEC. We issue variable annuity contracts and variable life insurance policies through separate accounts that are registered with the SEC as investment companies under the Investment Company Act of 1940 (the “Investment Company Act”) or are exempt from registration under the Investment Company Act. Such separate accounts are generally divided into sub-accounts, each of which invests in an underlying mutual fund which is itself a registered investment company under the Investment Company Act. In addition, the variable annuity contracts and variable life insurance policies associated with these registered separate accounts are registered with the SEC under the Securities Act of 1933 (the “Securities Act”) or are exempt from registration under the Securities Act. We also issue fixed interest rate or index-linked contracts with features that require them to be registered as securities under the Securities Act.
Federal and state securities regulatory authorities from time to time make inquiries and conduct examinations regarding our compliance with securities laws and regulations. We cooperate with such inquiries and examinations and take corrective action when warranted.
Environmental Laws and Regulations
As an owner and operator of real property in many jurisdictions, we are subject to extensive environmental laws and regulations in such jurisdictions. Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. We routinely have environmental assessments performed with respect to real estate being acquired for investment and real property to be acquired through foreclosure. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, results of operations or financial condition.

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Unclaimed Property
We are subject to the laws and regulations of states and other jurisdictions concerning identification, reporting and escheatment of unclaimed or abandoned funds, and are subject to audit and examination for compliance with these requirements. See “—Insurance Regulation — Insurance Regulatory Examinations and Other Activities” for discussion of the Regulatory Settlement Agreement relating to unclaimed proceeds. See also “Controls and Procedures” and Note 16 of the Notes to the Consolidated Financial Statements.
Fiscal Measures
If the U.S. Congress does not approve annual appropriations or otherwise extend appropriations by continuing resolution, many federal government agencies must discontinue most non-essential, discretionary functions, known as a “partial government shutdown.” Most recently, the U.S. government operated under a partial shutdown from December 22, 2018 to January 25, 2019. During a partial government shutdown, financial markets, including the government bond market, continue to function. If the SEC is shut down, although certain SEC functions continue, the SEC may not process new or pending registration statements, qualifications of new or pending offering statements or applications for exemptive relief, which could disrupt or delay new public bond issuances. The partial shutdown of certain other federal agencies could also delay or otherwise impact certain transactions or projects. An extended partial government shutdown could also negatively impact capital markets and economic conditions generally.
Company Ratings
Insurer financial strength ratings represent the opinions of rating agencies, including A.M. Best Company (“A.M. Best”), Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”), regarding the ability of an insurance company to meet its financial obligations to policyholders and contractholders.
Rating Stability Indicators
Rating agencies use an “outlook statement” of “positive,” “stable,” ‘‘negative’’ or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a “stable” outlook to indicate that the rating is not expected to change; however, a “stable” rating does not preclude a rating agency from changing a rating at any time, without notice. Certain rating agencies assign rating modifiers such as “CreditWatch” or “under review” to indicate their opinion regarding the potential direction of a rating. These ratings modifiers are generally assigned in connection with certain events such as potential mergers, acquisitions, dispositions or material changes in a company’s results, in order for the rating agency to perform its analysis to fully determine the rating implications of the event.
Insurer Financial Strength Ratings
The following insurer financial strength ratings represent each rating agency’s opinion of Metropolitan Life Insurance Company’s ability to pay obligations under insurance policies and contracts in accordance with their terms and are not evaluations directed toward the protection of investors in securities of Metropolitan Life Insurance Company. Insurer financial strength ratings are not statements of fact nor are they recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of any other rating.
Our insurer financial strength ratings at the date of this filing are indicated in the following table. Outlook is stable unless otherwise indicated. Additional information about financial strength ratings can be found on the websites of the respective rating agencies.
 
A.M. Best
 
Fitch
 
Moody’s
 
S&P
Ratings Structure
“A++ (superior)” to “S (suspended)”
 
“AAA (exceptionally strong)” to “C (distressed)”
 
“Aaa (highest quality)” to “C (lowest rated)”
 
“AAA (extremely strong)” to “SD (Selective Default)” or “D (Default)”
Metropolitan Life Insurance Company
A+
 
AA-
 
Aa3
 
AA-
2nd of 16
 
4th of 19
 
4th of 21
 
4th of 22
See “Risk Factors — Economic Environment and Capital Markets Risks — A Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings or MetLife, Inc.’s Credit Ratings Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations.” See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Rating Agencies” for an in-depth description of the impact of a ratings downgrade.

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Item 1A. Risk Factors
Economic Environment and Capital Markets Risks
Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition
Stressed conditions, volatility and disruptions in financial asset classes or various markets can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices, derivative prices and availability, real estate markets, consumer spending, business investment, government spending, the volatility and strength of the capital markets, and deflation and inflation, and government actions taken in response to any of these factors, could all adversely affect our financial condition (including our liquidity and capital levels), our business operations and our ability to meet our obligations, by virtue of their impact on levels of economic activity, employment, customer behavior, or mismatched impacts on the value of our assets and our liabilities. Such factors could also have a material adverse effect on our results of operations, financial condition, liquidity or cash flows through realized investment losses, derivative losses, changes in insurance liabilities, impairments, increased valuation allowances, increases in reserves for future policyholder benefits, reduced net investment income and changes in unrealized gain or loss positions.
Sustained periods of low interest rates and risk asset returns could reduce income from our investment portfolio, increase our liabilities for claims and future benefits, and increase the cost of risk transfer measures such as hedging, causing our profit margins to erode as a result of reduced income from our investment portfolio and increase in insurance liabilities. In the event of extreme prolonged market events, such as a global credit crisis, a market downturn, or sustained low market returns, we could incur significant capital or operating losses due to, among other reasons, losses incurred in our general account and as a result of the impact on us of guarantees, including increases in liabilities, capital maintenance obligations and collateral requirements associated with our affiliated reinsurers and other similar arrangements. Any of these events could also impair our financial strength ratings.
See “Business — Regulation.”
Interest Rate Risk
Some of our products, principally traditional life, universal life, fixed annuities, GICs, funding agreements and structured settlements, expose us to the risk that changes in interest rates, including reductions in the difference between short-term and long-term interest rates, could reduce our investment margin or “spread,” which could in turn reduce our net income.
In a low interest rate environment, we may be forced to reinvest proceeds from investments that have matured or have been prepaid or sold at lower yields, which could reduce our investment spread. Moreover, borrowers may prepay or redeem the fixed income securities and commercial, agricultural or residential mortgage loans in our investment portfolio with greater frequency in order to borrow at lower market rates, thereby exacerbating this risk. Although lowering interest crediting rates can help offset decreases in spreads on some products, our ability to lower these rates is limited to the portion of our in-force product portfolio that has adjustable interest crediting rates, and could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative, which could have a material adverse effect on our results of operations and financial condition.
Significantly lower spreads may cause us to accelerate amortization, thereby reducing net income and potentially negatively affecting our credit instrument covenants or rating agency assessment of our financial condition. In addition, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive investments to consumers. This could result in increased premium payments on products with flexible premium features, repayment of policy loans and increased persistency during a period when our new investments carry lower returns. A decline in market interest rates could also reduce our return on investments that do not support particular policy obligations. During periods of sustained lower interest rates, our reserves for policy liabilities may not be sufficient to meet future policy obligations and may need to be strengthened. Accordingly, declining and sustained lower interest rates may materially affect our results of operations, financial position and cash flows, and may significantly reduce our profitability.

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Increases in interest rates could also negatively affect our profitability. In periods of rapidly increasing interest rates, we may not be able to replace, in a timely manner, the investments in our general account with higher yielding investments needed to fund the higher crediting rates necessary to keep interest rate sensitive products competitive. We therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets. In addition, policy loans, surrenders and withdrawals may increase as policyholders seek investments with higher perceived returns as interest rates rise. This process may result in cash outflows requiring that we sell investments at a time when the prices of those investments are adversely affected by the increase in interest rates, which may result in realized investment losses. Unanticipated withdrawals, terminations and substantial policy amendments may cause us to accelerate the amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”), which reduces net income and potentially negatively affects our credit instrument covenants and rating agency assessment of our financial condition. Furthermore, if interest rates rise, our unrealized gains on fixed income securities would decrease and our unrealized losses would increase, perhaps substantially. The accumulated change in estimated fair value of these fixed income securities would be recognized in net income when a gain or loss is realized upon the sale of the security or if the decline in estimated fair value is determined to be other than temporary and an impairment charge to earnings is taken. Finally, an increase in interest rates could result in decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds.
Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our fixed income investments relative to our interest rate sensitive liabilities. For some of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. In addition, asymmetrical and non-economic accounting may cause material changes to our net income and stockholders’ equity in any given period because our nonqualified derivatives are recorded at fair value through earnings, while the related hedged items either follow an accrual-based accounting model, such as insurance liabilities, or are recorded at fair value through other comprehensive income.
Regulators, law enforcement agencies, or the ICE Benchmark Association (the current administrator of LIBOR) may take actions resulting in changes to the way LIBOR is determined, the discontinuance of reliance on LIBOR as a benchmark rate or the establishment of alternative reference rates. The U.K. Financial Conduct Authority has announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The Federal Reserve Bank of New York has begun publishing a Secured Overnight Financing Rate (“SOFR”), which is intended to replace U.S. dollar LIBOR, and central banks in several other jurisdictions have also announced plans for alternative reference rates for other currencies. At this time, we cannot predict how markets will respond to these new rates, and we cannot predict the effect of any changes to or discontinuation of LIBOR on new or existing financial instruments to which we have exposure. Any changes to or discontinuation of LIBOR may have an adverse effect on interest rates on certain derivatives and floating-rate securities we hold, securities we have issued, or other assets or liabilities whose value is tied to LIBOR or to a LIBOR alternative. Any uncertainty regarding the continued use and reliability of LIBOR could adversely affect the value of such instruments. Furthermore, changes to or the discontinuation of LIBOR may impact other aspects of our business, including products, pricing, and models. Any change to or discontinuation of similar benchmark rates besides LIBOR could have similar effects.
See:
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Current Environment;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity Securities AFS and Equity Securities;” and
•
Note 9 of the Notes to the Consolidated Financial Statements.
Credit Spread Risk
Changes in credit spreads may result in market price volatility and cash flow variability. Market price volatility can make it difficult to value certain of our securities if trading becomes less frequent. In such case, valuations may include assumptions or estimates that may have significant period-to-period changes, which could have a material adverse effect on our results of operations or financial condition and may require additional reserves. Significant volatility in the markets could cause changes in credit spreads and defaults and a lack of pricing transparency, which could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows. An increase in credit spreads relative to U.S. Treasury benchmarks can also adversely affect the cost of our borrowing should we need to access credit markets.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Investment Risks.”

21

Equity Risk
Downturns and volatility in equity markets can have a material adverse effect on the revenues and investment returns from our savings and investment products and services, where fee income is earned based upon the estimated fair value of the assets that we manage. The variable annuity business in particular is highly sensitive to equity markets, and a sustained weakness or stagnation in the equity markets could decrease revenues and earnings with respect to those products. Furthermore, certain of our variable annuity products offer guaranteed benefits that increase our potential benefit exposure should equity markets decline or stagnate.
The timing of distributions from and valuations of leveraged buy-out funds, hedge funds and other private equity funds in which we invest can be difficult to predict and depends on the performance of the underlying investments, the funds’ schedules for making distributions, and their needs for cash. As a result, the amount of net investment income from these investments can vary substantially from period to period. Significant volatility could adversely impact returns and net investment income on these alternative investment classes. In addition, the estimated fair value of such alternative investments or equity securities we hold may be adversely impacted by downturns or volatility in equity markets.
See “Quantitative and Qualitative Disclosures About Market Risk.”
Real Estate Risk
Our investments in commercial, agricultural and residential mortgage loans, and our investments in real estate and real estate joint ventures, can be adversely affected by changes in the supply and demand of leasable commercial space, creditworthiness of tenants and partners, capital markets volatility, interest rate fluctuations, commodity prices, farm incomes and housing and commercial property market conditions. These factors, which are beyond our control, could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows.
Obligor and Counterparty Risk
The issuers or guarantors of fixed income securities and mortgage loans we own may default on principal and interest payments they owe us. Additionally, the underlying collateral within asset-backed securities, including mortgage-backed securities, may default on principal and interest payments causing an adverse change in cash flows. The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, or other events that adversely affect the issuers, guarantors or underlying collateral of these securities and mortgage loans could cause the estimated fair value of our portfolio of fixed income securities and mortgage loans and our earnings to decline and the default rate of the fixed income securities and mortgage loans in our investment portfolio to increase. U.S. states, municipalities may face budget deficits and other financial difficulties, which could have an adverse impact on the value of securities we hold issued by and political subdivisions or under the auspices of such U.S. states, municipalities and political subdivisions.
Many of our transactions with counterparties such as brokers and dealers, central clearinghouses, commercial banks, investment banks, hedge funds and investment funds and other financial institutions expose us to the risk of counterparty default. Such credit risk may be exacerbated if we cannot realize the collateral held by us in secured transactions or cannot liquidate such collateral at prices sufficient to recover the full amount of the loan or derivative exposure due to us. Furthermore, potential action by governments and regulatory bodies, such as investment, nationalization, conservatorship, receivership and other intervention, whether under existing legal authority or any new authority that may be created, or lack of action by governments and central banks, as well as deterioration in the banks’ credit standing, could negatively impact these instruments, securities, transactions and investments or limit our ability to trade with them. Any such losses or impairments to the carrying value of these investments or other changes may materially and adversely affect our business and results of operations.
Derivatives Risk
If our counterparties, clearing brokers or central clearinghouses fail or refuse to honor their obligations under our derivatives, our hedges of the related risk will be ineffective. A counterparty’s or central clearinghouse’s insolvency, inability or unwillingness to make payments under the terms of derivatives agreements or inability or unwillingness to return collateral could have a material adverse effect on our financial condition and results of operations, including our liquidity. If the net estimated fair value of a derivative to which we are a party declines, we may be required to pledge collateral or make payments related to such decline. In addition, ratings downgrades or financial difficulties of derivative counterparties may require us to utilize additional capital with respect to the impacted businesses. Furthermore, the valuation of our derivatives could change based on changes to our valuation methodology or the discovery of errors in such valuation or valuation methodology.

22

See:
•
“Business — Regulation — Derivatives Regulation” and     
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Derivatives.”
Adverse Capital and Credit Market Conditions May Significantly Affect Our Ability to Meet Liquidity Needs, Our Access to Capital and Our Cost of Capital
Volatility, disruptions, or other conditions in global capital markets could also have an adverse impact on our capital, credit capacity, and liquidity. If our stress-testing indicates that such conditions could have an impact beyond expectations, or our business otherwise requires, we may have to seek additional financing, the availability and cost of which could be adversely affected by market conditions, regulatory considerations, availability of credit to our industry generally, our credit ratings and credit capacity, and the perception of our customers and lenders regarding our long- or short-term financial prospects if we incur large operating or investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms or at all. Our liquidity requirements may change if, among other things, we are required to return significant amounts of cash collateral on short notice under securities lending or derivatives agreements or we are required to post collateral or make payments related to specified counterparty agreements.
Without sufficient liquidity, our ability to pay claims, other operating expenses, interest on our debt and dividends on our capital stock, to maintain our securities lending activities, to replace certain maturing liabilities, and to sustain our operations and investments could be adversely affected, and our business and financial results may suffer. Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital needed to operate our business, most significantly in our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities, satisfy regulatory capital requirements, and access the capital necessary to grow our business. As a result, we may be forced to delay raising capital, issue different types of securities than we would have otherwise, less effectively deploy such capital, issue shorter tenor securities than we prefer, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.
See:
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Securities Lending and Repurchase Agreements” and
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity.”
An Inability to Access Credit Facilities Could Result in a Reduction in Our Liquidity and Lead to Downgrades in MetLife, Inc.’s Credit Ratings and Our Financial Strength Ratings
MetLife, Inc.’s failure to comply with or fulfill all conditions and covenants under the unsecured credit facility (the “Credit Facility”) maintained by MetLife, Inc. and MetLife Funding, Inc., a wholly-owned subsidiary of Metropolitan Life Insurance Company (“MetLife Funding”), or the failure of lenders to fund their lending commitments (whether due to insolvency, illiquidity or other reasons) in the amounts provided for under the terms of the Credit Facility, could restrict MetLife, Inc.’s ability to access the Credit Facility when needed. This could adversely affect our ability to meet our obligations as they come due and on MetLife, Inc.’s credit ratings and our financial strength ratings, and could thus have a material adverse effect on our liquidity, financial condition and results of operations.
See:
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity and Capital Sources — Global Funding Sources — Credit Facility” and
•
Note 11 of the Notes to the Consolidated Financial Statements.

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A Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings or MetLife, Inc.’s Credit Ratings Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations
Nationally Recognized Statistical Rating Organizations (“NRSROs”) and similar entities could downgrade our financial strength ratings or credit ratings or MetLife, Inc.’s credit ratings, or lower our or MetLife, Inc.’s ratings outlooks, at any time and without notice. Such changes could have a material adverse effect on our financial condition and results of operations in many ways, including:
•
reducing new sales of insurance products, annuities and other investment products;
•
impacting our ability to generate cash flows from issuances of funding agreements and other capital market products;
•
impacting the cost and availability of financing for MetLife, Inc. and its subsidiaries, including us;
•
adversely affecting our relationships with our sales force and independent sales intermediaries;
•
materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders;
•
requiring us to post collateral, including additional collateral under certain of our financing and derivative transactions;
•
requiring us to reduce prices for many of our products and services to remain competitive;
•
providing termination rights for the benefit of our derivative instrument counterparties;
•
adversely affecting our ability to obtain reinsurance at reasonable prices or at all;
•
limiting our access to the capital markets;
•
increasing the cost of debt; and
•
subjecting us to increased regulatory scrutiny.
NRSROs may heighten the level of scrutiny that they apply to insurance companies, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate, and adjust upward the capital and other requirements employed in the models for maintenance of certain ratings levels.
See:
•
“Business — Company Ratings;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity and Capital Uses — Pledged Collateral;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Rating Agencies;” and
•
Note 9 of the Notes to the Consolidated Financial Statements.
Reinsurance May Not Be Available, Affordable or Adequate to Protect Us Against Losses
Market conditions beyond our control determine the availability and cost of reinsurance protection for new business, and in certain circumstances, the price of reinsurance for business already reinsured may also increase. Any decrease in the amount of reinsurance will increase our risk of loss, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business or result in the assumption of more risk with respect to the policies we issue.
Because reinsurance does not relieve us of our direct liability to policyholders, a reinsurer’s insolvency, inability or unwillingness to make payments under the terms of a reinsurance agreement, or a reinsurer’s inability or unwillingness to maintain collateral, could have a material adverse effect on our financial condition and results of operations, including our liquidity.
See “Business — Reinsurance Activity.”

24

Regulatory and Legal Risks
Our Businesses Are Highly Regulated, and Changes in Laws, Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Our Business, Results of Operations and Financial Condition
Our businesses are subject to a wide variety of insurance and other laws and regulations in the jurisdictions in which they operate. Authorities and regulators may take actions or make decisions, including implementing or modifying licensing, permit, or approval requirements, that may negatively affect our business. They may also take actions or make decisions that adversely affect our customers and independent sales intermediaries or their operations, which may affect our business relationships with them and their ability to purchase or distribute our products, and thus may negatively affect our business in a variety of jurisdictions. The overall regulatory environment (or changes to that environment) in the jurisdictions in which we operate, and changes in laws in those jurisdictions, could have a material adverse effect on our results of operations.
We cannot predict with any certainty the impact on our business, financial condition or results of operations of changes to legislative or administrative policies that can affect insurance, such as policies regarding financial services regulation, securities regulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation, or any new legislation or regulatory changes that may be adopted. From time to time, regulators raise issues during examinations or audits that could, if determined adversely, have a material impact on us. In addition, regulators may change interpretations of regulations and legislators may enact statutes with retroactive impact, particularly in areas such as accounting or statutory reserve requirements, which may adversely affect our businesses. Further, a particular regulator or other governmental authority may interpret a law, regulation or accounting principle differently than we have, exposing us to different or additional risks. Compliance with applicable laws and regulations, including regulatory and securities filings requirements, is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business. Additionally, any failure to strictly comply with regulatory or securities filing requirements, or any other legal or regulatory requirements, could harm our reputation or result in regulatory sanctions or legal claims. Changes to or failure to comply with applicable laws and regulations could thus have a material adverse effect on our financial condition and results of operations.
We also cannot predict with certainty the impact of rules, should they take effect, substantially expanding the definition of “investment advice” and imposing an impartial or “best interests” standard in providing such advice, thereby broadening the circumstances under which we or our representatives could be deemed a fiduciary under ERISA or the Code, or amendments to certain prohibited transaction exemptions, will have on our products and services to certain employee benefit plans that are subject to ERISA or the Code. Furthermore, we cannot predict the impact that “best interest” standards recently proposed by various regulators may have on our business, results of operations, or financial condition. Compliance with new or changed rules or legislation in this area may increase our regulatory burden and that of our independent sales intermediaries, require changes to our compensation practices and product offerings, and increase litigation risk, which could adversely affect our business, results of operations and financial condition.
Changes in laws and regulations that affect our customers and independent sales intermediaries or their operations also may affect our business relationships with them and their ability to purchase or distribute our products. Such actions may negatively affect our business, results of operations and financial condition.
If our associates fail to adhere to regulatory requirements or our policies and procedures, we may be subject to penalties, restrictions or other sanctions by applicable regulators, and we may suffer reputational harm.
See “Business — Regulation,” as supplemented by discussions of regulatory developments in our subsequently filed Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business — Regulatory Developments.”
Changes in Tax Laws or Interpretations of Such Laws Could Materially Impact Our Operations by Increasing Our Corporate Taxes and Making Some of Our Products Less Attractive to Consumers
Changes in tax laws or interpretations of such laws could increase our corporate taxes, which may materially impact our net equity. Budget deficits make it likely that governments’ need for additional offsetting revenue will result in future tax proposals that will increase our effective tax rate or have product implications. However, it remains difficult to predict the timing and effect that future tax law changes could have on our corporate taxes. Such changes could not only directly impact our corporate taxes but also could adversely impact our products (including life insurance and retirement plans) by making some of our products less attractive to consumers. A shift away from life insurance and annuity contracts and other tax-deferred products by our customers would reduce our income from sales of these products, as well as the asset base upon which we earn investment income and fees, thereby reducing our earnings and potentially affecting the value of our deferred tax assets.

25

The precise impact of certain provisions of U.S. Tax Reform is still uncertain. For instance, many regulations under the new law have not been finalized or have only recently been finalized. U.S. Tax Reform thus contains provisions whose meaning is subject to differing interpretations, and future guidance may materially differ from our current interpretation.
See:
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — U.S. Tax Reform” and
•
Note 15 of the Notes to the Consolidated Financial Statements.
Litigation and Regulatory Investigations Are Increasingly Common in Our Businesses and May Result in Significant Financial Losses and Harm to Our Reputation
We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses. Plaintiffs’ lawyers may bring or are bringing class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, claims payments and procedures, product design, disclosure, administration, investments, denial or delay of benefits and breaches of fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages. 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 often be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness 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. In addition, a court or other governmental authority may interpret a law, regulation or accounting principle differently than we have, exposing us to different or additional risks. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal costs and otherwise have a material adverse effect on our business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain associates could be materially and adversely impacted. Regulatory inquiries and litigation may also cause volatility in the price of stocks of companies in our industry.
Current claims, litigation, unasserted claims probable of assertion, investigations and other proceedings against us could have a material adverse effect on our business, financial condition or results of operations. It is also possible that related or unrelated claims, litigation, unasserted claims probable of assertion, investigations and proceedings may arise or be commenced in the future, and we could become subject to further investigations, lawsuits, or enforcement actions. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal actions and precedents and industry-wide regulations that could adversely affect our business, financial condition and results of operations.
Material pending litigation and regulatory matters affecting us and risks to our business presented by these proceedings are discussed in Note 16 of the Notes to the Consolidated Financial Statements. Updates are provided in the notes to our interim condensed consolidated financial statements regarding contingencies, commitments and guarantees included in our subsequently filed Quarterly Reports on Form 10-Q, as well as in Part II, Item 1 (“Legal Proceedings”) of those Quarterly Reports.
Investment Risks
Defaults, Downgrades, Volatility or Other Events May Adversely Affect the Investments We Hold, Resulting in a Reduction in Our Net Income and Profitability
A major economic downturn, acts of corporate malfeasance, widening credit risk spreads, ratings downgrades or other events could adversely affect the issuers or guarantors of securities or the underlying collateral of structured securities that we hold, which could cause the estimated fair value of our fixed income securities portfolio and corresponding earnings to decline and the default rate of the fixed income securities in our investment portfolio to increase. Similarly, a ratings downgrade affecting a security we hold could require us to hold more capital to support that security in order to maintain our RBC levels. Our intent to sell, or our assessment of the likelihood that we will be required to sell, fixed income securities may adversely impact levels of writedowns or impairments. Realized losses or impairments on these securities may have a material adverse effect on our net income in a particular quarterly or annual period.

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An increase in the default rate of our mortgage loan investments or fluctuations in their performance could have a material adverse effect on our business, results of operations and financial condition. Substantially all of our commercial and agricultural mortgage loans held for investment have balloon payment maturities, which may increase the risk of default. Any geographic or property type concentration of our mortgage loans may have adverse effects on our investment portfolio and consequently on our results of operations or financial condition, and our ability to sell assets relating to such particular groups of related assets may be limited if other market participants are seeking to sell at the same time. In addition, legislation that would allow or require modifications to the terms of mortgage loans could have an adverse effect on our investment portfolio, results of operations or financial condition.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Mortgage Loans.”
We May Have Difficulty Selling Certain Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner and Realizing Full Value
There may be a limited market for certain investments we hold in our investment portfolio, making them relatively illiquid. These include privately-placed fixed income securities, certain derivative instruments, mortgage loans, policy loans, direct financing and leveraged leases, other limited partnership interests, tax credit and renewable energy partnerships and real estate equity, including real estate joint ventures and funds. Even some of our very high quality investments may experience reduced liquidity during periods of market volatility or disruption. If we are forced to sell certain assets in our investment portfolio during periods of market volatility or disruption, market prices may be lower than our carrying value in such investments, and we may have difficulty selling such investments in a timely manner, be forced to sell investments in a volatile or illiquid market for less than we otherwise would have been able to realize under normal market conditions, or both. This may result in realized losses that could have a material adverse effect on our results of operations and financial condition, as well as our financial ratios, which could in turn affect compliance with our credit instruments and rating agency capital adequacy measures.
We may face similar risks if we are required under our securities lending program to return significant amounts of cash collateral that we have invested. If we decrease the amount of our securities lending activities over time in response to such risks, the amount of net investment income generated by these activities will also likely decline.
Our Requirements to Pledge Collateral or Make Payments Related to Declines in Estimated Fair Value of Derivatives Transactions or Specified Assets in Connection with OTC-Cleared and OTC-Bilateral Transactions May Adversely Affect Our Liquidity, Expose Us to Central Clearinghouse and Counterparty Credit Risk, and Increase our Costs of Hedging
The amount of collateral we may be required to pledge and the payments we may be required to make under our derivatives transactions may increase under certain circumstances. The OCC, the Federal Reserve Board, FDIC, Prudential Regulators, the CFTC, central clearinghouses and counterparties may restrict or eliminate certain types of eligible collateral or charge us to pledge such non-cash collateral, which would increase our costs and could adversely affect the liquidity of our investments and the composition of our investment portfolio.
See:
•
“Business — Regulation — Derivatives Regulation;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity and Capital Uses — Pledged Collateral;” and
•
Note 9 of the Notes to the Consolidated Financial Statements.

27

Business Risks
Differences Between Actual Claims Experience and Underwriting and Reserving Assumptions May Adversely Affect Our Financial Results
Our earnings significantly depend upon the extent to which our actual claims experience is consistent with the assumptions we use in setting prices for our products and establishing liabilities for future policy benefits and claims. We cannot determine precisely the amounts that we will ultimately pay to settle our liabilities, particularly when those payments may not occur until well into the future. We evaluate our actual experience and liabilities periodically based on accounting requirements, and that evaluation can result in a change to liability assumptions that may increase our liabilities. Reserve estimates in some instances are also affected by our operating practices and procedures that are used, among other things, to support our assumptions with respect to the Company’s obligations to its policyholders and contractholders. These practices and procedures include, among other things, obtaining, accumulating, and filtering data, and our use of technology, such as database analysis and electronic communications. To the extent that these practices and procedures do not accurately produce the data to support our assumptions or cause us to change our assumptions, or to the extent that enhanced technological tools become available to us, such assumptions and procedures, as well as our reserves, may require adjustment. Furthermore, to the extent that any of our operating practices and procedures do not accurately produce, or reproduce, data that we use to conduct any or all aspects of our business, such errors may negatively impact our business, reputation, results of operations, and financial condition.
Increased longevity due to improvements in medical technologies may require us to modify our assumptions, models, or reserves. Additionally, increases in the prevalence and accuracy of genetic testing, or legislation or regulation regarding the use by insurers of information produced by such testing, may exacerbate adverse selection risks. Such changes in medical technologies may thus have a material adverse effect on our business, results of operations, and financial condition.
See:
•
“Business — Policyholder Liabilities;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Deferred Policy Acquisition Costs and Value of Business Acquired;”
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Derivatives;” and
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Consolidated Results — Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017 — Actuarial Assumption Review and Certain Other Insurance Adjustments.”
Technological Changes May Present New and Intensified Challenges to Our Business
Recent and future changes in technology may present us with new challenges and may intensify many of the challenges that we already face. For example, as a result of the availability of new technological tools for data collection and analysis, we have access to an increasing amount of data, from an increasing variety of sources, regarding deaths of our policyholders and annuitants. We may be unable to accurately or completely process this increased volume of information within the time periods required by applicable standards. Furthermore, the additional information that we obtain as a result of technological improvements may require us to modify our assumptions, models, or reserves. Changes in technology related to collection and analysis of data regarding customers could, in these ways or others, expose us to regulatory or legal actions and may have a material adverse effect on our business, reputation, results of operations, and financial condition.
Technological advances may also impact the composition and results of our investment portfolio. For example, changes in energy technology may impact the relative attractiveness of investments in a variety of energy sources, and increasing consumer preferences for e-commerce may negatively impact the profitability of retail and commercial real estate. If we are unable to adjust our investments in reaction to such changes, our results of operations and financial condition may be materially and adversely affected.

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Catastrophes May Adversely Impact Liabilities for Policyholder Claims and Reinsurance Availability
Our life insurance operations face the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. A significant pandemic could have a major impact on the global economy and financial markets or could result in disruption to our business operations. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic is outside of our control and could have a material impact on the losses we experience. A localized event that affects the workplace of one or more of our group insurance customers could cause a significant loss due to mortality or morbidity claims. These events could have a material adverse effect on our business, results of operations and financial condition in any period.
We May Need to Fund Deficiencies in Our Closed Block; Assets Allocated to the Closed Block Benefit Only the Holders of Closed Block Policies
The closed block assets established in connection with the demutualization of Metropolitan Life Insurance Company, the cash flows generated by the closed block assets and the anticipated revenue from the policies included in the closed block may not be sufficient to provide for the benefits guaranteed under these policies. If they are not, we must fund the shortfall. Even if they are sufficient, we may choose, for competitive reasons, to support policyholder dividend payments with our general account funds. Such actions may reduce funds that would otherwise be available to us for other uses and could thus adversely impact our results of operations or financial condition.
See Note 7 of the Notes to the Consolidated Financial Statements.
We May Be Required to Accelerate the Amortization of or Impair DAC, DSI or VOBA
DAC, deferred sales inducements (“DSI”) and VOBA for certain products are amortized in proportion to actual and expected gross profits or margins. Low investment returns, mortality, morbidity, persistency, interest crediting rates, dividends paid to policyholders, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation may negatively affect the amount of future gross profit or margins. If actual gross profits or margins are less than originally expected, then the amortization of such costs would be accelerated in the period the actual experience is known and would result in a charge to net income. Significant or sustained equity market declines or significantly lower spreads could result in an acceleration of amortization of DAC, DSI and VOBA, resulting in a charge to net income. Such adjustments could have a material adverse effect on our results of operations or financial condition.
See:
•
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Deferred Policy Acquisition Costs and Value of Business Acquired” and
•
Note 1 of the Notes to the Consolidated Financial Statements.
Guarantees Within Certain Products May Decrease Our Earnings, Increase the Volatility of Our Results, Result in Higher Risk Management Costs and Expose Us to Increased Counterparty Risk
The valuation of our liabilities associated with products that include guaranteed benefits, including guaranteed minimum death benefits (including but not limited to no-lapse guarantee benefits), guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, guaranteed minimum income benefits (“GMIBs”), and minimum crediting rate features could increase in the event of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates. An increase in these liabilities would result in a decrease in our net income.
The derivatives and other risk management strategies we use to hedge the economic exposure to these liabilities that do not qualify for hedge accounting treatment may result in volatility in the results of our operations, including net income, to the extent the financial measurement of the hedged liability does not fully reflect the sensitivity to the underlying economic exposure. The risk management strategies and hedging instruments that we use to directly mitigate the volatility in net income associated with certain of these liabilities, including the use of reinsurance and derivatives, may not effectively offset the costs of guarantees and may not be completely effective. Furthermore, changes in policyholder behavior or mortality, combined with adverse market events, may produce economic losses not addressed by the risk management techniques employed. These factors may have a material adverse effect on our results of operations, including net income, capitalization, financial condition or liquidity.
See Note 1 of the Notes to the Consolidated Financial Statements.

29

Operational Risks
MetLife’s Risk Management Policies and Procedures or Our Models May Leave Us Exposed to Unidentified or Unanticipated Risk
MetLife’s enterprise risk management policies and procedures may not be sufficiently comprehensive and may not identify every risk to which MetLife and its subsidiaries, including Metropolitan Life Insurance Company, are exposed. Many of MetLife’s methods for managing risk and exposures are based upon the use of observed historical market behavior to model or project potential future exposure.
Models used by our business are based on assumptions, projections and data that may be inaccurate. Business or other decisions, including determination of reserves, based on incorrect or misused model output and reports could have a material adverse impact on our results of operations. Models used by our business may be misspecified for their intended purpose, may be misused, may not operate properly, and may contain errors related to model inputs, data, assumptions, calculations, or output. We perform model reviews that could give rise to adjustments to models that may adversely impact our results of operations. Additionally, our model review process may not adequately identify or remediate errors in or related to our models. As a result, our models may not fully predict future exposures or correctly reflect past experience, which may have a material impact on our business, reputation, results of operations or financial condition.
Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of MetLife’s associates will follow MetLife’s risk management policies and procedures, nor can there be any assurance that MetLife’s risk management policies and procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, MetLife may have to implement more extensive and perhaps different risk management policies and procedures in the future due to legal and regulatory requirements, which could result in increased costs and may adversely affect our results of operations.
See:
•
“Business — Regulation — Insurance Regulation” and
•
“Quantitative and Qualitative Disclosures About Market Risk.”
Our Policies and Procedures May Be Insufficient To Protect Us From Certain Operational Risks
We are highly dependent on our ability to process a large number of complex transactions across our businesses. The large number of transactions we process, and complexity of our administrative systems, makes it possible that errors will occasionally occur, and the controls and procedures we have in place to prevent such errors may not be entirely effective. The occurrence of mistakes, particularly significant ones, can subject us to claims from our customers and may have a material adverse effect on our reputation, business, results of operations, or financial condition.
We are dependent on our group product customers or their employees for certain information to accurately review and pay claims on many of our products. If we are unable to obtain necessary and accurate information from our customers, we may be unable to provide or verify coverage and to pay claims, or we may pay claims without accurate or complete documentation, which may have a material adverse effect on our reputation, business, results of operations, or financial condition.
From time to time, we rely on vendors or other service providers for services related to the administration of our products, investment management, or other business operations. To the extent our efforts to ensure such vendors’ controls meet our standards are inadequate, our vendors fail to perform their services accurately or timely, the exchange of information between us and our vendors is imperfect, or our vendors suffer financial or reputational distress, any errors, misconduct, or discontinuation of services that result could have a material adverse effect on our business, reputation, results of operations, or financial condition.
From time to time, our administrative and operational practices may fail to timely and completely identify all of the property that we are legally required to escheat to a variety of jurisdictions as unclaimed property. As a result, we may be subject to unexpected charges, reserve strengthening, and expenses, as well as regulatory examinations, penalties or other fines. Each of these affects may harm our reputation or regulatory relationships that may harm our business, financial condition, or results of operations.
Our practices and procedures are evaluated periodically and from time to time may limit our efforts to contact all of our customers, which may result in delayed, untimely, or missed customer payments that may have a material adverse effect on the Company, including reputational harm.

30

We are subject to risks related to fraud, including fraud committed by MetLife’s associates, as well as fraud through claims and other processes. Our policies and procedures may be ineffective in preventing, detecting or mitigating fraud and other illegal or improper acts, which could have a material adverse effect on our business, reputation, financial condition, or results of operations.
If MetLife’s policies and practices to attract, motivate and retain employees, to develop talent, and to plan for management succession are not effective, our business, results of operations, and financial condition could be adversely affected.
We cannot be certain that we will not identify control deficiencies or material weaknesses in the future. If we identify future control deficiencies or material weaknesses, these may lead to additional adverse effects on our business, our reputation, our results of operations, and the market price of our common stock.
See “Business — Regulation — Unclaimed Property.”
A Failure in Our Cybersecurity or Other Information Security Systems or MetLife’s Disaster Recovery Plans, or Those of MetLife’s Suppliers, Could Result in a Loss or Disclosure of Confidential Information, Damage to Our Reputation and Impairment of Our Ability to Conduct Business Effectively
We rely on the effective operation of MetLife’s and its suppliers’ computer systems throughout our business for a variety of functions, including processing claims, transactions and applications, providing information to customers and distributors, performing actuarial analyses and maintaining financial records. We also retain confidential and proprietary information on MetLife’s and its suppliers’ computer systems, and we rely on sophisticated technologies to maintain the security of that information. MetLife’s and its suppliers’ computer systems are subject to computer viruses or other malicious codes, unauthorized or fraudulent access, social engineering, phishing, human error, cyberattacks or other computer-related penetrations, and such threats have increased over recent periods. The administrative and technical controls and other preventive actions we take to reduce the risk of cyber-incidents and protect our information technology may be insufficient to prevent physical and electronic break-ins, cyber-attacks, compromised credentials, fraud, other security breaches or other unauthorized access to MetLife’s and its suppliers’ computer systems. In some cases, such cyber-incidents may not be immediately detected. Such incidents may impede or interrupt our business operations and could adversely affect our business, reputation, financial condition and results of operations.
In the event of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyberattack or war, unanticipated problems with MetLife’s and its suppliers’ disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect MetLife’s and its suppliers’ computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of MetLife’s managers, or MetLife associates generally, are unavailable following a disaster, our ability to effectively conduct business could be severely compromised. These interruptions also may interfere with MetLife’s suppliers’ ability to provide goods and services and MetLife’s associates’ ability to perform their job responsibilities.
The failure of MetLife’s and its suppliers’ computer systems or MetLife and its suppliers’ disaster recovery plans for any reason, or any such failure on the part of vendors, distributors, and other third parties that provide operational or information technology services to MetLife, could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory investigations and sanctions, expose us to legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. Insurance for cyber liability, operational and other risks relating to our business and systems may not be sufficient to protect us against such losses or may become less readily available or more expensive, which could adversely affect our results of operations. In addition, increased scrutiny of cybersecurity issues by regulators, including new laws or regulations, could result in increased compliance costs.
There can be no assurance that MetLife’s information security policies and systems in place can prevent unauthorized access, use or disclosure of confidential information, including nonpublic personal information, nor can we be certain that we will be able to reliably access all of the documents and records in the information storage systems we use, whether electronic or physical. In some circumstances, we may fail to obtain or maintain all of the records we need to accurately and timely administer, and establish appropriate reserves for benefits and claims with respect to, our products, which failure could adversely affect our business, reputation, results of operations or our financial condition.

31

MetLife is continuously evaluating and enhancing systems and creating new systems and processes as our business depends on our ability to maintain and improve technology systems. Due to the complexity and interconnectedness of these systems and processes, these changes, as well as changes designed to update and enhance MetLife’s protective measures to address new threats, increase the risk of a system or process failure or the creation of a gap in MetLife’s security measures. Any such failure or gap could adversely affect our business, reputation, results of operations or financial condition.
Any Failure to Protect the Confidentiality of Client Information Could Adversely Affect Our Reputation or Result in Legal or Regulatory Penalties
If MetLife or its suppliers fail to maintain adequate internal controls or if MetLife’s or its suppliers’ associates fail to comply with relevant policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of our clients’ confidential personal information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation or lead to civil or criminal penalties, which, in turn, could have a material adverse effect on our business, financial condition and results of operations. Increased scrutiny of privacy issues by regulators, including new laws or regulations, could result in increased compliance costs. In addition, any inquiries from U.S. state, federal or other regulators regarding the use of “big data” techniques could result in harm to our reputation, and any limitations on such use could have a material impact on our business, financial condition and results of operations.
See “Business — Regulation — Cybersecurity and Privacy Regulation.”
Changes in Accounting Standards May Adversely Affect Our Financial Statements
From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the IFRS Foundation. We cannot always meaningfully assess the effects of such new or revised accounting standards on our financial statements. Our adoption of future accounting standards could have a material adverse effect on our financial condition and results of operations.
See Note 1 of the Notes to the Consolidated Financial Statements.
MetLife’s Associates May Take Excessive Risks, Which Could Negatively Affect Our Financial Condition and Business
The associates who conduct our business, including executive officers and other members of management, sales managers, investment professionals, product managers, sales agents, wholesalers, underwriters, and other associates, may take excessive risks in a wide variety of business decisions, including setting underwriting guidelines and standards, determining claims, designing and pricing products, determining what assets to purchase for investment and when to sell them, evaluating business opportunities, and other decisions. The design and implementation of MetLife’s compensation programs and practices may not be effective in deterring MetLife’s associates from taking excessive risks, and MetLife’s controls and procedures may not be sufficient to monitor its associates’ business decisions, prevent excessive risk-taking, or prevent associate misconduct. If MetLife’s associates take excessive risks, the impact of those risks could have a material adverse effect on our reputation, financial condition and business operations.
We May Experience Difficulty in Marketing and Distributing Products Through Our Distribution Channels
Third-party distributors, through whom we primarily distribute our products, may suspend, alter, reduce or terminate their distribution relationships with us for various reasons, including changes in our distribution strategy, adverse developments in our business, adverse rating agency actions or concerns about market-related risks. There can be no assurance that the terms of our agreements with third-party distributors will remain acceptable to us or such third parties. Key distribution partners may merge, change their business models in ways that affect how our products are sold, or terminate their distribution contracts with us, and new distribution channels could emerge, and such developments could adversely impact the effectiveness of our distribution efforts. Consolidation of distributors and other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us. Interruptions or changes to our relationships with distributors could materially hinder our ability to market our products and could have a material adverse effect on our business, operating results and financial condition.
We may not be able to monitor or control the manner in which unaffiliated firms or agents distribute our products. If our products are distributed by such firms or agents in an inappropriate manner, or to customers for whom they are unsuitable, we may be subject to reputational harm, regulatory fines and other harm to our business.

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Risks Related to Acquisitions, Dispositions or Other Structural Changes
We Could Face Difficulties, Unforeseen Liabilities, Asset Impairments or Rating Actions Arising from Business Acquisitions, Dispositions of Businesses, or Legal Entity Reorganizations
Acquisitions and dispositions of businesses, joint ventures, and other structural changes expose us to a number of risks arising from, among other factors:
•
potential difficulties achieving projected financial results, including the costs and benefits of integration or deconsolidation, due to macroeconomic, business, demographic, actuarial, regulatory, or political factors;
•
unforeseen liabilities or asset impairments;
•
the scope and duration of rights to indemnification for losses, and the recoverability of such indemnification;
•
the use of capital that could be used for other purposes;
•
liquidity requirements;
•
reactions of ratings agencies, policyholders and contractholders, distributors, suppliers and other contractual counterparties;
•
regulatory requirements that could impact our operations or capital requirements;
•
changes in statutory or U.S. GAAP accounting principles, practices or policies;
•
dedication of management resources that could otherwise be deployed to other business, or distraction of key personnel from maximizing business value;
•
providing or receiving transition services that may disrupt operations or impose liabilities or restrictions on us;
•
loss of key personnel or difficulties recruiting personnel;
•
loss of customers;
•
loss of distribution resources or suppliers;
•
inefficiencies as we integrate operations and address differences in cultural, management, information, compliance and financial systems and procedures; and
•
impacts on internal controls and procedures.
Reorganizing or consolidating the legal entities through which we conduct business may raise similar risks. The success with which we are able to realize benefits from legal entity reorganizations will also depend on our ability to manage a variety of issues, including regulatory approvals, modification of our operations and changes to our investment portfolios or derivatives hedging activities.
Any of these risks, if realized, could prevent us from achieving the benefits we expect or could otherwise have a material adverse effect on our business, results of operations or financial condition.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Throughout the U.S., we or our affiliates own eight buildings and have approximately 112 leases used in support of all segments, as well as Corporate & Other.
We believe our and our affiliates’ properties are adequate and suitable for our business as currently conducted, and are adequately maintained. The above properties do not include properties we own for investment-only purposes.
Item 3. Legal Proceedings
See Note 16 of the Notes to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.

33

Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
No established public trading market exists for Metropolitan Life Insurance Company’s common equity; all of Metropolitan Life Insurance Company’s common stock is held by MetLife, Inc.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.

34

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Forward-Looking Statements and Other Financial Information
For purposes of this discussion, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). Management's narrative analysis of the Company’s results of operations is presented pursuant to General Instruction I(2)(a) of Form 10-K. This narrative analysis should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company's consolidated financial statements included elsewhere herein.
This narrative analysis may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Note Regarding Forward-Looking Statements” for cautionary language regarding forward-looking statements.
This narrative analysis includes references to our performance measure, adjusted earnings, that is not based on GAAP. See “— Non-GAAP and Other Financial Disclosures” for a definition and discussion of this and other financial measures, and “— Results of Operations” for reconciliations of historical non-GAAP financial measures to the most directly comparable GAAP measures.
Overview
MLIC is a provider of insurance, annuities, employee benefits and asset management. MLIC is organized into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. See “Business — Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability.
U.S. Tax Reform
In December 2017, U.S. Tax Reform was signed into law. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company recognized the tax effects of U.S. Tax Reform for the year ended December 31, 2017. While the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform in the period of enactment, its income tax accounting was not complete due to uncertainties that existed at the time. Accordingly, certain U.S. Tax Reform amounts were revised in the Company’s consolidated financial statements for the year ended December 31, 2018. In addition, given the complexities of U.S. Tax Reform, there still remain uncertainties surrounding aspects of the new law that may impact results in the future. See Note 15 of the Notes to the Consolidated Financial Statements for a further discussion of U.S. Tax Reform. 
Separation of Brighthouse
In August 2017, MetLife, Inc. completed the separation of Brighthouse Financial, Inc. and its subsidiaries (“Brighthouse”) through a distribution of 96,776,670 shares of Brighthouse Financial, Inc. common stock to the MetLife, Inc. common shareholders (the “Separation”). MetLife, Inc. retained the remaining ownership interest of 22,996,436 shares, or 19.2%, of Brighthouse Financial, Inc. common stock outstanding.
In June 2018, MetLife, Inc. sold Brighthouse Financial, Inc. common stock in exchange for MetLife, Inc. senior notes and Brighthouse was no longer considered a related party. At December 31, 2018, MetLife, Inc. no longer held any shares of Brighthouse Financial, Inc. for its own account; however, certain insurance company separate accounts managed by MetLife held shares of Brighthouse Financial, Inc.

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Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Consolidated Financial Statements. For a discussion of our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
(i)
liabilities for future policy benefits and the accounting for reinsurance;

(ii)
capitalization and amortization of DAC and the establishment and amortization of VOBA;

(iii)
estimated fair values of investments in the absence of quoted market values;

(iv)
investment impairments;

(v)
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;

(vi)
measurement of employee benefit plan liabilities;

(vii)
measurement of income taxes and the valuation of deferred tax assets; and

(viii)
liabilities for litigation and regulatory matters.

In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
Generally, future policy benefits are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of business basis. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.
Future policy benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Liabilities for unpaid claims are estimated based upon our historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs.
Future policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess ratably over the accumulation period based on total expected assessments. Liabilities for 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 the secondary and paid-up guarantee liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility for variable products are consistent with historical experience of the appropriate underlying equity index, such as the S&P 500 Index.
We regularly review our estimates of liabilities for future policy benefits and compare them with our actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our liability for future policy benefits.

37

Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to that evaluated in our security impairment process. See “— Investment Impairments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance programs.
Deferred Policy Acquisition Costs and Value of Business Acquired
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis to reflect significant changes in processes or distribution methods.
VOBA represents the excess of book value over the estimated fair value of acquired insurance, annuity and investment-type contracts in force at the acquisition date. The estimated fair value of the acquired obligations is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future profitability of the related business.
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC and VOBA. Our practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. We monitor these events and only change the assumption when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease (increase) in the DAC and VOBA amortization with an offset to our unearned revenue liability which nets to approximately $30 million. We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for the variable universal life contracts and variable deferred annuity contracts is 7.0%.
We periodically review long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Assumptions used in the calculation of estimated gross margins and profits which may have significantly changed are updated annually. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Our most significant assumption updates resulting in a change to expected future gross margins and profits and the amortization of DAC and VOBA are due to revisions to expected future investment returns, expenses, in-force or persistency assumptions and policyholder dividends on participating traditional life contracts, variable and universal life contracts and annuity contracts. We expect these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.
See Note 5 of the Notes to the Consolidated Financial Statements for additional information on DAC and VOBA.

38

Estimated Fair Value of Investments
In determining the estimated fair value of our investments, fair values are based on unadjusted quoted prices for identical investments in active markets that are readily and regularly obtainable. When such unadjusted quoted prices are not available, estimated fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of investments.
The methodologies, assumptions and inputs utilized are described in Note 10 of the Notes to the Consolidated Financial Statements.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Our ability to sell investments, or the price ultimately realized for investments, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain investments.
Investment Impairments
One of the significant estimates related to fixed maturity securities available-for-sale (“AFS”) is our impairment evaluation. The assessment of whether an other-than-temporary impairment (“OTTI”) occurred is based on our case-by-case evaluation of the underlying reasons for the decline in estimated fair value on a security-by-security basis. Our review of each security for OTTI includes an analysis of gross unrealized losses by three categories of severity and/or age of gross unrealized loss. An extended and severe unrealized loss position on a security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments. Accordingly, such an unrealized loss position may not impact our evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected.
Additionally, we consider a wide range of factors about the security issuer and use our best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in our evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Factors we consider in the OTTI evaluation process are described in Note 8 of the Notes to the Consolidated Financial Statements.
The determination of the amount of allowances and impairments on the remaining invested asset classes is highly subjective and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 9 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.

39

We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions, including expectations concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates. The valuation of these embedded derivatives also includes an adjustment for our nonperformance risk and risk margins for non-capital market inputs. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife, Inc. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
The accounting for derivatives is complex and interpretations of accounting standards continue to evolve in practice. If it is determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Assessments of hedge effectiveness and 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.
Variable annuities with guaranteed minimum benefits may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates, changes in our nonperformance risk, variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. If interpretations change, there is a risk that features previously not bifurcated may require bifurcation and reporting at estimated fair value on the consolidated financial statements and respective changes in estimated fair value could materially affect net income.
Additionally, we ceded the risk associated with certain of the variable annuities with guaranteed minimum benefits described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. Because certain of the direct guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur since the change in fair value of the embedded derivative on the ceded risk is being recorded in net income without a corresponding and offsetting change in fair value of the direct guarantee.
See Note 9 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.
Employee Benefit Plans
Through September 30, 2018, the Company sponsored and/or administered various qualified and nonqualified defined benefit pension plans and other postretirement employee benefit plans covering eligible employees who meet specified eligibility requirements of the sponsor and its participating affiliates. See Note 14 of the Notes to the Consolidated Financial Statements for information regarding the change in plan sponsor from the Company to an affiliate effective October 1, 2018, as well as amendments to our U.S. benefit plans. The calculation of the obligations and expenses associated with these plans requires an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases and healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirement, withdrawal rates and mortality. In consultation with external actuarial firms, we determine these assumptions based upon a variety of factors such as historical experience of the plan and its assets, currently available market and industry data, and expected benefit payout streams.

40

We determine the expected rate of return on plan assets based upon an approach that considers inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation, as well as expenses, expected asset manager performance, asset weights and the effect of rebalancing. We determine the discount rates used to value the pension and postretirement obligations, based upon rates commensurate with current yields on high quality corporate bonds. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant impact on the Company’s consolidated financial statements and liquidity.
See Note 14 of the Notes to the Consolidated Financial Statements for additional discussion of assumptions used in measuring liabilities relating to our employee benefit plans.
Income Taxes
We provide for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. Tax laws are often complex and may be subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions in which we conduct business.
In establishing a liability for unrecognized tax benefits, assumptions may be made in determining whether, and to what extent, a tax position may be sustained. Once established, unrecognized tax benefits are adjusted when there is more information available or when events occur requiring a change.
Valuation allowances are established against deferred tax assets when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. See Note 1 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of such valuation allowances.
We may be required to change our provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported on the consolidated financial statements in the year these changes occur.
In December 2017, U.S. Tax Reform was signed into law. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company recognized the tax effects of U.S. Tax Reform for the year ended December 31, 2017. While the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform in the period of enactment, its income tax accounting was not complete due to uncertainties that existed at the time. Accordingly, certain U.S. Tax Reform amounts were revised in the Company’s consolidated financial statements for the year ended December 31, 2018.
See also Notes 1 and 15 of the Notes to the Consolidated Financial Statements for additional information on our income taxes.
Litigation Contingencies
We are a defendant in a large number of litigation matters and are involved in a number of regulatory investigations. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including our asbestos-related liability, are especially difficult to estimate due to the limitation of reliable data and uncertainty regarding numerous variables that can affect liability estimates. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements. It is possible that an adverse outcome in certain of our litigation and regulatory investigations, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon our consolidated net income or cash flows in particular quarterly or annual periods.
See Note 16 of the Notes to the Consolidated Financial Statements for additional information regarding our assessment of litigation contingencies.

41

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 and the Company’s business.
MetLife’s economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of diversification benefits among risk types. Economic capital-based risk estimation is an evolving science and industry best practices have emerged and continue to evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for the calculation of diversification benefits, and the quantification of appropriate shock levels. MetLife’s management is responsible for the ongoing production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, net income (loss), or adjusted earnings.
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios 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.
Dispositions
In 2016, MLIC distributed to MetLife, Inc., as a non-cash extraordinary dividend, all of the issued and outstanding shares of common stock of each of New England Life Insurance Company (“NELICO”) and General American Life Insurance Company (“GALIC”). See Note 3 of the Notes to the Consolidated Financial Statements.

42

Results of Operations
Consolidated Results
Business Overview. Overall sales in our U.S. segment for the year ended December 31, 2018 increased over 2017 levels reflecting higher sales of pension risk transfers (driven by a large transaction in the second quarter of 2018) and stable value products, partially offset by a decrease in funding agreement issuances, as well as lower sales of specialized life insurance and structured settlement products, all within our RIS business. Sales in our Group Benefits business were slightly lower compared to 2017, as the impact of strong jumbo case sales in our core products in 2017 more than offset strong sales in our voluntary products in 2018. Revenues in our MetLife Holdings segment decreased as a result of the discontinuance of the marketing of life and annuity products in early 2017.
 
Years Ended December 31,
 
2018

2017
 
(In millions)
Revenues
 
 
 
Premiums
$
26,613

 
$
22,925

Universal life and investment-type product policy fees
2,124

 
2,227

Net investment income
10,919

 
10,513

Other revenues
1,586

 
1,570

Net investment gains (losses)
153

 
334

Net derivative gains (losses)
766

 
(344
)
Total revenues
42,161

 
37,225

Expenses
 
 
 
Policyholder benefits and claims and policyholder dividends
30,182

 
26,889

Interest credited to policyholder account balances
2,479

 
2,235

Capitalization of DAC
(34
)
 
(61
)
Amortization of DAC and VOBA
470

 
241

Interest expense on debt
108

 
106

Other expenses
4,647

 
4,849

Total expenses
37,852

 
34,259

Income (loss) before provision for income tax
4,309

 
2,966

Provision for income tax expense (benefit)
173

 
(561
)
Net income (loss)
4,136

 
3,527

Less: Net income (loss) attributable to noncontrolling interests
6

 
2

Net income (loss) attributable to Metropolitan Life Insurance Company
$
4,130

 
$
3,525

Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017
During the year ended December 31, 2018, net income (loss) increased $609 million from 2017, primarily driven by favorable changes in adjusted earnings and net derivative gains (losses), partially offset by a 2017 tax benefit related to U.S. Tax Reform and an unfavorable change in net investment gains (losses).
Management of Investment Portfolio and Hedging Market Risks with Derivatives. We manage our investment portfolio using disciplined asset/liability management (“ALM”) principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities AFS and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities.

43

We purchase investments to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currency exchange rates, credit spreads and equity markets; counterparty specific factors such as financial performance, credit rating and collateral valuation; and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of both impairments and realized gains and losses on investments sold.
We also use derivatives as an integral part of our management of the investment portfolio and insurance liabilities to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. We use freestanding interest rate, equity, credit and currency derivatives to hedge certain invested assets and insurance liabilities. A portion of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged, which creates volatility in earnings. We actively evaluate market risk hedging needs and strategies to ensure our liquidity objectives are met under a range of market conditions. For example, during 2017, we restructured certain derivative hedges to decrease volatility from nonqualified interest rate derivatives and to help meet liquidity objectives under varying interest rate scenarios. As part of this restructuring, we replaced certain nonqualified derivatives with derivatives that qualify for hedge accounting treatment. In addition, we also entered into replication transactions using interest rate swaps, which are accounted for at amortized cost under statutory guidelines and are nonqualified derivatives under GAAP.
Certain direct or assumed variable annuity products with guaranteed minimum benefits contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). We use reinsurance and derivatives to hedge the market and other risks inherent in these variable annuity guarantees. Ceded reinsurance of direct variable annuity products with guaranteed minimum benefits generally contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). Ongoing refinement of the strategy may be required to take advantage of recently adopted NAIC rules related to a statutory accounting election for derivatives that mitigate interest rate sensitivity related to variable annuity guarantees. The restructured hedge strategy is classified as a macro hedge program, included in the non-VA program derivatives section of the table below, to protect our overall statutory capital from significant adverse economic conditions. The valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged, and can be a significant driver of net derivative gains (losses) and volatility in earnings, but does not have an economic impact on us.

44

Net Derivative Gains (Losses). Direct, assumed and ceded variable annuity embedded derivatives, as well as the associated freestanding derivative hedges, are referred to as “VA program derivatives.” All other embedded derivatives and all freestanding derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as “non-VA program derivatives.” The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives:
 
Years Ended December 31,
 
2018
 
2017
 
(In millions)
Non-VA program derivatives
 
 
 
Interest rate
$
(86
)
 
$
46

Foreign currency exchange rate
368

 
(400
)
Credit
(31
)
 
140

Equity
85

 
36

Non-VA embedded derivatives
445

 
(196
)
Total non-VA program derivatives
781

 
(374
)
VA program derivatives
 
 
 
Embedded derivatives - direct and assumed guarantees:
 
 
 
Market risks
173

 
677

Nonperformance risk adjustment
51

 
(65
)
Other risks
(293
)
 
121

    Total
(69
)
 
733

Embedded derivatives - ceded reinsurance:
 
 
 
Market and other risks
—

 
(110
)
    Total
—

 
(110
)
Freestanding derivatives hedging direct and assumed embedded derivatives
54

 
(593
)
    Total VA program derivatives
(15
)
 
30

Net derivative gains (losses)
$
766

 
$
(344
)
The favorable change in net derivative gains (losses) on non-VA program derivatives was $1.2 billion ($912 million, net of income tax). This was primarily due to the U.S. dollar strengthening relative to other key currencies in 2018 versus mostly weakening in 2017, favorably impacting foreign currency swaps that primarily hedge foreign currency-denominated bonds. Also, there was a change in the value of the underlying assets favorably impacting non-VA embedded derivatives related to funds withheld on a certain reinsurance agreement. These increases were partially offset by credit spreads widening in 2018 while narrowing in 2017, unfavorably impacting written credit default swaps used in replications and long-term interest rates increasing in 2018 while mostly decreasing in 2017, unfavorably impacting receive fixed interest rate swaps and interest rate total return swaps. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged.
The unfavorable change in net derivative gains (losses) on VA program derivatives was $45 million ($36 million, net of income tax). This was due to an unfavorable change of $161 million ($127 million, net of income tax) in market and other risks on direct and assumed variable annuity embedded derivatives, net of the impact of market and other risks on the ceded reinsurance embedded derivatives and net of freestanding derivatives hedging those risks, partially offset by a favorable change of $116 million ($92 million, net of income tax) in the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged. The primary change in other risks was due to the impact of variable annuity reinsurance recaptures, which occurred in the first quarter of 2017.
The aforementioned unfavorable change of $161 million ($127 million, net of income tax) was primarily driven by changes in market factors and other risks.

45

The primary changes in market factors are summarized as follows:
•
Key equity index levels decreased in 2018 and increased in 2017, contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. For example, the S&P 500 Index decreased 6% in 2018 and increased 19% in 2017.
•
Long-term U.S. interest rates increased in 2018 and mostly decreased in 2017, contributing to a favorable change in our embedded derivatives and an unfavorable change in our freestanding interest rate derivatives, which was partially mitigated by the restructuring of the VA hedging strategy. For example, the 30-year U.S. swap rate increased 30 basis points in 2018 and decreased 5 basis points in 2017.
We calculate the nonperformance risk adjustment as the change in the embedded derivative discounted at the risk-adjusted rate (which includes our own credit spread to the extent that the embedded derivative is in-the-money) less the change in the embedded derivative discounted at the risk-free rate. The favorable change in the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives of $116 million ($92 million, net of income tax) was primarily due to a favorable change of $96 million, before income tax, as a result of model changes and changes in capital market inputs, such as long-term interest rates and key equity index levels, on variable annuity guarantees, and a favorable change of $20 million, before income tax, related to changes in our own credit spread.
When equity index levels decrease in isolation, the direct and assumed variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk-free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives.
When the risk-free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk-free interest rate had remained constant. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk-free interest rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives.
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction.
Generally, a higher portion of the ceded reinsurance for GMIBs is accounted for as an embedded derivative as compared to the direct guarantees since the settlement provisions of the reinsurance agreements generally meet the accounting criteria of “net settlement.” This mismatch in accounting can lead to significant volatility in earnings, even though the risks inherent in these direct guarantees are fully covered by the ceded reinsurance.
Net Investment Gains (Losses). The unfavorable change in net investment gains (losses) of $181 million ($143 million, net of income tax) primarily reflects lower gains on sales of real estate joint ventures, partially offset by favorable foreign currency translation impacts on unhedged guaranteed investment contracts.
Actuarial Assumption Review and Certain Other Insurance Adjustments. Results for 2018 include a $120 million ($95 million, net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $3 million gain ($2 million, net of income tax) was recognized in net derivative gains (losses).
Of the $120 million charge, $49 million ($39 million, net of income tax) was related to DAC and $71 million ($56 million, net of income tax) was associated with reserves. The portion of the $120 million charge that was included in adjusted earnings was a gain of $49 million ($39 million, net of income tax).
The $3 million gain recognized in net derivative gains (losses) associated with our annual review of actuarial assumptions was included within the other risks in embedded derivatives caption in the table above.

46

As a result of our annual review of actuarial assumptions, changes were made to economic, biometric, policyholder behavior, and operational assumptions. The most significant impacts were due to operational assumption updates related to the projection of closed block results in the MetLife Holdings segment, and are summarized as follows:
•
Economic assumption updates resulted in net favorable changes to reserves, partially offset by unfavorable changes to DAC for a net favorable impact of $60 million ($47 million, net of income tax).
•
Changes to biometric assumptions resulted in net favorable changes to DAC, partially offset by unfavorable changes in reserves for a net favorable impact of $33 million ($26 million, net of income tax).
•
Changes in policyholder behavior assumptions resulted in net unfavorable changes to reserves, partially offset by favorable changes to DAC for a net unfavorable impact of $116 million ($91 million, net of income tax).
•
Changes in operational assumptions resulted in a net charge of $97 million ($77 million, net of income tax).
Results for 2017 include a $39 million ($25 million, net of 2017 income tax) gain associated with our annual review of actuarial assumptions related to reserves and DAC, of which an $18 million ($12 million, net of 2017 income tax) gain was recognized in net derivative gains (losses). Of the $39 million gain, a $106 million ($69 million, net of 2017 income tax) gain was associated with DAC, offset by a $67 million ($44 million, net of 2017 income tax) loss related to reserves. The portion of the $39 million gain that was included in adjusted earnings was $105 million ($68 million, net of 2017 income tax).
Certain other insurance adjustments recorded in 2018 include a $74 million ($59 million, net of income tax) charge due to a 2018 increase in our incurred but not reported (“IBNR”) life reserves, reflecting enhancements to our processes related to potential claims in our MetLife Holdings segment, and a favorable net insurance adjustment of $47 million ($37 million, net of income tax) resulting from reserve and DAC modeling improvements in our individual disability insurance business in our U.S. segment. These adjustments were included in adjusted earnings.
Taxes and Other Tax-Related Items. Income tax expense for the year ended December 31, 2018 was $173 million, or 4% of income (loss) before provision for income tax, compared with an income tax benefit of $561 million, or 19% of income (loss) before provision for income tax, for the year ended December 31, 2017. The Company’s effective tax rates differ from the U.S. statutory rate of 21% typically due to nontaxable investment income and tax credits for investments in low income housing. Our 2018 results include the following tax items: (i) a net tax-related benefit of $359 million related to the settlement of tax audits, which includes a $349 million benefit related to the tax treatment of a wholly-owned U.K. investment subsidiary of Metropolitan Life Insurance Company (comprised of a $168 million tax benefit and a $181 million interest benefit), (ii) an adjusted earnings benefit of $93 million related to U.S. Tax Reform (comprised of a $139 million tax benefit and a $46 million, net of income tax, reduction in net investment income), and (iii) a benefit of $36 million related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to Metropolitan Life Insurance Company. Our 2017 results include the following tax items: (i) a net benefit of $1.0 billion related to the impact of U.S. Tax Reform which includes a $1.4 billion tax benefit and an adjusted earnings charge of $360 (comprised of a $316 million tax charge and a $44 million, net of income tax, reduction in net investment income), and (ii) a benefit of $36 million from the finalization of certain tax audits.
Adjusted Earnings. As more fully described in “— Non-GAAP and Other Financial Disclosures,” we use adjusted earnings, which does not equate to net income (loss), as determined in accordance with GAAP, to analyze our performance, evaluate segment performance and allocate resources. We believe that the presentation of adjusted earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Adjusted earnings allows analysis of our performance and facilitates comparisons to industry results. Adjusted earnings should not be viewed as a substitute for net income (loss). Adjusted earnings increased $1.4 billion, net of income tax, to $3.8 billion, net of income tax, for the year ended December 31, 2018 from $2.4 billion, net of income tax, for the year ended December 31, 2017.

47

Reconciliation of net income (loss) to adjusted earnings
 
Years Ended December 31,
 
2018

2017
 
(In millions)
Net income (loss)
$
4,136

 
$
3,527

Less: Net investment gains (losses)
153

 
334

Less: Net derivative gains (losses)
766

 
(344
)
Less: Other adjustments to net income (1)
(538
)
 
(474
)
Less: Provision for income tax (expense) benefit
(79
)
 
1,574

Adjusted earnings
$
3,834

 
$
2,437

______________
(1)
See definitions and components of adjusted revenues and adjusted expenses under “— Non-GAAP and Other Financial Disclosures.” Further, see “— Reconciliation of revenues to adjusted revenues and expenses to adjusted expenses” for additional details on these adjustments by financial statement line item.
Reconciliation of revenues to adjusted revenues and expenses to adjusted expenses

 
Years Ended December 31,
 
2018
 
2017
 
(In millions)
Total revenues
$
42,161

 
$
37,225

Less: Adjustments from total revenues to adjusted revenues, in the line items indicated:
 
 
 
Net investment gains (losses)
153

 
334

Net derivative gains (losses)
766

 
(344
)
Universal life and investment-type product policy fees

93

 
97

Net investment income

(385
)
 
(370
)
Total adjusted revenues
$
41,534

 
$
37,508

Total expenses
$
37,852

 
$
34,259

Less: Adjustments from total expenses to adjusted expenses, in the line items indicated:

 
 
 
Policyholder benefits and claims and policyholder dividends
105

 
321

Interest credited to policyholder account balances
(4
)
 
(3
)
Amortization of DAC and VOBA
150

 
(118
)
Other expenses
(5
)
 
1

Total adjusted expenses
$
37,606

 
$
34,058


48

Consolidated Results — Adjusted Earnings
Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017
Unless otherwise stated, all amounts discussed below are net of income tax.
Overview. The primary drivers of the increase in adjusted earnings were the favorable impact of U.S. Tax Reform, other favorable tax items, higher net investment income due to higher investment yields and a larger asset base, net favorable refinements to DAC and certain insurance-related liabilities and favorable underwriting, partially offset by higher interest credited expenses and the net unfavorable change from our annual actuarial assumption review.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in a net increase in adjusted earnings of $902 million for 2018 compared to 2017, which includes a slight reduction in net investment income related to tax credit partnership investments. Our 2018 results include a tax benefit of $449 million, primarily related to the lower tax rate, as well as a tax benefit of $139 million to reflect a revision to the estimated impact from the enactment of U.S. Tax Reform. Our 2017 results include a tax charge of $316 million to reflect the enactment of U.S. Tax Reform.
Business Growth. Net investment income improved as a result of higher average invested assets in our U.S. segment, partially offset by a reduced asset base in our MetLife Holdings segment. The higher asset base in our U.S. segment was due to the impact of increased premiums and deposits, primarily from pension risk transfer sales, partially offset by a decrease in net flows from funding agreements. Consistent with the growth in average invested assets from positive net flows in the U.S segment, interest credited on long-duration and deposit-type liabilities increased. In our MetLife Holdings segment, negative net flows in our deferred annuities business and a decrease in universal life sales resulted in lower asset-based fee income, partially offset by lower deferred annuities interest credited expense, decreasing adjusted earnings. Higher interest credited on insurance liabilities in our MetLife Holdings segment also decreased adjusted earnings. In our U.S. segment, higher volume-related, direct and premium tax expenses were partially offset by lower pension and post-retirement expenses. However, this net increase in expenses, coupled with the increase due to the 2018 reinstatement of the annual health insurer fee under the Patient Protection and Health Care and Education Reconciliation Act of 2010, were more than offset by a corresponding increase in premiums, fees and other revenues. The combined impact of the items affecting our business growth, partially offset by lower DAC amortization, increased adjusted earnings by $11 million.
Market Factors. Market factors, including interest rate levels, variability in equity market returns, and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment yields were positively impacted by higher yields on fixed income securities and mortgage loans, higher returns on fair value option securities (“FVO Securities”) and real estate investments, lower investment expenses and higher prepayment fees. The resulting increase in net investment income was partially offset by lower returns on private equities, driven by a decrease in partnership distributions, as well as lower earnings on our securities lending program, primarily resulting from lower margins due to the impact of a flatter yield curve. The net increase in investment yields was more than offset by higher average interest credited rates, which drove an increase in interest credited expenses, primarily in our U.S. segment. The changes in market factors discussed above resulted in a $70 million decrease in adjusted earnings.
Underwriting and Actuarial Assumption Review. Favorable underwriting increased adjusted earnings by $119 million due to favorable morbidity experience of $77 million and favorable mortality experience of $42 million, primarily in our U.S. segment. The favorable morbidity experience in our U.S. segment was due to favorable renewal results, as well as lower claim incidence and severity in our group disability business, coupled with growth and favorable claims experience in our accident & health business, partially offset by less favorable claims experience in our dental and vision businesses. Favorable morbidity experience in our MetLife Holdings segment was primarily due to the impact of favorable rate actions in our long-term care business. Favorable mortality results in our U.S. segment were mainly due to our specialized life insurance, pension risk transfer, structured settlements and universal life businesses, partially offset by less favorable claim experience in our term life business. This was partially offset by unfavorable mortality results in our MetLife Holdings segment as a result of higher life claim severity. Our annual actuarial assumption review resulted in a decrease of $46 million in adjusted earnings when compared to 2017, primarily due to less favorable changes in operational assumptions, including updates to closed block projections, maintenance and other expenses.

49

Other Insurance Adjustments. Refinements to DAC and certain insurance-related liabilities, which were recorded in both 2018 and 2017, resulted in a $171 million increase in adjusted earnings. This includes the following 2018 refinements: (i) a favorable insurance adjustment in our U.S. segment resulting from reserve and DAC modeling improvements in our individual disability insurance business; (ii) a favorable reserve adjustment in our MetLife Holdings segment resulting from modeling improvements in our life business; and (iii) a charge due to an increase in our IBNR life reserves, reflecting enhancements to our processes related to potential claims in our MetLife Holdings segment. This also includes the following 2017 refinements in our MetLife Holdings segment: (i) the net unfavorable impact from a life reinsurance recapture; (ii) the unfavorable impact from the recapture and novation of, as well as adjustments to, assumed and ceded agreements covering certain variable annuity business; (iii) an unfavorable DAC adjustment related to certain assumed participating whole life business; and (iv) a favorable reserve adjustment resulting from modeling improvements in our life business reserving process; as well as a 2017 charge related to an increase in certain RIS policy reserves in our U.S. segment.
Expenses. Our unit cost initiative contributed to an improvement in adjusted earnings of $19 million primarily due to lower (i) Separation-related expenses, (ii) employee-related expenses, including expenses related to pension and postretirement benefits, (iii) expenses for interest on certain tax positions, as well as expenses incurred in 2017 related to the guaranty fund assessment for Penn Treaty Network America Insurance Company. These decreases in expenses were partially offset by increases in (i) litigation accruals, (ii) costs associated with corporate initiatives and projects, and (iii) other corporate-related expenses. The increase in costs associated with corporate initiatives and projects was primarily due to expenses associated with the continued investment in our unit cost initiative, partially offset by lease impairments in 2017 and lower costs associated with certain other enterprise-wide initiatives in 2018.
Taxes and Other Tax-Related Items. The Company’s effective tax rates differ from the U.S. statutory rate of 21% typically due to nontaxable investment income and tax credits for investments in low income housing. This incremental tax benefit was lower in 2018 compared to 2017 which resulted in a $48 million decrease in adjusted earnings. Our results for 2018 include the following tax items: (i) a tax-related benefit of $359 million related to the settlement of tax audits, which included a $349 million benefit related to the tax treatment of a wholly-owned U.K. investment subsidiary of Metropolitan Life Insurance Company (comprised of a $168 million tax benefit and a $181 million interest benefit), and (ii) a benefit of $36 million related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to Metropolitan Life Insurance Company. Our results for 2017 include a tax benefit of $36 million from tax audit settlements.
Effects of Inflation
Management believes that inflation has not had a material effect on the Company’s consolidated results of operations, except insofar as inflation may affect interest rates.
An increase in inflation could affect our business in several ways. During inflationary periods, the value of fixed income investments falls which could increase realized and unrealized losses. Inflation also increases expenses for labor and other materials, potentially putting pressure on profitability if such costs cannot be passed through in our product prices. Prolonged and elevated inflation could adversely affect the financial markets and the economy generally, and dispelling it may require governments to pursue a restrictive fiscal and monetary policy, which could constrain overall economic activity, inhibit revenue growth and reduce the number of attractive investment opportunities.

50

Investments
Investment Risks
Our 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 Investments Department, led by the Chief Investment Officer, manages investment risks using a risk control framework comprised of policies, procedures and limits, as discussed further below. The Investments Risk Committee, chaired by GRM, reviews and monitors investment risk limits and tolerances. We are exposed to the following primary sources of investment risks:
•
credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;
•
interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds;
•
liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions;
•
market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio, will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure, and, if credit spreads widen significantly or for an extended period of time, will likely result in higher OTTI. Credit spread tightening will reduce net investment income associated with purchases of fixed maturity securities AFS and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio;
•
currency risk, relating to the variability in currency exchange rates for foreign denominated investments including with respect to the U.K.’s planned withdrawal from the European Union. This risk relates to potential decreases in estimated fair value and net investment income resulting from changes in currency exchange rates versus the U.S. dollar. In general, the weakening of foreign currencies versus the U.S. dollar will adversely affect the estimated fair value of our foreign denominated investments; and
•
real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include, but are not limited to, market conditions, including the supply and demand of leasable commercial space, creditworthiness of borrowers and their tenants and joint venture partners, capital markets volatility, and changes in certain market factors: interest rates, commodity prices, farm incomes and U.S. housing market conditions.
We manage investment risk through in-house fundamental credit analysis of the underlying obligors, issuers, transaction structures and real estate properties. We also manage credit, market and liquidity risk through industry and issuer diversification and asset allocation. These risk limits, approved annually by a committee of directors that oversees our investment portfolio, promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure, as measured by our economic capital framework. For real estate assets, we manage credit and market risk through asset allocation and by diversifying by geography, property and product type. We manage interest rate risk as part of our ALM strategies. These strategies include maintaining an investment portfolio with diversified maturities that has a weighted average duration that reflects the duration of our estimated liability cash flow profile, and utilizing product design, such as the use of market value adjustment features and surrender charges, to manage interest rate risk. We also manage interest rate risk through proactive monitoring and management of certain NGEs of our products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. We hedge risk to foreign currency exchange rate fluctuation by hedging with foreign currency derivatives. We also use certain derivatives in the management of credit, interest rate, and market valuation risk.
We enter into market standard purchased and written credit default swap contracts. Payout under such contracts is triggered by certain credit events experienced by the referenced entities. For credit default swaps covering North American corporate issuers, credit events typically include bankruptcy and failure to pay on borrowed money. For European corporate issuers, credit events typically also include involuntary restructuring. With respect to credit default contracts on sovereign debt, credit events typically include failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association determines that a credit event has occurred.

51

We use purchased credit default swaps to mitigate credit risk in our investment portfolio. Generally, we purchase credit protection by entering into credit default swaps referencing the issuers of specific assets we own. In certain cases, basis risk exists between these credit default swaps and the specific assets we own. For example, we may purchase credit protection on a macro basis to reduce exposure to specific industries or other portfolio concentrations. In such instances, the referenced entities and obligations under the credit default swaps may not be identical to the individual obligors or securities in our investment portfolio. In addition, our purchased credit default swaps may have shorter tenors than the underlying investments they are hedging, which gives us more flexibility in managing credit exposures. We believe that our purchased credit default swaps serve as economic hedges which mitigate our credit exposure.
Current Environment
The global economy and markets continue to be affected by the changing financial and economic environment. As an insurance company with significant operations in the United States, we are affected by the monetary policy of the Federal Reserve Board in the United States, and also the monetary policy of central banks around the world due to the diversification of our investment portfolio. See “— Selected Country and Sector Investments.” Citing a strengthening economy, the Federal Reserve Board has continued along its stated path of balance sheet tapering and the Federal Reserve Board’s Federal Open Market Committee has continued to increase the federal funds rate, most recently in December 2018 and has since left interest rates unchanged. The Federal Reserve, as well as other central banks, may take further actions, including with respect to the level of interest rates, which may have an impact on the pricing levels of risk-bearing investments and may adversely impact our business operations, investment portfolio and derivatives. The current environment continues to impact our net investment income, net investment gains (losses), net derivative gains (losses), level of unrealized gains (losses) within the various asset classes in our investment portfolio, and our level of investment in lower yielding cash equivalents, short-term investments and government securities. See “Risk Factors — Economic Environment and Capital Markets Risks — Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition.”
European Investments
We maintain general account investments in Europe in order to diversify our global portfolio. In Europe, we have proactively mitigated risk in both direct and indirect exposures by investing in a diversified portfolio of high quality investments with a focus on the higher-rated countries, including the U.K., France, the Netherlands and Germany. The sovereign and agency debt of these countries continues to maintain investment grade credit ratings from all major rating agencies. European sovereign and agency fixed maturity securities AFS, at estimated fair value, were $1.3 billion at December 31, 2018. Our European corporate securities (fixed maturity and perpetual hybrid securities classified as non-redeemable preferred stock) are invested in a diversified portfolio of primarily non-financial services securities, which comprised $12.6 billion, or 72% of European corporate securities, at estimated fair value, at December 31, 2018. Of these European fixed maturity securities AFS, 93% were investment grade and, for the 7% that were below investment grade, the majority were non-financial services corporate securities at December 31, 2018. European financial services corporate securities, at estimated fair value, were $4.9 billion (including $2.3 billion within the banking sector) with 98% investment grade, at December 31, 2018. Total European fixed maturity securities AFS, at estimated fair value, were $19.0 billion at December 31, 2018, including $285 million of Structured Securities (see “— Fixed Maturity Securities AFS and Equity Securities”).
Selected Country and Sector Investments
We have country specific exposure to volatility, as we maintain general account investments in the selected countries through our global portfolio diversification. In addition, we have sector specific exposure to volatility, including the impact of lower oil prices and variability in oil prices, on the energy sector.

52

Selected Country: The following table presents a summary of fixed maturity securities AFS in these countries. The information below is presented on a country of risk basis (e.g. the country where the issuer primarily conducts business). Sovereign includes government and agency.
 
Selected Country Fixed Maturity Securities AFS at December 31, 2018
 
Sovereign  
 
Financial
Services
 
Non-Financial
Services
 
Structured
 
Total (1)
 
(Dollars in millions)
United Kingdom
$
—

 
$
2,279

 
$
6,110

 
$
268

 
$
8,657

Turkey
66

 
5

 
69

 
—

 
140

Argentina
17

 
—

 
2

 
—

 
19

Total
$
83

 
$
2,284

 
$
6,181

 
$
268

 
$
8,816

Investment grade %
—
%
 
99
%
 
92
%
 
84
%
 
93
%
______________
(1)
The par value and amortized cost of these selected country fixed maturity securities AFS were $8.4 billion and $9.3 billion, respectively, at December 31, 2018.
Selected Sector: Our exposure to energy sector fixed maturity securities AFS was $6.0 billion (comprised of fixed maturity securities AFS of $6.0 billion at estimated fair value and related net written credit default swaps of $48 million at notional value), of which 83% were investment grade, with unrealized losses of $33 million at December 31, 2018. We maintain a diversified energy sector fixed maturities securities AFS portfolio across sub-sectors and issuers. This portfolio comprised 2% of total investments at December 31, 2018.
We manage direct and indirect investment exposure in the selected countries and the energy sector through fundamental credit analysis and we continually monitor and adjust our level of investment exposure. We do not expect that our general account investments in these countries or the energy sector will have a material adverse effect on our results of operations or financial condition.
Investment Portfolio Results
The reconciliation of net investment income under GAAP to net investment income, as reported on an adjusted earnings basis, is presented below.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Net investment income — GAAP basis
$
10,919

 
$
10,513

 
$
11,083

  Investment hedge adjustments
325

 
370

 
531

  Other
60

 
—

 
—

Net investment income, as reported on an adjusted basis (1)
$
11,304

 
$
10,883

 
$
11,614

__________________
(1)
See “— Non-GAAP and Other Financial Disclosures — Adjusted revenues and adjusted expenses — Net investment income” for a discussion of the adjustments made to net investment income under GAAP in calculating net investment income, as reported on an adjusted basis.

53

The following yield table presents our investment portfolio results for the periods indicated. We calculate yields on our investment portfolio using the non-GAAP performance metric of net investment income, as reported on an adjusted basis. Net investment income, as reported on an adjusted basis, includes the impact of changes in foreign currency exchange rates. This yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
Yield% (1)
 
Amount
 
Yield% (1)
 
Amount
 
Yield% (1)
 
Amount
 
(Dollars in millions)
Fixed maturity securities AFS (2) (3)
4.83

%
$
7,029

 
4.78

%
$
6,919

 
4.92

%
$
7,578

Mortgage loans (3)
4.66

%
2,822

 
4.59

%
2,647

 
4.63

%
2,539

Real estate and real estate joint ventures
3.21

%
211

 
2.58

%
169

 
3.61

%
229

Policy loans
4.92

%
297

 
5.20

%
310

 
5.18

%
404

Equity securities
4.66

%
41

 
5.53

%
97

 
4.83

%
89

Other limited partnership interests
13.89

%
580

 
16.43

%
625

 
10.40

%
413

Cash and short-term investments
(0.08
)
%
(1
)
 
(1.27
)
%
(10
)
 
0.40

%
7

Other invested assets
 
 
622

 
 
 
521

 
 
 
744

Investment income
4.98

%
11,601

 
4.94

%
11,278

 
5.05

%
12,003

Investment fees and expenses
(0.13
)
 
(297
)
 
(0.17
)
 
(395
)
 
(0.16
)
 
(389
)
Net investment income, as reported on an adjusted basis
4.85

%
$
11,304

 
4.77

%
$
10,883

 
4.89

%
$
11,614

______________
(1)
Yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, annuities funding structured settlement claims, freestanding derivative assets, collateral received from derivative counterparties, and the effects of consolidating certain variable interest entities (“VIEs”) under GAAP that are treated as consolidated securitization entities (“CSEs”). A yield is not presented for other invested assets, as it is not considered a meaningful measure of performance for this asset class.
(2)
Investment income from fixed maturity securities AFS includes amounts from FVO Securities of $22 million for the year ended December 31, 2018. There were no FVO Securities and related investment income as of and for the years ended December 31, 2017 and 2016.
(3)
Investment income from fixed maturity securities AFS and mortgage loans includes prepayment fees.
See “— Results of Operations — Consolidated Results — Adjusted Earnings” for an analysis of the period over period changes in investment portfolio results.

54

Fixed Maturity Securities AFS and Equity Securities
The following table presents fixed maturity securities AFS and equity securities by type (public or private) and information about perpetual and redeemable securities held at:
 
December 31, 2018
 
December 31, 2017
 
 
Estimated
Fair
Value
 
% of Total
 
Estimated
Fair
Value
 
% of Total
 
 
(Dollars in millions)
 
Fixed maturity securities AFS
 
 
 
 
 
 
 
 
  Publicly-traded
$
125,211

 
78.7
%
$
136,376

 
80.1
%
  Privately-placed
33,862

 
21.3
 
33,896

 
19.9
 
    Total fixed maturity securities AFS
$
159,073

 
100.0
%
$
170,272

 
100.0
%
    Percentage of cash and invested assets
60.2
%
 
 
 
63.0
%
 
 
 
Equity securities
 
 
 
 
 
 
 
 
  Publicly-traded
$
637

 
82.4
%
$
735

 
44.3
%
  Privately-held
136

 
17.6
 
923

 
55.7
 
    Total equity securities
$
773

 
100.0
%
$
1,658

 
100.0
%
    Percentage of cash and invested assets
0.3
%
 
 
 
0.6
%
 
 
 
Perpetual and redeemable securities
 
 
 
 
 
 
 
 
Perpetual securities included within fixed maturity securities AFS and equity securities
$
304

 
 
 
$
353

 
 
 
Redeemable preferred stock with a stated maturity included within fixed maturity securities AFS
$
642

 
 
 
$
649

 
 
 
Included within fixed maturity securities AFS are structured securities including residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”) and commercial mortgage-backed securities (“CMBS”) (collectively, “Structured Securities”).
Perpetual securities are included within fixed maturity securities AFS and equity securities. Upon acquisition, we classify perpetual securities that have attributes of both debt and equity as fixed maturity securities AFS if the securities have an interest rate step-up feature which, when combined with other qualitative factors, indicates that the securities have more debt-like characteristics; while those with more equity-like characteristics are classified as equity securities. Many of such securities, commonly referred to as “perpetual hybrid securities,” have been issued by non-U.S. financial institutions that are accorded the highest two capital treatment categories by their respective regulatory bodies (i.e. core capital, or “Tier 1 capital” and perpetual deferrable securities, or “Upper Tier 2 capital”).
Redeemable preferred stock with a stated maturity is included within fixed maturity securities AFS. These securities, which are commonly referred to as “capital securities,” primarily have cumulative interest deferral features and are primarily issued by U.S. financial institutions.

55

Valuation of Securities. We are responsible for the determination of the estimated fair value of our investments. We determine the estimated fair value of publicly-traded securities after considering one of three primary sources of information: quoted market prices in active markets, independent pricing services, or independent broker quotations. We determine the estimated fair value of privately-placed securities after considering one of three primary sources of information: market standard internal matrix pricing, market standard internal discounted cash flow techniques, or independent pricing services (after we determine the independent pricing services’ use of available observable market data). For publicly-traded securities, the number of quotations obtained varies by instrument and depends on the liquidity of the particular instrument. Generally, we obtain prices from multiple pricing services to cover all asset classes and obtain multiple prices for certain securities, but ultimately utilize the price with the highest placement in the fair value hierarchy. Independent pricing services that value these instruments use market standard valuation methodologies based on data about market transactions and inputs from multiple pricing sources that are market observable or can be derived principally from or corroborated by observable market data. See Note 10 of the Notes to the Consolidated Financial Statements for a discussion of the types of market standard valuation methodologies utilized and key assumptions and observable inputs used in applying these standard valuation methodologies. When a price is not available in the active market or through an independent pricing service, management values the security primarily using market standard internal matrix pricing or discounted cash flow techniques, and non-binding quotations from independent brokers who are knowledgeable about these securities. Independent non-binding broker quotations utilize inputs that may be difficult to corroborate with observable market data. As shown in the following section, less than 1% of our fixed maturity securities AFS were valued using non-binding quotations from independent brokers at December 31, 2018.
Senior management, independent of the trading and investing functions, is responsible for the oversight of control systems and valuation policies for securities, mortgage loans and derivatives. On a quarterly basis, new transaction types and markets are reviewed and approved to ensure that observable market prices and market-based parameters are used for valuation, wherever possible, and for determining that valuation adjustments, when applied, are based upon established policies and are applied consistently over time. Senior management oversees the selection of independent third-party pricing providers and the controls and procedures to evaluate third-party pricing.
We review our valuation methodologies on an ongoing basis and revise those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with fair value accounting standards through controls designed to ensure valuations represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. We ensure that prices received from independent brokers, also referred to herein as “consensus pricing,” are representative of estimated fair value by considering such pricing relative to our knowledge of the current market dynamics and current pricing for similar financial instruments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio.
We also apply a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained, or an internally developed valuation is prepared. Internally developed valuations of current estimated fair value, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio; accordingly, overrides were not material. This is, in part, because internal estimates are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used.
We have reviewed the significance and observability of inputs used in the valuation methodologies to determine the appropriate fair value hierarchy level for each of our securities. Based on the results of this review and investment class analysis, each instrument is categorized as Level 1, 2 or 3 based on the lowest level significant input to its valuation. See Note 10 of the Notes to the Consolidated Financial Statements for information regarding the valuation techniques and inputs by level within the three-level fair value hierarchy by major classes of invested assets.

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Fair Value of Fixed Maturity Securities AFS and Equity Securities
Fixed maturity securities AFS and equity securities measured at estimated fair value on a recurring basis and their corresponding fair value pricing sources are as follows:
 
December 31, 2018
 
Fixed Maturity
Securities AFS
 
Equity
Securities
 
(Dollars in millions)
Level 1
 
 
 
 
 
 
 
Quoted prices in active markets for identical assets
$
12,310

 
7.7
%
 
$
341

 
44.1
%
Level 2
 
 
 
 
 
 
 
Independent pricing sources
134,701

 
84.7

 
41

 
5.3

Internal matrix pricing or discounted cash flow techniques
1,410

 
0.9

 
35

 
4.5

Significant other observable inputs
136,111

 
85.6

 
76

 
9.8

Level 3
 
 
 
 
 
 
 
Independent pricing sources
7,692

 
4.8

 
255

 
33.0

Internal matrix pricing or discounted cash flow techniques
2,780

 
1.8

 
96

 
12.4

Independent broker quotations
180

 
0.1

 
5

 
0.7

Significant unobservable inputs
10,652

 
6.7

 
356

 
46.1

Total estimated fair value
$
159,073

 
100.0
%
 
$
773

 
100.0
%
See Note 10 of the Notes to the Consolidated Financial Statements for the fixed maturity securities AFS and equity securities fair value hierarchy.
The majority of the Level 3 fixed maturity securities AFS and equity securities were concentrated in three sectors: U.S. and foreign corporate securities and RMBS at December 31, 2018. During the year ended December 31, 2018, Level 3 fixed maturity securities AFS decreased by $1.0 billion, or 9%. The decrease was driven by transfers out of Level 3 in excess of transfers into Level 3 and a decrease in estimated fair value recognized in other comprehensive income (loss), partially offset by purchases in excess of sales and an increase in estimated fair value recognized in net income.
See “— Fixed Maturity Securities AFS and Equity Securities — Valuation of Securities” for further information regarding the composition of fair value pricing sources for securities. See Note 10 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for securities measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs; transfers into and/or out of Level 3; and further information about the valuation approaches and inputs by level and by major classes of invested assets that affect the amounts reported above.
Fixed Maturity Securities AFS
See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for information about fixed maturity securities AFS by sector, contractual maturities and continuous gross unrealized losses.
Fixed Maturity Securities AFS Credit Quality — Ratings
The Securities Valuation Office of the NAIC evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called “NAIC designations.” If no designation is available from the NAIC, then, as permitted by the NAIC, an internally developed designation is used. The NAIC designations are generally similar to the credit quality ratings of the NRSRO for fixed maturity securities AFS, except for certain Structured Securities as described below. Rating agency ratings are based on availability of applicable ratings from rating agencies on the NAIC credit rating provider list, including Moody’s, S&P, Fitch, Dominion Bond Rating Service, A.M. Best, Kroll Bond Rating Agency, Egan Jones Ratings Company and Morningstar Credit Ratings, LLC (“Morningstar”). If no rating is available from a rating agency, then an internally developed rating is used.

57

The NAIC has adopted revised methodologies for certain Structured Securities comprised of non-agency RMBS, CMBS and ABS. The NAIC’s objective with the revised methodologies for these Structured Securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such Structured Securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from Structured Securities. We apply the revised NAIC methodologies to Structured Securities held by Metropolitan Life Insurance Company as it maintains the NAIC statutory basis of accounting. The NAIC’s present methodology is to evaluate Structured Securities held by insurers using the revised NAIC methodologies on an annual basis. If Metropolitan Life Insurance Company acquires Structured Securities that have not been previously evaluated by the NAIC, but are expected to be evaluated by the NAIC in the upcoming annual review, an internally developed designation is used until an NAIC designation becomes available. NAIC designations may not correspond to NRSRO ratings.
The following table presents total fixed maturity securities AFS by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the revised NAIC methodologies as described above, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at:
 
 
 
 
December 31,
 
 
 
 
 
2018
 
 
2017
 
NAIC
Designation
 
NRSRO Rating
 
Amortized
Cost
 
Unrealized
Gain (Loss)
 
Estimated
Fair
Value
 
% of
Total
 
 
Amortized
Cost
 
Unrealized
Gain (Loss)
 
Estimated
Fair
Value
 
% of
Total
 
 
 
 
 
(Dollars in millions)
 
1
 
Aaa/Aa/A
 
$
97,686

 
$
4,544

 
$
102,230

 
64.3
%
 
$
102,912

 
$
9,074

 
$
111,986

 
65.8
%
2
 
Baa
 
45,384

 
(97
)
 
45,287

 
28.5
 
 
42,238

 
3,094

 
45,332

 
26.6
 
 
 
Subtotal investment grade
 
143,070

 
4,447

 
147,517

 
92.8
 
 
145,150

 
12,168

 
157,318

 
92.4
 
3
 
Ba
 
7,824

 
(294
)
 
7,530

 
4.7
 
 
8,231

 
258

 
8,489

 
5.0
 
4
 
B
 
3,676

 
(188
)
 
3,488

 
2.2
 
 
3,789

 
53

 
3,842

 
2.2
 
5
 
Caa and lower
 
590

 
(66
)
 
524

 
0.3
 
 
632

 
(13
)
 
619

 
0.4
 
6
 
In or near default
 
15

 
(1
)
 
14

 
—
 
 
7

 
(3
)
 
4

 
—
 
 
 
Subtotal below investment grade
 
12,105

 
(549
)
 
11,556

 
7.2
 
 
12,659

 
295

 
12,954

 
7.6
 
 
 
Total fixed maturity securities AFS
 
$
155,175

 
$
3,898

 
$
159,073

 
100.0
%
 
$
157,809

 
$
12,463

 
$
170,272

 
100.0
%

58

The following tables present total fixed maturity securities AFS, based on estimated fair value, by sector classification and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the revised NAIC methodologies as described above:
 
Fixed Maturity Securities AFS — by Sector & Credit Quality Rating
NAIC Designation:
1
 
2
 
3
 
4
 
5
 
6
 
Total
Estimated
Fair Value
NRSRO Rating:
Aaa/Aa/A
 
Baa
 
Ba
 
B
 
Caa and
Lower
 
In or Near
Default
 
 
(Dollars in millions)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
21,380

 
$
25,190

 
$
5,024

 
$
2,769

 
$
432

 
$
7

 
$
54,802

U.S. government and agency
29,812

 
349

 
—

 
—

 
—

 
—

 
30,161

Foreign corporate
7,111

 
16,640

 
1,631

 
537

 
44

 
—

 
25,963

RMBS
22,186

 
334

 
122

 
86

 
3

 
6

 
22,737

ABS
7,728

 
629

 
150

 
20

 
—

 
—

 
8,527

Municipals
6,703

 
210

 
34

 
—

 
—

 
—

 
6,947

CMBS
5,367

 
28

 
6

 
—

 
43

 
—

 
5,444

Foreign government
1,943

 
1,907

 
563

 
76

 
2

 
1

 
4,492

Total fixed maturity securities AFS
$
102,230

 
$
45,287

 
$
7,530

 
$
3,488

 
$
524

 
$
14

 
$
159,073

Percentage of total
64.3
%
 
28.5
%
 
4.7
%
 
2.2
%
 
0.3
%
 
—
%
 
100.0
%
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
23,330

 
$
25,769

 
$
5,379

 
$
3,043

 
$
566

 
$
3

 
$
58,090

U.S. government and agency
38,279

 
266

 
—

 
—

 
—

 
—

 
38,545

Foreign corporate
6,634

 
16,442

 
1,889

 
590

 
41

 
—

 
25,596

RMBS
22,087

 
283

 
206

 
49

 
9

 
—

 
22,634

ABS
7,106

 
590

 
169

 
—

 
1

 
—

 
7,866

Municipals
7,296

 
199

 
55

 
—

 
—

 
1

 
7,551

CMBS
5,437

 
6

 
45

 
—

 
—

 
—

 
5,488

Foreign government
1,817

 
1,777

 
746

 
160

 
2

 
—

 
4,502

Total fixed maturity securities AFS
$
111,986

 
$
45,332

 
$
8,489

 
$
3,842

 
$
619

 
$
4

 
$
170,272

Percentage of total
65.8
%
 
26.6
%
 
5.0
%
 
2.2
%
 
0.4
%
 
—
%
 
100.0
%
U.S. and Foreign Corporate Fixed Maturity Securities AFS
We maintain a diversified portfolio of corporate fixed maturity securities AFS across industries and issuers. This portfolio does not have any exposure to any single issuer in excess of 1% of total investments and the top 10 holdings comprised 2% of total investments at both December 31, 2018 and 2017. The tables below present our U.S. and foreign corporate securities holdings by industry at:
 
December 31,
 
2018
 
2017
 
Estimated
Fair
Value
 
% of
Total
 
Estimated
Fair
Value
 
% of
Total
 
(Dollars in millions)
Industrial
$
25,746

 
31.9
%
 
$
27,302

 
32.6
%
Consumer
18,291

 
22.6

 
19,671

 
23.5

Finance
15,444

 
19.1

 
14,678

 
17.6

Utility
13,467

 
16.7

 
13,636

 
16.3

Communications
6,153

 
7.6

 
6,725

 
8.0

Other
1,664

 
2.1

 
1,674

 
2.0

Total
$
80,765

 
100.0
%
 
$
83,686

 
100.0
%

59

Structured Securities 
We held $36.7 billion and $36.0 billion of Structured Securities, at estimated fair value, at December 31, 2018 and 2017, respectively, as presented in the RMBS, ABS and CMBS sections below.
RMBS 
Our RMBS holdings by security type, risk profile and ratings profile are as follows at:
 
December 31,
 
2018
 
2017
 
Estimated
Fair
Value
 
% of
Total
 
Net
Unrealized
Gains (Losses)
 
Estimated
Fair
Value
 
% of
Total
 
Net
Unrealized
Gains (Losses)
 
(Dollars in millions)
By security type:
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
12,622

 
55.5
%
 
$
678

 
$
13,026

 
57.6
%
 
$
848

Pass-through securities
10,115

 
44.5

 
(127
)
 
9,608

 
42.4

 
51

Total RMBS
$
22,737

 
100.0
%
 
$
551

 
$
22,634

 
100.0
%
 
$
899

By risk profile:
 
 
 
 
 
 
 
 
 
 
 
Agency
$
15,088

 
66.4
%
 
$
21

 
$
14,192

 
62.7
%
 
$
236

Prime
1,037

 
4.6

 
45

 
1,139

 
5.0

 
71

Alt-A
3,238

 
14.2

 
267

 
4,036

 
17.8

 
362

Sub-prime
3,374

 
14.8

 
218

 
3,267

 
14.5

 
230

Total RMBS
$
22,737

 
100.0
%
 
$
551

 
$
22,634

 
100.0
%
 
$
899

Ratings profile:
 
 
 
 
 
 
 
 
 
 
 
Rated Aaa/AAA
$
15,800

 
69.5
%
 
 
 
$
14,608

 
64.5
%
 
 
Designated NAIC 1
$
22,186

 
97.6
%
 
 
 
$
22,087

 
97.6
%
 
 
Collateralized mortgage obligations are structured by dividing the cash flows of mortgage loans into separate pools or tranches of risk that create multiple classes of bonds with varying maturities and priority of payments. Pass-through mortgage-backed securities are secured by a mortgage loan or collection of mortgage loans. The monthly mortgage loan payments from homeowners pass from the originating bank through an intermediary, such as a government agency or investment bank, which collects the payments and, for a fee, remits or passes these payments through to the holders of the pass-through securities.
The majority of our RMBS holdings were rated Aaa/AAA by Moody’s, S&P or Fitch; and were designated NAIC 1 by the NAIC at December 31, 2018 and 2017. Agency RMBS were guaranteed or otherwise supported by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association. Non-agency RMBS include prime, alternative residential mortgage loans (“Alt-A”) and sub-prime RMBS. Prime residential mortgage lending includes the origination of residential mortgage loans to the most creditworthy borrowers with high quality credit profiles. Alt-A is a classification of mortgage loans where the risk profile of the borrower is between prime and sub-prime. Sub-prime mortgage lending is the origination of residential mortgage loans to borrowers with weak credit profiles.
Included within prime and Alt-A RMBS are re-securitization of real estate mortgage investment conduit (“Re-REMIC”) securities. Re-REMIC RMBS involve the pooling of previous issues of prime and Alt-A RMBS and restructuring the combined pools to create new senior and subordinated securities. The credit enhancement on the senior tranches is improved through the re-securitization.
Historically, we have managed our exposure to sub-prime RMBS holdings by focusing primarily on senior tranche securities, stress testing the portfolio with severe loss assumptions, and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2). The estimated fair value of our sub-prime RMBS holdings purchased since 2012 was $3.1 billion and $3.0 billion at December 31, 2018 and 2017, respectively, with unrealized gains (losses) of $193 million at both December 31, 2018 and 2017.

60

ABS 
Our ABS holdings are diversified both by collateral type and by issuer. The following table presents our ABS holdings by collateral type and ratings profile at:
 
December 31,
 
2018
 
2017
 
Estimated
Fair
Value
 
% of
Total
 
Net
Unrealized
Gains (Losses)
 
Estimated
Fair
Value
 
% of
Total
 
Net
Unrealized
Gains (Losses)
 
(Dollars in millions)
By collateral type:
 
 
 
 
 
 
 
 
 
 
 
Collateralized debt obligations
$
5,402

 
63.4
%
 
$
(88
)
 
$
4,557

 
57.9
%
 
$
49

Student loans
821

 
9.6

 
13

 
862

 
11.0

 
2

Automobile loans
532

 
6.2

 
—

 
642

 
8.2

 
—

Consumer loans
413

 
4.9

 
3

 
427

 
5.4

 
4

Credit card loans
352

 
4.1

 
1

 
790

 
10.0

 
—

Foreign residential loans
233

 
2.7

 
(3
)
 
110

 
1.4

 
(2
)
Other loans
774

 
9.1

 
2

 
478

 
6.1

 
5

Total
$
8,527

 
100.0
%
 
$
(72
)
 
$
7,866

 
100.0
%
 
$
58

Ratings profile:
 
 
 
 
 
 
 
 
 
 
 
Rated Aaa/AAA
$
4,543

 
53.3
%
 
 
 
$
4,040

 
51.4
%
 
 
Designated NAIC 1
$
7,728

 
90.6
%
 
 
 
$
7,106

 
90.3
%
 
 
CMBS
Our CMBS holdings are diversified by vintage year. The following tables present our CMBS holdings by NRSRO rating and vintage year at:
 
December 31, 2018
 
Aaa
 
Aa
 
A
 
Baa
 
Below
Investment
Grade
 
Total
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
(Dollars in millions)
2003 - 2011
$
152

 
$
154

 
$
23

 
$
22

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
175

 
$
176

2012
182

 
183

 
175

 
173

 
198

 
195

 
7

 
7

 
—

 
—

 
562

 
558

2013
403

 
417

 
419

 
426

 
198

 
199

 
—

 
—

 
59

 
43

 
1,079

 
1,085

2014
147

 
146

 
310

 
309

 
75

 
75

 
—

 
—

 
—

 
—

 
532

 
530

2015
382

 
376

 
59

 
59

 
28

 
27

 
—

 
—

 
—

 
—

 
469

 
462

2016
211

 
208

 
50

 
47

 
10

 
10

 
—

 
—

 
—

 
—

 
271

 
265

2017
460

 
454

 
381

 
371

 
166

 
161

 
—

 
—

 
—

 
—

 
1,007

 
986

2018
897

 
904

 
334

 
334

 
145

 
144

 
—

 
—

 
—

 
—

 
1,376

 
1,382

Total
$
2,834

 
$
2,842

 
$
1,751

 
$
1,741

 
$
820

 
$
811

 
$
7

 
$
7

 
$
59

 
$
43

 
$
5,471

 
$
5,444

Ratings
Distribution
 
 
52.2
%
 
 
 
32.0
%
 
 
 
14.9
%
 
 
 
0.1
%
 
 
 
0.8
%
 
 
 
100.0
%

61

 
December 31, 2017
 
Aaa
 
Aa
 
A
 
Baa
 
Below
Investment
Grade
 
Total
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
(Dollars in millions)
2003 - 2011
$
170

 
$
177

 
$
30

 
$
31

 
$
7

 
$
7

 
$
5

 
$
5

 
$
—

 
$
—

 
$
212

 
$
220

2012
228

 
234

 
197

 
202

 
196

 
201

 
7

 
7

 
—

 
—

 
628

 
644

2013
460

 
486

 
475

 
493

 
207

 
212

 
60

 
45

 
—

 
—

 
1,202

 
1,236

2014
281

 
289

 
336

 
342

 
74

 
77

 
—

 
—

 
—

 
—

 
691

 
708

2015
961

 
977

 
174

 
179

 
47

 
48

 
—

 
—

 
—

 
—

 
1,182

 
1,204

2016
282

 
285

 
47

 
46

 
11

 
10

 
—

 
—

 
—

 
—

 
340

 
341

2017
543

 
543

 
428

 
428

 
164

 
164

 
—

 
—

 
—

 
—

 
1,135

 
1,135

Total
$
2,925

 
$
2,991

 
$
1,687

 
$
1,721

 
$
706

 
$
719

 
$
72

 
$
57

 
$
—

 
$
—

 
$
5,390

 
$
5,488

Ratings
Distribution
 
 
54.5
%
 
 
 
31.4
%
 
 
 
13.1
%
 
 
 
1.0
%
 
 
 
—
%
 
 
 
100.0
%
The tables above reflect NRSRO ratings including Moody’s, S&P, Fitch and Morningstar. CMBS designated NAIC 1 were 98.6% and 99.1% of total CMBS at December 31, 2018 and 2017, respectively.
Evaluation of Fixed Maturity Securities AFS for OTTI and Evaluating Temporarily Impaired Fixed Maturity Securities AFS
See Note 8 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities AFS for OTTI and evaluation of temporarily impaired fixed maturity securities AFS.
OTTI Losses on Fixed Maturity Securities AFS Recognized in Earnings
See Note 8 of the Notes to the Consolidated Financial Statements for information about OTTI losses and gross gains and gross losses on fixed maturity securities AFS sold.
Overview of OTTI Losses on Securities Recognized in Earnings
Credit-related impairments of fixed maturity securities AFS were $23 million, $6 million and $89 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Explanations of changes in fixed maturity securities AFS and equity securities impairments are as follows:
Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017
Overall OTTI losses recognized in earnings on fixed maturity securities AFS were $23 million for the year ended December 31, 2018, as compared to $6 million for the year ended December 31, 2017. The most significant increase in OTTI losses were in U.S. and foreign corporate securities, which comprised $23 million for the year ended December 31, 2018, as compared to $5 million for the year ended December 31, 2017. An increase of $18 million in OTTI losses was mainly concentrated in consumer securities and was a result of issuer specific factors.
In 2018, we adopted new guidance under which equity securities are no longer evaluated for impairment, rather are measured at fair value through net income. Accordingly, there were no equity securities impairments for the year ended December 31, 2018. See Note 1 of the Notes to the Consolidated Financial Statements.
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overall OTTI losses recognized in earnings on fixed maturity securities AFS were $6 million for the year ended December 31, 2017, as compared to $97 million for the year ended December 31, 2016. The most significant decrease in OTTI losses were in U.S. and foreign corporate securities, which comprised $5 million for the year ended December 31, 2017, as compared to $81 million for the year ended December 31, 2016. A decrease of $76 million in OTTI losses was concentrated in industrial securities and was the result of lower oil prices impacting the energy sector in 2016.
Overall OTTI losses recognized in earnings on equity securities were $24 million for the year ended December 31, 2017, as compared to $75 million for the year ended December 31, 2016, a decrease of $51 million, reflecting the impact of lower oil prices impacting the energy sector in 2016.

62

Future Impairments
Future OTTI on fixed maturity securities AFS will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, and foreign currency exchange rates. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
See Note 1 of the Notes to the Consolidated Financial Statements for a description of new guidance to be adopted in 2020 regarding the measurement of credit losses on financial instruments.
Securities Lending and Repurchase Agreements
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. In addition, we participate in short-term repurchase agreement transactions with unaffiliated financial institutions.
See “— Liquidity and Capital Resources — Liquidity and Capital Uses — Securities Lending,” “— Liquidity and Capital Resources — Liquidity and Capital Uses — Repurchase Agreements” and Note 8 of the Notes to the Consolidated Financial Statements for information regarding our securities lending program and our repurchase agreement transactions.
Mortgage Loans
Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Mortgage loans and the related valuation allowances are summarized as follows at:
 
December 31,
 
2018
 
2017
 
Recorded
Investment
 
% of
Total
 
Valuation
Allowance
 
% of
Recorded
Investment
 
Recorded
Investment
 
% of
Total
 
Valuation
Allowance
 
% of
Recorded
Investment
 
(Dollars in millions)
Commercial
$
38,123

 
59.9
%
 
$
190

 
0.5
%
 
$
35,440

 
60.9
%
 
$
173

 
0.5
%
Agricultural
14,164

 
22.2

 
44

 
0.3
%
 
12,712

 
21.8

 
40

 
0.3
%
Residential
11,392

 
17.9

 
57

 
0.5
%
 
10,058

 
17.3

 
58

 
0.6
%
Total
$
63,679

 
100.0
%
 
$
291

 
0.5
%
 
$
58,210

 
100.0
%
 
$
271

 
0.5
%
The information presented in the tables herein exclude mortgage loans where we elected the fair value option . Such amounts are presented in Note 8 of the Notes to the Consolidated Financial Statements. The carrying value of all mortgage loans, net of valuation allowance was 24.1% and 21.6% of cash and invested assets at December 31, 2018 and 2017, respectively.
We diversify our mortgage loan portfolio by both geographic region and property type to reduce the risk of concentration. Of our commercial and agricultural mortgage loan portfolios, 87% are collateralized by properties located in the United States, with the remaining 13% collateralized by properties located outside the United States, which includes 6% of properties located in the U.K., at December 31, 2018. The carrying values of our commercial and agricultural mortgage loans located in California, New York and Texas were 19%, 10% and 7%, respectively, of total commercial and agricultural mortgage loans at December 31, 2018. Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral.
We manage our residential mortgage loan portfolio in a similar manner to reduce risk of concentration. All residential mortgage loans were collateralized by properties located in the United States at December 31, 2018. The carrying values of our residential mortgage loans located in California, Florida, and New York were 34%, 9%, and 7%, respectively, of total residential mortgage loans at December 31, 2018.

63

Commercial Mortgage Loans by Geographic Region and Property Type. Commercial mortgage loans are the largest component of the mortgage loan invested asset class. The tables below present the diversification across geographic regions and property types of commercial mortgage loans at:
 
December 31,
 
2018
 
2017
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
(Dollars in millions)
Region
 
 
 
 
 
 
 
Pacific
$
8,915

 
23.4
%
 
$
8,234

 
23.2
%
Middle Atlantic
6,074

 
15.9

 
5,625

 
15.9

International
5,523

 
14.5

 
5,722

 
16.2

South Atlantic
5,361

 
14.1

 
4,704

 
13.3

West South Central
3,260

 
8.5

 
3,086

 
8.7

East North Central
2,372

 
6.2

 
2,202

 
6.2

Mountain
1,292

 
3.4

 
1,109

 
3.1

New England
1,187

 
3.1

 
747

 
2.1

West North Central
560

 
1.5

 
461

 
1.3

East South Central
468

 
1.2

 
744

 
2.1

Multi-Region and Other
3,111

 
8.2

 
2,806

 
7.9

Total recorded investment
38,123

 
100.0
%
 
35,440

 
100.0
%
Less: valuation allowances
190

 
 
 
173

 
 
Carrying value, net of valuation allowances
$
37,933

 
 
 
$
35,267

 
 
Property Type
 
 
 
 
 
 
 
Office
$
18,853

 
49.5
%
 
$
18,151

 
51.2
%
Retail
6,535

 
17.1

 
5,906

 
16.7

Apartment
5,294

 
13.9

 
4,696

 
13.3

Industrial
3,289

 
8.6

 
2,754

 
7.8

Hotel
2,990

 
7.8

 
3,051

 
8.6

Other
1,162

 
3.1

 
882

 
2.4

Total recorded investment
38,123

 
100.0
%
 
35,440

 
100.0
%
Less: valuation allowances
190

 
 
 
173

 
 
Carrying value, net of valuation allowances
$
37,933

 
 
 
$
35,267

 
 
Mortgage Loan Credit Quality — Monitoring Process. We monitor our mortgage loan investments on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. See Note 8 of the Notes to the Consolidated Financial Statements for tables that present mortgage loans by credit quality indicator, past due and nonaccrual mortgage loans, impaired loans, as well as the carrying value of foreclosed mortgage loans included in real estate and real estate joint ventures.
We review our commercial mortgage loans on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt service coverage ratios and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt service coverage ratios. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a geographic and sector basis. We review our residential mortgage loans on an ongoing basis. See Note 8 of the Notes to the Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related valuation allowance methodology.

64

Loan-to-value ratios and debt service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 55% and 54% at December 31, 2018 and 2017, respectively, and our average debt service coverage ratio was 2.4x and 2.6x at December 31, 2018 and 2017, respectively. The debt service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage loans, our average loan-to-value ratio was 45% and 44% at December 31, 2018 and 2017, respectively. The values utilized in calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated.
Mortgage Loan Valuation Allowances. Our valuation allowances are established both on a loan specific basis for those loans considered impaired where a property specific or market specific risk has been identified that could likely result in a future loss, as well as for pools of loans with similar risk characteristics where a property specific or market specific risk has not been identified, but for which we expect to incur a loss. Accordingly, a valuation allowance is provided to absorb these estimated probable credit losses.
The determination of the amount of valuation allowances is based upon our periodic evaluation and assessment of known and inherent risks associated with our loan portfolios. Such evaluations and assessments are based upon several factors, including our experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations and assessments are revised as conditions change and new information becomes available, which can cause the valuation allowances to increase or decrease over time as such evaluations are revised. Negative credit migration, including an actual or expected increase in the level of problem loans, will result in an increase in the valuation allowance. Positive credit migration, including an actual or expected decrease in the level of problem loans, will result in a decrease in the valuation allowance.
See Note 8 of the Notes to the Consolidated Financial Statements for information about how valuation allowances are established and monitored and activity in and balances of the valuation allowance as of and for the years ended December 31, 2018, 2017 and 2016.
Real Estate and Real Estate Joint Ventures
Real estate and real estate joint ventures is comprised of wholly-owned real estate and joint ventures with interests in single property income-producing real estate and, to a lesser extent, joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the operation of income-producing properties, as well as a runoff portfolio. The carrying values of real estate and real estate joint ventures were $6.2 billion and $6.7 billion, or 2.3% and 2.5% of cash and invested assets at December 31, 2018 and 2017, respectively. The estimated fair value of our real estate investments was $10.9 billion and $11.2 billion at December 31, 2018 and 2017, respectively.
There were $13 million of impairments recognized on real estate and real estate joint ventures for the year ended December 31, 2017. There were no such impairments for the years ended December 31, 2018 and 2016. Depreciation expense on real estate investments was $65 million, $76 million and $68 million for the years ended December 31, 2018, 2017 and 2016, respectively. Real estate investments were net of accumulated depreciation of $671 million and $668 million at December 31, 2018 and 2017, respectively.
We diversify our real estate investments by both geographic region and property type to reduce risk of concentration.
Geographical diversification: Substantially all of our real estate investments, excluding funds, were located in the United States at December 31, 2018. The carrying value of our real estate investments, excluding funds, located in California, the District of Columbia and Massachusetts were 22%, 17% and 10%, respectively, of total real estate investments, excluding funds, at December 31, 2018. The majority of these funds hold underlying real estate investments that are well diversified across the United States.

65

Property type diversification: Real estate and real estate joint venture investments by property type are categorized by sector as follows at:
 
December 31,
 
2018
 
2017
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
 
(Dollars in millions)
Office
$
2,198


35.7
%

$
2,170


32.6
%
Real estate funds
1,488


24.2


1,184


17.8

Retail
651


10.6


570


8.6

Apartment
618


10.0


1,263


19.0

Hotel
448


7.3


434


6.5

Industrial
291


4.7


347


5.2

Land
274


4.5


356


5.3

Agriculture
27


0.4


29


0.4

Other
157


2.6


303


4.6

Total real estate and real estate joint ventures
$
6,152

 
100.0
%
 
$
6,656

 
100.0
%
Other Limited Partnership Interests
Other limited partnership interests are comprised of investments in private funds, including private equity funds and hedge funds. At December 31, 2018 and 2017, the carrying value of other limited partnership interests was $4.5 billion and $4.0 billion, or 1.7% and 1.5% of cash and invested assets, which included $285 million and $262 million of hedge funds, respectively. Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds.
Other Invested Assets
The following table presents the carrying value of our other invested assets by type at:
 
 
December 31,
 
 
2018

2017
 
 
Carrying Value

% of Total

Carrying Value

% of Total
 
 




(Dollars in millions)



 
Freestanding derivatives with positive estimated fair values
$
7,218


46.0
%

$
6,592


44.2
%
 
Tax credit and renewable energy partnerships
2,456


15.7


3,165


21.2

 
Affiliated investments
2,213


14.1


2,258


15.1

 
Annuities funding structured settlement claims (1)
1,279


8.2


1,284


8.6

 
Leveraged leases
932


5.9


1,112


7.5

 
FHLB common stock (2)
724


4.6


—


—

 
Operating joint venture
245


1.6


57


0.4

 
FVO Securities
216


1.4


—


—

 
Direct financing leases
198


1.3


207


1.4

 
Funds withheld
149


0.9


160


1.1

 
Other
60


0.3


76


0.5

 
Total
$
15,690


100.0
%

$
14,911


100.0
%
 
Percentage of cash and invested assets
5.9
%



5.5
%


(1) See Notes 1 and 4 of the Notes to the Consolidated Financial Statements.
(2) See Note 8 of the Notes to the Consolidated Financial Statements.

66

Leveraged lease impairments were $105 million, $79 million and $36 million for the years ended December 31, 2018, 2017 and 2016, respectively.
See Notes 1, 8 and 9 of the Notes to the Consolidated Financial Statements for information regarding freestanding derivatives with positive estimated fair values, tax credit and renewable energy partnerships, affiliated investments, annuities funding structured settlement claims, leveraged and direct financing leases, Federal Home Loan Bank (“FHLB”) common stock, FVO Securities, an operating joint venture and funds withheld.
Derivatives
Derivative Risks
We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 9 of the Notes to the Consolidated Financial Statements for:
•
A comprehensive description of the nature of our derivatives, including the strategies for which derivatives are used in managing various risks.
•
Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at December 31, 2018 and 2017.
•
The statement of operations effects of derivatives in cash flow, fair value, or nonqualifying hedge relationships for the years ended December 31, 2018, 2017 and 2016.
See “Quantitative and Qualitative Disclosures About Market Risk — Management of Market Risk Exposures — Hedging Activities” for more information about our use of derivatives by major hedge program.
Fair Value Hierarchy
See Note 10 of the Notes to the Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy.
The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income.
Derivatives categorized as Level 3 at December 31, 2018 include: interest rate forwards with maturities which extend beyond the observable portion of the yield curve; interest rate total return swaps with unobservable repurchase rates; foreign currency swaps with certain unobservable inputs, including the unobservable portion of the yield curve; credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs; and equity index options with unobservable correlation inputs. At December 31, 2018, less than 1% of the estimated fair value of our derivatives was priced through independent broker quotations.
See Note 10 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
See “— Summary of Critical Accounting Estimates — Derivatives” for further information on the estimates and assumptions that affect derivatives.
Credit Risk
See Note 9 of the Notes to the Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral.
Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives on the consolidated balance sheets, and does not affect our legal right of offset.

67

Credit Derivatives
The following table presents the gross notional amount and estimated fair value of credit default swaps at:
 
 
December 31,
 
 
2018
 
2017
Credit Default Swaps
 
Gross
Notional
Amount
 
Estimated
Fair Value
 
Gross
Notional
Amount
 
Estimated
Fair Value
 
 
(In millions)
Purchased
 
$
858

 
$
20

 
$
980

 
$
(1
)
Written
 
7,864

 
54

 
7,874

 
181

Total
 
$
8,722

 
$
74

 
$
8,854

 
$
180

__________________
The following table presents the gross gains, gross losses and net gains (losses) recognized in net derivative gains (losses) for credit default swaps as follows: 
 
 
Years Ended December 31,
 
 
2018
 
2017
Credit Default Swaps
 
Gross
Gains 
 
Gross
Losses 
 
Net
Gains
(Losses)
 
Gross
Gains 
 
Gross
Losses 
 
Net
Gains
(Losses)
 
 
(In millions)
Purchased (1)
 
$
16

 
$
(7
)
 
$
9

 
$
4

 
$
(20
)
 
$
(16
)
Written (1)
 
16

 
(106
)
 
(90
)
 
108

 
(6
)
 
102

Total
 
$
32

 
$
(113
)
 
$
(81
)
 
$
112

 
$
(26
)
 
$
86

__________________
(1)
Gains (losses) do not include earned income (expense) on credit default swaps.
The favorable change in net gains (losses) on purchased credit default swaps of $25 million was due to certain credit spreads on credit default swaps hedging certain bonds widening in the current period as compared to narrowing in the prior period. The unfavorable change in net gains (losses) on written credit default swaps of ($192) million was due to certain credit spreads on certain credit default swaps used as replications widening in the current period as compared to narrowing in the prior period.
The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by state insurance regulators and the NAIC and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasing Treasury bonds (or other high quality assets) and associating them with written credit default swaps on the desired corporate credit name, we can replicate the desired bond exposures and meet our ALM needs. In addition, given the shorter tenor of the credit default swaps (generally five-year tenors) versus a long-dated corporate bond, we have more flexibility in managing our credit exposures.
Embedded Derivatives
See Note 10 of the Notes to the Consolidated Financial Statements for information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy and a rollforward of the fair value measurements for embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
See Note 9 of the Notes to the Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives.
See “— Summary of Critical Accounting Estimates — Derivatives” for further information on the estimates and assumptions that affect embedded derivatives.

68

Off-Balance Sheet Arrangements
Credit Facility
See “— Liquidity and Capital Resources — Liquidity and Capital Sources — Global Funding Sources — Credit Facility” and Note 11 of the Notes to the Consolidated Financial Statements for further information including the classification of expenses and the nature of the associated liability for letters of credit issued and drawdowns on the facility.
Collateral for Securities Lending and Derivatives
We participate in a securities lending program in the normal course of business for the purpose of enhancing the total return on our investment portfolio. Periodically, we receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was $64 million and $11 million at estimated fair value at December 31, 2018 and 2017, respectively. See Notes 1 and 8 of the Notes to the Consolidated Financial Statements, as well as “— Investments — Securities Lending and Repurchase Agreements” for further discussion of our securities lending program, the classification of revenues and expenses, and the nature of the secured financing arrangements and associated liabilities.
We enter into derivatives to manage various risks relating to our ongoing business operations. We receive non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was $1.2 billion and $1.0 billion, at estimated fair value, at December 31, 2018 and 2017, respectively. See “— Liquidity and Capital Resources — Liquidity and Capital Uses — Pledged Collateral” and Note 9 of the Notes to the Consolidated Financial Statements for information regarding the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives.
Lease Commitments
As lessee, we have entered into various lease and sublease agreements for office space and equipment. Our commitments under such lease agreements are included within the contractual obligations table. See “— Liquidity and Capital Resources — Contractual Obligations” and Note 16 of the Notes to the Consolidated Financial Statements.
Guarantees
See “Guarantees” in Note 16 of the Notes to the Consolidated Financial Statements.
Other
We enter into the following additional commitments in the normal course of business for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnerships, bank credit facilities, bridge loans and private corporate bond investments. See “Net Investment Income” and “Net Investment Gains (Losses)” in Note 8 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, and gains and losses from such investments. See also “— Investments — Fixed Maturity Securities AFS and Equity Securities” and “— Investments — Mortgage Loans” for information on our investments in fixed maturity securities AFS and mortgage loans. See “— Investments — Real Estate and Real Estate Joint Ventures” and “— Investments — Other Limited Partnership Interests” for information on our partnership investments.
Other than the commitments disclosed in Note 16 of the Notes to the Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnerships, bank credit facilities, bridge loans, and private corporate bond investments. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities, bridge loans and private corporate bond investments, see “— Liquidity and Capital Resources — Contractual Obligations.”
Insolvency Assessments
See Note 16 of the Notes to the Consolidated Financial Statements.

69

Liquidity and Capital Resources
Overview
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. Changing conditions in the global capital markets and the economy may affect our financing costs and market interest for our debt securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, see “— Investments — Current Environment.”
Liquidity Management
Based upon the strength of our franchise, diversification of our businesses, strong financial fundamentals and the substantial funding sources available to us as described herein, we continue to believe we have access to ample liquidity to meet business requirements under current market conditions and reasonably possible stress scenarios. We continuously monitor and adjust our liquidity and capital plans for Metropolitan Life Insurance Company and its subsidiaries in light of market conditions, as well as changing needs and opportunities.
Short-term Liquidity
We maintain a substantial short-term liquidity position, which was $2.4 billion and $3.0 billion at December 31, 2018 and 2017, respectively. Short-term liquidity includes cash and cash equivalents and short-term investments, excluding assets that are pledged or otherwise committed, including amounts received in connection with securities lending, repurchase agreements, derivatives, and secured borrowings, as well as amounts held in the closed block.
Liquid Assets
An integral part of our liquidity management includes managing our level of liquid assets, which was $80.2 billion and $86.6 billion at December 31, 2018 and 2017, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include amounts received in connection with securities lending, repurchase agreements, derivatives, regulatory deposits, funding agreements and secured borrowings, as well as amounts held in the closed block.
Liquidity
Liquidity refers to the ability to generate adequate amounts of cash to meet our needs. We determine our liquidity needs based on a rolling 12-month forecast by portfolio of invested assets which we monitor daily. We adjust the asset mix and asset maturities based on this rolling 12-month forecast. To support this forecast, we conduct cash flow and stress testing, which include various scenarios of the potential risk of early contractholder and policyholder withdrawal. We include provisions limiting withdrawal rights on many of our products, including general account pension products sold to employee benefit plan sponsors. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product. In the event of significant cash requirements beyond anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternatives include cash flows from operations, sales of liquid assets and global funding sources, including commercial paper and the Credit Facility.
Under certain stressful market and economic conditions, our access to liquidity may deteriorate, or the cost to access liquidity may increase. If we require significant amounts of cash on short notice in excess of anticipated cash requirements or if we are required to post or return cash collateral in connection with derivatives or our securities lending program, we may have difficulty selling investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both. In addition, in the event of such forced sale, for securities in an unrealized loss position, realized losses would be incurred on securities sold and impairments would be incurred, if there is a need to sell securities prior to recovery, which may negatively impact our financial condition. See “Risk Factors — Investment Risks — We May Have Difficulty Selling Certain Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner and Realizing Full Value.”
All general account assets within a particular legal entity — other than those which may have been pledged to a specific purpose — are generally available to fund obligations of the general account of that legal entity.
Capital
We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate strong cash flows within our operating companies and borrow funds at competitive rates, as well as by our demonstrated ability to raise additional capital to meet operating and growth needs despite adverse market and economic conditions.

70

Rating Agencies
Rating agencies assign insurer financial strength and credit ratings to Metropolitan Life Insurance Company and MetLife, Inc.’s other insurance subsidiaries, as well as credit ratings to MetLife, Inc. Financial strength ratings represent the opinion of rating agencies regarding the ability of an insurance company to pay obligations under insurance policies and contracts in accordance with their terms. Credit ratings indicate the rating agency’s opinion regarding a debt issuer’s ability to meet the terms of debt obligations in a timely manner. They are important factors in our overall funding profile and ability to access certain types of liquidity. The level and composition of regulatory capital of Metropolitan Life Insurance Company are among the many factors considered in determining our insurer financial strength ratings and credit ratings. Each agency has its own capital adequacy evaluation methodology, and assessments are generally based on a combination of factors. In addition to heightening the level of scrutiny that they apply to insurance companies, rating agencies have increased and may continue to increase the frequency and scope of their credit reviews, may request additional information from the companies that they rate and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels.
Downgrades in our insurer financial strength or credit ratings, MetLife, Inc.’s credit ratings or changes to our or MetLife, Inc.’s ratings outlooks could have a material adverse effect on our financial condition and results of operations in many ways. See “Risk Factors — Economic Environment and Capital Markets Risks — A Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings or MetLife, Inc.’s Credit Ratings Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations.”
A downgrade in our insurer financial strength or credit ratings or the credit ratings or insurer financial strength ratings of MetLife, Inc. or its other subsidiaries would likely impact us in the following ways, including:
•
impact our ability to generate cash flows from the sale of funding agreements and other capital market products offered by our RIS business;
•
impact the cost and availability of financing for MetLife, Inc. and its subsidiaries; and
•
result in additional collateral requirements or other required payments under certain agreements, which are eligible to be satisfied in cash or by posting investments held by the subsidiaries subject to the agreements. See “— Liquidity and Capital Uses — Pledged Collateral.”
Statutory Capital and Dividends
We have statutory surplus well above levels to meet current regulatory requirements.
RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to Metropolitan Life Insurance Company. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. At the date of the most recent annual statutory financial statement filed with insurance regulators, the total adjusted capital of Metropolitan Life Insurance Company was in excess of each of those RBC levels.
The amount of dividends that Metropolitan Life Insurance Company can pay to MetLife, Inc. is constrained by the amount of surplus Metropolitan Life Insurance Company holds to maintain its ratings and provides an additional margin for risk protection and investment in Metropolitan Life Insurance Company’s businesses. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions to MetLife, Inc. by Metropolitan Life Insurance Company is governed by insurance laws and regulations. See “Business — Regulation — Insurance Regulation” and Note 12 of the Notes to the Consolidated Financial Statements.

71

Affiliated Captive Reinsurance Transactions
Metropolitan Life Insurance Company cedes specific policy classes, including ordinary life insurance, participating whole life insurance and long-term disability insurance, to a wholly-owned offshore reinsurer. The wholly-owned offshore reinsurer currently only reinsures Metropolitan Life Insurance Company’s business and the results of the offshore reinsurer are eliminated within our consolidated results of operations. MetLife, Inc. has also provided a guarantee of the wholly-owned offshore reinsurer’s payment obligations on a retrocession agreement entered into by the reinsurer. In addition, Metropolitan Life Insurance Company cedes specific policy classes, including term life insurance, universal life insurance and ordinary and industrial life insurance, to other affiliated captive reinsurers. MetLife, Inc. has committed to maintain the surplus of the other affiliated captive reinsurers, as well as provide a guarantee of one such captive reinsurer’s repayment obligations on letters of credit issued by unaffiliated financial institutions. The statutory reserves of such affiliated captive reinsurers are supported by a combination of funds withheld assets, investment assets and the letters of credit. We enter into reinsurance agreements with affiliated captive reinsurers for risk and capital management purposes, as well as to manage statutory reserve requirements related to universal life and term life insurance policies and other business.
The NYDFS continues to have a moratorium on new reserve financing transactions involving captive insurers. We are not aware of any states other than New York and California implementing such a moratorium. While such a moratorium would not impact our existing reinsurance agreements with captive reinsurers, a moratorium placed on the use of captives for new reserve financing transactions could impact our ability to write certain products and/or impact our RBC ratio and ability to deploy excess capital in the future. This could result in our need to increase prices, modify product features or limit the availability of those products to our customers. While this affects insurers across the industry, it could adversely impact our competitive position and our results of operations in the future. We continue to evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results. See Note 6 of the Notes to the Consolidated Financial Statements for further information on our reinsurance activities.

72

Summary of Primary Sources and Uses of Liquidity and Capital
Our primary sources and uses of liquidity and capital are summarized as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Sources:
 
 
 
 
 
Operating activities, net
$
8,026

 
$
6,354

 
$
5,804

Investing activities, net
3,410

 
—

 
—

Net change in policyholder account balances
—

 
43

 
3,710

Long-term debt issued
24

 
169

 
45

Other, net
—

 
88

 
—

Effect of change in foreign currency exchange rates on cash and cash equivalents balances
—

 
3

 
—

Total sources
11,460

 
6,657

 
9,559

Uses:
 
 
 
 
 
Investing activities, net
—

 
3,613

 
3,662

Net change in policyholder account balances
4,196

 
—

 
—

Net change in payables for collateral under securities loaned and other transactions
1,399

 
525

 
696

Long-term debt repaid
109

 
92

 
58

Financing element on certain derivative instruments and other derivative related transactions, net
149

 
300

 
321

Dividends of subsidiaries
—

 
—

 
115

Dividends paid to MetLife, Inc.
3,736

 
2,523

 
3,600

Return of capital associated with the purchase of operating joint venture interest from an affiliate
—

 
249

 
—

Other, net
54

 
—

 
44

Effect of change in foreign currency exchange rates on cash and cash equivalents balances
4

 
—

 
—

Total uses
9,647

 
7,302

 
8,496

Net increase (decrease) in cash and cash equivalents
$
1,813

 
$
(645
)
 
$
1,063

Cash Flows from Operations
The principal cash inflows from our insurance activities come from insurance premiums, net investment income, annuity considerations and deposit funds. The principal cash outflows are the result of various life insurance, annuity and pension products, operating expenses and income tax, as well as interest expense. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal.
Cash Flows from Investments
The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments and settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. We typically have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.
Cash Flows from Financing
The principal cash inflows from our financing activities come from issuances of debt, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt, payments of dividends on Metropolitan Life Insurance Company’s common stock, withdrawals associated with policyholder account balances and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early contractholder and policyholder withdrawal.

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Liquidity and Capital Sources
In addition to the general description of liquidity and capital sources in “— Summary of Primary Sources and Uses of Liquidity and Capital,” the Company’s primary sources of liquidity and capital are set forth below.
Global Funding Sources
Liquidity is provided by a variety of global funding sources, including funding agreements, the Credit Facility and commercial paper. Capital is provided by a variety of global funding sources, including short-term and long-term debt. The diversity of our global funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary global funding sources include:
Commercial Paper, Reported in Short-term Debt
MetLife Funding and MetLife, Inc. each have a commercial paper program that is supported by the Credit Facility (see “— Credit Facility”). MetLife Funding raises cash from its commercial paper program and uses the proceeds to extend loans through MetLife Credit Corp., another subsidiary of Metropolitan Life Insurance Company, to affiliates in order to enhance the financial flexibility and liquidity of these companies.
Federal Home Loan Bank Funding Agreements, Reported in Policyholder Account Balances
Metropolitan Life Insurance Company and its former insurance subsidiary, GALIC, are members of regional FHLBs. During the years ended December 31, 2018, 2017 and 2016, we issued $26.1 billion, $20.4 billion and $16.6 billion, respectively, and repaid $26.3 billion, $20.4 billion and $14.8 billion, respectively, under funding agreements with certain regional FHLBs. In December 2016, $625 million of funding agreement obligations were deconsolidated due to the disposition of GALIC. At both December 31, 2018 and 2017, total obligations outstanding under these funding agreements were $14.2 billion and $14.4 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements.
Special Purpose Entity Funding Agreements, Reported in Policyholder Account Balances
We issue fixed and floating rate funding agreements which are denominated in either U.S. dollars or foreign currencies, to certain special purpose entities (“SPEs”) that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. During the years ended December 31, 2018, 2017 and 2016, we issued $41.8 billion, $42.7 billion and $39.7 billion, respectively, and repaid $43.7 billion, $41.4 billion and $38.5 billion, respectively, under such funding agreements. At December 31, 2018 and 2017, total obligations outstanding under these funding agreements were $32.3 billion and $34.2 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements.
Federal Agricultural Mortgage Corporation Funding Agreements, Reported in Policyholder Account Balances
We have issued funding agreements to a subsidiary of Farmer Mac, as well as to certain SPEs that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by Farmer Mac. The obligations under all such funding agreements are secured by a pledge of certain eligible agricultural mortgage loans. During the years ended December 31, 2018, 2017 and 2016, we issued $900 million, $1.0 billion and $1.2 billion, respectively, and repaid $900 million, $1.0 billion and $1.2 billion, respectively, under such funding agreements. At both December 31, 2018 and 2017, total obligations outstanding under these funding agreements were $2.6 billion. See Note 4 of the Notes to the Consolidated Financial Statements.
Long-term Debt Issued
In August 2017, a subsidiary of Metropolitan Life Insurance Company issued $139 million of long-term debt to a third party.
Credit Facility
At December 31, 2018, MetLife Funding and MetLife, Inc. maintained the Credit Facility. When drawn upon, this facility bears interest at varying rates in accordance with the agreement.
The Credit Facility is used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. At December 31, 2018, we had outstanding $412 million in letters of credit and no drawdowns against this facility, and affiliates had $34 million in letters of credit outstanding against this facility. Remaining availability was $2.6 billion at December 31, 2018. See Note 11 of the Notes to the Consolidated Financial Statements for further information about the Credit Facility.

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We have no reason to believe that our lending counterparties will be unable to fulfill their respective contractual obligations under this facility. As commitments under the Credit Facility may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements.
Outstanding Debt Under Global Funding Sources
The following table summarizes our outstanding debt excluding long-term debt relating to CSEs at:
 
December 31,
 
2018
 
2017
 
(In millions)
Short-term debt (1)
$
129

 
$
243

Long-term debt (2)
$
1,562

 
$
1,661

______________
(1)
Includes $30 million and $143 million of debt that is non-recourse to the Company, subject to customary exceptions, at December 31, 2018 and 2017, respectively. Certain subsidiaries have pledged assets to secure this debt.
(2)
Includes $422 million and $523 million of debt that is non-recourse to the Company, subject to customary exceptions, at December 31, 2018 and 2017, respectively. Certain investment subsidiaries have pledged assets to secure this debt.
Debt and Facility Covenants
Certain of our debt instruments and the Credit Facility contain various administrative, reporting, legal and financial covenants. We believe we were in compliance with all applicable financial covenants at December 31, 2018.
Liquidity and Capital Uses
In addition to the general description of liquidity and capital uses in “— Summary of Primary Sources and Uses of Liquidity and Capital” and “— Contractual Obligations,” the Company’s primary uses of liquidity and capital are set forth below.
Dividends
During the years ended December 31, 2018, 2017 and 2016, Metropolitan Life Insurance Company paid cash dividends to MetLife, Inc. of $3.7 billion, $2.5 billion and $3.6 billion, respectively. Also, during the year ended December 31, 2016, Metropolitan Life Insurance Company distributed to MetLife, Inc. as a non-cash extraordinary dividend all of the issued and outstanding shares of common stock of each of NELICO and GALIC. The net book value of NELICO and GALIC at the time of the dividend was $2.9 billion, which was recorded as a dividend of retained earnings of $2.7 billion and a decrease to other comprehensive income of $254 million, net of income tax. See Notes 3 and 12 of the Notes to the Consolidated Financial Statements.
Debt Repayments
See Note 11 of the Notes to the Consolidated Financial Statements for further information on long-term and short-term debt.
•
In December 2018, a subsidiary of Metropolitan Life Insurance Company repaid $50 million of its $350 million aggregate principal amount three-month LIBOR plus 3.10% term loan; and
•
In December 2016, $107 million 7.625% surplus notes were deconsolidated due to the disposition of GALIC.
Support Agreements
Metropolitan Life Insurance Company is a party to a capital support commitment with its subsidiary, MetLife Funding. Under the arrangement, Metropolitan Life Insurance Company has agreed to cause such entity to meet specified capital requirements. We anticipate that in the event this arrangement places demands upon us, there will be sufficient liquidity and capital to enable us to meet such demands.

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Insurance Liabilities
Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse behavior differs somewhat by segment. In the MetLife Holdings segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. During the years ended December 31, 2018 and 2017, general account surrenders and withdrawals from annuity products were $1.8 billion and $1.6 billion, respectively. In the RIS business within the U.S. segment, which includes pension risk transfers, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals. With regard to the RIS business products that provide customers with limited rights to accelerate payments, at December 31, 2018, there were funding agreements totaling $148 million that could be put back to the Company.
Pledged Collateral
We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At December 31, 2018 and 2017, we had received pledged cash collateral from counterparties of $4.1 billion and $3.7 billion, respectively. At December 31, 2018 and 2017, we had pledged cash collateral to counterparties of $1 million and $188 million, respectively. See Note 9 of the Notes to the Consolidated Financial Statements for additional information about collateral pledged to us and collateral we pledge.
We pledge collateral from time to time in connection with funding agreements. See Note 4 of the Notes to the Consolidated Financial Statements.
Securities Lending
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $13.4 billion and $15.2 billion at December 31, 2018 and 2017, respectively. Of these amounts, $2.0 billion and $2.9 billion at December 31, 2018 and 2017, respectively, were on open, meaning that the related loaned security could be returned to us on the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2018 was $1.9 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement. See Note 8 of the Notes to the Consolidated Financial Statements.
Repurchase Agreements
We participate in short-term repurchase agreements whereby securities are loaned to unaffiliated financial institutions. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under these repurchase agreements, we were liable for cash collateral under our control of $1.0 billion at both December 31, 2018 and 2017. The estimated fair value of the securities on loan at December 31, 2018 was $1.0 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement. See Note 8 of the Notes to the Consolidated Financial Statements.
Litigation
We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated net income or cash flows in particular quarterly or annual periods. See Note 16 of the Notes to the Consolidated Financial Statements.

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Contractual Obligations
The following table summarizes our major contractual obligations at December 31, 2018:
 
Total
 
One Year or Less
 
More than One Year to Three Years
 
More than Three Years to Five Years
 
More than Five Years
 
(In millions)
Insurance liabilities
$
222,898

 
$
12,248

 
$
14,624

 
$
13,773

 
$
182,253

Policyholder account balances
104,139

 
27,785

 
15,892

 
9,299

 
51,163

Payables for collateral under securities loaned and other transactions
18,472

 
18,472

 
—

 
—

 
—

Debt
3,118

 
237

 
216

 
493

 
2,172

Investment commitments
8,178

 
7,829

 
293

 
56

 
—

Operating leases
1,221

 
125

 
273

 
256

 
567

Other
23,137

 
23,018

 
—

 
—

 
119

Total
$
381,163

 
$
89,714

 
$
31,298

 
$
23,877

 
$
236,274

Insurance Liabilities
Insurance liabilities include future policy benefits, other policy-related balances, policyholder dividends payable and the policyholder dividend obligation, which are all reported on the consolidated balance sheet and are more fully described in Notes 1 and 4 of the Notes to the Consolidated Financial Statements. The amounts presented reflect future estimated cash payments and (i) are based on mortality, morbidity, lapse and other assumptions comparable with our experience and expectations of future payment patterns; and (ii) consider future premium receipts on current policies in-force. All estimated cash payments presented are undiscounted as to interest, net of estimated future premiums on in-force policies and gross of any reinsurance recoverable. Payment of amounts related to policyholder dividends left on deposit are projected based on assumptions of policyholder withdrawal activity. Because the exact timing and amount of the ultimate policyholder dividend obligation is subject to significant uncertainty and the amount of the policyholder dividend obligation is based upon a long-term projection of the performance of the closed block, we have reflected the obligation at the amount of the liability, if any, presented on the consolidated balance sheet in the more than five years category. Additionally, the more than five years category includes estimated payments due for periods extending for more than 100 years.
The sum of the estimated cash flows of $222.9 billion exceeds the liability amounts of $134.3 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, most significantly mortality, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded.
Actual cash payments may differ significantly from the liabilities as presented on the consolidated balance sheet and the estimated cash payments as presented due to differences between actual experience and the assumptions used in the establishment of these liabilities and the estimation of these cash payments.
For the majority of our insurance operations, estimated contractual obligations for future policy benefits and policyholder account balances, as presented, are derived from the annual asset adequacy analysis used to develop actuarial opinions of statutory reserve adequacy for state regulatory purposes. These cash flows are materially representative of the cash flows under GAAP. See “— Policyholder Account Balances.”
Policyholder Account Balances
See Notes 1 and 4 of the Notes to the Consolidated Financial Statements for a description of the components of policyholder account balances. See “— Insurance Liabilities” regarding the source and uncertainties associated with the estimation of the contractual obligations related to future policy benefits and policyholder account balances.
Amounts presented represent the estimated cash payments undiscounted as to interest and including assumptions related to the receipt of future premiums and deposits; withdrawals, including unscheduled or partial withdrawals; policy lapses; surrender charges; annuitization; mortality; future interest credited; policy loans and other contingent events as appropriate for the respective product type. Such estimated cash payments are also presented net of estimated future premiums on policies currently in-force and gross of any reinsurance recoverable. For obligations denominated in foreign currencies, cash payments have been estimated using current spot foreign currency rates.

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The sum of the estimated cash flows of $104.1 billion exceeds the liability amount of $90.7 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded.
Payables for Collateral Under Securities Loaned and Other Transactions
We have accepted cash collateral in connection with securities lending and derivatives. As the securities lending transactions expire within the next year and the timing of the return of the derivatives collateral is uncertain, the return of the collateral has been included in the one year or less category in the table above. We also held non-cash collateral, which is not reflected as a liability on the consolidated balance sheet, of $1.2 billion at December 31, 2018.
Debt
Amounts presented for debt include short-term debt and long-term debt, the total of which differs from the total of the corresponding amounts presented on the consolidated balance sheet as the amounts presented herein (i) do not include premiums or discounts upon issuance or purchase accounting fair value adjustments; (ii) include future interest on such obligations for the period from January 1, 2019 through maturity; and (iii) do not include long-term debt relating to CSEs at December 31, 2018 as such debt does not represent our contractual obligation. Future interest on variable rate debt was computed using prevailing rates at December 31, 2018 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was computed using the stated rate on the obligations for the period from January 1, 2019 through maturity. Total debt at December 31, 2018 included affiliated debt obligations of $1.7 billion.
Investment Commitments
To enhance the return on our investment portfolio, we commit to lend funds under mortgage loans, bank credit facilities, bridge loans and private corporate bond investments and we commit to fund partnership investments. In the table above, the timing of the funding of mortgage loans and private corporate bond investments is based on the expiration dates of the corresponding commitments. As it relates to commitments to fund partnerships and bank credit facilities, we anticipate that these amounts could be invested any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations are generally presented in the one year or less category. Commitments to fund bridge loans are short-term obligations and, as a result, are presented in the one year or less category. See Note 16 of the Notes to the Consolidated Financial Statements and “— Off-Balance Sheet Arrangements.”
Operating Leases
As a lessee, we have various operating leases, primarily for office space. Contractual provisions exist that could increase or accelerate those lease obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to our financial position or results of operations. See Note 16 of the Notes to the Consolidated Financial Statements.
Other
Other obligations presented are principally comprised of amounts due under reinsurance agreements, payables related to securities purchased but not yet settled, securities sold short, accrued interest on debt obligations, estimated fair value of derivative obligations, deferred compensation arrangements, guaranty liabilities, and accruals and accounts payable due under contractual obligations, which are all reported in other liabilities on the consolidated balance sheet. If the timing of any of these other obligations is sufficiently uncertain, the amounts are included within the one year or less category. Items reported in other liabilities on the consolidated balance sheet that were excluded from the table represent accounting conventions or are not liabilities due under contractual obligations. Unrecognized tax benefits and related accrued interest totaling $638 million were excluded as the timing of payment could not be reliably determined at December 31, 2018.
Separate account liabilities are excluded as they are fully funded by cash flows from the corresponding separate account assets and are set equal to the estimated fair value of separate account assets.
We also enter into agreements to purchase goods and services in the normal course of business; however, such amounts are excluded as these purchase obligations were not material to our consolidated results of operations or financial position at December 31, 2018.
Additionally, we have agreements in place for services we conduct, generally at cost, to subsidiaries and affiliates relating to insurance, reinsurance, loans and capitalization. Intercompany transactions have been eliminated in consolidation. Intercompany transactions among insurance subsidiaries and affiliates have been approved by the appropriate insurance regulators as required.

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Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Future Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Non-GAAP and Other Financial Disclosures
In this report, the Company presents certain measures of its performance that are not calculated in accordance with GAAP. We believe that these non-GAAP financial measures enhance the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business.
The following non-GAAP financial measures should not be viewed as substitutes for the most directly comparable financial measures calculated in accordance with GAAP:
Non-GAAP financial measures:
Comparable GAAP financial measures:
(i)
adjusted revenues
(i)
revenues
(ii)
adjusted expenses
(ii)
expenses
(iii)
adjusted earnings
(iii)
net income (loss)
Reconciliations of these non-GAAP measures to the most directly comparable historical GAAP measures are included in the results of operations, see “— Results of Operations.” Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are not accessible on a forward-looking basis because we believe it is not possible without unreasonable effort to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a material impact on net income.
Our definitions of the various non-GAAP and other financial measures discussed in this report may differ from those used by other companies.
Adjusted earnings
This measure is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Adjusted earnings allows analysis of our performance and facilitates comparisons to industry results.
Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax.
Adjusted revenues and adjusted expenses
The financial measures of adjusted revenues and adjusted expenses focus on our primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and certain entities required to be consolidated under GAAP. Also, these measures exclude results of discontinued operations under GAAP and other businesses that have been or will be sold or exited by MLIC but do not meet the discontinued operations criteria under GAAP and are referred to as divested businesses. Divested businesses also includes the net impact of transactions with exited businesses that have been eliminated in consolidation under GAAP and costs relating to businesses that have been or will be sold or exited by MLIC that do not meet the criteria to be included in results of discontinued operations under GAAP. Adjusted revenues also excludes net investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to revenues, in the line items indicated, in calculating adjusted revenues:
•
Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB fees”); and
•
Net investment income: (i) includes earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment (“Investment hedge adjustments”), (ii) excludes post-tax adjusted earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iii) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP and (iv) includes distributions of profits from certain other limited partnership interests that were previously accounted for under the cost method, but are now accounted for at estimated fair value, where the change in estimated fair value is recognized in net investment gains (losses) under GAAP.

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The following additional adjustments are made to expenses, in the line items indicated, in calculating adjusted expenses:
•
Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass through adjustments, (iii) benefits and hedging costs related to GMIBs (“GMIB costs”) and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market value adjustments”);
•
Interest credited to policyholder account balances includes adjustments for earned income on derivatives and amortization of premium on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment;
•
Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB fees and GMIB costs, and (iii) Market value adjustments;
•
Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and
•
Other expenses excludes costs related to: (i) noncontrolling interests, (ii) acquisition, integration and other costs, and (iii) goodwill impairments.
The tax impact of the adjustments mentioned above are calculated net of the U.S. or foreign statutory tax rate, which could differ from the Company’s effective tax rate. Additionally, the provision for income tax (expense) benefit also includes the impact related to the timing of certain tax credits, as well as certain tax reforms.
The following additional information is relevant to an understanding of our performance results:
•
We sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity.
•
Asymmetrical and non-economic accounting refers to: (i) the portion of net derivative gains (losses) on embedded derivatives attributable to the inclusion of our credit spreads in the liability valuations, (ii) hedging activity that generates net derivative gains (losses) and creates fluctuations in net income because hedge accounting cannot be achieved and the item being hedged does not a have an offsetting gain or loss recognized in earnings, and (iii) impact of changes in foreign currency exchange rates on the re-measurement of foreign denominated unhedged funding agreements and financing transactions to the U.S. dollar and the re-measurement of certain liabilities from non-functional currencies to functional currencies. We believe that excluding the impact of asymmetrical and non-economic accounting from total GAAP results enhances investor understanding of our performance by disclosing how these accounting practices affect reported GAAP results.
•
Allocated equity is the portion of common stockholders’ equity that MetLife’s management allocates to each of its segments and sub-segments based on local capital requirements and economic capital. See “— Economic Capital.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Risk Management
We have an integrated process for managing risk, which we conduct through multiple Board and senior management committees (financial and non-financial) across MetLife, Inc.’s GRM, ALM, Finance, Treasury, Investments and business segment departments. The risk committee structure is designed to provide a consolidated enterprise-wide assessment and management of risk. MetLife, Inc.’s Enterprise Risk Committee (“ERC”) is responsible for reviewing all material risks to the enterprise and deciding on actions, if necessary, in the event risks exceed desired tolerances, taking into consideration industry best practices and the current environment to resolve or mitigate those risks. Additional committees at the MetLife, Inc. and subsidiary insurance company level manage capital and risk positions, and establish corporate business standards.
Global Risk Management
Independent from the lines of business, the centralized GRM, led by MetLife, Inc.’s Chief Risk Officer (“CRO”) coordinates across all committees to ensure that all material risks are properly identified, measured, aggregated, managed and reported across the Company. The CRO reports to MetLife, Inc.’s Chief Executive Officer (“CEO”) and is primarily responsible for maintaining and communicating the Company’s enterprise risk policies and for monitoring and analyzing all material risks.

80

GRM considers and monitors a full range of risks against the Company’s solvency, liquidity, earnings, business operations and reputation. GRM’s primary responsibilities consist of:
•
implementing a corporate risk framework, which outlines MetLife, Inc.’s approach for managing risk;
•
developing policies and procedures for identifying, managing, measuring, monitoring and controlling those risks identified in the corporate risk framework;
•
coordinating Own Risk and Solvency Assessments for Board, senior management and regulator use;
•
establishing appropriate corporate risk tolerance levels;
•
recommending risk appetite statements and investment general authorizations to the Board;
•
measuring capital on an economic basis;
•
recommending capital allocations on an economic capital basis; and
•
reporting to (i) the Finance and Risk Committee of MetLife, Inc.’s Board of Directors; (ii) the Investment Committee of MetLife, Inc.’s Board of Directors; (iii) the Compensation Committee of MetLife, Inc.’s Board of Directors; (iv) the Finance Committee of MLIC’s Board of Directors; and (v) the financial and non-financial senior management committees of each of MetLife, Inc. and MLIC on various aspects of risk.
Asset/Liability Management
We actively manage our assets using an approach that is liability driven and balances quality, diversification, asset/liability matching, liquidity, concentration 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 reasonably aligned on a cash flow and duration basis. The ALM process is the shared responsibility of the ALM, GRM, and Investments departments, with the engagement of senior members of MetLife, Inc.’s business segments, and is governed by the ALM Committees. The ALM Committees’ duties include reviewing and approving target portfolios investment guidelines and limits, approving significant portfolio and ALM strategies and providing oversight of the ALM process. The directives of the ALM Committees are carried out and monitored through ALM Working Groups which are set up to manage risk by geography, product or portfolio type. The ALM Steering Committee oversees the activities of the underlying ALM Committees and Working Groups. The ALM Steering Committee reports to the ERC.
MetLife, Inc. establishes portfolio guidelines that define ranges and limits related to asset allocation, interest rate risk, liquidity, concentration and other risks for each major business segment, legal entity or insurance product group. These guidelines support implementation of investment strategies used to adequately fund our liabilities within acceptable levels of risk. We also establish hedging programs and associated investment portfolios for different blocks of business. The ALM Working Groups monitor these strategies and programs through regular review of portfolio metrics, such as effective duration, yield curve sensitivity, convexity, value at risk, market sensitivities (to interest rates, equity market levels, equity volatility, and foreign exchange rates), stress scenario payoffs, liquidity, foreign exchange, asset sector concentration and credit quality.
Market Risk Exposures
We regularly analyze our exposure to interest rate, foreign currency exchange rate and equity market price risk. As a result of that analysis, we have determined that the estimated fair values of certain assets and liabilities are materially exposed to changes in interest rates, foreign currency exchange rates and equity markets. We have exposure to market risk through our insurance operations and investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates, foreign currency exchange rates and equity markets.
Interest Rates
Our exposure to interest rate changes results most significantly from our holdings of fixed maturity securities, as well as our interest rate sensitive liabilities. The fixed maturity securities AFS include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, mortgage-backed securities and ABS, all of which are mainly exposed to changes in medium- and long-term interest rates. The interest rate sensitive liabilities for purposes of this disclosure include debt, policyholder account balances related to certain investment type contracts, and embedded derivatives on variable annuities with guaranteed minimum benefits which have the same type of interest rate exposure (medium- and long-term interest rates) as fixed maturity securities AFS. The interest rate sensitive liabilities for purposes of this disclosure exclude a significant portion of the liabilities relating to insurance contracts. See “Risk Factors — Economic Environment and Capital Markets Risks — Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition.”

81

Foreign Currency Exchange Rates
Our exposure to fluctuations in foreign currency exchange rates against the U.S. dollar results from our holdings in non-U.S. dollar denominated fixed maturity and equity securities, mortgage loans, and certain liabilities. The foreign currency exchange rate liabilities for purposes of this disclosure exclude a significant portion of the liabilities relating to insurance contracts. The principal currencies that create foreign currency exchange rate risk in our investment portfolios and liabilities are the Euro and the British pound. We hedge foreign currency exchange rate risk with foreign currency swaps, forwards and options.
Equity Market
Along with investments in equity securities, we have exposure to equity market risk through certain liabilities that involve long-term guarantees on equity performance such as embedded derivatives on variable annuities with guaranteed minimum benefits and certain policyholder account balances. Equity exposures associated with limited partnership interests are excluded from this discussion as they are not considered financial instruments under GAAP.
Management of Market Risk Exposures
We use a variety of strategies to manage interest rate, foreign currency exchange rate and equity market risk, including the use of derivatives.
Interest Rate Risk Management
To manage interest rate risk, we analyze interest rate risk using various models, including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivatives. These projections involve evaluating the potential gain or loss on most of our in-force business under various increasing and decreasing interest rate environments. The NYDFS regulations require that we perform some of these analyses annually as part of our review of the sufficiency of our regulatory reserves. For MLIC, we maintain segmented operating and surplus asset portfolios for the purpose of ALM and the allocation of investment income to product lines. In the U.S., for each segment, invested assets greater than or equal to the GAAP liabilities net of certain non-invested assets allocated to the segment are maintained, with any excess allocated to Corporate & Other. The business segments may reflect differences in statutory line of business and any product market characteristic which may drive a distinct investment strategy with respect to duration, liquidity or credit quality of the invested assets. We measure relative sensitivities of the value of our assets and liabilities to changes in key assumptions utilizing internal models. These models reflect specific product characteristics and include assumptions based on current and anticipated experience regarding lapse, mortality and interest crediting rates. In addition, these models include asset cash flow projections reflecting interest payments, sinking fund payments, principal payments, bond calls, mortgage loan prepayments and defaults.
We employ product design, pricing and ALM strategies to reduce the potential effects of interest rate movements. Product design and pricing strategies include the use of surrender charges or restrictions on withdrawals in some products and the ability to reset crediting rates for certain products. ALM strategies include the use of derivatives. We also use reinsurance to mitigate interest rate risk.
We also use common industry metrics, such as duration and convexity, to measure the relative sensitivity of assets and liability values to changes in interest rates. In computing the duration of liabilities, we consider all policyholder guarantees and how we intend to set indeterminate policy elements such as interest credits or dividends. Each asset portfolio or portfolio group has a duration target based on the liability duration and the investment objectives of that portfolio. Where a liability cash flow may exceed the maturity of available assets, we may support such liabilities with equity investments, derivatives or interest rate curve mismatch strategies.
Foreign Currency Exchange Rate Risk Management
MetLife, Inc. has a well-established Enterprise Foreign Exchange (“FX”) Risk Policy to manage foreign currency exchange rate exposures within MetLife, Inc.’s risk tolerance. In general, investments backing specific liabilities are currency matched. This is achieved through direct investments in matching currency or through the use of FX derivatives. Enterprise FX risk limits are established by the ERC. Management of each of the Company’s segments, with oversight from MetLife, Inc.’s FX Risk Committee and the respective ALM committee for the segment, is responsible for managing any foreign currency exchange rate exposure. The general authorizations of the Investment Committee of MLIC also set limits on unhedged foreign currency investment exposure.
We use foreign currency swaps, forwards and options to mitigate the liability exposure, risk of loss and financial statement volatility associated with foreign currency denominated fixed income investments and the sale of certain insurance products.

82

Equity Market Risk Management
We manage equity market risk on an integrated basis with other risks through ALM strategies, including the dynamic hedging of certain variable annuity guarantee benefits, as well as reinsurance, in order to limit losses, minimize exposure to large risks, and provide additional capacity for future growth. We also manage equity market risk exposure in our investment portfolio through the use of derivatives. These derivatives include exchange-traded equity futures, equity index options contracts, total rate of return swaps and equity variance swaps. This risk is managed by the ALM Unit in partnership with the Investments Department.
Hedging Activities
We use derivative contracts primarily to hedge a wide range of risks including interest rate risk, foreign currency exchange rate risk, and equity market risk. Derivative hedges are designed to reduce risk on an economic basis while considering their impact on financial results under different accounting regimes, including U.S. GAAP and local statutory accounting. Our derivative hedge programs vary depending on the type of risk being hedged. Some hedge programs are asset or liability specific while others are portfolio hedges that reduce risk related to a group of liabilities or assets. Our use of derivatives by major hedge programs is as follows: 
•
Risks Related to Guarantee Benefits — We use a wide range of derivative contracts to mitigate the risk associated with living guarantee benefits. These derivatives include equity and interest rate futures, interest rate swaps, currency futures/forwards, equity indexed options, total rate of return swaps, interest rate option contracts and equity variance swaps.
•
Minimum Interest Rate Guarantees — For certain liability contracts, we provide the contractholder a guaranteed minimum interest rate. These contracts include certain fixed annuities and other insurance liabilities. We purchase interest rate caps and floors to reduce risk associated with these liability guarantees.
•
Reinvestment Risk in Long Duration Liability Contracts — Derivatives are used to hedge interest rate risk related to certain long duration liability contracts. Hedges include interest rate swaps and swaptions.
•
Foreign Currency Exchange Rate Risk — We use currency swaps, forwards and options to hedge foreign currency exchange rate risk. These hedges are generally used to swap foreign currency denominated bonds or equity market exposures to U.S. dollars.
•
General ALM Hedging Strategies — In the ordinary course of managing our asset/liability risks, we use interest rate futures, interest rate swaps, interest rate caps, interest rate floors and inflation swaps. These hedges are designed to reduce interest rate risk or inflation risk related to the existing assets or liabilities or related to expected future cash flows.
Risk Measurement: Sensitivity Analysis
We measure market risk related to our market sensitive assets and liabilities based on changes in interest rates, foreign currency exchange rates and equity market prices utilizing a sensitivity analysis. For purposes of this disclosure, a significant portion of the liabilities relating to insurance contracts is excluded, as discussed further below. This analysis estimates the potential changes in estimated fair value based on a hypothetical 10% change (increase or decrease) in interest rates, foreign currency exchange rates and equity market prices. We believe that a 10% change (increase or decrease) in these market rates and prices is reasonably possible in the near-term. In performing the analysis summarized below, we used market rates at December 31, 2018. The sensitivity analysis separately calculates each of our market risk exposures (interest rate, foreign currency exchange rate and equity market) relating to our assets and liabilities. We modeled the impact of changes (increases and decreases) in market rates and prices on the estimated fair values of our market sensitive assets and liabilities and present the results with the most adverse level of market risk impact to the Company for each of these market risk exposures as follows: 
•
the net present values of our interest rate sensitive exposures resulting from a 10% change (increase or decrease) in interest rates;
•
the U.S. dollar equivalent estimated fair values of our foreign currency exposures due to a 10% change (increase in the value of the U.S. dollar compared to all foreign currencies or decrease in the value of the U.S. dollar compared to all foreign currencies) in foreign currency exchange rates; and
•
the estimated fair value of our equity positions due to a 10% change (increase or decrease) in equity market prices.

83

The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that our actual losses in any particular period will not exceed the amounts indicated in the table below. Limitations related to this sensitivity analysis include: 
•
interest sensitive liabilities do not include $133.4 billion, at carrying value, of insurance contracts. Management believes that the changes in the economic value of those contracts under changing interest rates would offset a significant portion of the fair value changes of interest sensitive assets;
•
the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on mortgage loans;
•
sensitivities do not include the impact on asset or liability valuation of changes in market liquidity or changes in market credit spreads;
•
foreign currency risk is not isolated for certain embedded derivatives within host asset and liability contracts, as the risk on these instruments is reflected as equity;
•
for the derivatives that qualify as hedges, and for certain other assets such as mortgage loans, the impact on reported earnings may be materially different from the change in market values;
•
the analysis excludes liabilities pursuant to insurance contracts, as well as real estate holdings, private equity and hedge fund holdings; and
•
the model assumes that the composition of assets and liabilities remains unchanged throughout the period.
Accordingly, we use such models as tools and not as substitutes for the experience and judgment of our management. Based on our analysis of the impact of a 10% change (increase or decrease) in market rates and prices, we have determined that such a change could have a material adverse effect on the estimated fair value of certain assets and liabilities from interest rate, foreign currency exchange rate and equity market exposures.
The table below illustrates the potential loss in estimated fair value for each market risk exposure of our market sensitive assets and liabilities at:
 
December 31, 2018
 
(In millions)
Interest rate risk
$
3,599

Foreign currency exchange rate risk
$
221

Equity market risk
$
(21
)
The risk sensitivities derived used a 10% increase to interest rates, a 10% weakening of the U.S. dollar against foreign currencies, and a 10% increase in equity prices. The potential losses in estimated fair value presented are for non-trading securities.

84

The table below provides additional detail regarding the potential loss in estimated fair value of our interest sensitive financial instruments due to a 10% increase in interest rates by type of asset or liability at:
 
December 31, 2018
 
Notional Amount
 
Estimated
Fair
Value (1)
 
Assuming a 10% Increase in Interest Rates
 
(In millions)
Assets
 
 
 
 
 
Fixed maturity securities AFS
 
 
$
159,073

 
$
(2,839
)
Equity securities
 
 
$
773

 
—

FVO Securities
 
 
$
213

 
—

Mortgage loans
 
 
$
64,409

 
(622
)
Policy loans
 
 
$
6,981

 
(82
)
Short-term investments
 
 
$
1,506

 
(1
)
Other invested assets
 
 
$
2,819

 
(1
)
Cash and cash equivalents
 
 
$
6,882

 
—

Accrued investment income
 
 
$
2,050

 
—

Premiums, reinsurance and other receivables
 
 
$
14,786

 
(237
)
Total assets
 
 
 
 
$
(3,782
)
Liabilities (3)
 
 
 
 
 
Policyholder account balances
 
 
$
72,689

 
$
503

Payables for collateral under securities loaned and other transactions
 
 
$
18,472

 
—

Short-term debt
 
 
$
129

 
—

Long-term debt
 
 
$
1,746

 
28

Other liabilities
 
 
$
13,637

 
225

Embedded derivatives within liability host contracts (2)
 
 
$
704

 
195

Total liabilities
 
 
 
 
$
951

Derivative Instruments
 
 
 
 
 
Interest rate swaps
$
41,865

 
$
3,755

 
$
(428
)
Interest rate floors
$
12,701

 
$
102

 
(26
)
Interest rate caps
$
54,576

 
$
153

 
62

Interest rate futures
$
794

 
$
(1
)
 
2

Interest rate options
$
24,340

 
$
185

 
(67
)
Interest rate forwards
$
3,023

 
$
(216
)
 
(113
)
Interest rate total return swaps

$
1,048

 
$
31

 
(54
)
Synthetic GICs
$
18,006

 
$
—

 
—

Foreign currency swaps
$
33,416

 
$
570

 
(128
)
Foreign currency forwards
$
943

 
$
1

 
(1
)
Credit default swaps
$
8,722

 
$
74

 
—

Equity futures
$
1,006

 
$
(5
)
 
—

Equity index options
$
23,162

 
$
310

 
(15
)
Equity variance swaps
$
1,946

 
$
(49
)
 
—

Equity total return swaps
$
886

 
$
89

 
—

Total derivative instruments
 
 
 
 
$
(768
)
Net Change
 
 
 
 
$
(3,599
)
______________
(1)
Separate account assets and liabilities, which are interest rate sensitive, are not included herein as any interest rate risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below) or included within future policy benefits and other policy-related balances (see footnote (3) below). FVO Securities and long-term debt exclude $4 million and $5 million, respectively, related to CSEs.
(2)
Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.

85

(3)
Excludes $133.4 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% increase in interest rates.
Sensitivity to rising interest rates was consistent with prior year end; $3.6 billion at both December 31, 2018 and December 31, 2017.

86

The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% decrease in the U.S. dollar compared to all foreign currencies at:
 
December 31, 2018
 
Notional Amount
 
Estimated
Fair
Value (1)
 
Assuming a
10% Decrease
in the Foreign
Exchange Rate
 
(In millions)
Assets
 
 
 
 
 
Fixed maturity securities AFS
 
 
$
159,073

 
$
1,457

Equity securities
 
 
$
773

 
—

FVO Securities
 
 
$
213

 
—

Mortgage loans
 
 
$
64,409

 
385

Policy loans
 
 
$
6,981

 
—

Short-term investments
 
 
$
1,506

 
69

Other invested assets
 
 
$
2,819

 
185

Cash and cash equivalents
 
 
$
6,882

 
—

Accrued investment income
 
 
$
2,050

 
—

Premiums, reinsurance and other receivables
 
 
$
14,786

 
—

Total assets
 
 
 
 
$
2,096

Liabilities
 
 
 
 
 
Policyholder account balances
 
 
$
72,689

 
$
(1,091
)
Payables for collateral under securities loaned and other transactions
 
 
$
18,472

 
—

Long-term debt
 
 
$
1,746

 
—

Other liabilities
 
 
$
13,637

 
—

Embedded derivatives within liability host contracts (2)
 
 
$
704

 
—

Total liabilities
 
 
 
 
$
(1,091
)
Derivative Instruments
 
 
 
 
 
Interest rate swaps
$
41,865

 
$
3,755

 
$
—

Interest rate floors
$
12,701

 
$
102

 
—

Interest rate caps
$
54,576

 
$
153

 
—

Interest rate futures
$
794

 
$
(1
)
 
—

Interest rate options
$
24,340

 
$
185

 
—

Interest rate forwards
$
3,023

 
$
(216
)
 
—

Interest rate total return swaps

$
1,048

 
$
31

 
—

Synthetic GICs
$
18,006

 
$
—

 
—

Foreign currency swaps
$
33,416

 
$
570

 
(1,158
)
Foreign currency forwards
$
943

 
$
1

 
(68
)
Credit default swaps
$
8,722

 
$
74

 
3

Equity futures
$
1,006

 
$
(5
)
 
—

Equity index options
$
23,162

 
$
310

 
(3
)
Equity variance swaps
$
1,946

 
$
(49
)
 
—

Equity total return swaps
$
886

 
$
89

 
—

Total derivative instruments
 
 
 
 
$
(1,226
)
Net Change
 
 
 
 
$
(221
)
______________
(1)
Does not necessarily represent those financial instruments solely subject to foreign currency exchange rate risk. Separate account assets and liabilities, which are foreign currency exchange rate sensitive, are not included herein as any foreign currency exchange rate risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below). FVO Securities and long-term debt exclude $4 million and $5 million, respectively, related to CSEs.
(2)
Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.

87

Sensitivity to foreign currency exchange rates decreased $13 million, to $221 million at December 31, 2018 from $234 million at December 31, 2017.
The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% increase in equity prices by type of asset or liability at:
 
December 31, 2018
 
Notional Amount
 
Estimated
Fair
Value (1)
 
Assuming a
10% Increase
in Equity
Prices
 
(In millions)
Assets
 
 
 
 
 
Equity securities
 
 
$
773

 
$
77

FVO Securities

 
 
$
213

 
16

Total assets
 
 
 
 
$
93

Liabilities (3)
 
 
 
 
 
Policyholder account balances
 
 
$
72,689

 
$
—

Embedded derivatives within liability host contracts (2)
 
 
$
704

 
250

Total liabilities
 
 
 
 
$
250

Derivative Instruments
 
 
 
 
 
Interest rate swaps
$
41,865

 
$
3,755

 
$
—

Interest rate floors
$
12,701

 
$
102

 
—

Interest rate caps
$
54,576

 
$
153

 
—

Interest rate futures
$
794

 
$
(1
)
 
—

Interest rate options
$
24,340

 
$
185

 
—

Interest rate forwards
$
3,023

 
$
(216
)
 
—

Interest rate total return swaps

$
1,048

 
$
31

 
—

Synthetic GICs
$
18,006

 
$
—

 
—

Foreign currency swaps
$
33,416

 
$
570

 
—

Foreign currency forwards
$
943

 
$
1

 
—

Credit default swaps
$
8,722

 
$
74

 
—

Equity futures
$
1,006

 
$
(5
)
 
(75
)
Equity index options
$
23,162

 
$
310

 
(172
)
Equity variance swaps
$
1,946

 
$
(49
)
 
1

Equity total return swaps
$
886

 
$
89

 
(76
)
Total derivative instruments
 
 
 
 
$
(322
)
Net Change
 
 
 
 
$
21

______________
(1)
Does not necessarily represent those financial instruments solely subject to equity price risk. Additionally, separate account assets and liabilities, which are equity market sensitive, are not included herein as any equity market risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below) or included within future policy benefits and other policy-related balances (see footnote (3) below). FVO Securities excludes $4 million related to CSEs.
(2)
Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.
(3)
Excludes $133.4 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances.
As of December 31, 2018 sensitivity to a 10% equity market increase was a favorable $21 million. As of December 31, 2017 sensitivity to a 10% equity market decrease was an unfavorable $21 million.


88

Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements, Notes and Schedules
 
Page
Financial Statements at December 31, 2018 and 2017 and for the Years Ended December 31, 2018, 2017 and 2016:
 
Financial Statement Schedules at December 31, 2018 and 2017 and for the Years Ended December 31, 2018, 2017 and 2016:
 

89

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Metropolitan Life Insurance Company

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Metropolitan Life Insurance Company and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index to Consolidated Financial Statements, Notes and Schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP
New York, New York
March 18, 2019

We have served as the Company’s auditor since at least 1968; however, an earlier year could not be reliably determined.


90

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Balance Sheets
December 31, 2018 and 2017
(In millions, except share and per share data)
 
 
2018
 
2017
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $155,175 and $157,809, respectively)
 
$
159,073

 
$
170,272

Equity securities, at estimated fair value
 
773

 
1,658

Mortgage loans (net of valuation allowances of $291 and $271, respectively; includes $210 and $0, respectively, relating to variable interest entities; includes $299 and $520, respectively, under the fair value option)
 
63,687

 
58,459

Policy loans
 
6,061

 
6,006

Real estate and real estate joint ventures (includes $1,394 and $1,077, respectively, relating to variable interest entities; includes $0 and $25, respectively, of real estate held-for-sale)
 
6,152

 
6,656

Other limited partnership interests
 
4,481

 
3,991

Short-term investments, principally at estimated fair value
 
1,506

 
3,155

Other invested assets (includes $113 and $131, respectively, relating to variable interest entities)
 
15,690

 
14,911

Total investments
 
257,423

 
265,108

Cash and cash equivalents, principally at estimated fair value (includes $14 and $12, respectively, relating to variable interest entities)
 
6,882

 
5,069

Accrued investment income (includes $1 and $0, respectively, relating to variable interest entities)
 
2,050

 
2,042

Premiums, reinsurance and other receivables (includes $2 and $3, respectively, relating to variable interest entities)
 
21,829

 
22,098

Deferred policy acquisition costs and value of business acquired
 
4,117

 
4,348

Current income tax recoverable
 
—

 
64

Deferred income tax asset
 
43

 
—

Other assets (includes $2 and $2, respectively, relating to variable interest entities)
 
3,723

 
4,741

Separate account assets
 
110,850

 
130,825

Total assets
 
$
406,917

 
$
434,295

Liabilities and Equity
 
 
 
 
Liabilities
 
 
 
 
Future policy benefits
 
$
126,099

 
$
119,415

Policyholder account balances
 
90,656

 
93,939

Other policy-related balances
 
7,264

 
7,176

Policyholder dividends payable
 
494

 
499

Policyholder dividend obligation
 
428

 
2,121

Payables for collateral under securities loaned and other transactions
 
18,472

 
19,871

Short-term debt
 
129

 
243

Long-term debt (includes $5 and $6, respectively, at estimated fair value, relating to variable interest entities)
 
1,567

 
1,667

Current income tax payable
 
611

 
—

Deferred income tax liability
 
—

 
1,369

Other liabilities (includes $0 and $3, respectively, relating to variable interest entities)
 
24,620

 
27,409

Separate account liabilities
 
110,850

 
130,825

Total liabilities
 
381,190

 
404,534

Contingencies, Commitments and Guarantees (Note 16)
 


 


Equity
 
 
 
 
Metropolitan Life Insurance Company stockholder’s equity:
 
 
 
 
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 494,466,664 shares issued and outstanding
 
5

 
5

Additional paid-in capital
 
12,450

 
14,150

Retained earnings
 
9,512

 
10,035

Accumulated other comprehensive income (loss)
 
3,562

 
5,428

Total Metropolitan Life Insurance Company stockholder’s equity
 
25,529

 
29,618

Noncontrolling interests
 
198

 
143

Total equity
 
25,727

 
29,761

Total liabilities and equity
 
$
406,917

 
$
434,295

See accompanying notes to the consolidated financial statements.

91

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Operations
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
 
2018
 
2017
 
2016
Revenues
 
 
 
 
 
Premiums
$
26,613

 
$
22,925

 
$
22,393

Universal life and investment-type product policy fees
2,124

 
2,227

 
2,542

Net investment income
10,919

 
10,513

 
11,083

Other revenues
1,586

 
1,570

 
1,478

Net investment gains (losses):
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities available-for-sale
(23
)
 
(7
)
 
(87
)
Other-than-temporary impairments on fixed maturity securities available-for-sale transferred to other comprehensive income (loss)
—

 
1

 
(10
)
Other net investment gains (losses)
176

 
340

 
229

Total net investment gains (losses)
153

 
334

 
132

Net derivative gains (losses)
766

 
(344
)
 
(1,138
)
Total revenues
42,161

 
37,225

 
36,490

Expenses
 
 
 
 
 
Policyholder benefits and claims
29,097

 
25,792

 
25,313

Interest credited to policyholder account balances
2,479

 
2,235

 
2,233

Policyholder dividends
1,085

 
1,097

 
1,200

Other expenses
5,191

 
5,135

 
5,803

Total expenses
37,852

 
34,259

 
34,549

Income (loss) before provision for income tax
4,309

 
2,966

 
1,941

Provision for income tax expense (benefit)
173

 
(561
)
 
199

Net income (loss)
4,136

 
3,527

 
1,742

Less: Net income (loss) attributable to noncontrolling interests
6

 
2

 
(8
)
Net income (loss) attributable to Metropolitan Life Insurance Company
$
4,130

 
$
3,525

 
$
1,750

See accompanying notes to the consolidated financial statements.

92

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
 
 
2018
 
2017
 
2016
Net income (loss)
 
$
4,136

 
$
3,527

 
$
1,742

Other comprehensive income (loss):
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
 
(6,318
)
 
4,079

 
406

Unrealized gains (losses) on derivatives
 
346

 
(848
)
 
36

Foreign currency translation adjustments
 
(20
)
 
26

 
13

Defined benefit plans adjustment
 
2,409

 
129

 
217

Other comprehensive income (loss), before income tax
 
(3,583
)
 
3,386

 
672

Income tax (expense) benefit related to items of other comprehensive income (loss)
 
793

 
(1,077
)
 
(238
)
Other comprehensive income (loss), net of income tax
 
(2,790
)
 
2,309

 
434

Comprehensive income (loss)
 
1,346

 
5,836

 
2,176

Less: Comprehensive income (loss) attributable to noncontrolling interest, net of income tax
 
6

 
2

 
(8
)
Comprehensive income (loss) attributable to Metropolitan Life Insurance Company
 
$
1,340

 
$
5,834

 
$
2,184

See accompanying notes to the consolidated financial statements.

93

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Equity
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Metropolitan Life
Insurance Company
Stockholder’s Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2015
$
5

 
$
14,444

 
$
13,535

 
$
2,685

 
$
30,669

 
$
372

 
$
31,041

Capital contributions from MetLife, Inc.
 
 
10

 
 
 
 
 
10

 
 
 
10

Returns of capital
 
 
(68
)
 
 
 
 
 
(68
)
 
 
 
(68
)
Excess tax benefits related to stock-based compensation
 
 
27

 
 
 
 
 
27

 
 
 
27

Dividends paid to MetLife, Inc.
 
 
 
 
(3,600
)
 
 
 
(3,600
)
 
 
 
(3,600
)
Dividend of subsidiaries (Note 3)
 
 
 
 
(2,652
)
 
 
 
(2,652
)
 
2

 
(2,650
)
Change in equity of noncontrolling interests
 
 
 
 
 
 
 
 
—

 
(176
)
 
(176
)
Net income (loss)
 
 
 
 
1,750

 
 
 
1,750

 
(8
)
 
1,742

Other comprehensive income (loss), net of
income tax
 
 
 
 
 
 
434

 
434

 
 
 
434

Balance at December 31, 2016
5

 
14,413

 
9,033

 
3,119

 
26,570

 
190

 
26,760

Capital contributions from MetLife, Inc.
 
 
6

 
 
 
 
 
6

 
 
 
6

Returns of capital
 
 
(20
)
 
 
 
 
 
(20
)
 
 
 
(20
)
Purchase of operating joint venture interest from an affiliate (Note 8)
 
 
(249
)
 
 
 
 
 
(249
)
 
 
 
(249
)
Dividends paid to MetLife, Inc.
 
 
 
 
(2,523
)
 
 
 
(2,523
)
 
 
 
(2,523
)
Change in equity of noncontrolling interests
 
 
 
 
 
 
 
 
—

 
(49
)
 
(49
)
Net income (loss)
 
 
 
 
3,525

 
 
 
3,525

 
2

 
3,527

Other comprehensive income (loss), net of
income tax
 
 
 
 
 
 
2,309

 
2,309

 

 
2,309

Balance at December 31, 2017
5

 
14,150

 
10,035

 
5,428

 
29,618

 
143

 
29,761

Cumulative effects of changes in accounting principles, net of income tax (Note 1)
 
 
 
 
(917
)
 
924

 
7

 
 
 
7

Balance at January 1, 2018
5

 
14,150

 
9,118

 
6,352

 
29,625

 
143

 
29,768

Capital contributions from MetLife, Inc.
 
 
74

 
 
 
 
 
74

 
 
 
74

Returns of capital
 
 
(2
)
 
 
 
 
 
(2
)
 
 
 
(2
)
Transfer of employee benefit plans to an affiliate (Note 14)
 
 
(1,772
)
 
 
 
 
 
(1,772
)
 
 
 
(1,772
)
Dividends paid to MetLife, Inc.
 
 
 
 
(3,736
)
 
 
 
(3,736
)
 
 
 
(3,736
)
Change in equity of noncontrolling interests
 
 
 
 
 
 
 
 
—

 
49

 
49

Net income (loss)
 
 
 
 
4,130

 
 
 
4,130

 
6

 
4,136

Other comprehensive income (loss), net of
income tax
 
 
 
 
 
 
(2,790
)
 
(2,790
)
 

 
(2,790
)
Balance at December 31, 2018
$
5

 
$
12,450

 
$
9,512

 
$
3,562

 
$
25,529

 
$
198

 
$
25,727

See accompanying notes to the consolidated financial statements.

94

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
 
2018
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
 
Net income (loss)
$
4,136

 
$
3,527

 
$
1,742

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization expenses
264

 
395

 
367

Amortization of premiums and accretion of discounts associated with investments, net
(907
)
 
(823
)
 
(975
)
(Gains) losses on investments and from sales of businesses, net
(153
)
 
(334
)
 
(132
)
(Gains) losses on derivatives, net
(346
)
 
900

 
1,865

(Income) loss from equity method investments, net of dividends or distributions
375

 
314

 
483

Interest credited to policyholder account balances
2,479

 
2,235

 
2,233

Universal life and investment-type product policy fees
(2,124
)
 
(2,227
)
 
(2,542
)
Change in fair value option and trading securities
3

 
17

 
406

Change in accrued investment income
11

 
(40
)
 
81

Change in premiums, reinsurance and other receivables
(309
)
 
277

 
(2,606
)
Change in deferred policy acquisition costs and value of business acquired, net
436

 
180

 
108

Change in income tax
911

 
(2,200
)
 
(438
)
Change in other assets
947

 
309

 
701

Change in insurance-related liabilities and policy-related balances
3,997

 
4,029

 
2,741

Change in other liabilities
(1,675
)
 
(156
)
 
1,731

Other, net
(19
)
 
(49
)
 
39

Net cash provided by (used in) operating activities
8,026

 
6,354

 
5,804

Cash flows from investing activities
 
 
 
 
 
Sales, maturities and repayments of:
 
 
 
 
 
Fixed maturity securities available-for-sale
67,609

 
53,984

 
74,985

Equity securities
135

 
831

 
859

Mortgage loans
8,908

 
8,810

 
11,286

Real estate and real estate joint ventures
1,131

 
955

 
762

Other limited partnership interests
479

 
565

 
830

Purchases and originations of:
 
 
 
 
 
Fixed maturity securities available-for-sale
(61,109
)
 
(55,973
)
 
(72,414
)
Equity securities
(161
)
 
(607
)
 
(771
)
Mortgage loans
(13,968
)
 
(10,680
)
 
(16,039
)
Real estate and real estate joint ventures
(463
)
 
(885
)
 
(1,390
)
Other limited partnership interests
(871
)
 
(794
)
 
(809
)
Cash received in connection with freestanding derivatives
1,798

 
1,661

 
1,372

Cash paid in connection with freestanding derivatives
(2,258
)
 
(2,688
)
 
(2,451
)
Net change in policy loans
(55
)
 
(61
)
 
85

Net change in short-term investments
1,671

 
1,623

 
694

Net change in other invested assets
351

 
(177
)
 
(434
)
Net change in property, equipment and leasehold improvements
209

 
(177
)
 
(227
)
Other, net
4

 
—

 
—

Net cash provided by (used in) investing activities
$
3,410

 
$
(3,613
)
 
$
(3,662
)

See accompanying notes to the consolidated financial statements.




95

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)

Consolidated Statements of Cash Flows — (continued)
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
 
2018
 
2017
 
2016
Cash flows from financing activities
 
 
 
 
 
Policyholder account balances:
 
 
 
 
 
Deposits
$
74,550

 
$
70,258

 
$
64,962

Withdrawals
(78,746
)
 
(70,215
)
 
(61,252
)
Net change in payables for collateral under securities loaned and other transactions
(1,399
)
 
(525
)
 
(696
)
Long-term debt issued
24

 
169

 
45

Long-term debt repaid
(109
)
 
(92
)
 
(58
)
Financing element on certain derivative instruments and other derivative related transactions, net
(149
)
 
(300
)
 
(321
)
Dividend of subsidiaries
—

 
—

 
(115
)
Dividends paid to MetLife, Inc.
(3,736
)
 
(2,523
)
 
(3,600
)
Return of capital associated with the purchase of operating joint venture interest from an affiliate
—

 
(249
)
 
—

Other, net
(54
)
 
88

 
(44
)
Net cash provided by (used in) financing activities
(9,619
)
 
(3,389
)
 
(1,079
)
Effect of change in foreign currency exchange rates on cash and cash equivalents balances
(4
)
 
3

 
—

Change in cash and cash equivalents
1,813

 
(645
)
 
1,063

Cash and cash equivalents, beginning of year
5,069

 
5,714

 
4,651

Cash and cash equivalents, end of year
$
6,882

 
$
5,069

 
$
5,714

Supplemental disclosures of cash flow information
 
 
 
 
 
Net cash paid (received) for:
 
 
 
 
 
Interest
$
107

 
$
105

 
$
114

Income tax
$
483

 
$
1,693

 
$
819

Non-cash transactions
 
 
 
 
 
Capital contributions from MetLife, Inc.
$
74

 
$
6

 
$
10

Returns of capital
$
—

 
$
15

 
$
—

Transfer of employee benefit plans to an affiliate (Note 14)

$
1,772

 
$
—

 
$
—

Fixed maturity securities available-for-sale received in connection with pension risk transfer transactions
$
3,016

 
$
—

 
$
985

Transfer of fixed maturity securities available-for-sale from affiliates
$
—

 
$
292

 
$
367

Transfer of fixed maturity securities available-for-sale to affiliates
$
—

 
$
—

 
$
3,940

Transfer of mortgage loans to affiliates
$
—

 
$
—

 
$
626

Deconsolidation of real estate investment vehicles:
 
 
 
 
 
Reduction of real estate and real estate joint ventures
$
—

 
$
—

 
$
354

Reduction of noncontrolling interests
$
—

 
$
—

 
$
354

Disposal of subsidiaries:
 
 
 
 
 
Assets disposed
$
—

 
$
—

 
$
27,476

Liabilities disposed
—

 
—

 
(24,572
)
Net assets disposed
—

 
—

 
2,904

Cash disposed
—

 
—

 
(115
)
Dividend of interests in subsidiaries
—

 
—

 
(2,789
)
Loss on dividend of interests in subsidiaries
$
—

 
$
—

 
$
—


See accompanying notes to the consolidated financial statements.

96
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements

1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Metropolitan Life Insurance Company and its subsidiaries (collectively, “MLIC” or the “Company”) is a provider of insurance, annuities, employee benefits and asset management and is organized into two segments: U.S. and MetLife Holdings. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”).
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 on the consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from these estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of Metropolitan Life Insurance Company and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
Separate Accounts
Separate accounts are established in conformity with insurance laws. Generally, the assets of the separate accounts cannot be used to settle the liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. The Company reports 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 at their fair value, which is based on the estimated fair values of the underlying assets comprising the individual separate account portfolios. Investment performance (including 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 on the statements of operations. Separate accounts credited with a contractual investment return are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses and the accounting for these investments is consistent with the methodologies described herein for similar financial instruments held within the general account.
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. Such fees are included in universal life and investment-type product policy fees on the statements of operations.
Reclassifications
Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been reclassified to conform to the current year presentation as discussed throughout the Notes to the Consolidated Financial Statements.

97
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Summary of Significant Accounting Policies
The following are the Company’s significant accounting policies with references to notes providing additional information on such policies and critical accounting estimates relating to such policies.
Accounting Policy
Note
Insurance
4
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
5
Reinsurance
6
Investments
8
Derivatives
9
Fair Value
10
Employee Benefit Plans
14
Income Tax
15
Litigation Contingencies
16
Insurance
Future Policy Benefit Liabilities and Policyholder Account Balances
The Company establishes liabilities for amounts payable under insurance policies. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. 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. For long-duration insurance contracts, assumptions such as mortality, morbidity and interest rates are “locked in” upon the issuance of new business. However, significant adverse changes in experience on such contracts may require the establishment of premium deficiency reserves. Such reserves are determined based on the then current assumptions and do not include a provision for adverse deviation.
Premium deficiency reserves may also be established for short-duration contracts to provide for expected future losses. These reserves are based on actuarial estimates of the amount of loss inherent in that period, including losses incurred for which claims have not been reported. The provisions for unreported claims are calculated using studies that measure the historical length of time between the incurred date of a claim and its eventual reporting to the Company. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts.
Liabilities for universal and variable life policies with 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 life of the contract based on total expected assessments. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing deferred policy acquisition costs (“DAC”), and are thus subject to the same variability and risk as further discussed herein. The assumptions of investment performance and volatility for variable products are consistent with historical experience of appropriate underlying equity indices, such as the S&P Global Ratings (“S&P”) 500 Index. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
The Company regularly reviews its estimates of liabilities for future policy benefits and compares them with its actual experience. Differences result in changes to the liability balances with related charges or credits to benefit expenses in the period in which the changes occur.
Policyholder account balances relate to contracts or contract features where the Company has no significant insurance risk.

98
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

The Company issues directly and assumes through reinsurance variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit adjusted for withdrawals. These guarantees are accounted for as insurance liabilities or as embedded derivatives depending on how and when the benefit is paid. Specifically, a guarantee is accounted for as an embedded derivative if a guarantee is paid without requiring (i) the occurrence of a specific insurable event, or (ii) the policyholder to annuitize. Alternatively, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence of a specific insurable event, or (ii) annuitization. In certain cases, a guarantee may have elements of both an insurance liability and an embedded derivative and in such cases the guarantee is split and accounted for under both models.
Guarantees accounted for as insurance liabilities in future policy benefits include guaranteed minimum death benefits (“GMDBs”), the life-contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”), elective annuitizations of guaranteed minimum income benefits (“GMIBs”) and the life contingent portion of GMIBs that require annuitization when the account balance goes to zero.
Guarantees accounted for as embedded derivatives in policyholder account balances include guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of GMWBs and certain non-life contingent portions of GMIBs. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, premiums received in advance, unearned revenue liabilities, obligations assumed under structured settlement assignments, policyholder dividends due and unpaid, and policyholder dividends left on deposit.
The liability for policy and contract claims generally relates to incurred but not reported (“IBNR”) death, disability, long-term care and dental claims, as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company’s estimated ultimate cost of settling all claims. The Company derives estimates for the development of IBNR claims principally from analyses of historical patterns of claims by business line. The methods used to determine these estimates are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made.
The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premiums received in advance and applies the cash received to premiums when due.
The unearned revenue liability relates to universal life-type and investment-type products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized using the product’s estimated gross profits and margins, similar to DAC as discussed further herein. Such amortization is recorded in universal life and investment-type product policy fees.
See Note 4 for additional information on obligations assumed under structured settlement assignments.
Recognition of Insurance Revenues and Deposits
Premiums related to traditional life and annuity contracts with life contingencies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided to recognize profits over the estimated lives of the insurance policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into earnings in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments.
Premiums related to short-duration non-medical health, disability and accident & health contracts are recognized on a pro rata basis over the applicable contract term.
Deposits related to universal life-type and investment-type products are credited to policyholder account balances. Revenues from such contracts consist of fees for mortality, policy administration and surrender charges and are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged to earnings include interest credited and benefit claims incurred in excess of related policyholder account balances.

99
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

All revenues and expenses are presented net of reinsurance, as applicable.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. Such costs include:
•
incremental direct costs of contract acquisition, such as commissions;
•
the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed; and
•
other essential direct costs that would not have been incurred had a policy not been acquired or renewed.
All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections.
DAC and VOBA are amortized as follows:
Products:
In proportion to the following over estimated lives of the contracts:
•
Nonparticipating and non-dividend-paying traditional contracts:
Actual and expected future gross premiums.
 
•
Term insurance
 
 
•
Nonparticipating whole life insurance
 
 
•
Traditional group life insurance
 
 
•
Non-medical health insurance
 
•
Participating, dividend-paying traditional contracts
Actual and expected future gross margins.
•
Fixed and variable universal life contracts
Actual and expected future gross profits.
•
Fixed and variable deferred annuity contracts
 
See Note 5 for additional information on DAC and VOBA amortization. Amortization of DAC and VOBA is included in other expenses.
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated on the financial statements for reporting purposes.

100
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

The Company generally has two different types of sales inducements which are included in other assets: (i) the policyholder receives a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize DAC. The amortization of sales inducements is included in policyholder benefits and claims. Each year, or more frequently if circumstances indicate a potential recoverability issue exists, the Company reviews deferred sales inducements (“DSI”) to determine the recoverability of the asset.
Value of distribution agreements acquired (“VODA”) is reported in other assets and represents the present value of expected future profits associated with the expected future business derived from the distribution agreements acquired as part of a business combination. Value of customer relationships acquired (“VOCRA”) is also reported in other assets and represents the present value of the expected future profits associated with the expected future business acquired through existing customers of the acquired company or business. The VODA and VOCRA associated with past business combinations are amortized over useful lives ranging from 10 to 30 years and such amortization is included in other expenses. Each year, or more frequently if circumstances indicate a possible impairment exists, the Company reviews VODA and VOCRA to determine whether the asset is impaired.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC when there is a gain at inception on the ceding entity, and to other liabilities when there is a loss at inception. The net cost of reinsurance is recognized as a component of other expenses when there is a gain at inception, and as policyholder benefits and claims when there is a loss at inception and is subsequently amortized on a basis consistent with the methodology used for amortizing DAC related to the underlying reinsured contracts. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums; and ceded (assumed) premiums, reinsurance and other receivables (future policy benefits) are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums. Unearned premiums are reflected as a component of premiums, reinsurance and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of insurance protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting, amounts paid (received) in excess of the related insurance liabilities ceded (assumed) are recognized immediately as a loss and are reported in the appropriate line item within the statement of operations. Any gain on such retroactive agreement is deferred and is amortized as part of DAC, primarily using the recovery method.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.

101
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

The funds withheld liability represents amounts withheld by the Company in accordance with the terms of the reinsurance agreements. The Company withholds the funds rather than transferring the underlying investments and, as a result, records funds withheld liability within other liabilities. The Company recognizes interest on funds withheld, included in other expenses, at rates defined by the terms of the agreement which may be contractually specified or directly related to the investment portfolio.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in premiums, reinsurance and other receivables with changes in estimated fair value reported in net derivative gains (losses). Certain assumed GMWB, GMAB and GMIB are also accounted for as embedded derivatives with changes in estimated fair value reported in net derivative gains (losses).
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
Investments
Net Investment Income and Net Investment Gains (Losses)
Income from investments is reported within net investment income, unless otherwise stated herein. Gains and losses on sales of investments, impairment losses and changes in valuation allowances are reported within net investment gains (losses), unless otherwise stated herein.
Fixed Maturity Securities
The majority of the Company’s fixed maturity securities are classified as available-for-sale (“AFS”) and are reported at their estimated fair value. Unrealized investment gains and losses on these securities are recorded as a separate component of other comprehensive income (loss) (“OCI”), net of policy-related amounts and deferred income taxes. All security transactions are recorded on a trade date basis. Sales of securities are determined on a specific identification basis.
Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount, and is based on the estimated economic life of the securities, which for mortgage-backed and asset-backed securities considers the estimated timing and amount of prepayments of the underlying loans. See Note 8 “— Fixed Maturity Securities AFS — Methodology for Amortization of Premium and Accretion of Discount on Structured Securities.” The amortization of premium and accretion of discount also takes into consideration call and maturity dates.
The Company periodically evaluates these securities for impairment. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in estimated fair value, as well as an analysis of the gross unrealized losses by severity and/or age as described in Note 8 “— Fixed Maturity Securities AFS — Evaluation of Fixed Maturity Securities AFS for OTTI and Evaluating Temporarily Impaired Fixed Maturity Securities AFS.”
For securities in an unrealized loss position, an other-than-temporary impairment (“OTTI”) is recognized in earnings within net investment gains (losses) when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than-credit factors (“noncredit loss”) is recorded in OCI.

102
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Equity Securities
Equity securities are reported at their estimated fair value, with changes in estimated fair value included in net investment gains (losses). Sales of securities are determined on a specific identification basis. Dividends are recognized in net investment income when declared.
Mortgage Loans
The Company disaggregates its mortgage loan investments into three portfolio segments: commercial, agricultural and residential. The accounting policies that are applicable to all portfolio segments are presented below and the accounting policies related to each of the portfolio segments are included in Note 8.
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and are net of valuation allowances. Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount.
Also included in mortgage loans are residential mortgage loans for which the fair value option (“FVO”) was elected and which are stated at estimated fair value. Changes in estimated fair value are recognized in net investment income.
Policy Loans
Policy loans are stated at unpaid principal balances. Interest income is recorded as earned using the contractual interest rate. Generally, accrued interest is capitalized on the policy’s anniversary date. Valuation allowances are not established for policy loans, as they are fully collateralized by the cash surrender value of the underlying insurance policies. Any unpaid principal and accrued interest is deducted from the cash surrender value or the death benefit prior to settlement of the insurance policy.
Real Estate
Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset (typically 20 to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks.
Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition for a reasonable price in comparison to its estimated fair value is classified as held-for-sale. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Real Estate Joint Ventures and Other Limited Partnership Interests
The Company uses the equity method of accounting for real estate joint ventures and other limited partnership interests (“investee”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share of the investee’s earnings in net investment income on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period.
The Company accounts for its interest in real estate joint ventures and other limited partnership interests in which it has virtually no influence over the investee’s operations at fair value. Changes in estimated fair value of these investments are included in net investment gains (losses). Because of the nature and structure of these investments, they do not meet the characteristics of an equity security in accordance with applicable accounting standards.
The Company routinely evaluates its equity method investments for impairment. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred.

103
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Short-term Investments
Short-term investments include highly liquid securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase. Securities included within short-term investments are stated at estimated fair value, while other investments included within short-term investments are stated at amortized cost, which approximates estimated fair value. Short-term investments also include investments in affiliated money market pools.
Other Invested Assets
Other invested assets consist principally of the following:
•
Freestanding derivatives with positive estimated fair values which are described in “— Derivatives” below.
•
Tax credit and renewable energy partnerships which derive a significant source of investment return in the form of income tax credits or other tax incentives. Where tax credits are guaranteed by a creditworthy third party, the investment is accounted for under the effective yield method. Otherwise, the investment is accounted for under the equity method. See Note 15.
•
Affiliated investments include affiliated loans and affiliated preferred stock. Affiliated loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount. Affiliated preferred stock is stated at cost. Dividends are recognized in net investment income when declared.
•
Annuities funding structured settlement claims represent annuities funding claims assumed by the Company in its capacity as a structured settlements assignment company. The annuities are stated at their contract value, which represents the present value of the future periodic claim payments to be provided. The net investment income recognized reflects the amortization of discount of the annuity at its implied effective interest rate. See Note 4.
•
Leveraged leases net investment is equal to the minimum lease payments plus the unguaranteed residual value, less the unearned income, and is recorded net of non-recourse debt. Income is determined by applying the leveraged lease’s estimated rate of return to the net investment in the lease in those periods in which the net investment at the beginning of the period is positive. Leveraged leases derive investment returns in part from their income tax treatment. The Company regularly reviews residual values for impairment.
•
Investments in Federal Home Loan Bank (“FHLB”) common stock are carried at redemption value and are considered restricted investments until redeemed by the respective FHLB regional banks (“FHLBanks”).
•
Investment in an operating joint venture that engages in insurance underwriting activities accounted for under the equity method.
•
Fair value option securities (“FVO Securities”) are primarily investments in fixed maturity securities held-for-investment that are managed on a total return basis where the FVO has been elected, with changes in estimated fair value, included in net investment income.
•
Direct financing leases net investment is equal to the minimum lease payments plus the unguaranteed residual value, less unearned income. Income is determined by applying the pre-tax internal rate of return to the investment balance. The Company regularly reviews lease receivables for impairment.
•
Funds withheld represent a receivable for amounts contractually withheld by ceding companies in accordance with reinsurance agreements. The Company recognizes interest on funds withheld at rates defined by the terms of the agreement which may be contractually specified or directly related to the underlying investments.
Securities Lending and Repurchase Agreements
The Company accounts for securities lending transactions and repurchase agreements as financing arrangements and the associated liability is recorded at the amount of cash received. Income and expenses associated with securities lending transactions and repurchase agreements are reported as investment income and investment expense, respectively, within net investment income.

104
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Securities Lending
The Company enters into securities lending transactions, whereby blocks of securities are loaned to third parties, primarily brokerage firms and commercial banks. The Company obtains collateral at the inception of the loan, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, and maintains it at a level greater than or equal to 100% for the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. The Company is liable to return to the counterparties the cash collateral received. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the Company’s financial statements. The Company monitors the estimated fair value of the securities loaned on a daily basis and additional collateral is obtained as necessary throughout the duration of the loan.
Repurchase Agreements
The Company participates in short-term repurchase agreements with unaffiliated financial institutions. Under these agreements, the Company lends fixed maturity securities and receives cash as collateral in an amount generally equal to 95% to 100% of the estimated fair value of the securities loaned at the inception of the transaction. The Company monitors the estimated fair value of the collateral and the securities loaned throughout the duration of the transaction and additional collateral is obtained as necessary. Securities loaned under such transactions may be sold or re-pledged by the transferee.
Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivative’s carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
Statement of Operations Presentation:
Derivative:
Policyholder benefits and claims
•
Economic hedges of variable annuity guarantees included in future policy benefits
Net investment income
•
Economic hedges of equity method investments in joint ventures
 
•
All derivatives held in relation to trading portfolios
Hedge Accounting
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
•
Fair value hedge (a hedge of the estimated fair value of a recognized asset or liability) - in net derivative gains (losses), consistent with the change in estimated fair value of the hedged item attributable to the designated risk being hedged.
•
Cash flow hedge (a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability) - effectiveness in OCI (deferred gains or losses on the derivative are reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item); ineffectiveness in net derivative gains (losses).
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported on the statement of operations within interest income or interest expense to match the location of the hedged item.

105
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in net derivative gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company sells variable annuities and issues certain insurance products and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
•
the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value recorded in earnings;
•
the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and
•
a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument.
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.

106
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Fair Value
Fair value is defined 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 most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such unadjusted quoted prices are not available, estimated fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management’s judgment are used to determine the estimated fair value of assets and liabilities.
Employee Benefit Plans
Through September 30, 2018, the Company sponsored and/or administered various qualified and nonqualified defined benefit pension plans and other postretirement employee benefit plans covering eligible employees who meet specified eligibility requirements of the sponsor and its participating affiliates. A December 31 measurement date is used for all of the Company’s defined benefit pension and other postretirement benefit plans.
As of October 1, 2018, except for the nonqualified defined pension plan, the plan sponsor was changed from the Company to an affiliate. Following such change, the Company remains a participating affiliate in these plans. Accordingly, beginning October 1, 2018, the Company’s obligation and expense related to such plans is limited to the amount of associated expense allocated to it as a participating affiliate.
The Company recognizes the funded status of each of its defined benefit pension and other postretirement benefit plans, measured as the difference between the fair value of plan assets and the benefit obligation, which is the projected benefit obligation (“PBO”) for pension benefits and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits in other assets or other liabilities.
Actuarial gains and losses result from differences between the actual experience and the assumed experience on plan assets or PBO during a particular period and are recorded in accumulated OCI (“AOCI”). To the extent such gains and losses exceed 10% of the greater of the PBO or the estimated fair value of plan assets, the excess is amortized into net periodic benefit costs, generally over the average projected future service years of the active employees. In addition, prior service costs (credit) are recognized in AOCI at the time of the amendment and then amortized to net periodic benefit costs over the average projected future service years of the active employees.
Net periodic benefit costs are determined using management’s estimates and actuarial assumptions and are comprised of service cost, interest cost, settlement and curtailment costs, expected return on plan assets, amortization of net actuarial (gains) losses, and amortization of prior service costs (credit). Fair value is used to determine the expected return on plan assets.
Through September 30, 2018, the Company also sponsored defined contribution plans for substantially all employees under which a portion of employee contributions is matched. Applicable matching contributions were made each payroll period. Accordingly, the Company recognized compensation cost for current matching contributions. As of October 1, 2018, except for the nonqualified defined contribution plan, the plan sponsor was changed from the Company to an affiliate.
See Note 14 for information on the plan sponsor change.

107
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Income Tax
Metropolitan Life Insurance Company and its includable subsidiaries join with MetLife, Inc. and its includable subsidiaries in filing a consolidated U.S. life insurance and non-life insurance federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended. Current taxes (and the benefits of tax attributes such as losses) are allocated to Metropolitan Life Insurance Company and its subsidiaries under the consolidated tax return regulations and a tax sharing agreement. Under the consolidated tax return regulations, MetLife, Inc. has elected the “percentage method” (and 100% under such method) of reimbursing companies for tax attributes, e.g., net operating losses. As a result, 100% of tax attributes are reimbursed by MetLife, Inc. to the extent that consolidated federal income tax of the consolidated federal tax return group is reduced in a year by tax attributes. On an annual basis, each of the profitable subsidiaries pays to MetLife, Inc. the federal income tax which it would have paid based upon that year’s taxable income. If Metropolitan Life Insurance Company or its includable subsidiaries has current or prior deductions and credits (including but not limited to losses) which reduce the consolidated tax liability of the consolidated federal tax return group, the deductions and credits are characterized as realized (or realizable) by Metropolitan Life Insurance Company and its includable subsidiaries when those tax attributes are realized (or realizable) by the consolidated federal tax return group, even if Metropolitan Life Insurance Company or its includable subsidiaries would not have realized the attributes on a stand-alone basis under a “wait and see” method.
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 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 against deferred tax assets when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination, the Company considers many factors, including:
•
the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
•
the jurisdiction in which the deferred tax asset was generated;
•
the length of time that carryforward can be utilized in the various taxing jurisdictions;
•
future taxable income exclusive of reversing temporary differences and carryforwards;
•
future reversals of existing taxable temporary differences;
•
taxable income in prior carryback years; and
•
tax planning strategies.
The Company may be required to change its provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, the effect of changes in tax laws, tax regulations, or interpretations of such laws or regulations, is recognized in net income tax expense (benefit) in the period of change.
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 can be recorded on the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Unrecognized tax benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings in the period that such determination is made.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax expense.
On December 22, 2017, President Trump signed into law H.R. 1, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). See Note 15 for additional information on U.S. Tax Reform and related Staff Accounting Bulletin (“SAB”) 118 provisional amounts.

108
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Litigation Contingencies
The Company is a defendant in a large number of litigation matters and is involved in a number of regulatory investigations. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Except as otherwise disclosed in Note 16, legal costs are recognized as incurred. 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 on the Company’s consolidated financial statements.
Other Accounting Policies
Stock-Based Compensation
The Company recognizes stock-based compensation on its consolidated results of operations based on MetLife, Inc.’s allocation. MetLife, Inc. applies the accounting policies described below to determine those expenses.
MetLife, Inc. grants certain employees stock-based compensation awards under various plans that are subject to specific vesting conditions. MetLife, Inc. measures the cost of all stock-based transactions at fair value at the grant date and recognizes it over the period during which a grantee must provide services in exchange for the award. MetLife, Inc. remeasures performance shares and cash-payable awards quarterly. Employees who meet certain age-and-service criteria receive payment or may exercise their awards regardless of ending employment. However, the award’s payment or exercisability takes place at the originally-scheduled time, i.e., is not accelerated. As a result, the award does not require the employee to provide any substantive service after attaining those age-and-service criteria. Accordingly, MetLife, Inc. recognizes compensation expense related to stock-based awards from the beginning of the vesting to the earlier of the end of the vesting period or the date the employee attains the age-and-service criteria. MetLife, Inc. incorporates an estimation of future forfeitures of stock-based awards into the determination of compensation expense when recognizing expense over the requisite service period.
Cash and Cash Equivalents
The Company considers highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Securities included within cash equivalents are stated at estimated fair value, while other investments included within cash equivalents are stated at amortized cost, which approximates estimated fair value.
Property, Equipment, Leasehold Improvements and Computer Software
Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, as appropriate. The estimated life is generally 40 years for company occupied real estate property, from one to 25 years for leasehold improvements, and from three to seven years for all other property and equipment. The cost basis of the property, equipment and leasehold improvements was $926 million and $1.2 billion at December 31, 2018 and 2017, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $572 million and $614 million at December 31, 2018 and 2017, respectively. Related depreciation and amortization expense was $81 million, $124 million and $139 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software was $1.3 billion and $1.7 billion at December 31, 2018 and 2017, respectively. Accumulated amortization of capitalized software was $1.3 billion at both December 31, 2018 and 2017. Related amortization expense was $90 million, $164 million and $132 million for the years ended December 31, 2018, 2017 and 2016, respectively.
During the year ended December 31, 2018, the Company sold to an affiliate certain property, equipment, leasehold improvements and computer software at carrying value for a total of $785 million.

109
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Other Revenues
Other revenues primarily include, in addition to items described elsewhere herein, fees related to service contracts from customers related to prepaid legal plans, administrative services-only (“ASO”) contracts, and recordkeeping and related services. Substantially all of the revenue from the services is recognized over time as the applicable services are provided or are made available to the customers. The revenue recognized includes variable consideration to the extent it is probable that a significant reversal will not occur. In addition to the service fees, other revenues also include certain stable value fees and reinsurance ceded. These fees are recognized as earned.
Policyholder Dividends
Policyholder dividends are approved annually by Metropolitan Life Insurance Company’s board of directors. The aggregate amount of policyholder dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management’s judgment as to the appropriate level of statutory surplus to be retained by Metropolitan Life Insurance Company.
Foreign Currency
Assets, liabilities and operations of foreign affiliates and subsidiaries are recorded based on the functional currency of each entity. The determination of the functional currency is made based on the appropriate economic and management indicators. The local currencies of foreign operations are the functional currencies. Assets and liabilities of foreign affiliates and subsidiaries are translated from the functional currency to U.S. dollars at the exchange rates in effect at each year-end and revenues and expenses are translated at the average exchange rates during the year. The resulting translation adjustments are charged or credited directly to OCI, net of applicable taxes. Gains and losses from foreign currency transactions, including the effect of re-measurement of monetary assets and liabilities to the appropriate functional currency, are reported as part of net investment gains (losses) in the period in which they occur.
Goodwill
Goodwill, which is included in other assets, represents the future economic benefits arising from net assets acquired in a business combination that are not individually identified and recognized. Goodwill is calculated as the excess of cost over the estimated fair value of such net assets acquired, is not amortized, and is tested for impairment based on a fair value approach at least annually or more frequently if events or circumstances indicate that there may be justification for conducting an interim test. The Company performs its annual goodwill impairment testing during the third quarter based upon data as of the close of the second quarter. Goodwill associated with a business acquisition is not tested for impairment during the year the business is acquired unless there is a significant identified impairment event.
The impairment test is performed at the reporting unit level, which 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. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, there may be an indication of impairment. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business combination. The excess of the carrying value of goodwill over the implied fair value of goodwill would be recognized as an impairment and recorded as a charge against net income.
The Company tests goodwill for impairment by either performing a qualitative assessment or a quantitative test. The qualitative assessment is an assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect not to perform the qualitative assessment for some or all of its reporting units and perform a quantitative impairment test. In performing the quantitative impairment test, the Company may determine the fair values of its reporting units by applying a market multiple, discounted cash flow, and/or an actuarial based valuation approach.
For the 2018 annual goodwill impairment tests, the Company concluded that goodwill was not impaired. The goodwill balance was $70 million in the U.S. segment and $31 million in the MetLife Holdings segment, at both December 31, 2018 and 2017.

110
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. The following tables provide a description of new ASUs issued by the FASB and the impact of the adoption on the Company’s consolidated financial statements.
Adoption of New Accounting Pronouncements
Except as noted below, the ASUs adopted by the Company effective January 1, 2018 did not have a material impact on its consolidated financial statements.
Standard
Description
Effective Date and Method of Adoption
Impact on Financial Statements
ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

The new guidance allows a reclassification of AOCI to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. Due to the change in corporate tax rates resulting from the U.S. Tax Reform, the Company reported stranded tax effects in AOCI related to unrealized gains and losses on AFS securities, cumulative foreign translation adjustments and deferred costs on pension benefit plans.

January 1, 2018, the Company applied the ASU in the period of adoption.

The adoption of this guidance resulted in the release of stranded tax effects in AOCI resulting from the U.S. Tax Reform by decreasing retained earnings as of January 1, 2018 by $1.0 billion with a corresponding increase to AOCI. The Company’s accounting policy for the release of stranded tax effects in AOCI is on an aggregate portfolio basis.

ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as clarified and amended by ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The new guidance changed the previous accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the FVO that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. There is no longer a requirement to assess equity securities for impairment since such securities are now measured at fair value through net income. Additionally, there is no longer a requirement to assess equity securities for embedded derivatives requiring bifurcation.
January 1, 2018, the Company adopted, using a modified retrospective approach.
The adoption of this guidance resulted in a $101 million, net of income tax, increase to retained earnings largely offset by a decrease to AOCI that was primarily attributable to $925 million of equity securities previously classified and measured as equity securities AFS. The Company has included the required disclosures related to equity securities AFS within Note 8.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
The new guidance supersedes nearly all existing revenue recognition guidance under GAAP. However, it does not impact the accounting for insurance and investment contracts within the scope of FASB Accounting Standard Codification Topic 944, Financial Services - Insurance, leases, financial instruments and certain guarantees. For those contracts that are impacted, the new guidance requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services.
January 1, 2018, the Company adopted, using a modified retrospective approach.
The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements other than expanded disclosures in Note 13.
Other
Effective January 16, 2018, the London Clearing House (“LCH”) amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. These amendments impacted the accounting treatment of the Company’s centrally cleared derivatives, for which the LCH serves as the central clearing party. As of the effective date, the application of the amended rulebook reduced gross derivative assets by $2 million, gross derivative liabilities by $182 million, accrued investment income by $4 million, and collateral receivables recorded within premiums, reinsurance and other receivables by $176 million.

111
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. These amendments impacted the accounting treatment of the Company’s centrally cleared derivatives for which the CME serves as the central clearing party. As of the effective date, the application of the amended rulebook reduced gross derivative assets by $751 million, gross derivative liabilities by $603 million, accrued investment income by $55 million, accrued investment expense recorded within other liabilities by $10 million, collateral receivables recorded within premiums, reinsurance and other receivables by $226 million, and collateral payables recorded within payables for collateral under securities loaned and other transactions by $419 million.
Future Adoption of New Accounting Pronouncements
ASUs not listed below were assessed and either determined to be not applicable or are not expected to have a material impact on the Company’s consolidated financial statements. ASUs issued but not yet adopted as of December 31, 2018 that are being assessed and may or may not have a material impact on the Company’s consolidated financial statements are summarized in the table below.
Standard
Description
Effective Date and Method of Adoption
Impact on Financial Statements
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decisionmakers and service providers are variable interests.
January 1, 2020, to be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented.
The Company does not expect the adoption to have a material impact on its consolidated financial statements.

ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

The new guidance permits the use of the overnight index swap rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815.
January 1, 2019, to be applied prospectively for qualifying new or redesignated hedging relationships entered into after January 1, 2019.
The Company does not expect the adoption to have a material impact on its consolidated financial statements.

ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as an asset and which costs to expense as incurred. Implementation costs that are capitalized under the new guidance are required to be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.

January 1, 2020. The new guidance can be applied either prospectively to eligible costs incurred on or after the guidance is first applied, or retrospectively to all periods presented.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans

The new guidance removes certain disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant for employers that sponsor defined benefit pension or other postretirement plans.

December 31, 2020, to be applied on a retrospective basis to all periods presented (with early adoption permitted).
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.


112
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Standard
Description
Effective Date and Method of Adoption
Impact on Financial Statements
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
The new guidance modifies the disclosure requirements on fair value by removing some requirements, modifying others, adding changes in unrealized gains and losses included in OCI for recurring Level 3 fair value measurements, and under certain circumstances, providing the option to disclose certain other quantitative information with respect to significant unobservable inputs in lieu of a weighted average.

January 1, 2020. Amendments related to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively.
As of December 31, 2018, the Company early adopted the provisions of the guidance that removed the requirements relating to transfers between fair value hierarchy levels and certain disclosures about valuation processes for Level 3 fair value measurements. The Company will adopt the remainder of the new guidance at the effective date, and is currently evaluating the impact of those changes on its consolidated financial statements.

ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures.
January 1, 2021, to be applied retrospectively to January 1, 2019 (with early adoption permitted).
The Company has started its implementation efforts and is currently evaluating the impact of the new guidance. Given the nature and extent of the required changes to a significant portion of the Company’s operations, the adoption of this standard is expected to have a material impact on its consolidated financial statements.

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities 

The new guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in their financial statements.
January 1, 2019, to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings.
Upon adoption, the Company will make certain changes to its assessment of hedge effectiveness for fair value hedging relationships, and the Company will also reclassify hedge ineffectiveness for cash flow hedging relationships existing as of the adoption date, which was previously recorded to earnings, to AOCI. The estimated impact of adoption is a decrease to retained earnings of less than $250 million.

ASU 2017-08, Receivables —Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
The new guidance shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the new guidance does not require an accounting change for securities held at a discount whose discount continues to be amortized to maturity.
January 1, 2019, to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings.
The adoption of the new guidance will not have a material impact on the Company’s consolidated financial statements.

ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

The new guidance simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The new guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any.

January 1, 2020, to be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The new guidance will reduce the complexity involved with the evaluation of goodwill for impairment. The impact of the new guidance will depend on the outcomes of future goodwill impairment tests.


113
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Standard
Description
Effective Date and Method of Adoption
Impact on Financial Statements
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as clarified and amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses
This new guidance replaces the incurred loss impairment methodology with one that reflects expected credit losses. The measurement of expected credit losses should be based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance requires that an OTTI on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through realized investment gains and losses. The guidance also requires enhanced disclosures. In November 2018, the FASB issued ASU 2018-19, clarifying that receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The Company has assessed the asset classes impacted by the new guidance and is currently assessing the accounting and reporting system changes that will be required to comply with the new guidance.

January 1, 2020. For substantially all financial assets, the ASU is to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. For previously impaired debt securities and certain debt securities acquired with evidence of credit quality deterioration since origination, the new guidance is to be applied prospectively.
The Company believes that the most significant impact upon adoption will be to its mortgage loan investments. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

ASU 2016-02, Leases (Topic 842), as clarified and amended by ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted Improvements, and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors

The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. In July 2018, two amendments to the new guidance were issued. The amendments provide the option to adopt the new guidance prospectively without adjusting comparative periods. Also, the amendments provide lessors with a practical expedient not to separate lease and non-lease components for certain operating leases. In December 2018, an amendment was issued to clarify lessor accounting relating to taxes, certain lessor’s costs and variable payments related to both lease and non-lease components. The Company will adopt the new guidance and related amendments on January 1, 2019 and expects to elect certain practical expedients permitted under the transition guidance. In addition, the Company will elect the prospective transition option and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has been executing an integrated implementation plan which includes a multi-functional working group with a project governance structure to address any resource, system, data and process gaps related to the implementation of the new standard. The Company is currently integrating a lease accounting technology solution and finalizing updated reporting processes and additional internal controls to facilitate compliance with the new guidance.

January 1, 2019, to be applied on a modified retrospective basis using the optional transition method with a cumulative effect adjustment recorded at January 1, 2019.
The Company believes the most significant changes relate to (i) the recognition of new right of use assets and lease liabilities on the consolidated balance sheet for real estate operating leases; and (ii) the recognition of deferred gains associated with previous sale-leaseback transactions as a cumulative effect adjustment to retained earnings. On adoption, the Company will recognize additional operating liabilities, with corresponding right of use assets of the same amount adjusted for prepaid/deferred rent, unamortized initial direct costs and potential impairment of right of use assets based on the present value of the remaining minimum rental payments. These assets and liabilities will represent less than 1% of the Company’s total assets and total liabilities. The adoption will not have a material impact on its consolidated financial statements.

114
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

2. Segment Information
The Company is organized into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other.
U.S.
The U.S. segment offers a broad range of protection products and services aimed at serving the financial needs of customers throughout their lives. These products are sold to corporations and their respective employees, other institutions and their respective members, as well as individuals. The U.S. segment is organized into two businesses: Group Benefits and Retirement and Income Solutions (“RIS”).
•
The Group Benefits business offers life, dental, group short- and long-term disability, individual disability, accidental death and dismemberment, vision and accident & health coverages, as well as prepaid legal plans. This business also sells ASO arrangements to some employers.
•
The RIS business offers a broad range of life and annuity-based insurance and investment products, including stable value and pension risk transfer products, institutional income annuities, tort settlements, and capital markets investment products, as well as solutions for funding postretirement benefits and company-, bank- or trust-owned life insurance.
MetLife Holdings
The MetLife Holdings segment consists of operations relating to products and businesses that the Company no longer actively markets, such as variable, universal, term and whole life insurance, variable, fixed and index-linked annuities and long-term care insurance.
Corporate & Other
Corporate & Other contains the excess capital, as well as certain charges and activities, not allocated to the segments, including enterprise-wide strategic initiative restructuring charges and various start-up businesses. Additionally, Corporate & Other includes run-off businesses. Corporate & Other also includes the Company’s ancillary international operations, interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. For the year ended December 31, 2016, Corporate & Other includes business of the Company that was transferred to Brighthouse Financial, Inc. and its subsidiaries (“Brighthouse”). In addition, Corporate & Other includes the elimination of intersegment amounts, which generally relate to affiliated reinsurance and intersegment loans, which bear interest rates commensurate with related borrowings.
Financial Measures and Segment Accounting Policies
Adjusted earnings is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings is also the Company’s GAAP measure of segment performance and is reported below. Adjusted earnings should not be viewed as a substitute for net income (loss). The Company believes the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business.
Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax.
The financial measures of adjusted revenues and adjusted expenses focus on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and certain entities required to be consolidated under GAAP. Also, these measures exclude results of discontinued operations under GAAP and other businesses that have been or will be sold or exited by MLIC but do not meet the discontinued operations criteria under GAAP and are referred to as divested businesses. Divested businesses also includes the net impact of transactions with exited businesses that have been eliminated in consolidation under GAAP and costs relating to businesses that have been or will be sold or exited by MLIC that do not meet the criteria to be included in results of discontinued operations under GAAP. Adjusted revenues also excludes net investment gains (losses) and net derivative gains (losses).

115
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)


The following additional adjustments are made to revenues, in the line items indicated, in calculating adjusted revenues:
•
Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB fees”); and
•
Net investment income: (i) includes earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (ii) excludes post-tax adjusted earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iii) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP and (iv) includes distributions of profits from certain other limited partnership interests that were previously accounted for under the cost method, but are now accounted for at estimated fair value, where the change in estimated fair value is recognized in net investment gains (losses) under GAAP.
The following additional adjustments are made to expenses, in the line items indicated, in calculating adjusted expenses:
•
Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass-through adjustments, (iii) benefits and hedging costs related to GMIBs (“GMIB costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market value adjustments”);
•
Interest credited to policyholder account balances includes adjustments for earned income on derivatives and amortization of premium on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment;
•
Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB fees and GMIB costs and (iii) Market value adjustments;
•
Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and
•
Other expenses excludes costs related to: (i) noncontrolling interests, (ii) acquisition, integration and other costs, and (iii) goodwill impairments.
The tax impact of the adjustments mentioned above are calculated net of the U.S. or foreign statutory tax rate, which could differ from the Company’s effective tax rate. Additionally, the provision for income tax (expense) benefit also includes the impact related to the timing of certain tax credits, as well as certain tax reforms.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the years ended December 31, 2018, 2017 and 2016 and at December 31, 2018 and 2017. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for adjusted earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
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 and the Company’s business.
MetLife’s economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of diversification benefits among risk types. MetLife’s management is responsible for the ongoing production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, net income (loss) or adjusted earnings.

116
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)


Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios 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.
 
 

 
 
 
 
Year Ended December 31, 2018
 
U.S.
 
MetLife Holdings
 
Corporate
& Other
 
Total
 
Adjustments
 
Total
Consolidated
 
 
(In millions)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
23,388

 
$
3,205

 
$
20

 
$
26,613

 
$
—

 
$
26,613

Universal life and investment-type product policy fees
 
1,023

 
1,008

 
—

 
2,031

 
93

 
2,124

Net investment income
 
6,678

 
4,780

 
(154
)
 
11,304

 
(385
)
 
10,919

Other revenues
 
775

 
240

 
571

 
1,586

 
—

 
1,586

Net investment gains (losses)
 
—

 
—

 
—

 
—

 
153

 
153

Net derivative gains (losses)
 
—

 
—

 
—

 
—

 
766

 
766

Total revenues
 
31,864

 
9,233

 
437

 
41,534

 
627

 
42,161

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder benefits and claims and policyholder dividends
 
24,202

 
5,870

 
5

 
30,077

 
105

 
30,182

Interest credited to policyholder account balances
 
1,735

 
748

 
—

 
2,483

 
(4
)
 
2,479

Capitalization of DAC
 
(40
)
 
6

 
—

 
(34
)
 
—

 
(34
)
Amortization of DAC and VOBA
 
75

 
245

 
—

 
320

 
150

 
470

Interest expense on debt
 
12

 
8

 
88

 
108

 
—

 
108

Other expenses
 
2,838

 
980

 
834

 
4,652

 
(5
)
 
4,647

Total expenses
 
28,822

 
7,857

 
927

 
37,606

 
246

 
37,852

Provision for income tax expense (benefit)
 
648

 
269

 
(823
)
 
94

 
79

 
173

Adjusted earnings
 
$
2,394

 
$
1,107

 
$
333

 
3,834

 
 
 
 
Adjustments to:
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 
 
 
 
 
 
627

 
 
 
 
Total expenses
 
 
 
 
 
 
 
(246
)
 
 
 
 
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
(79
)
 
 
 
 
Net income (loss)
 
$
4,136

 
 
 
$
4,136

At December 31, 2018
 
U.S.
 
MetLife Holdings
 
Corporate
& Other
 
Total
 
 
(In millions)
Total assets
 
$
233,998

 
$
147,498

 
$
25,421

 
$
406,917

Separate account assets
 
$
69,328

 
$
41,522

 
$
—

 
$
110,850

Separate account liabilities
 
$
69,328

 
$
41,522

 
$
—

 
$
110,850


117
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)


 
 

 
 
 
 
Year Ended December 31, 2017
 
U.S.
 
MetLife Holdings
 
Corporate
& Other
 
Total
 
Adjustments
 
Total
Consolidated
 
 
(In millions)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
19,496

 
$
3,420

 
$
9

 
$
22,925

 
$
—

 
$
22,925

Universal life and investment-type product policy fees
 
1,004

 
1,126

 
—

 
2,130

 
97

 
2,227

Net investment income
 
6,206

 
4,920

 
(243
)
 
10,883

 
(370
)
 
10,513

Other revenues
 
781

 
200

 
589

 
1,570

 
—

 
1,570

Net investment gains (losses)
 
—

 
—

 
—

 
—

 
334

 
334

Net derivative gains (losses)
 
—

 
—

 
—

 
—

 
(344
)
 
(344
)
Total revenues
 
27,487

 
9,666

 
355

 
37,508

 
(283
)
 
37,225

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder benefits and claims and policyholder dividends
 
20,558

 
6,006

 
4

 
26,568

 
321

 
26,889

Interest credited to policyholder account balances
 
1,459

 
779

 
—

 
2,238

 
(3
)
 
2,235

Capitalization of DAC
 
(48
)
 
(13
)
 
—

 
(61
)
 
—

 
(61
)
Amortization of DAC and VOBA
 
56

 
303

 
—

 
359

 
(118
)
 
241

Interest expense on debt
 
11

 
8

 
87

 
106

 
—

 
106

Other expenses
 
2,717

 
1,201

 
930

 
4,848

 
1

 
4,849

Total expenses
 
24,753

 
8,284

 
1,021

 
34,058

 
201

 
34,259

Provision for income tax expense (benefit)
 
954

 
427

 
(368
)
 
1,013

 
(1,574
)
 
(561
)
Adjusted earnings
 
$
1,780

 
$
955

 
$
(298
)
 
2,437

 
 
 
 
Adjustments to:
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 
 
 
 
 
 
(283
)
 
 
 
 
Total expenses
 
 
 
 
 
 
 
(201
)
 
 
 
 
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
1,574

 
 
 
 
Net income (loss)
 
$
3,527

 
 
 
$
3,527

At December 31, 2017
 
U.S.
 
MetLife Holdings
 
Corporate
& Other
 
Total
 
 
(In millions)
Total assets
 
$
245,750

 
$
163,397

 
$
25,148

 
$
434,295

Separate account assets
 
$
80,240

 
$
50,585

 
$
—

 
$
130,825

Separate account liabilities
 
$
80,240

 
$
50,585

 
$
—

 
$
130,825


118
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)


 
 

 
 
 
 
Year Ended December 31, 2016
 
U.S.
 
MetLife Holdings
 
Corporate
& Other
 
Total
 
Adjustments
 
Total
Consolidated
 
 
(In millions)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
17,921

 
$
4,411

 
$
61

 
$
22,393

 
$
—

 
$
22,393

Universal life and investment-type product policy fees
 
988

 
1,236

 
216

 
2,440

 
102

 
2,542

Net investment income
 
6,075

 
5,606

 
(67
)
 
11,614

 
(531
)
 
11,083

Other revenues
 
750

 
110

 
618

 
1,478

 
—

 
1,478

Net investment gains (losses)
 
—

 
—

 
—

 
—

 
132

 
132

Net derivative gains (losses)
 
—

 
—

 
—

 
—

 
(1,138
)
 
(1,138
)
Total revenues
 
25,734

 
11,363

 
828

 
37,925

 
(1,435
)
 
36,490

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder benefits and claims and policyholder dividends
 
18,968

 
7,244

 
130

 
26,342

 
171

 
26,513

Interest credited to policyholder account balances
 
1,297

 
907

 
32

 
2,236

 
(3
)
 
2,233

Capitalization of DAC
 
(60
)
 
(267
)
 
(5
)
 
(332
)
 
—

 
(332
)
Amortization of DAC and VOBA
 
56

 
675

 
56

 
787

 
(346
)
 
441

Interest expense on debt
 
10

 
7

 
95

 
112

 
—

 
112

Other expenses
 
2,770

 
1,850

 
825

 
5,445

 
137

 
5,582

Total expenses
 
23,041

 
10,416

 
1,133

 
34,590

 
(41
)
 
34,549

Provision for income tax expense (benefit)
 
963

 
274

 
(551
)
 
686

 
(487
)
 
199

Adjusted earnings
 
$
1,730

 
$
673

 
$
246

 
2,649

 
 
 
 
Adjustments to:
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 
 
 
 
 
 
(1,435
)
 
 
 
 
Total expenses
 
 
 
 
 
 
 
41

 
 
 
 
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
487

 
 
 
 
Net income (loss)
 
$
1,742

 
 
 
$
1,742

The following table presents total premiums, universal life and investment-type product policy fees and other revenues by major product groups of the Company’s segments, as well as Corporate & Other:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Life insurance
$
13,251

 
$
13,139

 
$
13,907

Accident & health insurance
8,071

 
7,933

 
7,889

Annuities
8,685

 
5,390

 
4,379

Other
316

 
260

 
238

Total
$
30,323

 
$
26,722

 
$
26,413

Substantially all of the Company’s consolidated premiums, universal life and investment-type product policy fees and other revenues originated in the U.S.

119
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
2. Segment Information (continued)


Revenues derived from two U.S. segment customers each exceeded 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues. Revenues derived from the first U.S. segment customer were $6.0 billion for the year ended December 31, 2018, which represented 20% of consolidated premiums, universal life and investment-type product policy fees and other revenues. The revenue was from a single premium received for a pension risk transfer. Revenues derived from the second U.S. customer were $3.1 billion, $2.8 billion and $2.8 billion for the years ended December 31, 2018, 2017 and 2016, respectively, which represented 10%, 11% and 10%, of consolidated premiums, universal life and investment-type product policy fees and other revenues, respectively. Revenues derived from any other customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2018, 2017 and 2016.
3. Disposition
In December 2016, the Company distributed to MetLife, Inc. as a non-cash extraordinary dividend all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, New England Life Insurance Company (“NELICO”) and General American Life Insurance Company (“GALIC”). The net book value of NELICO and GALIC at the time of the dividend was $2.9 billion, which was recorded as a dividend of retained earnings of $2.7 billion and a decrease to other comprehensive income of $254 million, net of income tax. As of the date of the dividend payment, the Company no longer consolidates the assets, liabilities and operations of NELICO and GALIC.
4. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, are comprised of future policy benefits, policyholder account balances and other policy-related balances. Information regarding insurance liabilities by segment, as well as Corporate & Other, was as follows at:
 
December 31,
 
2018
 
2017
 
(In millions)
U.S.
$
135,003

 
$
131,224

MetLife Holdings
88,725

 
89,012

Corporate & Other
291

 
294

Total
$
224,019

 
$
220,530

See Note 6 for discussion of affiliated reinsurance liabilities included in the table above.

120
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Future policy benefits are measured as follows:
Product Type:
Measurement Assumptions:
Participating life
Aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate, ranging from 3% to 7%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends.
Nonparticipating life
Aggregate of the present value of future expected benefit payments and related expenses less the present value of future expected net premiums. Assumptions as to mortality and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2% to 11%.
Individual and group
traditional fixed annuities
after annuitization
Present value of future expected payments. Interest rate assumptions used in establishing such liabilities range from 1% to 11%.
Non-medical health
insurance
The net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities range from 1% to 7%.
Disabled lives
Present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rate assumptions used in establishing such liabilities range from 2% to 8%.
Participating business represented 3% and 4% of the Company’s life insurance in-force at December 31, 2018 and 2017, respectively. Participating policies represented 20%, 21% and 26% of gross traditional life insurance premiums for the years ended December 31, 2018, 2017 and 2016, respectively.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium payments; and (ii) credited interest, ranging from less than 1% to 13%, less expenses, mortality charges and withdrawals.

121
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Guarantees
The Company issues directly and assumes through reinsurance variable annuity products with guaranteed minimum benefits. GMABs, the non-life contingent portion of GMWBs and certain non-life contingent portions of GMIBs are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 9. Guarantees accounted for as insurance liabilities include:
Guarantee:
 
 
Measurement Assumptions:
GMDBs
•

A return of purchase payment upon death even if the account value is reduced to zero.
 
•

Present value of expected death benefits in excess of the projected account balance recognizing the excess ratably over the accumulation period based on the present value of total expected assessments.
 
•

An enhanced death benefit may be available for an additional fee.
 
•

Assumptions are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk.
 
 
 
 
•

Investment performance and volatility assumptions are consistent with the historical experience of the appropriate underlying equity index, such as the S&P 500 Index.
 
 
 
 
•

Benefit assumptions are based on the average benefits payable over a range of scenarios.
GMIBs
•

After a specified period of time determined at the time of issuance of the variable annuity contract, a minimum accumulation of purchase payments, even if the account value is reduced to zero, that can be annuitized to receive a monthly income stream that is not less than a specified amount.
 
•

Present value of expected income benefits in excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation period based on present value of total expected assessments.
 
•

Certain contracts also provide for a guaranteed lump sum return of purchase premium in lieu of the annuitization benefit.
 
•

Assumptions are consistent with those used for estimating GMDB liabilities.
 
 
 
 
•

Calculation incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder.
GMWBs
•

A return of purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that cumulative withdrawals in a contract year do not exceed a certain limit.
 
•

Expected value of the life contingent payments and expected assessments using assumptions consistent with those used for estimating the GMDB liabilities.
 
•

Certain contracts include guaranteed withdrawals that are life contingent.
 
 
 
The Company also issues other annuity contracts that apply a lower rate on funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize. These guarantees include benefits that are payable in the event of death, maturity or at annuitization. Certain other annuity contracts contain guaranteed annuitization benefits that may be above what would be provided by the current account value of the contract. Additionally, the Company issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid-up benefit.

122
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Information regarding the liabilities for guarantees (excluding base policy liabilities and embedded derivatives) relating to annuity and universal and variable life contracts was as follows:
 
Annuity Contracts
 
Universal and Variable
Life Contracts
 
 
 
GMDBs and
GMWBs
 
GMIBs
 
Secondary
Guarantees
 
Paid-Up
Guarantees
 
Total
 
(In millions)
Direct:
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
232

 
$
538

 
$
627

 
$
91

 
$
1,488

Incurred guaranteed benefits
55

 
63

 
92

 
11

 
221

Paid guaranteed benefits
(1
)
 
—

 
—

 
—

 
(1
)
Dispositions (1)
(18
)
 
(134
)
 
(99
)
 
—

 
(251
)
Balance at December 31, 2016
268

 
467

 
620

 
102

 
1,457

Incurred guaranteed benefits
58

 
112

 
105

 
7

 
282

Paid guaranteed benefits
—

 
—

 
—

 
—

 
—

Balance at December 31, 2017
326

 
579

 
725

 
109

 
1,739

Incurred guaranteed benefits
3

 
162

 
95

 
5

 
265

Paid guaranteed benefits
(12
)
 
(3
)
 
—

 
—

 
(15
)
Balance at December 31, 2018
$
317

 
$
738

 
$
820

 
$
114

 
$
1,989

Ceded:
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
50

 
$
26

 
$
354

 
$
63

 
$
493

Incurred guaranteed benefits
13

 
(8
)
 
(8
)
 
8

 
5

Paid guaranteed benefits
(1
)
 
—

 
—

 
—

 
(1
)
Dispositions (1)
(18
)
 
(39
)
 
(97
)
 
—

 
(154
)
Balance at December 31, 2016
44

 
(21
)
 
249

 
71

 
343

Incurred guaranteed benefits
(44
)
 
21

 
23

 
5

 
5

Paid guaranteed benefits
—

 
—

 
—

 
—

 
—

Balance at December 31, 2017
—

 
—

 
272

 
76

 
348

Incurred guaranteed benefits
—

 
—

 
29

 
4

 
33

Paid guaranteed benefits
—

 
—

 
—

 
—

 
—

Balance at December 31, 2018
$
—

 
$
—

 
$
301

 
$
80

 
$
381

Net:
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
182

 
$
512

 
$
273

 
$
28

 
$
995

Incurred guaranteed benefits
42

 
71

 
100

 
3

 
216

Paid guaranteed benefits
—

 
—

 
—

 
—

 
—

Dispositions (1)
—

 
(95
)
 
(2
)
 
—

 
(97
)
Balance at December 31, 2016
224

 
488

 
371

 
31

 
1,114

Incurred guaranteed benefits
102

 
91

 
82

 
2

 
277

Paid guaranteed benefits
—

 
—

 
—

 
—

 
—

Balance at December 31, 2017
326

 
579

 
453

 
33

 
1,391

Incurred guaranteed benefits
3

 
162

 
66

 
1

 
232

Paid guaranteed benefits
(12
)
 
(3
)
 
—

 
—

 
(15
)
Balance at December 31, 2018
$
317

 
$
738

 
$
519

 
$
34

 
$
1,608

______________
(1)
See Note 3.

123
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Information regarding the Company’s guarantee exposure, which includes direct business, but excludes offsets from hedging or reinsurance, if any, was as follows at:
 
 
December 31,
 
 
 
2018
 
2017
 
 
 
In the
Event of Death
 
At
Annuitization
 
In the
Event of Death
 
At
Annuitization
 
 
(Dollars in millions)
Annuity Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Variable Annuity Guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
Total account value (1), (2)
 
$
47,393

 
 
$
20,692

 
 
$
56,136

 
 
$
25,257

 
Separate account value (1)
 
$
37,342

 
 
$
19,839

 
 
$
45,431

 
 
$
24,336

 
Net amount at risk
 
$
2,433

(3
)
 
$
418

(4
)
 
$
990

(3
)
 
$
353

(4
)
Average attained age of contractholders
 
67 years

 
 
65 years

 
 
66 years

 
 
65 years

 
Other Annuity Guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
Total account value (1), (2)
 
N/A

 
 
$
144

 
 
N/A

 
 
$
141

 
Net amount at risk
 
N/A

 
 
$
85

(5
)
 
N/A

 
 
$
92

(5
)
Average attained age of contractholders
 
N/A

 
 
53 years

 
 
N/A

 
 
52 years

 
 
December 31,
 
2018
 
2017
 
Secondary
Guarantees
 
Paid-Up
Guarantees
 
Secondary
Guarantees
 
Paid-Up
Guarantees
 
(Dollars in millions)
Universal and Variable Life Contracts:
 
 
 
 
 
 
 
Total account value (1), (2)
$
4,614

 
$
937

 
$
4,679

 
$
977

Net amount at risk (6)
$
44,596

 
$
6,290

 
$
46,704

 
$
6,713

Average attained age of policyholders
55 years

 
63 years

 
54 years

 
62 years

______________
(1)
The Company’s annuity and life contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive.
(2)
Includes the contractholder’s investments in the general account and separate account, if applicable.
(3)
Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
(4)
Defined as the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved.
(5)
Defined as either the excess of the upper tier, adjusted for a profit margin, less the lower tier, as of the balance sheet date or the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. These amounts represent the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date.
(6)
Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date.

124
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Account balances of contracts with guarantees were invested in separate account asset classes as follows at:
 
December 31,
 
2018
 
2017
 
(In millions)
Fund Groupings:
 
 
 
Equity
$
18,073

 
$
21,464

Balanced
15,831

 
19,443

Bond
2,885

 
3,798

Money Market
53

 
57

Total
$
36,842

 
$
44,762

Obligations Assumed Under Structured Settlement Assignments
The Company assumed structured settlement claim obligations as an assignment company. These liabilities are measured at the present value of the periodic claims to be provided and reported as other policy-related balances. The Company received a fee for assuming these claim obligations and, as the assignee of the claim, is legally obligated to ensure periodic payments are made to the claimant. The Company purchased annuities from Brighthouse to fund these periodic payment claim obligations and designates payments to be made directly to the claimant by Brighthouse as the annuity writer. These annuities funding structured settlement claims are recorded as an investment. See Note 1.
See Note 8 for additional information on obligations assumed under structured settlement assignments.
Obligations Under Funding Agreements
The Company issues fixed and floating rate funding agreements, which are denominated in either U.S. dollars or foreign currencies, to certain unconsolidated special purpose entities (“SPEs”) that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. During the years ended December 31, 2018, 2017 and 2016, the Company issued $41.8 billion, $42.7 billion and $39.7 billion, respectively, and repaid $43.7 billion, $41.4 billion and $38.5 billion, respectively, of such funding agreements. At December 31, 2018 and 2017, liabilities for funding agreements outstanding, which are included in policyholder account balances, were $32.3 billion and $34.2 billion, respectively.
Metropolitan Life Insurance Company is a member of the FHLB of New York. Holdings of common stock of the FHLB of New York, included in other invested assets, were $724 million and $733 million at December 31, 2018 and 2017, respectively.

125
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

The Company has also entered into funding agreements with the FHLB of New York and a subsidiary of the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the U.S. (“Farmer Mac”). The liability for such funding agreements is included in policyholder account balances. Information related to such funding agreements was as follows at:
 
Liability
 
Collateral
 
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
(In millions)
 
FHLB of New York (1)
$
14,245

 
$
14,445

 
$
16,340

(2)
 
$
16,605

(2)
Farmer Mac (3)
$
2,550

 
$
2,550

 
$
2,639

 
 
$
2,644

 
__________________
(1)
Represents funding agreements issued to the FHLB of New York in exchange for cash and for which the FHLB of New York has been granted a lien on certain assets, some of which are in the custody of the FHLB of New York, including residential mortgage-backed securities (“RMBS”), to collateralize obligations under advances evidenced by funding agreements. The Company is permitted to withdraw any portion of the collateral in the custody of the FHLB of New York as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by the Company, the FHLB of New York’s recovery on the collateral is limited to the amount of the Company’s liability to the FHLB of New York.
(2)
Advances are collateralized by mortgage-backed securities. The amount of collateral presented is at estimated fair value.
(3)
Represents funding agreements issued to a subsidiary of Farmer Mac, as well as certain SPEs that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by Farmer Mac. The obligations under these funding agreements are secured by a pledge of certain eligible agricultural mortgage loans and may, under certain circumstances, be secured by other qualified collateral. The amount of collateral presented is at carrying value.
Liabilities for Unpaid Claims and Claim Expenses
The following is information about incurred and paid claims development by segment as of December 31, 2018. Such amounts are presented net of reinsurance, and are not discounted. The tables present claims development and cumulative claim payments by incurral year. The development tables are only presented for significant short-duration product liabilities within each segment. Where practical, up to 10 years of history has been provided. The information about incurred and paid claims development prior to 2018 is presented as supplementary information.

126
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

U.S.
Group Life - Term
 
 
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
 
At December 31, 2018
 
 
For the Years Ended December 31,
 
Total IBNR
Liabilities Plus
Expected
Development on
Reported Claims
 
Cumulative
Number of
Reported
Claims
 
 
(Unaudited)
 
 
 
 
Incurral Year
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
 
 
 
(Dollars in millions)
2011
 
$
6,318

 
$
6,290

 
$
6,293

 
$
6,269

 
$
6,287

 
$
6,295

 
$
6,294

 
$
6,295

 
$
1

 
207,608

2012
 
 
 
6,503

 
6,579

 
6,569

 
6,546

 
6,568

 
6,569

 
6,569

 
1

 
209,047

2013
 
 
 
 
 
6,637

 
6,713

 
6,719

 
6,720

 
6,730

 
6,720

 
3

 
211,341

2014
 
 
 
 
 
 
 
6,986

 
6,919

 
6,913

 
6,910

 
6,914

 
5

 
213,388

2015
 
 
 
 
 
 
 
 
 
7,040

 
7,015

 
7,014

 
7,021

 
11

 
213,243

2016
 
 
 
 
 
 
 
 
 
 
 
7,125

 
7,085

 
7,095

 
14

 
210,706

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
7,432

 
7,418

 
31

 
246,364

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7,757

 
899

 
203,329

Total
 
55,789

 
 
 
 
Cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance
 
(53,786
)
 
 
 
 
All outstanding liabilities for incurral years prior to 2011, net of reinsurance
 
9

 
 
 
 
Total unpaid claims and claim adjustment expenses, net of reinsurance
 
$
2,012

 
 
 
 
 
 
Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
(Unaudited)
 
 
Incurral Year
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
 
(In millions)
2011
 
$
4,982

 
$
6,194

 
$
6,239

 
$
6,256

 
$
6,281

 
$
6,290

 
$
6,292

 
$
6,295

2012
 
 
 
5,132

 
6,472

 
6,518

 
6,532

 
6,558

 
6,565

 
6,566

2013
 
 
 
 
 
5,216

 
6,614

 
6,664

 
6,678

 
6,711

 
6,715

2014
 
 
 
 
 
 
 
5,428

 
6,809

 
6,858

 
6,869

 
6,902

2015
 
 
 
 
 
 
 
 
 
5,524

 
6,913

 
6,958

 
6,974

2016
 
 
 
 
 
 
 
 
 
 
 
5,582

 
6,980

 
7,034

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
5,761

 
7,292

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,008

Total cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance
 
$
53,786

Average Annual Percentage Payout
The following is supplementary information about average historical claims duration as of December 31, 2018:
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
 
 
 
Years
 
1
 
2
 
3
 
4
 
5
 
6
 
7
 
8
Group Life - Term
 
78.2%
 
20.2%
 
0.7%
 
0.2%
 
0.4%
 
0.1%
 
—%
 
—%

127
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Group Long-Term Disability
 
 
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
 
At December 31, 2018
 
 
For the Years Ended December 31,
 
Total IBNR
Liabilities Plus
Expected
Development on
Reported Claims
 
Cumulative
Number of
Reported
Claims
 
 
(Unaudited)
 
 
 
 
Incurral Year
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
 
 
 
(Dollars in millions)
2011
 
$
955

 
$
916

 
$
894

 
$
914

 
$
924

 
$
923

 
$
918

 
$
917

 
$
—

 
21,643

2012
 
 
 
966

 
979

 
980

 
1,014

 
1,034

 
1,037

 
1,021

 
—

 
20,085

2013
 
 
 
 
 
1,008

 
1,027

 
1,032

 
1,049

 
1,070

 
1,069

 
—

 
21,135

2014
 
 
 
 
 
 
 
1,076

 
1,077

 
1,079

 
1,101

 
1,109

 
—

 
22,846

2015
 
 
 
 
 
 
 
 
 
1,082

 
1,105

 
1,093

 
1,100

 
—

 
21,177

2016
 
 
 
 
 
 
 
 
 
 
 
1,131

 
1,139

 
1,159

 
6

 
17,897

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
1,244

 
1,202

 
29

 
15,968

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,240

 
621

 
8,208

Total
 
8,817

 
 
 
 
Cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance
 
(3,815
)
 
 
 
 
All outstanding liabilities for incurral years prior to 2011, net of reinsurance
 
2,110

 
 
 
 
Total unpaid claims and claim adjustment expenses, net of reinsurance
 
$
7,112

 
 
 
 
 
 
Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
(Unaudited)
 
 
Incurral Year
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
 
(In millions)
2011
 
$
44

 
$
217

 
$
337

 
$
411

 
$
478

 
$
537

 
$
588

 
$
635

2012
 
 
 
43

 
229

 
365

 
453

 
524

 
591

 
648

2013
 
 
 
 
 
43

 
234

 
382

 
475

 
551

 
622

2014
 
 
 
 
 
 
 
51

 
266

 
428

 
526

 
609

2015
 
 
 
 
 
 
 
 
 
50

 
264

 
427

 
524

2016
 
 
 
 
 
 
 
 
 
 
 
49

 
267

 
433

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
56

 
290

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
54

Total cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance
 
$
3,815

Average Annual Percentage Payout
The following is supplementary information about average historical claims duration as of December 31, 2018:
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
 
 
 
 
Years
 
1
 
2
 
3
 
4
 
5
 
6
 
7
 
8
Group Long-Term Disability
 
4.4%
 
18.9%
 
14.0%
 
8.6%
 
7.2%
 
6.5%
 
5.6%
 
5.1%

128
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Significant Methodologies and Assumptions
Group Life - Term and Group Long-Term Disability incurred but not paid (“IBNP”) liabilities are developed using a combination of loss ratio and development methods. Claims in the course of settlement are then subtracted from the IBNP liabilities, resulting in the IBNR liabilities. The loss ratio method is used in the period in which the claims are neither sufficient nor credible. In developing the loss ratios, any material rate increases that could change the underlying premium without affecting the estimated incurred losses are taken into account. For periods where sufficient and credible claim data exists, the development method is used based on the claim triangles which categorize claims according to both the period in which they were incurred and the period in which they were paid, adjudicated or reported. The end result is a triangle of known data that is used to develop known completion ratios and factors. Claims paid are then subtracted from the estimated ultimate incurred claims to calculate the IBNP liability.
An expense liability is held for the future expenses associated with the payment of incurred but not yet paid claims (IBNR and pending). This is expressed as a percentage of the underlying claims liability and is based on past experience and the anticipated future expense structure.
For Group Life - Term and Group Long-Term Disability, first year incurred claims and allocated loss adjustment expenses increased in 2018 compared to the 2017 incurral year due to the growth in the size of the business.
There were no significant changes in methodologies during 2018. The assumptions used in calculating the unpaid claims and claim adjustment expenses for Group Life - Term and Group Long-Term Disability are updated annually to reflect emerging trends in claim experience.
No additional premiums or return premiums have been accrued as a result of the prior year development.
Liabilities for Group Life - Term unpaid claims and claim adjustment expenses are not discounted.
The liabilities for Group Long-Term Disability unpaid claims and claim adjustment expenses were $6.0 billion at both December 31, 2018 and 2017. Using interest rates ranging from 3% to 8%, based on the incurral year, the total discount applied to these liabilities was $1.3 billion at both December 31, 2018 and 2017. The amount of interest accretion recognized was $509 million, $510 million and $565 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts were reflected in policyholder benefits and claims.
For Group Life - Term, claims were based upon individual death claims. For Group Long-Term Disability, claim frequency was determined by the number of reported claims as identified by a unique claim number assigned to individual claimants. Claim counts initially include claims that do not ultimately result in a liability. These claims are omitted from the claim counts once it is determined that there is no liability.
The Group Long-Term Disability IBNR, included in the development tables above, was developed using discounted cash flows, and is presented on a discounted basis.

129
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses
The reconciliation of the net incurred and paid claims development tables to the liability for unpaid claims and claims adjustment expenses on the consolidated balance sheet was as follows at:
 
 
December 31, 2018
 
 
(In millions)
Short-Duration:
 
 
 
Unpaid claims and allocated claims adjustment expenses, net of reinsurance:
 
 
 
U.S.:
 
 
 
Group Life - Term
 
$
2,012

 
Group Long-Term Disability
 
7,112

 
Total
 
 
$
9,124

Other insurance lines - all segments combined
 
 
517

Total unpaid claims and allocated claims adjustment expenses, net of reinsurance
 
 
9,641

 
 
 
 
Reinsurance recoverables on unpaid claims:
 
 
 
U.S.:
 
 
 
Group Life - Term
 
20

 
Group Long-Term Disability
 
109

 
Total
 
 
129

Other insurance lines - all segments combined
 
 
26

Total reinsurance recoverable on unpaid claims
 
 
155

Total unpaid claims and allocated claims adjustment expense
 
 
9,796

Discounting
 
 
(1,253
)
Liability for unpaid claims and claim adjustment liabilities - short-duration
 
 
8,543

Liability for unpaid claims and claim adjustment liabilities - all long-duration lines
 
 
4,047

Total liability for unpaid claims and claim adjustment expense (included in future policy benefits and other policy-related balances)
 
 
$
12,590


130
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
4. Insurance (continued)

Rollforward of Claims and Claim Adjustment Expenses
Information regarding the liabilities for unpaid claims and claim adjustment expenses was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Balance at December 31 of prior period
 
$
12,090

 
$
11,621

 
$
7,527

Less: Reinsurance recoverables
 
1,401

 
1,251

 
273

Net balance at December 31 of prior period
 
10,689

 
10,370

 
7,254

Cumulative adjustment (1)
 
—

 
—

 
3,277

Net balance at January 1,
 
10,689

 
10,370

 
10,531

Incurred related to:
 
 
 
 
 
 
Current year
 
16,714

 
16,264

 
15,978

Prior years (2)
 
241

 
175

 
322

Total incurred
 
16,955

 
16,439

 
16,300

Paid related to:
 
 
 
 
 
 
Current year
 
(12,359
)
 
(12,212
)
 
(12,454
)
Prior years
 
(4,192
)
 
(3,908
)
 
(3,905
)
Total paid
 
(16,551
)
 
(16,120
)
 
(16,359
)
Dispositions (3)
 
—

 
—

 
(102
)
Net balance at December 31,
 
11,093

 
10,689

 
10,370

Add: Reinsurance recoverables
 
1,497

 
1,401

 
1,251

Balance at December 31,
 
$
12,590

 
$
12,090

 
$
11,621

______________
(1)
Reflects the accumulated adjustment, net of reinsurance, upon implementation of the short-duration contracts guidance which clarified the requirement to include claim information for long-duration contracts. The accumulated adjustment primarily reflects unpaid claim liabilities, net of reinsurance, for long-duration contracts as of the beginning of the period presented.
(2)
During 2018 and 2017, claims and claim adjustment expenses associated with prior years increased due to events incurred in prior years but reported during current year. During 2016, claims and claim adjustment expenses associated with prior years increased due to the implementation of guidance related to short-duration contracts.
(3)
See Note 3.
Separate Accounts
Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $66.0 billion and $75.2 billion at December 31, 2018 and 2017, respectively, for which the policyholder assumes all investment risk, and separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $44.8 billion and $55.6 billion at December 31, 2018 and 2017, respectively. The latter category consisted primarily of guaranteed interest contracts (“GICs”). The average interest rate credited on these contracts was 2.68% and 2.40% at December 31, 2018 and 2017, respectively.
For the years ended December 31, 2018, 2017 and 2016, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts.

131
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
See Note 1 for a description of capitalized acquisition costs.
Nonparticipating and Non-Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts (term insurance, nonparticipating whole life insurance, traditional group life insurance, and non-medical health insurance) over the appropriate premium paying period in proportion to the actual and expected future gross premiums that were set at contract issue. The expected premiums are 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), 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.
Participating, Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these 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 within the closed block (dividend-paying traditional contracts) future gross margins are also dependent upon changes in the policyholder dividend obligation. See Note 7. Of these factors, the Company anticipates that investment returns, expenses, persistency and other factor changes, as well as 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 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. When expected future gross margins are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross margins are above the previously estimated expected future gross margins. Each period, the Company also reviews the estimated gross margins for each block of business to determine the recoverability of DAC and VOBA balances.
Fixed and Variable Universal Life Contracts and Fixed and Variable Deferred Annuity Contracts
The Company amortizes DAC and VOBA related to these 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 significantly impact 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. When expected future gross profits are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross profits are above the previously estimated expected future gross profits. Each period, the Company also reviews the estimated gross profits for each block of business to determine the recoverability of DAC and VOBA balances.

132
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)

Factors Impacting Amortization
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC and VOBA. 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 and living 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 events and only changes the assumption when its long-term expectation changes.
The Company also periodically reviews other long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, policyholder behavior 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.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such modification, referred to as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Amortization of DAC and VOBA is attributed to net investment gains (losses) and net derivative gains (losses), and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses had been recognized.

133
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)

Information regarding DAC and VOBA was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
DAC:
 
 
 
 
 
Balance at January 1,
$
4,320

 
$
4,714

 
$
5,977

Capitalizations
34

 
61

 
332

Amortization related to:
 
 
 
 
 
Net investment gains (losses) and net derivative gains (losses)
(114
)
 
91

 
353

Other expenses
(355
)
 
(331
)
 
(791
)
Total amortization
(469
)
 
(240
)
 
(438
)
Unrealized investment gains (losses)
204

 
(215
)
 
(12
)
Dispositions (1)
—

 
—

 
(1,145
)
Balance at December 31,
4,089

 
4,320

 
4,714

VOBA:
 
 
 
 
 
Balance at January 1,
28

 
29

 
66

Amortization related to:
 
 
 
 
 
Other expenses
(1
)
 
(1
)
 
(3
)
Total amortization
(1
)
 
(1
)
 
(3
)
Unrealized investment gains (losses)
1

 
—

 
13

Dispositions (1)
—

 
—

 
(47
)
Balance at December 31,
28

 
28

 
29

Total DAC and VOBA:
 
 
 
 
 
Balance at December 31,
$
4,117

 
$
4,348

 
$
4,743

_________________
(1)     See Note 3.
Information regarding total DAC and VOBA by segment, as well as Corporate & Other, was as follows at:
 
December 31,
 
2018
 
2017
 
(In millions)
U.S.
$
403

 
$
413

MetLife Holdings
3,709

 
3,930

Corporate & Other
5

 
5

Total
$
4,117

 
$
4,348


134
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)

Information regarding other intangibles was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
DSI:
 
 
 
 
 
 
Balance at January 1,
 
$
93

 
$
105

 
$
130

Capitalization
 
1

 
1

 
4

Amortization
 
(15
)
 
(8
)
 
(16
)
Unrealized investment gains (losses)
 
14

 
(5
)
 
1

Dispositions (1)
 
$
—

 
$
—

 
$
(14
)
Balance at December 31,
 
$
93

 
$
93

 
$
105

VODA and VOCRA:
 
 
 
 
 
 
Balance at January 1,
 
$
207

 
$
235

 
$
265

Amortization
 
(26
)
 
(28
)
 
(30
)
Balance at December 31,
 
$
181

 
$
207

 
$
235

Accumulated amortization
 
$
276

 
$
250

 
$
222

_________________
(1) See Note 3.
The estimated future amortization expense to be reported in other expenses for the next five years was as follows:
 
 
VOBA
 
VODA and VOCRA
 
 
(In millions)
2019
 
$
2

 
$
24

2020
 
$
2

 
$
22

2021
 
$
2

 
$
19

2022
 
$
2

 
$
17

2023
 
$
2

 
$
15

6. Reinsurance
The Company enters into reinsurance agreements primarily as a purchaser of reinsurance for its various insurance products and also as a provider of reinsurance for some insurance products issued by affiliated and unaffiliated companies. The Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide additional capacity for future growth.
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 in Note 8.
U.S.
For certain policies within its Group Benefits business, the Company generally retains most of the risk and only cedes particular risks on certain client arrangements. The majority of the Company’s reinsurance activity within this business relates to client agreements for employer sponsored captive programs, risk-sharing agreements and multinational pooling.

135
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

The Company’s RIS business has periodically engaged in reinsurance activities, on an opportunistic basis. There were no such transactions during the periods presented.
MetLife Holdings
For its life products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics.
Catastrophe Coverage
The Company has exposure to catastrophes which could contribute to significant fluctuations in its results of operations. The Company purchases catastrophe coverage to reinsure risks issued within territories that it believes are subject to the greatest catastrophic risks. The Company uses excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks. Excess of retention reinsurance agreements provide for a portion of a risk to remain with the direct writing company and quota share reinsurance agreements provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies.
Reinsurance Recoverables
The Company reinsures its business through a diversified group of well-capitalized reinsurers. The Company analyzes recent trends in arbitration and litigation outcomes in disputes, if any, with its reinsurers. The Company monitors ratings and evaluates the financial strength of its reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. The Company generally secures large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts, and irrevocable letters of credit. These reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, which at December 31, 2018 and 2017 were not significant.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $1.9 billion of unsecured unaffiliated reinsurance recoverable balances at both December 31, 2018 and 2017.
At December 31, 2018, the Company had $2.9 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $2.0 billion, or 69%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.3 billion of net unaffiliated ceded reinsurance recoverables which were unsecured. At December 31, 2017, the Company had $2.9 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $2.1 billion, or 72%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.3 billion of net unaffiliated ceded reinsurance recoverables which were unsecured.
The Company has reinsured with an unaffiliated third-party reinsurer 59% of the closed block through a modified coinsurance agreement. The Company accounts for this agreement under the deposit method of accounting. The Company, having the right of offset, has offset the modified coinsurance deposit with the deposit recoverable.

136
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

The amounts on the consolidated statements of operations include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Premiums
 
 
 
 
 
Direct premiums
$
26,883

 
$
23,062

 
$
21,931

Reinsurance assumed
752

 
1,116

 
1,687

Reinsurance ceded
(1,022
)
 
(1,253
)
 
(1,225
)
Net premiums
$
26,613

 
$
22,925

 
$
22,393

Universal life and investment-type product policy fees
 
 
 
 
 
Direct universal life and investment-type product policy fees
$
2,382

 
$
2,492

 
$
3,006

Reinsurance assumed
9

 
12

 
60

Reinsurance ceded
(267
)
 
(277
)
 
(524
)
Net universal life and investment-type product policy fees
$
2,124

 
$
2,227

 
$
2,542

Other revenues
 
 
 
 
 
Direct other revenues
$
1,017

 
$
930

 
$
851

Reinsurance assumed
(11
)
 
35

 
(2
)
Reinsurance ceded
580

 
605

 
629

Net other revenues
$
1,586

 
$
1,570

 
$
1,478

Policyholder benefits and claims
 
 
 
 
 
Direct policyholder benefits and claims
$
29,589

 
$
26,199

 
$
25,248

Reinsurance assumed
691

 
875

 
1,496

Reinsurance ceded
(1,183
)
 
(1,282
)
 
(1,431
)
Net policyholder benefits and claims
$
29,097

 
$
25,792

 
$
25,313

Interest credited to policyholder account balances
 
 
 
 
 
Direct interest credited to policyholder account balances
$
2,446

 
$
2,199

 
$
2,279

Reinsurance assumed
46

 
49

 
35

Reinsurance ceded
(13
)
 
(13
)
 
(81
)
Net interest credited to policyholder account balances
$
2,479


$
2,235


$
2,233

Other expenses
 
 
 
 
 
Direct other expenses
$
4,650

 
$
4,489

 
$
4,830

Reinsurance assumed
71

 
138

 
583

Reinsurance ceded
470

 
508

 
390

Net other expenses
$
5,191

 
$
5,135

 
$
5,803


137
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

The amounts on the consolidated balance sheets include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows at:
 
December 31,
 
2018
 
2017
 
Direct
 
Assumed
 
Ceded
 
Total
Balance
Sheet
 
Direct
 
Assumed
 
Ceded
 
Total
Balance
Sheet
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums, reinsurance and other
receivables
$
2,094

 
$
518

 
$
19,217

 
$
21,829

 
$
2,491

 
$
448

 
$
19,159

 
$
22,098

Deferred policy acquisition costs and
value of business acquired
4,343

 
15

 
(241
)
 
4,117

 
4,581

 
17

 
(250
)
 
4,348

Total assets
$
6,437

 
$
533

 
$
18,976

 
$
25,946

 
$
7,072

 
$
465

 
$
18,909

 
$
26,446

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits
$
124,787

 
$
1,313

 
$
(1
)
 
$
126,099

 
$
118,077

 
$
1,342

 
$
(4
)
 
$
119,415

Policyholder account balances
90,489

 
167

 
—

 
90,656

 
93,758

 
181

 
—

 
93,939

Other policy-related balances
7,021

 
231

 
12

 
7,264

 
6,914

 
247

 
15

 
7,176

Other liabilities
6,084

 
2,242

 
16,294

 
24,620

 
8,498

 
2,242

 
16,669

 
27,409

Total liabilities
$
228,381

 
$
3,953

 
$
16,305

 
$
248,639

 
$
227,247

 
$
4,012

 
$
16,680

 
$
247,939

In December 2016, the Company recaptured two reinsurance agreements which covered 90% of the liabilities on certain participating whole life insurance policies issued between April 1, 2000 and December 31, 2001 which were reinsured by an unaffiliated company. This recapture resulted in an increase in DAC and VOBA of $95 million, a decrease in premiums, reinsurance and other receivables of $697 million, and a decrease in other liabilities of $713 million. The Company recognized a gain of $72 million, net of income tax, for the year ended December 31, 2016, as a result of this transaction.
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on reinsurance were $14.1 billion and $14.3 billion at December 31, 2018 and 2017, respectively. The deposit liabilities on reinsurance were $1.8 billion and $1.9 billion at December 31, 2018 and 2017, respectively.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain of MetLife, Inc.’s subsidiaries, including MetLife Reinsurance Company of Charleston (“MRC”), MetLife Reinsurance Company of Vermont, and Metropolitan Tower Life Insurance Company, all of which are related parties. Additionally, the Company has reinsurance agreements with Brighthouse Life Insurance Company ("Brighthouse Insurance"), Brighthouse Life Insurance Company of NY ("Brighthouse NY") and NELICO, former subsidiaries of MetLife, Inc. In August 2017, MetLife, Inc. completed the separation of Brighthouse and retained 19.2% of Brighthouse Financial, Inc. common stock outstanding. In June 2018, MetLife, Inc. sold its Brighthouse Financial, Inc. common stock and Brighthouse was no longer considered a related party.

138
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

Information regarding the significant effects of affiliated reinsurance included on the consolidated statements of operations was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Premiums
 
 
 
 
 
Reinsurance assumed
$
9

 
$
122

 
$
727

Reinsurance ceded
(117
)
 
(132
)
 
(45
)
Net premiums
$
(108
)
 
$
(10
)
 
$
682

Universal life and investment-type product policy fees
 
 
 
 
 
Reinsurance assumed
$
(1
)
 
$
12

 
$
60

Reinsurance ceded
(18
)
 
(19
)
 
(138
)
Net universal life and investment-type product policy fees
$
(19
)
 
$
(7
)
 
$
(78
)
Other revenues
 
 
 
 
 
Reinsurance assumed
$
—

 
$
37

 
$
(1
)
Reinsurance ceded
541

 
563

 
575

Net other revenues
$
541

 
$
600

 
$
574

Policyholder benefits and claims
 
 
 
 
 
Reinsurance assumed
$
11

 
$
69

 
$
697

Reinsurance ceded
(120
)
 
(122
)
 
(110
)
Net policyholder benefits and claims
$
(109
)
 
$
(53
)
 
$
587

Interest credited to policyholder account balances
 
 
 
 
 
Reinsurance assumed
$
38

 
$
47

 
$
34

Reinsurance ceded
(13
)
 
(13
)
 
(81
)
Net interest credited to policyholder account balances
$
25

 
$
34

 
$
(47
)
Other expenses
 
 
 
 
 
Reinsurance assumed
$
10

 
$
40

 
$
490

Reinsurance ceded
543

 
600

 
570

Net other expenses
$
553

 
$
640

 
$
1,060


139
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

Information regarding the significant effects of affiliated reinsurance included on the consolidated balance sheets was as follows at:
 
December 31,
 
2018
 
2017
 
 
Assumed
 
Ceded
 
Assumed (1)
 
Ceded
 
(In millions)
Assets
 
 
 
 
 
 
 
 
Premiums, reinsurance and other receivables
 
$
—

 
$
12,676

 
$
47

 
$
12,762

Deferred policy acquisition costs and value of business acquired
 
—

 
(175
)
 
—

 
(180
)
Total assets
 
$
—

 
$
12,501

 
$
47

 
$
12,582

Liabilities
 
 
 
 
 
 
 
 
Future policy benefits
 
$
61

 
$
(1
)
 
$
380

 
$
(4
)
Policyholder account balances
 
141

 
—

 
166

 
—

Other policy-related balances
 
6

 
12

 
104

 
15

Other liabilities
 
841

 
12,366

 
1,858

 
12,970

Total liabilities
 
$
1,049

 
$
12,377

 
$
2,508

 
$
12,981

_____________
(1)
Includes $1.4 billion of total liabilities related to assumed risks from Brighthouse, which effective July 1, 2018 was no longer considered a related party.
The Company ceded two blocks of business to an affiliate on a 75% coinsurance with funds withheld basis. Certain contractual features of these agreements qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivatives related to the funds withheld associated with these reinsurance agreements are included within other liabilities and were $4 million and $16 million at December 31, 2018 and 2017, respectively. Net derivative gains (losses) associated with these embedded derivatives were $12 million, ($6) million and ($2) million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company ceded risks to an affiliate related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their estimated fair value are included within net derivative gains (losses). There were no embedded derivatives associated with the cessions included within premiums, reinsurance and other receivables at December 31, 2018 and 2017. Net derivative gains (losses) associated with the embedded derivatives were $0, ($110) million and $33 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Certain contractual features of the closed block agreement with MRC create an embedded derivative, which is separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement is included within other liabilities and was $461 million and $882 million at December 31, 2018 and 2017, respectively. Net derivative gains (losses) associated with the embedded derivative were $421 million, ($115) million and ($73) million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company assumed risks from affiliates related to guaranteed minimum benefit guarantees written directly by the affiliates. These assumed reinsurance agreements contain embedded derivatives and changes in their estimated fair value are also included within net derivative gains (losses). The embedded derivatives associated with these agreements are included within policyholder account balances and were $0 and $3 million at December 31, 2018 and 2017, respectively. Net derivative gains (losses) associated with the embedded derivatives were $1 million, $263 million and ($32) million for the years ended December 31, 2018, 2017 and 2016, respectively.
In January 2017, Brighthouse NY and NELICO recaptured risks related to certain variable annuities, including guaranteed minimum benefits, reinsured by the Company. These recaptures resulted in a decrease in cash and cash equivalents of $34 million, a decrease in premiums, reinsurance and other receivables of $77 million, a decrease in future policy benefits of $79 million, a decrease in policyholder account balances of $387 million and an increase in other liabilities of $76 million. The Company recognized a gain of $178 million, net of income tax, for the year ended December 31, 2017, as a result of these transactions.

140
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
6. Reinsurance (continued)

In January 2017, the Company recaptured risks related to guaranteed minimum benefit guarantees on certain variable annuities reinsured by Brighthouse Insurance. This recapture resulted in an increase in investments and cash and cash equivalents of $428 million and a decrease in premiums, reinsurance and other receivables of $565 million. The Company recognized a loss of $89 million, net of income tax, for the year ended December 31, 2017, as a result of this transaction.
In April 2016, Brighthouse Insurance recaptured risks related to certain single premium deferred annuity contracts from the Company. As a result of this recapture, the significant effects to the Company were a decrease in investments and cash and cash equivalents of $4.3 billion and a decrease in DAC of $87 million, offset by a decrease in other liabilities of $4.0 billion. The Company recognized a loss of $95 million, net of income tax, for the year ended December 31, 2016, as a result of this recapture.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $451 million and $13 million of unsecured affiliated reinsurance recoverable balances at December 31, 2018 and 2017, respectively.
Affiliated reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on affiliated reinsurance were $11.4 billion and $11.5 billion at December 31, 2018 and 2017, respectively. The deposit liabilities on affiliated reinsurance were $837 million and $1.8 billion at December 31, 2018 and 2017, respectively.

141
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

7. Closed Block
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life Insurance Company 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 Metropolitan Life Insurance Company’s plan of reorganization, as amended (the “Plan of Reorganization”). On the Demutualization Date, Metropolitan Life Insurance Company established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life Insurance Company. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience.
The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force. The expected life of the closed block is over 100 years from the Demutualization Date.
The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the Demutualization Date (adjusted to eliminate the impact of related amounts in AOCI) represents the estimated maximum future earnings from the closed block expected to result from operations, attributed net of income tax, to the closed block. Earnings of the closed block are recognized in income over the period the policies and contracts in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block are greater than the expected cumulative earnings of the closed block, the Company will pay the excess to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block are less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings.
Experience within the closed block, in particular mortality and investment yields, as well as realized and unrealized gains and losses, directly impact the policyholder dividend obligation. Amortization of the closed block DAC, which resides outside of the closed block, is based upon cumulative actual and expected earnings within the closed block. Accordingly, the Company’s net income continues to be sensitive to the actual performance of the closed block.

142
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
7. Closed Block (continued)

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.
Information regarding the closed block liabilities and assets designated to the closed block was as follows at:
 
 
December 31,
 
 
2018
 
2017
 
 
(In millions)
Closed Block Liabilities
 
 
 
 
Future policy benefits
 
$
40,032

 
$
40,463

Other policy-related balances
 
317

 
222

Policyholder dividends payable
 
431

 
437

Policyholder dividend obligation
 
428

 
2,121

Deferred income tax liability
 
28

 
—

Other liabilities
 
328

 
212

Total closed block liabilities
 
41,564

 
43,455

Assets Designated to the Closed Block
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at estimated fair value
 
25,354

 
27,904

Equity securities, at estimated fair value
 
61

 
70

Contractholder-directed equity securities and fair value option securities, at estimated fair value
 
43

 
—

Mortgage loans
 
6,778

 
5,878

Policy loans
 
4,527

 
4,548

Real estate and real estate joint ventures
 
544

 
613

Other invested assets
 
643

 
731

Total investments
 
37,950

 
39,744

Accrued investment income
 
443

 
477

Premiums, reinsurance and other receivables; cash and cash equivalents
 
83

 
14

Current income tax recoverable
 
69

 
35

Deferred income tax asset
 
—

 
36

Total assets designated to the closed block
 
38,545

 
40,306

Excess of closed block liabilities over assets designated to the closed block
 
3,019

 
3,149

Amounts included in AOCI:
 
 
 
 
Unrealized investment gains (losses), net of income tax
 
1,089

 
1,863

Unrealized gains (losses) on derivatives, net of income tax
 
86

 
(7
)
Allocated to policyholder dividend obligation, net of income tax
 
(338
)
 
(1,379
)
Total amounts included in AOCI
 
837

 
477

Maximum future earnings to be recognized from closed block assets and liabilities
 
$
3,856

 
$
3,626


143
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
7. Closed Block (continued)

See Note 1 for discussion of new accounting guidance related to U.S. Tax Reform.
Information regarding the closed block policyholder dividend obligation was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Balance at January 1,
 
$
2,121

 
$
1,931

 
$
1,783

Change in unrealized investment and derivative gains (losses)
 
(1,693
)
 
190

 
148

Balance at December 31,
 
$
428

 
$
2,121

 
$
1,931

Information regarding the closed block revenues and expenses was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Revenues
 
 
 
 
 
 
Premiums
 
$
1,672

 
$
1,736

 
$
1,804

Net investment income
 
1,758

 
1,818

 
1,902

Net investment gains (losses)
 
(71
)
 
1

 
(10
)
Net derivative gains (losses)
 
22

 
(32
)
 
25

Total revenues
 
3,381

 
3,523

 
3,721

Expenses
 
 
 
 
 
 
Policyholder benefits and claims
 
2,475

 
2,453

 
2,563

Policyholder dividends
 
968

 
976

 
953

Other expenses
 
117

 
125

 
133

Total expenses
 
3,560

 
3,554

 
3,649

Revenues, net of expenses before provision for income tax expense (benefit)
 
(179
)
 
(31
)
 
72

Provision for income tax expense (benefit)
 
(39
)
 
12

 
24

Revenues, net of expenses and provision for income tax expense (benefit)
 
$
(140
)
 
$
(43
)
 
$
48

Metropolitan Life Insurance Company charges the closed block with federal income taxes, state and local premium taxes and other state or local taxes, as well as investment management expenses relating to the closed block as provided in the Plan of Reorganization. Metropolitan Life Insurance Company also charges the closed block for expenses of maintaining the policies included in the closed block.
8. Investments
See Note 10 for information about the fair value hierarchy for investments and the related valuation methodologies.
Investment Risks and Uncertainties
Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of impairments, the recognition of income on certain investments and the potential consolidation of VIEs. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the consolidated financial statements.
The determination of valuation allowances and impairments is highly subjective and is based upon periodic evaluations and assessments 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.

144
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

The recognition of income on certain investments (e.g. structured securities, including mortgage-backed securities, asset-backed securities (“ABS”) and certain structured investment transactions) is dependent upon certain factors such as prepayments and defaults, and changes in such factors could result in changes in amounts to be earned.
Fixed Maturity Securities AFS
Fixed Maturity Securities AFS by Sector
The following table presents the fixed maturity securities AFS by sector. Municipals includes taxable and tax-exempt revenue bonds, and to a much lesser extent, general obligations of states, municipalities and political subdivisions. Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities AFS. Included within fixed maturity securities AFS are structured securities including RMBS, ABS and commercial mortgage-backed securities (“CMBS”) (collectively, “Structured Securities”).
 
December 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair
Value
 
 
Gains
 
Temporary
Losses
 
OTTI
Losses (1)
 
Gains
 
Temporary
Losses
 
OTTI
Losses (1)
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
53,927

 
$
2,440

 
$
1,565

 
$
—

 
$
54,802

 
$
53,291

 
$
5,037

 
$
238

 
$
—

 
$
58,090

U.S. government and agency
28,139

 
2,388

 
366

 
—

 
30,161

 
35,021

 
3,755

 
231

 
—

 
38,545

Foreign corporate
26,592

 
674

 
1,303

 
—

 
25,963

 
24,367

 
1,655

 
426

 
—

 
25,596

RMBS
22,186

 
831

 
305

 
(25
)
 
22,737

 
21,735

 
1,039

 
181

 
(41
)
 
22,634

ABS
8,599

 
40

 
112

 
—

 
8,527

 
7,808

 
73

 
15

 
—

 
7,866

Municipals
6,070

 
907

 
30

 
—

 
6,947

 
6,310

 
1,245

 
3

 
1

 
7,551

CMBS
5,471

 
48

 
75

 
—

 
5,444

 
5,390

 
124

 
26

 
—

 
5,488

Foreign government
4,191

 
408

 
107

 
—

 
4,492

 
3,887

 
641

 
26

 
—

 
4,502

Total fixed maturity securities AFS
$
155,175

 
$
7,736

 
$
3,863

 
$
(25
)
 
$
159,073

 
$
157,809

 
$
13,569

 
$
1,146

 
$
(40
)
 
$
170,272

__________________
(1)
Noncredit OTTI losses included in AOCI in an unrealized gain position are due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities. See also “— Net Unrealized Investment Gains (Losses).”
The Company held non-income producing fixed maturity securities AFS with an estimated fair value of $14 million and $4 million with unrealized gains (losses) of ($1) million and ($3) million at December 31, 2018 and 2017, respectively.
Methodology for Amortization of Premium and Accretion of Discount on Structured Securities
Amortization of premium and accretion of discount on Structured Securities considers the estimated timing and amount of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the originally anticipated and the actual prepayments received and currently anticipated. Prepayment assumptions for Structured Securities are estimated using inputs obtained from third-party specialists and based on management’s knowledge of the current market. For credit-sensitive and certain prepayment-sensitive Structured Securities, the effective yield is recalculated on a prospective basis. For all other Structured Securities, the effective yield is recalculated on a retrospective basis.

145
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Maturities of Fixed Maturity Securities AFS
The amortized cost and estimated fair value of fixed maturity securities AFS, by contractual maturity date, were as follows at December 31, 2018:
 
Due in One
Year or Less
 
Due After One
Year Through
Five Years
 
Due After Five
Years Through Ten
Years
 
Due After Ten
Years
 
Structured
Securities
 
Total Fixed
Maturity
Securities AFS
 
(In millions)
Amortized cost
$
7,499

 
$
27,652

 
$
28,623

 
$
55,145

 
$
36,256

 
$
155,175

Estimated fair value
$
7,436

 
$
27,705

 
$
28,543

 
$
58,681

 
$
36,708

 
$
159,073

Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities AFS not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position at:
 
December 31, 2018
 
December 31, 2017
 
Less than 12 Months
 
Equal to or Greater
than 12 Months
 
Less than 12 Months
 
Equal to or Greater
than 12 Months
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
(Dollars in millions)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
23,398

 
$
1,176

 
$
3,043

 
$
389

 
$
3,727

 
$
57

 
$
2,523

 
$
181

U.S. government and agency
4,322

 
29

 
7,948

 
337

 
13,905

 
76

 
3,018

 
155

Foreign corporate
12,911

 
893

 
2,138

 
410

 
1,677

 
43

 
3,912

 
383

RMBS
5,611

 
107

 
4,482

 
173

 
3,673

 
30

 
3,332

 
110

ABS
5,958

 
105

 
223

 
7

 
732

 
3

 
358

 
12

Municipals
675

 
22

 
94

 
8

 
106

 
1

 
120

 
3

CMBS
2,455

 
45

 
344

 
30

 
844

 
6

 
193

 
20

Foreign government
1,364

 
83

 
191

 
24

 
247

 
6

 
265

 
20

Total fixed maturity securities AFS
$
56,694

 
$
2,460

 
$
18,463

 
$
1,378

 
$
24,911

 
$
222

 
$
13,721

 
$
884

Total number of securities in an
unrealized loss position
5,263

 
 
 
1,125

 
 
 
1,295

 
 
 
1,103

 
 

146
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Evaluation of Fixed Maturity Securities AFS for OTTI and Evaluating Temporarily Impaired Fixed Maturity Securities AFS
Evaluation and Measurement Methodologies
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 in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below amortized cost; (ii) the potential for impairments 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 where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (vii) with respect to Structured Securities, changes in forecasted cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security; (viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
The methodology and significant inputs used to determine the amount of credit loss are as follows:
•
The Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security prior to impairment.
•
When determining collectability and the period over which value is expected to recover, the Company applies considerations utilized in its overall impairment evaluation process which incorporates information regarding the specific security, fundamentals of the industry and geographic area in which the security issuer operates, and overall macroeconomic conditions. Projected future cash flows are estimated using assumptions derived from management’s best estimates of likely scenario-based outcomes after giving consideration to a variety of variables that include, but are not limited to: payment terms of the security; the likelihood that the issuer can service the interest and principal payments; the quality and amount of any credit enhancements; the security’s position within the capital structure of the issuer; possible corporate restructurings or asset sales by the issuer; and changes to the rating of the security or the issuer by rating agencies.
•
Additional considerations are made when assessing the unique features that apply to certain Structured Securities including, but not limited to: the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying loans or assets backing a particular security, and the payment priority within the tranche structure of the security.
•
When determining the amount of the credit loss for the following types of securities: U.S. and foreign corporate, foreign government and municipals, the estimated fair value is considered the recovery value when available information does not indicate that another value is more appropriate. When information is identified that indicates a recovery value other than estimated fair value, management considers in the determination of recovery value the same considerations utilized in its overall impairment evaluation process as described above, as well as any private and public sector programs to restructure such securities.
With respect to securities that have attributes of debt and equity (“perpetual hybrid securities”), consideration is given in the OTTI analysis as to whether there has been any deterioration in the credit of the issuer and the likelihood of recovery in value of the securities that are in a severe and extended unrealized loss position. Consideration is also given as to whether any perpetual hybrid securities with an unrealized loss, regardless of credit rating, have deferred any dividend payments. When an OTTI loss has occurred, the OTTI loss is the entire difference between the perpetual hybrid security’s cost and its estimated fair value with a corresponding charge to earnings.

147
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

The amortized cost of securities is adjusted for OTTI in the period in which the determination is made. The Company does not change the revised cost basis for subsequent recoveries in value.
In periods subsequent to the recognition of OTTI on a security, the Company accounts for the impaired security as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted over the remaining term of the security in a prospective manner based on the amount and timing of estimated future cash flows.
Current Period Evaluation
Based on the Company’s current evaluation of its securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at December 31, 2018. Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, and foreign currency exchange rates. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities AFS increased $2.7 billion during the year ended December 31, 2018 to $3.8 billion. The increase in gross unrealized losses for the year ended December 31, 2018, was primarily attributable to increases in interest rates, widening credit spreads and, to a lesser extent, the impact of weakening of certain foreign currencies on non-functional currency denominated fixed maturity securities AFS.
At December 31, 2018, $132 million of the total $3.8 billion of gross unrealized losses were from 22 fixed maturity securities AFS with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Investment Grade Fixed Maturity Securities AFS
Of the $132 million of gross unrealized losses on fixed maturity securities AFS with an unrealized loss of 20% or more of amortized cost for six months or greater, $82 million, or 62%, were related to gross unrealized losses on 10 investment grade fixed maturity securities AFS. Unrealized losses on investment grade fixed maturity securities AFS are principally related to widening credit spreads since purchase and, with respect to fixed-rate fixed maturity securities AFS, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities AFS
Of the $132 million of gross unrealized losses on fixed maturity securities AFS with an unrealized loss of 20% or more of amortized cost for six months or greater, $50 million, or 38%, were related to gross unrealized losses on 12 below investment grade fixed maturity securities AFS. Unrealized losses on below investment grade fixed maturity securities AFS are principally related to U.S. and foreign corporate securities (primarily industrial and utility securities) and CMBS and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainty. Management evaluates U.S. and foreign corporate securities based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issuers and evaluates CMBS based on actual and projected cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, the payment terms of the underlying assets backing a particular security and the payment priority within the tranche structure of the security.

148
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Equity Securities
Equity securities are summarized as follows at:
 
December 31, 2018
 
December 31, 2017
 
Estimated
Fair
Value
 
% of
Total
 
Estimated
Fair
Value
 
% of
Total
 
 
(Dollars in millions)
 
 
 
 
 
 
 
 
Common stock
$
442

 
57.2
%
 
$
1,251

 
75.5
%
Non-redeemable preferred stock
331

 
42.8

 
407

 
24.5

Total equity securities
$
773

 
100.0
%
 
$
1,658

 
100.0
%
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), effective January 1, 2018, the Company has reclassified its investment in common stock in FHLB from equity securities to other invested assets. These investments are carried at redemption value and are considered restricted investments until redeemed by the respective FHLBanks. The carrying value of these investments at December 31, 2017 was $733 million.

Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
 
December 31,
 
2018
 
2017
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
 
(Dollars in millions)
Mortgage loans:
 
 
 
 
 
 
 
Commercial
$
38,123

 
59.9
 %
 
$
35,440

 
60.6
 %
Agricultural
14,164

 
22.2

 
12,712

 
21.8

Residential
11,392

 
17.9

 
10,058

 
17.2

Total recorded investment
63,679

 
100.0

 
58,210

 
99.6

Valuation allowances
(291
)
 
(0.5
)
 
(271
)
 
(0.5
)
Subtotal mortgage loans, net
63,388

 
99.5

 
57,939

 
99.1

Residential — FVO
299

 
0.5

 
520

 
0.9

Total mortgage loans, net
$
63,687

 
100.0
 %
 
$
58,459

 
100.0
 %

Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on residential mortgage loans — FVO is presented in Note 10. The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis.
The amount of net discounts, included within total recorded investment, is primarily attributable to residential mortgage loans, and at December 31, 2018 and 2017 was $907 million and $1.0 billion, respectively.
The carrying value of foreclosed mortgage loans included in real estate and real estate joint ventures was $42 million and $44 million at December 31, 2018 and 2017, respectively.
Purchases of mortgage loans, primarily residential, were $3.4 billion, $3.1 billion and $2.9 billion for the years ended December 31, 2018, 2017 and 2016, respectively.

149
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

The Company originates and acquires unaffiliated mortgage loans and simultaneously sells a portion to affiliates under master participation agreements. The aggregate amount of mortgage loan participation interests in unaffiliated mortgage loans sold by the Company to affiliates during the years ended December 31, 2018, 2017 and 2016 was $1.5 billion, $2.5 billion and $3.6 billion, respectively. In connection with the mortgage loan participations, the Company collected mortgage loan principal and interest payments from unaffiliated borrowers on behalf of affiliates and remitted such receipts to the affiliates in the amount of $1.5 billion, $1.8 billion and $2.1 billion during the years ended December 31, 2018, 2017 and 2016, respectively.
The Company purchases unaffiliated mortgage loan participation interests under a master participation agreement from an affiliate, simultaneously with the affiliate’s origination or acquisition of mortgage loans. The aggregate amount of unaffiliated mortgage loan participation interests purchased by the Company from such affiliate during the year ended December 31, 2018 was $3.7 billion. The Company did not purchase any unaffiliated mortgage loan participation interests during the years ended December 31, 2017 and 2016. In connection with the mortgage loan participations, the affiliate collected mortgage loan principal and interest payments on the Company’s behalf and the affiliate remitted such payments to the Company in the amount of $119 million during the year ended December 31, 2018.
Mortgage Loans, Valuation Allowance and Impaired Loans by Portfolio Segment
Mortgage loans by portfolio segment, by method of evaluation of credit loss, impaired mortgage loans including those modified in a troubled debt restructuring, and the related valuation allowances, were as follows at and for the years ended:
 
Evaluated Individually for Credit Losses
 
Evaluated Collectively for
Credit Losses
 
Impaired
 Loans
 
Impaired Loans with a
Valuation Allowance
 
Impaired Loans without a
Valuation Allowance
 
 
 
 
 
 
 
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Valuation
Allowances
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Recorded
Investment
 
Valuation
Allowances
 
Carrying
Value
 
Average
Recorded
Investment
 
(In millions)
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
38,123

 
$
190

 
$
—

 
$
—

Agricultural
31

 
31

 
3

 
169

 
169

 
13,964

 
41

 
197

 
123

Residential
—

 
—

 
—

 
431

 
386

 
11,006

 
57

 
386

 
358

Total
$
31

 
$
31

 
$
3

 
$
600

 
$
555

 
$
63,093

 
$
288

 
$
583

 
$
481

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
35,440

 
$
173

 
$
—

 
$
5

Agricultural
22

 
21

 
2

 
27

 
27

 
12,664

 
38

 
46

 
32

Residential
—

 
—

 
—

 
358

 
324

 
9,734

 
58

 
324

 
285

Total
$
22

 
$
21

 
$
2

 
$
385

 
$
351

 
$
57,838

 
$
269

 
$
370

 
$
322

The average recorded investment for impaired commercial, agricultural and residential mortgage loans was $30 million, $49 million and $188 million, respectively, for the year ended December 31, 2016.

150
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Valuation Allowance Rollforward by Portfolio Segment
The changes in the valuation allowance, by portfolio segment, were as follows:
 
Commercial
 
Agricultural
 
Residential
 
Total
 
(In millions)
Balance at January 1, 2016
$
165

 
$
37

 
$
55

 
$
257

Provision (release)
6

 
1

 
23

 
30

Charge-offs, net of recoveries
—

 
—

 
(16
)
 
(16
)
Dispositions (1)
(4
)
 
—

 
—

 
(4
)
Balance at December 31, 2016
167

 
38

 
62

 
267

Provision (release)
6

 
4

 
8

 
18

Charge-offs, net of recoveries
—

 
(2
)
 
(12
)
 
(14
)
Balance at December 31, 2017
173

 
40

 
58

 
271

Provision (release)
17

 
4

 
7

 
28

Charge-offs, net of recoveries
—

 
—

 
(8
)
 
(8
)
Balance at December 31, 2018
$
190

 
$
44

 
$
57

 
$
291

________________
(1)See Note 3.
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience with loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
Commercial and Agricultural Mortgage Loan Portfolio Segments
The Company typically uses several years of historical experience in establishing non-specific valuation allowances which capture multiple economic cycles. For evaluations of commercial mortgage loans, in addition to historical experience, management considers factors that include the impact of a rapid change to the economy, which may not be reflected in the loan portfolio, and recent loss and recovery trend experience as compared to historical loss and recovery experience. For evaluations of agricultural mortgage loans, in addition to historical experience, management considers factors that include increased stress in certain sectors, which may be evidenced by higher delinquency rates, or a change in the number of higher risk loans. On a quarterly basis, management incorporates the impact of these current market events and conditions on historical experience in determining the non-specific valuation allowance established for commercial and agricultural mortgage loans.

151
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

All commercial mortgage loans are reviewed on an ongoing basis which may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt service coverage ratios, and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt service coverage ratios. All agricultural mortgage loans are monitored on an ongoing basis. The monitoring process for agricultural mortgage loans is generally similar to the commercial mortgage loan monitoring process, with a focus on higher risk loans, including reviews on a geographic and property-type basis. Higher risk loans are reviewed individually on an ongoing basis for potential credit loss and specific valuation allowances are established using the methodology described above. Quarterly, the remaining loans are reviewed on a pool basis by aggregating groups of loans that have similar risk characteristics for potential credit loss, and non-specific valuation allowances are established as described above using inputs that are unique to each segment of the loan portfolio.
For commercial mortgage loans, the primary credit quality indicator is the debt service coverage ratio, which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. The Company also reviews the loan-to-value ratio of its commercial mortgage loan portfolio. Loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio and the values utilized in calculating the ratio are updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of the Company’s ongoing review of its commercial mortgage loan portfolio.
For agricultural mortgage loans, the Company’s primary credit quality indicator is the loan-to-value ratio. The values utilized in calculating this ratio are developed in connection with the ongoing review of the agricultural mortgage loan portfolio and are routinely updated.
Residential Mortgage Loan Portfolio Segment
The Company’s residential mortgage loan portfolio is comprised primarily of closed end, amortizing residential mortgage loans. For evaluations of residential mortgage loans, the key inputs of expected frequency and expected loss reflect current market conditions, with expected frequency adjusted, when appropriate, for differences from market conditions and the Company’s historical experience. In contrast to the commercial and agricultural mortgage loan portfolios, residential mortgage loans are smaller-balance homogeneous loans that are collectively evaluated for impairment. Non-specific valuation allowances are established using the evaluation framework described above for pools of loans with similar risk characteristics from inputs that are unique to the residential segment of the loan portfolio. Loan specific valuation allowances are only established on residential mortgage loans when they have been restructured and are established using the methodology described above for all loan portfolio segments.
For residential mortgage loans, the Company’s primary credit quality indicator is whether the loan is performing or nonperforming. The Company generally defines nonperforming residential mortgage loans as those that are 60 or more days past due and/or in nonaccrual status which is assessed monthly. Generally, nonperforming residential mortgage loans have a higher risk of experiencing a credit loss.

152
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans was as follows at:
 
Recorded Investment
 
Estimated
Fair
Value
 
% of
Total
 
Debt Service Coverage Ratios
 
Total
 
% of
Total
 
 
> 1.20x
 
1.00x - 1.20x
 
< 1.00x
 
 
(Dollars in millions)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan-to-value ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 65%
$
31,282

 
$
723

 
$
85

 
$
32,090

 
84.2
%
 
$
32,440

 
84.3
%
65% to 75%
4,759

 
—

 
21

 
4,780

 
12.5

 
4,829

 
12.6

76% to 80%
340

 
210

 
56

 
606

 
1.6

 
585

 
1.5

Greater than 80%
480

 
167

 
—

 
647

 
1.7

 
613

 
1.6

Total
$
36,861

 
$
1,100

 
$
162

 
$
38,123

 
100.0
%
 
$
38,467

 
100.0
%
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan-to-value ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 65%
$
29,346

 
$
1,359

 
$
198

 
$
30,903

 
87.2
%
 
$
31,563

 
87.5
%
65% to 75%
3,245

 
95

 
114

 
3,454

 
9.7

 
3,465

 
9.6

76% to 80%
149

 
171

 
57

 
377

 
1.1

 
363

 
1.0

Greater than 80%
400

 
159

 
147

 
706

 
2.0

 
665

 
1.9

Total
$
33,140

 
$
1,784

 
$
516

 
$
35,440

 
100.0
%
 
$
36,056

 
100.0
%
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
 
December 31,
 
2018
 
2017
 
Recorded
Investment
 
% of
Total
 
Recorded
Investment
 
% of
Total
 
(Dollars in millions)
Loan-to-value ratios:
 
 
 
 
 
 
 
Less than 65%
$
13,075

 
92.3
%
 
$
12,082

 
95.0
%
65% to 75%
1,034

 
7.3

 
581

 
4.6

76% to 80%
32

 
0.2

 
40

 
0.3

Greater than 80%
23

 
0.2

 
9

 
0.1

Total
$
14,164

 
100.0
%
 
$
12,712

 
100.0
%
The estimated fair value of agricultural mortgage loans was $14.1 billion and $12.8 billion at December 31, 2018 and 2017, respectively.

153
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans was as follows at:
 
December 31,
 
2018
 
2017
 
Recorded
Investment
 
% of
Total
 
Recorded
Investment
 
% of
Total
 
(Dollars in millions)
Performance indicators:
 
 
 
 
 
 
 
Performing
$
10,990

 
96.5
%
 
$
9,614

 
95.6
%
Nonperforming (1)
402

 
3.5

 
444

 
4.4

Total
$
11,392

 
100.0
%
 
$
10,058

 
100.0
%
__________________
(1)
Includes residential mortgage loans in process of foreclosure of $140 million and $132 million at December 31, 2018 and 2017, respectively.
The estimated fair value of residential mortgage loans was $11.8 billion and $10.6 billion at December 31, 2018 and 2017, respectively.
Past Due and Nonaccrual Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both December 31, 2018 and 2017. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage loans — 90 days. The past due and nonaccrual mortgage loans at recorded investment, prior to valuation allowances, by portfolio segment, were as follows at:
 
Past Due
 
Greater than 90 Days Past Due and Still Accruing Interest
 
Nonaccrual
 
December 31, 2018
 
December 31, 2017
 
December 31, 2018
 
December 31, 2017
 
December 31, 2018
 
December 31, 2017
 
(In millions)
Commercial
$
—

 
$
—

 
$
—

 
$
—

 
$
167

 
$
—

Agricultural
204

 
134

 
109

 
125

 
105

 
36

Residential
402

 
444

 
—

 
—

 
402

 
444

Total
$
606

 
$
578

 
$
109

 
$
125

 
$
674

 
$
480

Mortgage Loans Modified in a Troubled Debt Restructuring
The Company may grant concessions related to borrowers experiencing financial difficulties, which are classified as troubled debt restructurings. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates, and/or a reduction of accrued interest. The amount, timing and extent of the concessions granted are considered in determining any impairment or changes in the specific valuation allowance recorded with the restructuring. Through the continuous monitoring process, a specific valuation allowance may have been recorded prior to the quarter when the mortgage loan is modified in a troubled debt restructuring.
For the year ended December 31, 2018, the Company had 440 residential mortgage loans modified in a troubled debt restructuring with carrying value of $96 million and $92 million pre-modification and post-modification, respectively. For the year ended December 31, 2017, the Company had 500 residential mortgage loans modified in a troubled debt restructuring with carrying value of $120 million and $108 million pre-modification and post-modification, respectively. For the years ended December 31, 2018 and 2017, the Company did not have a significant amount of agricultural mortgage loans and no commercial mortgage loans modified in a troubled debt restructuring.
For both the years ended December 31, 2018 and 2017, the Company did not have a significant amount of mortgage loans modified in a troubled debt restructuring with subsequent payment default.

154
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Other Invested Assets
Other invested assets is comprised primarily of freestanding derivatives with positive estimated fair values (see Note 9), tax credit and renewable energy partnerships, affiliated investments, annuities funding structured settlement claims, leveraged and direct financing leases and FHLB common stock. See “— Related Party Investment Transactions” for information regarding affiliated investments and annuities funding structured settlement claims.
Tax Credit Partnerships
The carrying value of tax credit partnerships was $1.7 billion and $1.8 billion at December 31, 2018 and 2017, respectively. Losses from tax credit partnerships included within net investment income were $257 million, $259 million, and $166 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Leveraged and Direct Financing Leases
Investment in leveraged and direct financing leases consisted of the following at:
 
December 31,
 
2018
 
2017
 
Leveraged
Leases
 
Direct
Financing
Leases
 
Leveraged
Leases
 
Direct
Financing
Leases
 
(In millions)
Rental receivables, net
$
715

 
$
256

 
$
911

 
$
278

Estimated residual values
618

 
42

 
649

 
42

Subtotal
1,333

 
298

 
1,560

 
320

Unearned income
(401
)
 
(100
)
 
(448
)
 
(113
)
Investment in leases
$
932

 
$
198

 
$
1,112

 
$
207

Rental receivables are generally due in periodic installments. The payment periods for leveraged leases generally range from one to 15 years but in certain circumstances can be over 25 years, while the payment periods for direct financing leases generally range from one to 25 years but in certain circumstances can be over 25 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming rental receivables as those that are 90 days or more past due. At both December 31, 2018 and 2017, all leveraged lease receivables and direct financing rental receivables were performing.
The Company’s deferred income tax liability related to leveraged leases was $465 million and $875 million at December 31, 2018 and 2017, respectively.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $5.0 billion and $3.1 billion at December 31, 2018 and 2017, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity securities AFS, equity securities and derivatives and the effect on DAC, VOBA, DSI, future policy benefits and the policyholder dividend obligation, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in AOCI.

155
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

The components of net unrealized investment gains (losses), included in AOCI, were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Fixed maturity securities AFS
$
3,890

 
$
12,349

 
$
7,912

Fixed maturity securities AFS with noncredit OTTI losses included in AOCI
25

 
40

 
10

Total fixed maturity securities AFS
3,915

 
12,389

 
7,922

Equity securities
—

 
119

 
72

Derivatives
1,742

 
1,396

 
2,244

Other
231

 
1

 
16

Subtotal
5,888

 
13,905

 
10,254

Amounts allocated from:
 
 
 
 
 
Future policy benefits
(5
)
 
(19
)
 
(9
)
DAC and VOBA related to noncredit OTTI losses recognized in AOCI
—

 
—

 
(1
)
DAC, VOBA and DSI
(571
)
 
(790
)
 
(569
)
Policyholder dividend obligation
(428
)
 
(2,121
)
 
(1,931
)
Subtotal
(1,004
)
 
(2,930
)
 
(2,510
)
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI
(5
)
 
(14
)
 
(3
)
Deferred income tax benefit (expense)
(982
)
 
(3,704
)
 
(2,690
)
Net unrealized investment gains (losses)
$
3,897

 
$
7,257

 
$
5,051

The changes in net unrealized investment gains (losses) were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Balance at January 1,
$
7,257

 
$
5,051

 
$
4,773

Cumulative effects of changes in accounting principles, net of income tax (Note 1)

1,310

 
—

 
—

Fixed maturity securities AFS on which noncredit OTTI losses have been recognized
(15
)
 
30

 
49

Unrealized investment gains (losses) during the year
(7,883
)
 
3,621

 
541

Unrealized investment gains (losses) relating to:
 
 
 
 
 
Future policy benefits
14

 
(10
)
 
(2
)
DAC and VOBA related to noncredit OTTI losses recognized in AOCI
—

 
1

 
(1
)
DAC, VOBA and DSI
219

 
(221
)
 
3

Policyholder dividend obligation
1,693

 
(190
)
 
(148
)
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI
9

 
(11
)
 
(17
)
Deferred income tax benefit (expense)
1,293

 
(1,014
)
 
(148
)
Net unrealized investment gains (losses)
3,897

 
7,257

 
5,050

Net unrealized investment gains (losses) attributable to noncontrolling interests
—

 
—

 
1

Balance at December 31,
$
3,897

 
$
7,257

 
$
5,051

Change in net unrealized investment gains (losses)
$
(3,360
)
 
$
2,206

 
$
277

Change in net unrealized investment gains (losses) attributable to noncontrolling interests
—

 
—

 
1

Change in net unrealized investment gains (losses) attributable to Metropolitan Life
Insurance Company
$
(3,360
)
 
$
2,206

 
$
278


156
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both December 31, 2018 and 2017.
Securities Lending and Repurchase Agreements
Securities, Collateral and Reinvestment Portfolio
A summary of the securities lending and repurchase agreements transactions is as follows:
 
December 31,
 
2018
 
2017
 
Securities on Loan (1)
 
 
 
 
 
Securities on Loan (1)
 
 
 
 

Amortized Cost
 
Estimated Fair Value
 
Cash Collateral Received from Counterparties (2) (3)
 
Reinvestment Portfolio at Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
 
Cash Collateral Received from Counterparties (2) (3)
 
Reinvestment Portfolio at Estimated Fair Value

 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
Securities lending
$
12,521

 
$
13,138

 
$
13,351

 
$
13,376

 
$
13,887

 
$
14,852

 
$
15,170

 
$
15,188

Repurchase agreements
$
974

 
$
1,020

 
$
1,000

 
$
1,001

 
$
900

 
$
1,031

 
$
1,000

 
$
1,000

__________________

(1)
Securities on loan in connection with securities lending are included within fixed maturities securities AFS and securities on loan in connection with repurchase agreements are included within fixed maturities securities AFS, cash equivalents and short-term investments.
(2)
In connection with securities lending, in addition to cash collateral received, the Company received from counterparties security collateral of $64 million and $11 million at December 31, 2018 and 2017, respectively, which may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the consolidated financial statements.
(3)
The securities lending liability for cash collateral is included within payables for collateral under securities loaned and other transactions; and the repurchase agreements liability for cash collateral is included within payables for collateral under securities loaned and other transactions and other liabilities.

157
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Contractual Maturities
A summary of the remaining contractual maturities of securities lending agreements and repurchase agreements is as follows:
 
December 31,
 
2018
 
2017
 
Remaining Maturities of the Agreements
 
 
 
Remaining Maturities of the Agreements
 
 
 
Open (1)
 
1 Month
or Less
 
Over
 1 to 6
Months
 
Total
 
Open (1)
 
1 Month
or Less
 
Over
1 to 6
Months
 
Total
 
(In millions)
Cash collateral liability by loaned security type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,970

 
$
7,426

 
$
3,955

 
$
13,351

 
$
2,927

 
$
5,279

 
$
6,964

 
$
15,170

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
—

 
$
1,000

 
$
—

 
$
1,000

 
$
—

 
$
1,000

 
$
—

 
$
1,000

__________________
(1)
The related loaned security could be returned to the Company on the next business day, which would require the Company to immediately return the cash collateral. The estimated fair value of the securities on loan related to this cash collateral at December 31, 2018 was $1.9 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement.
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both.
The securities lending and repurchase agreements reinvestment portfolios acquired with the cash collateral consisted principally of high quality, liquid, publicly-traded fixed maturity securities AFS, short-term investments, cash equivalents or held in cash. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put back to the Company.

Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value for all asset classes, except mortgage loans, which are presented at carrying value at:
 
December 31,
 
2018
 
2017
 
(In millions)
Invested assets on deposit (regulatory deposits)
$
47

 
$
49

Invested assets pledged as collateral (1)
20,207

 
20,775

Total invested assets on deposit and pledged as collateral
$
20,254

 
$
20,824

__________________
(1)
The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4), derivative transactions (see Note 9) and secured debt (See Note 11).

158
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

See “— Securities Lending and Repurchase Agreements” for information regarding securities supporting securities lending and repurchase agreement transactions and Note 7 for information regarding investments designated to the closed block. In addition, the restricted investment in FHLB common stock was $724 million and $733 million, at redemption value, at December 31, 2018 and 2017, respectively (see Note 1).
Purchased Credit Impaired Investments
Investments acquired with evidence of credit quality deterioration since origination and for which it is probable at the acquisition date that the Company will be unable to collect all contractually required payments are classified as purchased credit impaired (“PCI”) investments. For each investment, the excess of the cash flows expected to be collected as of the acquisition date over its acquisition date fair value is referred to as the accretable yield and is recognized as net investment income on an effective yield basis. If, subsequently, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected to be collected, the accretable yield is adjusted prospectively. The excess of the contractually required payments (including interest) as of the acquisition date over the cash flows expected to be collected as of the acquisition date is referred to as the nonaccretable difference, and this amount is not expected to be realized as net investment income. Decreases in cash flows expected to be collected can result in OTTI.
The Company’s PCI investments had an outstanding principal balance of $3.9 billion and $4.6 billion at December 31, 2018 and 2017, respectively, which represents the contractually required principal and accrued interest payments whether or not currently due and a carrying value (estimated fair value of the investments plus accrued interest) of $3.2 billion and $3.8 billion at December 31, 2018 and 2017, respectively. Accretion of accretable yield on PCI investments recognized in earnings in net investment income was $266 million and $273 million for the years ended December 31, 2018 and 2017, respectively. Purchases of PCI investments were insignificant in both of the years ended December 31, 2018 and 2017.
Collectively Significant Equity Method Investments
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests consisting of leveraged buy-out funds, hedge funds, private equity funds, joint ventures and other funds. The portion of these investments accounted for under the equity method had a carrying value of $11.5 billion at December 31, 2018. The Company’s maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus unfunded commitments of $3.1 billion at December 31, 2018. Except for certain real estate joint ventures and certain funds, the Company’s investments in its remaining real estate funds and other limited partnership interests are generally of a passive nature in that the Company does not participate in the management of the entities.
As described in Note 1, the Company generally records its share of earnings in its equity method investments using a three-month lag methodology and within net investment income. Aggregate net investment income from these equity method investments exceeded 10% of the Company’s consolidated pre-tax income (loss) for two of the three most recent annual periods: 2017 and 2016. The Company is providing the following aggregated summarized financial data for such equity method investments, for the most recent annual periods, in order to provide comparative information. This aggregated summarized financial data does not represent the Company’s proportionate share of the assets, liabilities, or earnings of such entities.
The aggregated summarized financial data presented below reflects the latest available financial information and is as of, and for, the years ended December 31, 2018, 2017 and 2016. Aggregate total assets of these entities totaled $466.8 billion and $450.0 billion at December 31, 2018 and 2017, respectively. Aggregate total liabilities of these entities totaled $56.3 billion and $59.5 billion at December 31, 2018 and 2017, respectively. Aggregate net income (loss) of these entities totaled $42.7 billion, $35.0 billion and $27.6 billion for the years ended December 31, 2018, 2017 and 2016, respectively. Aggregate net income (loss) from the underlying entities in which the Company invests is primarily comprised of investment income, including recurring investment income and realized and unrealized investment gains (losses).
Variable Interest Entities
The Company has invested in legal entities that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity. The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity.

159
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Consolidated VIEs
Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
The following table presents the total assets and total liabilities relating to investment related VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at:
 
December 31,
 
2018
 
2017
 
Total
Assets
 
Total
Liabilities
 
Total
Assets
 
Total
Liabilities
 
(In millions)
Real estate joint ventures (1)
$
1,394

 
$
—

 
$
1,077

 
$
—

Renewable energy partnership (2)
102

 
—

 
116

 
3

Investment fund (primarily mortgage loans) (3)
219

 
—

 
—

 
—

Other investments (2)
21

 
5

 
32

 
6

Total
$
1,736

 
$
5

 
$
1,225

 
$
9

__________________
(1)
The Company’s investment in these affiliated real estate joint ventures was $1.3 billion and $1.0 billion at December 31, 2018 and 2017, respectively. Other affiliates’ investments in these affiliated real estate joint ventures were $123 million and $85 million at December 31, 2018 and 2017, respectively.
(2)
Assets of the renewable energy partnership and other investments primarily consisted of other invested assets.
(3)
The investment by the Company and its affiliate in this affiliated investment fund was $178 million and $41 million, respectively, at December 31, 2018.
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
 
December 31,
 
2018
 
2017
 
Carrying
Amount
 
Maximum
Exposure
to Loss (1)
 
Carrying
Amount
 
Maximum
Exposure
to Loss (1)
 
(In millions)
Fixed maturity securities AFS:
 
 
 
 
 
 
 
Structured Securities (2)
$
35,112

 
$
35,112

 
$
34,284

 
$
34,284

U.S. and foreign corporate
669

 
669

 
1,166

 
1,166

Other limited partnership interests
3,979

 
6,405

 
3,561

 
5,765

Other invested assets
1,914

 
2,066

 
2,172

 
2,506

Real estate joint ventures
33

 
37

 
38

 
43

Total
$
41,707

 
$
44,289

 
$
41,221

 
$
43,764

__________________

160
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

(1)
The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by creditworthy third parties. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties of $93 million and $117 million at December 31, 2018 and 2017, respectively. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee.
(2)
For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity.
As described in Note 16, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during each of the years ended December 31, 2018, 2017 and 2016.
During 2018 and 2017, the Company securitized certain residential mortgage loans and acquired an interest in the related RMBS issued. While the Company has a variable interest in the issuer of the securities, it is not the primary beneficiary of the issuer of the securities since it does not have any rights to remove the servicer or veto rights over the servicer’s actions. The carrying value and the estimated fair value of mortgage loans were $451 million and $478 million, respectively, for loans sold during 2018, and $319 million and $339 million, respectively, for loans sold during 2017. Gains on securitizations of $27 million and $20 million during the years ended December 31, 2018 and 2017, respectively, were included within net investment gains (losses). The estimated fair value of RMBS acquired in connection with the securitizations was $98 million and $52 million at December 31, 2018 and 2017, respectively, which was included in the carrying amount and maximum exposure to loss for Structured Securities presented above. See Note 10 for information on how the estimated fair value of mortgage loans and RMBS is determined, the valuation approaches and key inputs, their placement in the fair value hierarchy, and for certain RMBS, quantitative information about the significant unobservable inputs and the sensitivity of their estimated fair value to changes in those inputs.
Net Investment Income
The components of net investment income were as follows:

Years Ended December 31,

2018

2017

2016
 
(In millions)
Investment income:
 
 
 
 
 
Fixed maturity securities AFS
$
7,268

 
$
7,057

 
$
7,653

Equity securities
42

 
97

 
90

Mortgage loans
2,822

 
2,647

 
2,539

Policy loans
297

 
310

 
404

Real estate and real estate joint ventures
472

 
446

 
488

Other limited partnership interests
519

 
625

 
413

Cash, cash equivalents and short-term investments
121

 
74

 
43

FVO Securities (1)
22

 
—

 
3

Operating joint venture
37

 
19

 
9

Other
261

 
133

 
204

Subtotal
11,861

 
11,408

 
11,846

Less: Investment expenses
942

 
895

 
763

Net investment income
$
10,919

 
$
10,513

 
$
11,083

________________

161
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

(1)
Changes in estimated fair value subsequent to purchase for investments still held as of the end of the respective periods included in net investment income were $22 million for the year ended December 31, 2018. There were no changes in estimated fair value subsequent to purchase for investments still held as of the end of the respective periods for the years ended December 31, 2017 and 2016.
See “— Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses.
The Company invests in real estate joint ventures, other limited partnership interests and tax credit and renewable energy partnerships, and also does business through an operating joint venture, the majority of which are accounted for under the equity method. Net investment income from other limited partnership interests and an operating joint venture, accounted for under the equity method; and real estate joint ventures and tax credit and renewable energy partnerships, primarily accounted for under the equity method, totaled $344 million, $300 million and $239 million for the years ended December 31, 2018, 2017, and 2016, respectively.


162
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Total gains (losses) on fixed maturity securities AFS:
 
 
 
 
 
Total OTTI losses recognized — by sector and industry:
 
 
 
 
 
U.S. and foreign corporate securities — by industry:
 
 
 
 
 
Consumer
$
(19
)
 
$
(5
)
 
$
—

Industrial
(2
)
 
—

 
(58
)
Finance
(2
)
 
—

 
—

Utility
—

 
—

 
(20
)
Communications
—

 
—

 
(3
)
Total U.S. and foreign corporate securities
(23
)
 
(5
)
 
(81
)
RMBS
—

 
—

 
(16
)
Municipals
—

 
(1
)
 
—

OTTI losses on fixed maturity securities AFS recognized in earnings
(23
)
 
(6
)
 
(97
)
Fixed maturity securities AFS — net gains (losses) on sales and disposals
107

 
23

 
169

Total gains (losses) on fixed maturity securities AFS
84

 
17

 
72

Total gains (losses) on equity securities:
 
 
 
 
 
Total OTTI losses recognized — by security type:
 
 
 
 
 
Common stock
—

 
(23
)
 
(75
)
Non-redeemable preferred stock
—

 
(1
)
 
—

OTTI losses on equity securities recognized in earnings
—

 
(24
)
 
(75
)
Equity securities — net gains (losses) on sales and disposals
17

 
7

 
19

Change in estimated fair value of equity securities (1)
(101
)
 
—

 
—

Total gains (losses) on equity securities
(84
)
 
(17
)

(56
)
Mortgage loans
(50
)
 
(34
)
 
(20
)
Real estate and real estate joint ventures
311

 
607

 
142

Other limited partnership interests
8

 
(52
)
 
(59
)
Other (2)
(162
)
 
(115
)
 
(32
)
Subtotal
107

 
406

 
47

Change in estimated fair value of other limited partnership interests and real estate joint ventures
11

 
—

 
—

Non-investment portfolio gains (losses)
35

 
(72
)
 
85

Total net investment gains (losses)
$
153

 
$
334

 
$
132

________________
(1)
Changes in estimated fair value subsequent to purchase for equity securities still held as of the end of the period included in net investment gains (losses) were ($82) million for the year ended December 31, 2018. See Note 1.
(2)
Other gains (losses) included a renewable energy partnership realized loss of $83 million and a leveraged lease impairment of $105 million for the year ended December 31, 2018.
See “— Related Party Investment Transactions” for discussion of affiliated net investment gains (losses) related to transfers of invested assets to affiliates.

163
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

Gains (losses) from foreign currency transactions included within net investment gains (losses) were $21 million, ($142) million and $89 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Sales or Disposals and Impairments of Fixed Maturity Securities AFS
Sales of securities are determined on a specific identification basis. Proceeds from sales or disposals and the components of net investment gains (losses) were as shown in the table below:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Proceeds
$
53,042

 
$
34,483

 
$
58,812

Gross investment gains
$
604

 
$
278

 
$
755

Gross investment losses
(497
)
 
(255
)
 
(586
)
OTTI losses
(23
)
 
(6
)
 
(97
)
Net investment gains (losses)
$
84

 
$
17

 
$
72

Credit Loss Rollforward of Fixed Maturity Securities AFS
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities AFS still held for which a portion of the OTTI loss was recognized in OCI:
 
Years Ended December 31,
 
2018
 
2017
 
(In millions)
Balance at January 1,
$
110

 
$
157

Additions:
 
 
 
Initial impairments — credit loss OTTI on securities not previously impaired
—

 
1

Reductions:
 
 
 
Sales (maturities, pay downs or prepayments) of securities previously impaired as credit loss OTTI
(38
)
 
(47
)
Increase in cash flows — accretion of previous credit loss OTTI
(2
)
 
(1
)
Balance at December 31,
$
70

 
$
110

Related Party Investment Transactions
Recurring related party investments and related net investment income were as follows at and for the years ended:
 
 
 
 
December 31,
 
Years Ended December 31,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
2016
Investment Type/Balance Sheet Category
 
Related Party
 
Carrying Value
 
Net Investment Income
 
 
 
 
(In millions)
Affiliated investments (1)
 
MetLife, Inc.
 
$
1,798

 
$
1,843

 
$
31

 
$
78

 
$
91

Affiliated investments (2)
 
American Life Insurance Company
 
100

 
100

 
3

 
3

 
3

Affiliated investments (3)
 
Metropolitan Property and Casualty Insurance Company
 
315

 
315

 
10

 
6

 
5

Other invested assets
 
 
 
$
2,213

 
$
2,258

 
$
44

 
$
87

 
$
99

 
 
 
 
 
 
 
 
 
 
 
 
 
Money market pool (4)
 
Metropolitan Money Market Pool
 
$
52

 
$
70

 
$
1

 
$
1

 
$
—

Short-term investments
 
 
 
$
52

 
$
70

 
$
1

 
$
1

 
$
—

________________


164
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

(1)
Represents an investment in affiliated senior notes. In March 2018, three senior notes previously issued by MetLife, Inc. to the Company were redenominated to Japanese yen. A $500 million senior note was redenominated to a new 53.3 billion Japanese yen senior note to the Company. The 53.3 billion Japanese yen senior note matures in June 2019 and bears interest at a rate per annum of 1.45%, payable semi-annually. A $250 million senior note was redenominated to a new 26.5 billion Japanese yen senior note to the Company. The 26.5 billion Japanese yen senior note matures in October 2019 and bears interest at a rate per annum of 1.72%, payable semi-annually. Another $250 million senior note was also redenominated to a new 26.5 billion Japanese yen senior note to the Company. The 26.5 billion Japanese yen senior note matures in September 2020 and bears interest at a rate per annum of 0.82%, payable semi-annually. In the second quarter of 2018, the remaining $825 million of affiliated senior notes previously issued by MetLife, Inc. to the Company were redenominated into two new senior notes totaling 38.5 billion Japanese yen which mature in July 2021 and bear interest at a rate per annum of 2.97%, payable semi-annually, and into two new senior notes totaling 51.0 billion Japanese yen which mature in December 2021 and bear interest at a rate per annum of 3.14%, payable semi-annually.
(2)
Represents an investment in an affiliated surplus note. The surplus note, which bears interest at a fixed rate of 3.17%, payable semiannually, is due on June 30, 2020.
(3)
Represents an investment in affiliated preferred stock. Dividends are payable quarterly at a variable rate.
(4)
The investment has a variable rate of return.
The Company transfers invested assets, primarily consisting of fixed maturity securities AFS, to and from affiliates. Invested assets transferred to and from affiliates were as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017 (1)
 
2016 (2)
 
 
(In millions)
Estimated fair value of invested assets transferred to affiliates
 
$
—

 
$
453

 
$
5,678

Amortized cost of invested assets transferred to affiliates
 
$
—

 
$
416

 
$
5,338

Net investment gains (losses) recognized on transfers
 
$
—

 
$
37

 
$
340

Estimated fair value of invested assets transferred from affiliates
 
$
77

 
$
306

 
$
1,583

_________________
(1)
In January 2017, the Company received transferred investments with an estimated fair value of $292 million, which are included in the table above, in addition to $275 million in cash related to the recapture by the Company of risks from minimum benefit guarantees on certain variable annuities previously reinsured by Brighthouse Insurance. See Note 6 for additional information related to the separation of Brighthouse.
(2)
In April 2016, the Company transferred investments and cash and cash equivalents with an amortized cost and estimated fair value of $4.0 billion and $4.3 billion, respectively, for the recapture by Brighthouse Insurance of risks related to certain single premium deferred annuity contracts previously reinsured to Brighthouse Insurance, which are included in the table above. Also, in November 2016, the Company transferred investments and cash and cash equivalents with an amortized cost and estimated fair value of $863 million and $933 million, respectively, for the recapture by Brighthouse NY of risks related to certain single premium deferred annuity contracts previously reinsured to Brighthouse NY, which are included in the table above. See Note 6 for additional information related to the separation of Brighthouse.
As a structured settlements assignment company, the Company purchased annuities from Brighthouse to fund the periodic structured settlement claim payment obligations it assumed. Each annuity purchased is contractually designated to the assumed claim obligation it funds. The aggregate related party annuity contract values recorded, for which the Company has also recorded unpaid claim obligations of equal amounts, were $1.3 billion at December 31, 2017. The related party net investment income and corresponding policyholder benefits and claims recognized were $36 million, $69 million and $64 million for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 6 for information related to the separation of Brighthouse.

165
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
8. Investments (continued)

The related party funds withheld from Brighthouse had a carrying value of $157 million at December 31, 2017. The related party other revenue and corresponding policyholder benefits and claims recognized were $7 million, $20 million and $11 million for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 6 for information related to the separation of Brighthouse and related party reinsurance transactions.
In March 2017, the Company purchased from Brighthouse Insurance an interest in an operating joint venture for $286 million, which was settled in cash in April 2017.
Through March 31, 2018, the Company provided investment administrative services to certain affiliates. The related investment administrative service charges to these affiliates were $19 million, $73 million and $172 million for the years ended December 31, 2018, 2017 and 2016, respectively. Effective April 1, 2018, the Company receives investment advisory services from an affiliate. The related affiliated investment advisory charges to the Company since April 1, 2018 were $198 million for the year ended December 31, 2018.
See “— Mortgage Loans — Mortgage Loans by Portfolio Segment” for discussion of mortgage loan participation agreements with affiliates.
See “— Variable Interest Entities” for information on investments in affiliated real estate joint ventures and affiliated investment fund.
9. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 10 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps and structured interest rate swaps to synthetically replicate investment risks and returns which are not readily available in the cash markets.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, interest rate total return swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair value, cash flow and nonqualifying hedging relationships.
The Company uses structured interest rate swaps to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. government and agency, or other fixed maturity securities AFS. Structured interest rate swaps are included in interest rate swaps and are not designated as hedging instruments.

166
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

Interest rate total return swaps are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. Interest rate total return swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). The Company utilizes interest rate total return swaps in nonqualifying hedging relationships.
The Company purchases interest rate caps primarily to protect its floating rate liabilities against rises in interest rates above a specified level and against interest rate exposure arising from mismatches between assets and liabilities, and interest rate floors primarily to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities, to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts and to pledge initial margin based on futures exchange requirements. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring, to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance, and to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow and nonqualifying hedging relationships.
A synthetic GIC is a contract that simulates the performance of a traditional GIC through the use of financial instruments. Under a synthetic GIC, the contractholder owns the underlying assets. The Company guarantees a rate of return on those assets for a premium. Synthetic GICs are not designated as hedging instruments.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency exchange rate derivatives, including foreign currency swaps and foreign currency forwards, to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and nonqualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in nonqualifying hedging relationships.

167
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional amount in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations and involuntary restructuring for corporate obligors, as well as repudiation, moratorium or governmental intervention for sovereign obligors. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. government and agency, or other fixed maturity securities AFS. These credit default swaps are not designated as hedging instruments.
The Company also entered into certain purchased and written credit default swaps held in relation to trading portfolios for the purpose of generating profits on short-term differences in price. These credit default swaps were not designated as hedging instruments. As of December 31, 2016, the Company no longer maintained a trading portfolio for derivatives.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these transactions as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, equity variance swaps, exchange-traded equity futures and equity total return swaps.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the underlying equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company utilizes equity index options in nonqualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps in nonqualifying hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts and to pledge initial margin based on futures exchange requirements. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.

168
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

In an equity total return swap, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. The Company uses equity total return swaps to hedge its equity market guarantees in certain of its insurance products. Equity total return swaps can be used as hedges or to synthetically create investments. The Company utilizes equity total return swaps in nonqualifying hedging relationships.
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:

 
Primary Underlying Risk Exposure
 
December 31,
 
2018
 
2017
 
 
 
Estimated Fair Value
 
 
 
Estimated Fair Value
 
Gross
Notional
Amount
 
Assets
 
Liabilities
 
Gross
Notional
Amount
 
Assets
 
Liabilities
 
 
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
$
2,446

 
$
2,197

 
$
2

 
$
3,826

 
$
2,289

 
$
3

Foreign currency swaps
Foreign currency exchange rate
 
1,191

 
49

 
—

 
1,082

 
47

 
17

Subtotal
 
3,637

 
2,246

 
2

 
4,908

 
2,336

 
20

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
3,181

 
139

 
1

 
3,337

 
234

 
—

Interest rate forwards
Interest rate
 
3,023

 
—

 
216

 
3,333

 
—

 
127

Foreign currency swaps
Foreign currency exchange rate
 
26,239

 
1,218

 
1,318

 
22,287

 
795

 
1,078

Subtotal
 
32,443

 
1,357

 
1,535

 
28,957

 
1,029

 
1,205

Total qualifying hedges
 
36,080

 
3,603

 
1,537

 
33,865

 
3,365

 
1,225

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
36,238

 
1,507

 
85

 
43,028

 
1,722

 
336

Interest rate floors
Interest rate
 
12,701

 
102

 
—

 
7,201

 
91

 
—

Interest rate caps
Interest rate
 
54,576

 
154

 
1

 
53,079

 
78

 
2

Interest rate futures
Interest rate
 
794

 
—

 
1

 
2,257

 
1

 
2

Interest rate options
Interest rate
 
24,340

 
185

 
—

 
7,525

 
142

 
11

Interest rate total return swaps
Interest rate
 
1,048

 
33

 
2

 
1,048

 
8

 
2

Synthetic GICs
Interest rate
 
18,006

 
—

 
—

 
11,318

 
—

 
—

Foreign currency swaps
Foreign currency exchange rate
 
5,986

 
700

 
79

 
6,739

 
547

 
164

Foreign currency forwards
Foreign currency exchange rate
 
943

 
15

 
14

 
961

 
16

 
7

Credit default swaps — purchased
Credit
 
858

 
24

 
4

 
980

 
7

 
8

Credit default swaps — written
Credit
 
7,864

 
67

 
13

 
7,874

 
181

 
—

Equity futures
Equity market
 
1,006

 
1

 
6

 
1,282

 
5

 
1

Equity index options
Equity market
 
23,162

 
706

 
396

 
14,408

 
384

 
476

Equity variance swaps
Equity market
 
1,946

 
32

 
81

 
3,530

 
45

 
169

Equity total return swaps
Equity market
 
886

 
89

 
—

 
1,077

 
—

 
39

Total non-designated or nonqualifying derivatives
 
190,354

 
3,615

 
682

 
162,307


3,227

 
1,217

Total
 
$
226,434

 
$
7,218

 
$
2,219

 
$
196,172

 
$
6,592

 
$
2,442


169
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both December 31, 2018 and 2017. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps and interest rate swaps that are used to synthetically create investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Freestanding derivative and hedging gains (losses) (1)
$
390

 
$
(771
)
 
$
(715
)
Embedded derivative gains (losses)
376

 
427

 
(423
)
Total net derivative gains (losses)
$
766

 
$
(344
)
 
$
(1,138
)
__________________
(1)
Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships, which are not presented elsewhere in this note.
The following table presents earned income on derivatives:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Qualifying hedges:
 
 
 
 
 
Net investment income
$
371

 
$
302

 
$
280

Interest credited to policyholder account balances
(113
)
 
(64
)
 
(1
)
Nonqualifying hedges:
 
 
 
 
 
Net investment income
—

 
—

 
(1
)
Net derivative gains (losses)
339

 
406

 
577

Policyholder benefits and claims
8

 
5

 
4

Total
$
605

 
$
649

 
$
859


170
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

Nonqualifying Derivatives and Derivatives for Purposes Other Than Hedging
The following table presents the amount and location of gains (losses) recognized in income for derivatives that were not designated or not qualifying as hedging instruments:
 
Net
Derivative
Gains (Losses)
 
Net
Investment
Income (1)
 
Policyholder
Benefits and
Claims (2)
 
(In millions)
Year Ended December 31, 2018
 
 
 
 
 
Interest rate derivatives
$
(340
)
 
$
4

 
$
—

Foreign currency exchange rate derivatives
429

 
—

 
—

Credit derivatives — purchased
9

 
—

 
—

Credit derivatives — written
(90
)
 
—

 
—

Equity derivatives
166

 
1

 
45

Total
$
174

 
$
5

 
$
45

Year Ended December 31, 2017
 
 
 
 
 
Interest rate derivatives
$
(343
)
 
$
1

 
$
—

Foreign currency exchange rate derivatives
(746
)
 
—

 
—

Credit derivatives — purchased
(16
)
 
—

 
—

Credit derivatives — written
102

 
—

 
—

Equity derivatives
(536
)
 
(6
)
 
(216
)
Total
$
(1,539
)
 
$
(5
)
 
$
(216
)
Year Ended December 31, 2016
 
 
 
 
 
Interest rate derivatives
$
(1,088
)
 
$
—

 
$
—

Foreign currency exchange rate derivatives
726

 
—

 
—

Credit derivatives — purchased
(23
)
 
—

 
—

Credit derivatives — written
48

 
—

 
—

Equity derivatives
(457
)
 
(14
)
 
(94
)
Total
$
(794
)
 
$
(14
)
 
$
(94
)
__________________
(1)
Changes in estimated fair value related to economic hedges of equity method investments in joint ventures and derivatives held in relation to trading portfolios. As of December 31, 2016, the Company no longer maintained a trading portfolio for derivatives.
(2)
Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits.
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate assets and liabilities to floating rate assets and liabilities; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets and liabilities.

171
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges within net derivative gains (losses). The following table presents the amount of such net derivative gains (losses):
Derivatives in Fair Value
Hedging Relationships
 
Hedged Items in Fair Value
Hedging Relationships
 
Net Derivative
Gains (Losses)
Recognized
for Derivatives
 
Net Derivative
Gains (Losses)
Recognized for
Hedged Items
 
Ineffectiveness
Recognized in
Net Derivative
Gains (Losses)
 
 
 
 
(In millions)
Year Ended December 31, 2018
 
 
 
 
 
 
Interest rate swaps:
 
Fixed maturity securities AFS
 
$
1

 
$
(1
)
 
$
—

 
 
Policyholder liabilities (1)
 
(221
)
 
227

 
6

Foreign currency swaps:
 
Foreign-denominated fixed maturity securities AFS and mortgage loans
 
52

 
(55
)
 
(3
)
 
 
Foreign-denominated policyholder account
balances (2)
 
23

 
(23
)
 
—

Total
 
$
(145
)
 
$
148

 
$
3

Year Ended December 31, 2017
 
 
 
 
 
 
Interest rate swaps:
 
Fixed maturity securities AFS
 
$
4

 
$
(5
)
 
$
(1
)
 
 
Policyholder liabilities (1)
 
(69
)
 
134

 
65

Foreign currency swaps:
 
Foreign-denominated fixed maturity securities AFS
 
(24
)
 
27

 
3

 
 
Foreign-denominated policyholder account
balances (2)
 
65

 
(43
)
 
22

Total
 
$
(24
)
 
$
113

 
$
89

Year Ended December 31, 2016
 
 
 
 
 
 
Interest rate swaps:
 
Fixed maturity securities AFS
 
$
8

 
$
(9
)
 
$
(1
)
 
 
Policyholder liabilities (1)
 
(109
)
 
90

 
(19
)
Foreign currency swaps:
 
Foreign-denominated fixed maturity securities AFS
 
10

 
(9
)
 
1

 
 
Foreign-denominated policyholder account
balances (2)
 
(95
)
 
92

 
(3
)
Total
 
$
(186
)
 
$
164

 
$
(22
)
__________________
(1)
Fixed rate liabilities reported in policyholder account balances or future policy benefits.
(2)
Fixed rate or floating rate liabilities.
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; and (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed rate investments.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). These amounts were $0, $20 million and $17 million for the years ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed four years and five years, respectively.

172
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

At December 31, 2018 and 2017, the balance in AOCI associated with cash flow hedges was $1.7 billion and $1.4 billion, respectively.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations, consolidated statements of comprehensive income (loss) and the consolidated statements of equity:
 
 
 
 
 
 
 
 
 
Derivatives in Cash Flow
Hedging Relationships
 
Amount of Gains
(Losses) Deferred in
AOCI on Derivatives
 
Amount and Location
of Gains (Losses)
Reclassified from
AOCI into Income (Loss)
 
Amount and Location
of Gains (Losses)
Recognized in Income
(Loss) on Derivatives
 
 
(Effective Portion)
 
(Effective Portion)
(Ineffective Portion)
 
 
 
 
Net Derivative
Gains (Losses)
 
Net Investment
Income
 
Net Derivative
Gains (Losses)
 
 
(In millions)
Year Ended December 31, 2018
 
 
 
 
 
 
Interest rate swaps
 
$
(148
)
 
$
23

 
$
18

 
$
2

Interest rate forwards
 
(114
)
 
(1
)
 
2

 
—

Foreign currency swaps
 
180

 
(469
)
 
(3
)
 
5

Credit forwards
 
—

 
1

 
1

 
—

Total
 
$
(82
)
 
$
(446
)
 
$
18

 
$
7

Year Ended December 31, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
73

 
$
24

 
$
16

 
$
18

Interest rate forwards
 
210

 
(11
)
 
2

 
(2
)
Foreign currency swaps
 
(161
)
 
938

 
(1
)
 
—

Credit forwards
 
—

 
1

 
1

 
—

Total
 
$
122

 
$
952

 
$
18

 
$
16

Year Ended December 31, 2016
 
 
 
 
 
 
Interest rate swaps
 
$
58

 
$
57

 
$
12

 
$
—

Interest rate forwards
 
(366
)
 
(1
)
 
3

 
—

Foreign currency swaps
 
167

 
(251
)
 
(1
)
 
—

Credit forwards
 
—

 
3

 
1

 
—

Total
 
$
(141
)
 
$
(192
)
 
$
15

 
$
—

All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At December 31, 2018, the Company expected to reclassify $109 million of deferred net gains (losses) on derivatives in AOCI, included in the table above, to earnings within the next 12 months.
Credit Derivatives
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the nonqualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $7.9 billion at both December 31, 2018 and 2017. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps. At December 31, 2018 and 2017, the Company would have received $54 million and $181 million, respectively, to terminate all of these contracts.

173
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
 
 
December 31,
 
 
2018
 
2017
Rating Agency Designation of Referenced
Credit Obligations (1)
 
Estimated
Fair Value
of Credit
Default Swaps
 
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
Estimated
Fair Value
of Credit
Default Swaps
 
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
 
(Dollars in millions)
Aaa/Aa/A
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
$
2

 
$
154

 
2.0

 
$
3

 
$
159

 
2.8

Credit default swaps referencing indices
 
27

 
2,079

 
2.5

 
42

 
2,193

 
2.7

Subtotal
 
29

 
2,233

 
2.5

 
45

 
2,352

 
2.7

Baa
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
1

 
277

 
1.6

 
4

 
416

 
1.5

Credit default swaps referencing indices
 
20

 
5,124

 
5.2

 
111

 
4,761

 
5.2

Subtotal
 
21

 
5,401

 
5.0

 
115

 
5,177

 
4.9

Ba
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
10

 
1.5

 
1

 
105

 
3.4

Credit default swaps referencing indices
 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
—

 
10

 
1.5

 
1

 
105

 
3.4

B
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
—

 
—

 
2

 
20

 
3.5

Credit default swaps referencing indices
 
4

 
220

 
5.0

 
18

 
220

 
5.0

Subtotal
 
4

 
220

 
5.0

 
20

 
240

 
4.9

Total
 
$
54

 
$
7,864

 
4.3

 
$
181

 
$
7,874

 
4.2

__________________
(1)
The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used.
(2)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.
(3)
Single name credit default swaps may be referenced to the credit of corporations, foreign governments, or state and political subdivisions.
The Company has also entered into credit default swaps to purchase credit protection on certain of the referenced credit obligations in the table above. As a result, the maximum amounts of potential future recoveries available to offset the $7.9 billion of future payments under credit default provisions at both December 31, 2018 and 2017 set forth in the table above were $16 million and $27 million at December 31, 2018 and 2017, respectively.

174
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives.
See Note 10 for a description of the impact of credit risk on the valuation of derivatives.

175
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
 
 
December 31,
 
 
2018
 
2017
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
(In millions)
Gross estimated fair value of derivatives:
 
 
 
 
 
 
 
 
OTC-bilateral (1)
 
$
7,255

 
$
2,166

 
$
6,478

 
$
2,203

OTC-cleared (1), (6)
 
52

 
24

 
168

 
216

Exchange-traded
 
1

 
7

 
6

 
3

Total gross estimated fair value of derivatives (1)
 
7,308

 
2,197

 
6,652

 
2,422

Amounts offset on the consolidated balance sheets
 
—

 
—

 
—

 
—

Estimated fair value of derivatives presented on the consolidated balance sheets (1), (6)
 
7,308

 
2,197

 
6,652

 
2,422

Gross amounts not offset on the consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(1,988
)
 
(1,988
)
 
(1,891
)
 
(1,891
)
OTC-cleared
 
(20
)
 
(20
)
 
(31
)
 
(31
)
Exchange-traded
 
—

 
—

 
—

 
—

Cash collateral: (3), (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(4,000
)
 
—

 
(3,448
)
 
—

OTC-cleared
 
(26
)
 
—

 
(131
)
 
(179
)
Exchange-traded
 
—

 
—

 
—

 
—

Securities collateral: (5)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(1,136
)
 
(178
)
 
(954
)
 
(312
)
OTC-cleared
 
—

 
(4
)
 
—

 
(6
)
Exchange-traded
 
—

 
(7
)
 
—

 
(3
)
Net amount after application of master netting agreements and collateral
 
$
138

 
$
—

 
$
197

 
$
—

__________________
(1)
At December 31, 2018 and 2017, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $90 million and $60 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($22) million and ($20) million, respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities AFS, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At December 31, 2018 and 2017, the Company received excess cash collateral of $95 million and $122 million, respectively, and provided excess cash collateral of $1 million and $9 million, respectively, which is not included in the table above due to the foregoing limitation.

176
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at December 31, 2018, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities AFS on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31, 2018 and 2017, the Company received excess securities collateral with an estimated fair value of $28 million and $30 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2018 and 2017, the Company provided excess securities collateral with an estimated fair value of $94 million and $152 million, respectively, for its OTC-bilateral derivatives, and $231 million and $299 million, respectively, for its OTC-cleared derivatives, and $52 million and $50 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
(6)
Effective January 16, 2018, the LCH amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. Effective January 3, 2017, the CME amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. See Note 1 for further information on the LCH and CME amendments.
The Company’s collateral arrangements for its OTC-bilateral derivatives require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the collateral amount owed by that counterparty reaches a minimum transfer amount. All of the Company’s netting agreements for derivatives contain provisions that require both Metropolitan Life Insurance Company and the counterparty to maintain a specific investment grade financial strength or credit rating from each of Moody’s and S&P. If a party’s financial strength or credit ratings were to fall below that specific investment grade financial strength or credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that were in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
 
 
December 31,
 
 
2018
 
2017
 
 
Derivatives
Subject to
Financial
Strength-
Contingent
Provisions
 
Derivatives
Not Subject
to Financial
Strength-
Contingent
Provisions
 
Total
 
Derivatives
Subject to
Financial
Strength-
Contingent
Provisions
 
Derivatives
Not Subject
to Financial
Strength-
Contingent
Provisions
 
Total
 
 
(In millions)
Estimated Fair Value of Derivatives in a Net Liability Position (1)
 
$
178

 
$
—

 
$
178

 
$
313

 
$
—

 
$
313

Estimated Fair Value of Collateral Provided:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities AFS
 
$
187

 
$
—

 
$
187

 
$
399

 
$
—

 
$
399

Cash
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

 
$
—

__________________
(1)
After taking into consideration the existence of netting agreements.
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; affiliated ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; affiliated assumed reinsurance of guaranteed minimum benefits related to GMWBs, GMABs, and certain GMIBs; funds withheld on ceded reinsurance and affiliated funds withheld on ceded reinsurance; fixed annuities with equity indexed returns; and certain debt and equity securities.

177
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
9. Derivatives (continued)

The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
 
 
 
December 31,
 
Balance Sheet Location
 
2018
 
2017
 
 
 
(In millions)
Embedded derivatives within asset host contracts:
 
 
 
 
 
Options embedded in debt or equity securities (1)
Investments
 
—

 
(113
)
Embedded derivatives within asset host contracts
 
$
—

 
$
(113
)
Embedded derivatives within liability host contracts:
 
 
 
 
Direct guaranteed minimum benefits
Policyholder account balances
 
$
178

 
$
(94
)
Assumed guaranteed minimum benefits
Policyholder account balances
 
3

 
3

Funds withheld on ceded reinsurance
Other liabilities
 
465

 
898

Fixed annuities with equity indexed returns
Policyholder account balances
 
58

 
69

Embedded derivatives within liability host contracts
 
$
704

 
$
876

__________________
(1)
Effective January 1, 2018, in connection with the adoption of new guidance related to the recognition and measurement of financial instruments, the Company was no longer required to bifurcate and account separately for derivatives embedded in equity securities (see Note 1). Beginning January 1, 2018, the change in fair value of equity securities was recognized as a component of net investment gains and losses.
The following table presents changes in estimated fair value related to embedded derivatives:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Net derivative gains (losses) (1), (2)
$
376

 
$
427

 
$
(423
)
__________________
(1)
The valuation of direct and assumed guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $51 million, ($65) million and $76 million for the years ended December 31, 2018, 2017 and 2016, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $0, less than $1 million, and ($29) million for the years ended December 31, 2018, 2017 and 2016, respectively.
(2)
See Note 6 for discussion of affiliated net derivative gains (losses).

178
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

10. Fair Value
When developing estimated fair values, the Company considers three broad valuation approaches: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The Company determines the most appropriate valuation approach to use, given what is being measured and the availability of sufficient inputs, giving priority to observable inputs. The Company categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input with the lowest level in its valuation. The input levels are as follows:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities AFS.
 
Level 2
Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. These inputs can 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 significant 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 determination of estimated 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.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell securities, as well as the price ultimately realized for these securities, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain securities.
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

179
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below at:
 
December 31, 2018
 
Fair Value Hierarchy
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
(In millions)
Assets
 
 
 
 
 
 
 
Fixed maturity securities AFS:
 
 
 
 
 
 
 
U.S. corporate
$
—

 
$
51,676

 
$
3,126

 
$
54,802

U.S. government and agency
12,310

 
17,851

 
—

 
30,161

Foreign corporate
—

 
21,988

 
3,975

 
25,963

RMBS
—

 
19,719

 
3,018

 
22,737

ABS
—

 
8,072

 
455

 
8,527

Municipals
—

 
6,947

 
—

 
6,947

CMBS
—

 
5,376

 
68

 
5,444

Foreign government
—

 
4,482

 
10

 
4,492

Total fixed maturity securities AFS
12,310

 
136,111

 
10,652

 
159,073

Equity securities
341

 
76

 
356

 
773

Short-term investments
698

 
783

 
25

 
1,506

Residential mortgage loans — FVO
—

 
—

 
299

 
299

Other investments
—

 
1

 
215

 
216

Derivative assets: (1)
 
 
 
 
 
 
 
Interest rate
—

 
4,284

 
33

 
4,317

Foreign currency exchange rate
—

 
1,982

 
—

 
1,982

Credit
—

 
62

 
29

 
91

Equity market
1

 
776

 
51

 
828

Total derivative assets
1

 
7,104

 
113

 
7,218

Embedded derivatives within asset host contracts (2)
—

 
—

 
—

 
—

Separate account assets (3)
20,558

 
89,348

 
944

 
110,850

Total assets (4)
$
33,908

 
$
233,423

 
$
12,604

 
$
279,935

Liabilities
 
 
 
 
 
 
 
Derivative liabilities: (1)
 
 
 
 
 
 
 
Interest rate
$
1

 
$
89

 
$
218

 
$
308

Foreign currency exchange rate
—

 
1,410

 
1

 
1,411

Credit
—

 
13

 
4

 
17

Equity market
6

 
395

 
82

 
483

Total derivative liabilities
7

 
1,907

 
305

 
2,219

Embedded derivatives within liability host contracts (2)
—

 
—

 
704

 
704

Long-term debt
—

 
—

 
—

 
—

Separate account liabilities (3)
1

 
20

 
7

 
28

Total liabilities
$
8

 
$
1,927

 
$
1,016

 
$
2,951


180
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
(In millions)
Assets
 
 
 
 
 
 
 
Fixed maturity securities AFS:
 
 
 
 
 
 
 
U.S. corporate
$
—

 
$
54,629

 
$
3,461

 
$
58,090

U.S. government and agency
18,802

 
19,743

 
—

 
38,545

Foreign corporate
—

 
21,471

 
4,125

 
25,596

RMBS
—

 
19,372

 
3,262

 
22,634

ABS
—

 
7,079

 
787

 
7,866

Municipals
—

 
7,551

 
—

 
7,551

CMBS
—

 
5,461

 
27

 
5,488

Foreign government
—

 
4,471

 
31

 
4,502

Total fixed maturity securities AFS
18,802

 
139,777

 
11,693

 
170,272

Equity securities
399

 
893

 
366

 
1,658

Short-term investments
2,056

 
1,092

 
7

 
3,155

Residential mortgage loans — FVO
—

 
—

 
520

 
520

Other investments
—

 
—

 
—

 
—

Derivative assets: (1)
 
 
 
 
 
 
 
Interest rate
1

 
4,556

 
8

 
4,565

Foreign currency exchange rate
—

 
1,405

 
—

 
1,405

Credit
—

 
149

 
39

 
188

Equity market
5

 
363

 
66

 
434

Total derivative assets
6

 
6,473

 
113

 
6,592

Embedded derivatives within asset host contracts (2)
—

 
—

 
—

 
—

Separate account assets (3)
23,571

 
106,294

 
960

 
130,825

Total assets
$
44,834

 
$
254,529

 
$
13,659

 
$
313,022

Liabilities
 
 
 
 
 
 
 
Derivative liabilities: (1)
 
 
 
 
 
 
 
Interest rate
$
2

 
$
351

 
$
130

 
$
483

Foreign currency exchange rate
—

 
1,261

 
5

 
1,266

Credit
—

 
8

 
—

 
8

Equity market
1

 
515

 
169

 
685

Total derivative liabilities
3

 
2,135

 
304

 
2,442

Embedded derivatives within liability host contracts (2)
—

 
—

 
876

 
876

Long-term debt
—

 
—

 
—

 
—

Separate account liabilities (3)
—

 
7

 
2

 
9

Total liabilities
$
3

 
$
2,142

 
$
1,182

 
$
3,327

__________________
(1)
Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables.

181
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

(2)
Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances and other liabilities on the consolidated balance sheets. At December 31, 2018 and 2017, debt and equity securities also included embedded derivatives of $0 and ($113) million, respectively.
(3)
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 estimated fair value of separate account assets. Separate account liabilities presented in the tables above represent derivative liabilities.
(4)
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), other limited partnership interests are measured at estimated fair value on a recurring basis effective January 1, 2018. This represents the former cost method investments held as of January 1, 2018 that were measured at estimated fair value on a recurring basis upon adoption of this guidance. Total assets included in the fair value hierarchy exclude these other limited partnership interests that are measured at estimated fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient. At December 31, 2018, the estimated fair value of such investments was $140 million.
The following describes the valuation methodologies used to measure assets and liabilities at fair value.
Investments
Securities, Short-term Investments, Other Investments and Long-term Debt
When available, the estimated fair value of these financial instruments 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’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, giving priority to observable inputs. 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. When observable inputs are not available, the market standard valuation methodologies 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’s judgment or estimation and cannot be supported by reference to market activity. Even though these inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such securities and are considered appropriate given the circumstances.
The estimated fair value of other investments and long-term debt is determined on a basis consistent with the methodologies described herein for securities.
The valuation approaches and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy are presented below. The valuation of most instruments listed below is determined using independent pricing sources, matrix pricing, discounted cash flow methodologies or other similar techniques that use either observable market inputs or unobservable inputs.


182
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)


Instrument
 
Level 2
Observable Inputs
Level 3
Unobservable Inputs
Fixed maturity securities AFS
U.S. corporate and Foreign corporate securities
 
Valuation Approaches: Principally the market and income approaches.
Valuation Approaches: Principally the market approach.
 
Key Inputs:
Key Inputs:
 
•
quoted prices in markets that are not active
•
illiquidity premium
 
•
benchmark yields; spreads off benchmark yields; new issuances; issuer rating
•
delta spread adjustments to reflect specific credit-related issues
 
•
trades of identical or comparable securities; duration
•
credit spreads
 
•
Privately-placed securities are valued using the additional key inputs:
•
quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
 
 
•
market yield curve; call provisions
 
 
 
•
observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer
•

independent non-binding broker quotations
 
 
•
delta spread adjustments to reflect specific credit-related issues
 
 
U.S. government and agency securities, Municipals and Foreign government securities
 
Valuation Approaches: Principally the market approach.
Valuation Approaches: Principally the market approach.
 
Key Inputs:
Key Inputs:
 
•
quoted prices in markets that are not active
•
independent non-binding broker quotations
 
•
benchmark U.S. Treasury yield or other yields
•
quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
 
•
the spread off the U.S. Treasury yield curve for the identical security
 
 
•
issuer ratings and issuer spreads; broker-dealer quotes
•
credit spreads
 
•
comparable securities that are actively traded
 
 
Structured Securities
 
Valuation Approaches: Principally the market and income approaches.
Valuation Approaches: Principally the market and income approaches.
 
Key Inputs:
Key Inputs:
 
•
quoted prices in markets that are not active
•
credit spreads
 
•
spreads for actively traded securities; spreads off benchmark yields
•
quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
 
•
expected prepayment speeds and volumes
 
 
•
current and forecasted loss severity; ratings; geographic region
•
independent non-binding broker quotations
 
•
weighted average coupon and weighted average maturity
 
 
 
•
average delinquency rates; debt-service coverage ratios
 
 
 
•
issuance-specific information, including, but not limited to:
 
 
 
 
•
collateral type; structure of the security; vintage of the loans
 
 
 
 
•
payment terms of the underlying assets
 
 
 
 
•
payment priority within the tranche; deal performance
 
 


183
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

Instrument
Level 2
Observable Inputs
Level 3
Unobservable Inputs
Equity securities
 
Valuation Approaches: Principally the market approach.
Valuation Approaches: Principally the market and income approaches.
 
Key Input:
Key Inputs:
 
•
quoted prices in markets that are not considered active
•
credit ratings; issuance structures
 
 
 
•
quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
 
 
 
•
independent non-binding broker quotations
Short-term investments and Other investments
 
•
Short-term investments and other investments are of a similar nature and class to the fixed maturity securities AFS and equity securities described above; accordingly, the valuation approaches and observable inputs used in their valuation are also similar to those described above.
•
Short-term investments and other investments are of a similar nature and class to the fixed maturity securities AFS and equity securities described above; accordingly, the valuation approaches and unobservable inputs used in their valuation are also similar to those described above.
Residential mortgage loans — FVO
 
• N/A
Valuation Approaches: Principally the market approach.
 
 
 
 
Valuation Techniques and Key Inputs: These investments are based primarily on matrix pricing or other similar techniques that utilize inputs from mortgage servicers that are unobservable or cannot be derived principally from, or corroborated by, observable market data.

Separate account assets and Separate account liabilities (1)
Mutual funds and hedge funds without readily determinable fair values as prices are not published publicly
 
Key Input:
•
N/A
 
•
quoted prices or reported NAV provided by the fund managers
 
 
Other limited partnership interests
 
•

N/A
Valued giving consideration to the underlying holdings
of the partnerships and adjusting, if appropriate.
 
 
 
Key Inputs:
 
 
 
•
liquidity; bid/ask spreads; performance record of the fund manager
 
 
 
•
other relevant variables that may impact the exit value of the particular partnership interest
__________________
(1)
Estimated fair value equals carrying value, based on the value of the underlying assets, including: mutual fund interests, fixed maturity securities, equity securities, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. Fixed maturity securities, equity securities, derivatives, short-term investments and cash and cash equivalents are similar in nature to the instruments described under “— Securities, Short-term Investments, Other Investments and Long-term Debt” and “— Derivatives — Freestanding Derivatives.”
Derivatives
The estimated 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 OTC-bilateral and OTC-cleared derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral and OTC-cleared derivatives may 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 may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.

184
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as 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.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Freestanding Derivatives
Level 2 Valuation Approaches and Key Inputs:
This level includes all types of derivatives utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivatives with unobservable inputs as described in Level 3.
Level 3 Valuation Approaches and Key Inputs:
These valuation methodologies generally use the same inputs as described in the corresponding sections for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
Freestanding derivatives are principally valued using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. Key inputs are as follows:
Instrument
 
Interest Rate
 
Foreign Currency
Exchange Rate
 
Credit
 
Equity Market
Inputs common to Level 2 and Level 3 by instrument type
•
swap yield curves
•
swap yield curves
•
swap yield curves
•
swap yield curves
•
basis curves
•
basis curves
•
credit curves
•
spot equity index levels
•
interest rate volatility (1)
•
currency spot rates
•
recovery rates
•
dividend yield curves
 
 
 
•

cross currency basis curves
 
 
•

equity volatility (1)
 
 
 
 
 
 
 
 
 
Level 3
•
swap yield curves (2)
•
swap yield curves (2)
•
swap yield curves (2)
•
dividend yield curves (2)
 
•
basis curves (2)
•
basis curves (2)
•
credit curves (2)
•
equity volatility (1), (2)
 
•
repurchase rates
•
cross currency basis curves (2)
•
credit spreads
•
correlation between model inputs (1)
 
 
 
•
currency correlation
•
repurchase rates
 
 
 
 
 
 
 
•
independent non-binding broker quotations
 
 
__________________
(1)
Option-based only.
(2)
Extrapolation beyond the observable limits of the curve(s).

185
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

Embedded Derivatives
Embedded derivatives principally include certain direct and assumed variable annuity guarantees, equity or bond indexed crediting rates within certain funding agreements and annuity contracts, and those related to funds withheld on ceded reinsurance agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
The Company calculates the fair value of these embedded derivatives, which are estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business, projecting future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries as compared to MetLife, Inc.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees 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 nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The Company ceded the risk associated with certain of the GMIBs, GMABs and GMWBs previously described. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also ceded directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives) but where the reinsurance agreement contains an embedded derivative. These embedded derivatives are included within premiums, reinsurance and other receivables on the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as described in “— Investments — Securities, Short-term Investments, Other Investments and Long-term Debt.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.

186
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

The estimated fair value of the embedded equity and bond indexed derivatives contained in certain funding agreements is determined using market standard swap valuation models and observable market inputs, including a nonperformance risk adjustment. The estimated fair value of these embedded derivatives are included, along with their funding agreements host, within policyholder account balances with changes in estimated fair value recorded in net derivative gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
Embedded Derivatives Within Asset and Liability Host Contracts
Level 3 Valuation Approaches and Key Inputs:
Direct and assumed guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curves, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curves and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Reinsurance ceded on certain guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those described above in “— Direct and assumed guaranteed minimum benefits” and also include counterparty credit spreads.
Embedded derivatives within funds withheld related to certain ceded reinsurance
These embedded derivatives are principally valued using the income approach. The valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curves and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.

187
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
 
 
 
 
 
 
 
December 31, 2018
 
December 31, 2017
 
Impact of
Increase in Input
on Estimated
Fair Value (2)
 
Valuation Techniques
 
Significant
Unobservable Inputs
 
Range
 
Weighted
Average (1)
 
Range
 
Weighted
Average (1)
 
Fixed maturity securities AFS (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate and foreign corporate
•
Matrix pricing
 
•
Offered quotes (4)
 
85
-
134
 
105
 
83
-
142
 
111
 
Increase
 
•
Market pricing
 
•
Quoted prices (4)
 
25
-
638
 
107
 
10
-
443
 
123
 
Increase
RMBS
•
Market pricing
 
•
Quoted prices (4)
 
—
-
106
 
94
 
—
-
126
 
94
 
Increase (5)
ABS
•
Market pricing
 
•
Quoted prices (4)
 
10
-
101
 
97
 
27
-
104
 
100
 
Increase (5)
 
•
Consensus pricing
 
•
Offered quotes (4)
 



 

 
100
-
101
 
100
 
Increase (5)
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
•
Present value techniques
 
•
Swap yield (6)
 
268
-
317
 
 
 
200
-
300
 
 
 
Increase (7)
 
 
 
 
•
Repurchase rates (8)
 
(5)
-
6
 
 
 
(5)
-
5
 
 
 
Decrease (7)
Foreign currency exchange rate
•
Present value techniques
 
•
Swap yield (6)
 
(20)
-
(5)
 
 
 
(14)
-
(3)
 
 
 
Increase (7)
Credit
•
Present value techniques
 
•
Credit spreads (9)
 
97
-
103
 
 
 
—
-
—
 
 
 
Decrease (7)
 
•
Consensus pricing
 
•
Offered quotes (10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity market
•
Present value techniques or option pricing models
 
•
Volatility (11)
 
21%
-
26%
 
 
 
11%
-
31%
 
 
 
Increase (7)
 
 
 
 
•
Correlation (12)
 
10%
-
30%
 
 
 
10%
-
30%
 
 
 
 
Embedded derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct and assumed guaranteed minimum benefits
•
Option pricing techniques
 
•
Mortality rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ages 0 - 40
 
0.01%
-
0.18%
 
 
 
0%
-
0.09%
 
 
 
Decrease (13)
 
 
 
 
 
Ages 41 - 60
 
0.04%
-
0.57%
 
 
 
0.04%
-
0.65%
 
 
 
Decrease (13)
 
 
 
 
 
Ages 61 - 115
 
0.26%
-
100%
 
 
 
0.26%
-
100%
 
 
 
Decrease (13)
 
 
 
 
•
Lapse rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Durations 1 - 10
 
0.25%
-
100%
 
 
 
0.25%
-
100%
 
 
 
Decrease (14)
 
 
 
 
 
Durations 11 - 20
 
3%
-
100%
 
 
 
3%
-
100%
 
 
 
Decrease (14)
 
 
 
 
 
Durations 21 - 116
 
2.5%
-
100%
 
 
 
3%
-
100%
 
 
 
Decrease (14)
 
 
 
 
•
Utilization rates
 
0%
-
25%
 
 
 
0%
-
25%
 
 
 
Increase (15)
 
 
 
 
•
Withdrawal rates
 
0.25%
-
10%
 
 
 
0.25%
-
10%
 
 
 
(16)
 
 
 
 
•
Long-term equity volatilities
 
16.50%
-
22%
 
 
 
17.40%
-
25%
 
 
 
Increase (17)
 
 
 
 
•
Nonperformance risk spread
 
0.05%
-
0.59%
 
 
 
0.02%
-
0.44%
 
 
 
Decrease (18)
__________________
(1)
The weighted average for fixed maturity securities AFS is determined based on the estimated fair value of the securities.
(2)
The impact of a decrease in input would have resulted in the opposite impact on estimated fair value. For embedded derivatives, changes to direct and assumed guaranteed minimum benefits are based on liability positions.
(3)
Significant increases (decreases) in expected default rates in isolation would have resulted in substantially lower (higher) valuations.
(4)
Range and weighted average are presented in accordance with the market convention for fixed maturity securities AFS of dollars per hundred dollars of par.
(5)
Changes in the assumptions used for the probability of default would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates.

188
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

(6)
Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curves are utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.
(7)
Changes in estimated fair value are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions.
(8)
Ranges represent different repurchase rates utilized as components within the valuation methodology and are presented in basis points.
(9)
Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps.
(10)
At both December 31, 2018 and 2017, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value.
(11)
Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.
(12)
Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases) in correlation in isolation will increase (decrease) the significance of the change in valuations.
(13)
Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(14)
Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(15)
The utilization rate assumption estimates the percentage of contractholders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(16)
The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.
(17)
Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(18)
Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative.

189
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets, and embedded derivatives within funds withheld related to certain ceded reinsurance, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The residential mortgage loans — FVO and long-term debt are valued using independent non-binding broker quotations and internal models including matrix pricing and discounted cash flow methodologies using current interest rates. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table. The valuation techniques and significant unobservable inputs used in the fair value measurement for the more significant assets measured at estimated fair value on a nonrecurring basis and determined using significant unobservable inputs (Level 3) are summarized in “— Nonrecurring Fair Value Measurements.”

190
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Fixed Maturity Securities AFS
 
 
 
 
 
 
Corporate (1)
 
Structured Securities
 
Municipals
 
Foreign
Government
 
Equity
Securities
 
Short-term
Investments
 
 
(In millions)
Balance, January 1, 2017
 
$
8,839

 
$
4,541

 
$
10

 
$
21

 
$
420

 
$
25

Total realized/unrealized gains (losses) included in net
income (loss) (2) (3)
 
(2
)
 
95

 
—

 
—

 
—

 
—

Total realized/unrealized gains (losses)
included in AOCI
 
416

 
109

 
—

 
—

 
17

 
—

Purchases (4)
 
2,451

 
900

 
—

 
19

 
14

 
6

Sales (4)
 
(1,408
)
 
(1,282
)
 
—

 
(2
)
 
(51
)
 
—

Issuances (4)
 
—

 
—

 
—

 
—

 
—

 
—

Settlements (4)
 
—

 
—

 
—

 
—

 
—

 
—

Transfers into Level 3 (5)
 
58

 
63

 
—

 
—

 
—

 
—

Transfers out of Level 3 (5)
 
(2,768
)
 
(350
)
 
(10
)
 
(7
)
 
(34
)
 
(24
)
Balance, December 31, 2017
 
7,586

 
4,076

 
—

 
31

 
366

 
7

Total realized/unrealized gains (losses) included in net
income (loss) (2) (3)
 
2

 
79

 
—

 
1

 
(30
)
 
—

Total realized/unrealized gains (losses) included in AOCI
 
(463
)
 
(31
)
 
—

 
(1
)
 
—

 
—

Purchases (4)
 
1,377

 
752

 
—

 
—

 
3

 
24

Sales (4)
 
(1,241
)
 
(755
)
 
—

 
(21
)
 
(26
)
 
(1
)
Issuances (4)
 
—

 
—

 
—

 
—

 
—

 
—

Settlements (4)
 
—

 
—

 
—

 
—

 
—

 
—

Transfers into Level 3 (5)
 
151

 
58

 
—

 
—

 
52

 
—

Transfers out of Level 3 (5)
 
(311
)
 
(638
)
 
—

 
—

 
(9
)
 
(5
)
Balance, December 31, 2018
 
$
7,101

 
$
3,541

 
$
—

 
$
10

 
$
356

 
$
25

Changes in unrealized gains (losses) included in net
income (loss) for the instruments still held at
December 31, 2016: (6)
 
$
—

 
$
101

 
$
1

 
$
—

 
$
(29
)
 
$
—

Changes in unrealized gains (losses) included in net
income (loss) for the instruments still held at
December 31, 2017: (6)
 
$
(7
)
 
$
83

 
$
—

 
$
—

 
$
(17
)
 
$
—

Changes in unrealized gains (losses) included in net
income (loss) for the instruments still held at
December 31, 2018: (6)
 
$
(5
)
 
$
68

 
$
—

 
$
—

 
$
(22
)
 
$
—

Gains (Losses) Data for the year ended December 31,
2016
 
 
 
 
 
 
 
 
 
 
 
 
Total realized/unrealized gains (losses) included in net
income (loss) (2) (3)
 
$
—

 
$
100

 
$
1

 
$
—

 
$
(24
)
 
$
—

Total realized/unrealized gains (losses) included in AOCI
 
$
(39
)
 
$
47

 
$
2

 
$
(1
)
 
$
21

 
$
—


191
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Residential
Mortgage
Loans - FVO
 
Other Investments
 
Net
Derivatives (7)
 
Net Embedded
Derivatives (8)
 
Separate
Account
Assets (9) 
 
Long-term
Debt
 
 
(In millions)
Balance, January 1, 2017
 
$
566

 
$
—

 
$
(559
)
 
$
(893
)
 
$
1,141

 
$
(74
)
Total realized/unrealized gains (losses) included in net
income (loss) (2) (3)
 
40

 
—

 
21

 
450

 
(8
)
 
—

Total realized/unrealized gains (losses) included in AOCI
 
—

 
—

 
207

 
—

 
—

 
—

Purchases (4)
 
175

 
—

 
—

 
—

 
186

 
—

Sales (4)
 
(179
)
 
—

 
—

 
—

 
(80
)
 
—

Issuances (4)
 
—

 
—

 
—

 
—

 
1

 
—

Settlements (4)
 
(82
)
 
—

 
140

 
(433
)
 
(93
)
 
34

Transfers into Level 3 (5)
 
—

 
—

 
—

 
—

 
35

 
—

Transfers out of Level 3 (5)
 
—

 
—

 
—

 
—

 
(224
)
 
40

Balance, December 31, 2017
 
520

 
—

 
(191
)
 
(876
)
 
958

 
—

Total realized/unrealized gains (losses) included in net
income (loss) (2) (3)
 
7

 
22

 
(69
)
 
376

 
7

 
—

Total realized/unrealized gains (losses) included in AOCI
 
—

 
—

 
(110
)
 
—

 
—

 
—

Purchases (4)
 
—

 
196

 
4

 
—

 
198

 
—

Sales (4)
 
(162
)
 
(2
)
 
—

 
—

 
(168
)
 
—

Issuances (4)
 
—

 
—

 
(1
)
 
—

 
(3
)
 
—

Settlements (4)
 
(66
)
 
—

 
175

 
(204
)
 
(1
)
 
—

Transfers into Level 3 (5)
 
—

 
—

 
—

 
—

 
53

 
—

Transfers out of Level 3 (5)
 
—

 
(1
)
 
—

 
—

 
(107
)
 
—

Balance, December 31, 2018
 
$
299

 
$
215

 
$
(192
)
 
$
(704
)
 
$
937

 
$
—

Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2016: (6)
 
$
8

 
$
—

 
$
(166
)
 
$
(863
)
 
$
—

 
$
—

Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2017: (6)
 
$
27

 
$
—

 
$
(18
)
 
$
452

 
$
—

 
$
—

Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2018: (6)
 
$
(15
)
 
$
23

 
$
18

 
$
387

 
$
—

 
$
—

Gains (Losses) Data for the year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Total realized/unrealized gains (losses) included in net
income (loss) (2) (3) (10)
 
$
8

 
$
—

 
$
(168
)
 
$
870

 
$
(2
)
 
$
—

Total realized/unrealized gains (losses) included in AOCI
 
$
—

 
$
—

 
$
(366
)
 
$
—

 
$
—

 
$
—

__________________
(1)
Comprised of U.S. and foreign corporate securities.
(2)
Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses), while changes in estimated fair value of residential mortgage loans — FVO are included in net investment income. Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).
(3)
Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.
(4)
Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements.
(5)
Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.
(6)
Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).

192
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

(7)
Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.
(8)
Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
(9)
Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income (loss). For the purpose of this disclosure, these changes are presented within net investment gains (losses). Separate account assets and liabilities are presented net for the purposes of the rollforward.
(10)
Includes $420 million for net embedded derivatives for the year ended December 31, 2016 related to the disposition of NELICO and GALIC. See Note 3.
Fair Value Option
The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis. The following table presents information for residential mortgage loans which are accounted for under the FVO and were initially measured at fair value.
 
December 31,
 
2018
 
2017
 
(In millions)
Unpaid principal balance
$
344

 
$
650

Difference between estimated fair value and unpaid principal balance
(45
)
 
(130
)
Carrying value at estimated fair value
$
299

 
$
520

Loans in nonaccrual status
$
89

 
$
198

Loans more than 90 days past due
$
41

 
$
94

Loans in nonaccrual status or more than 90 days past due, or both — difference between aggregate estimated fair value and unpaid principal balance
$
(36
)
 
$
(102
)
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods and still held at the reporting dates (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
 
At December 31,
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
 
Carrying Value After Measurement
 
Gains (Losses)
 
(In millions)
Other limited partnership interests (1)
N/A

(2)
 
$
58

 
$
95

 
N/A

(2
)
 
$
(65
)
 
$
(59
)
Other assets (3)
$
—

 
 
$
—

 
$
—

 
$
—

 
 
$
4

 
$
(30
)
__________________

(1)
Estimated fair value is determined from information provided on the financial statements of the underlying entities including NAV data. These investments include private equity and debt funds that typically invest primarily in various strategies including leveraged buyout funds; power, energy, timber and infrastructure development funds; venture capital funds; and below investment grade debt and mezzanine debt funds. In the future, distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds, the exact timing of which is uncertain.
(2)
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), other limited partnership interests are measured at estimated fair value on a recurring basis, effective January 1, 2018.

193
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

(3)
During the year ended December 31, 2016, the Company recognized an impairment of computer software in connection with the sale to Massachusetts Mutual Life Insurance Company (“MassMutual”) of MetLife, Inc.’s U.S. retail advisor force and certain assets associated with the MetLife Premier Client Group, including all of the issued and outstanding shares of MetLife’s affiliated broker-dealer, MetLife Securities, Inc., a wholly-owned subsidiary of MetLife, Inc. (collectively, the “U.S. Retail Advisor Force Divestiture”). See Note 18.
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions, short-term debt and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three-level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
 
 
December 31, 2018
 
 
 
 
Fair Value Hierarchy
 
 
 
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
$
63,388

 
$
—

 
$
—

 
$
64,409

 
$
64,409

Policy loans
 
$
6,061

 
$
—

 
$
269

 
$
6,712

 
$
6,981

Other invested assets
 
$
2,940

 
$
—

 
$
2,673

 
$
146

 
$
2,819

Premiums, reinsurance and other
receivables
 
$
14,228

 
$
—

 
$
113

 
$
14,673

 
$
14,786

Liabilities
 
 
 
 
 
 
 
 
 
 
Policyholder account balances
 
$
72,194

 
$
—

 
$
—

 
$
72,689

 
$
72,689

Long-term debt
 
$
1,562

 
$
—

 
$
1,746

 
$
—

 
$
1,746

Other liabilities
 
$
13,593

 
$
—

 
$
448

 
$
13,189

 
$
13,637

Separate account liabilities
 
$
50,578

 
$
—

 
$
50,578

 
$
—

 
$
50,578


194
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
10. Fair Value (continued)

 
 
December 31, 2017
 
 
 
 
Fair Value Hierarchy
 
 
 
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
$
57,939

 
$
—

 
$
—

 
$
59,465

 
$
59,465

Policy loans
 
$
6,006

 
$
—

 
$
261

 
$
6,797

 
$
7,058

Other limited partnership interests
 
$
214

 
$
—

 
$
—

 
$
212

 
$
212

Other invested assets
 
$
2,260

 
$
—

 
$
2,028

 
$
154

 
$
2,182

Premiums, reinsurance and other
receivables
 
$
15,024

 
$
—

 
$
679

 
$
14,859

 
$
15,538

Liabilities
 
 
 
 
 
 
 
 
 
 
Policyholder account balances
 
$
75,323

 
$
—

 
$
—

 
$
76,452

 
$
76,452

Long-term debt
 
$
1,661

 
$
—

 
$
2,021

 
$
—

 
$
2,021

Other liabilities
 
$
13,954

 
$
—

 
$
547

 
$
13,490

 
$
14,037

Separate account liabilities
 
$
61,757

 
$
—

 
$
61,757

 
$
—

 
$
61,757



195
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

11. Long-term and Short-term Debt
Long-term and short-term debt outstanding, excluding debt relating to consolidated securitization entities, was as follows:
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
Interest Rates (1)
 
 
 
 
 
2018
 
2017
 
Range
 
Weighted Average
 
Maturity
 
Face
Value
 
Unamortized
Discount and Issuance Costs
 
Carrying
Value
 
Face
Value
 
Unamortized
Discount and Issuance Costs
 
Carrying
Value (2)
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Surplus notes - affiliated
7.38%
-
7.38%
 
7.38%
 
2037
 
$
700

 
$
(9
)
 
$
691

 
$
700

 
$
(10
)
 
$
690

Surplus notes
7.80%
-
7.88%
 
7.83%
 
2024
-
2025
 
400

 
(2
)
 
398

 
400

 
(3
)
 
397

Other notes (2)
2.99%
-
6.50%
 
4.92%
 
2020
-
2058
 
477

 
(4
)
 
473

 
578

 
(4
)
 
574

Total long-term debt
 
 
 
 
 
 
 
 
 
 
1,577

 
(15
)
 
1,562

 
1,678

 
(17
)
 
1,661

Total short-term debt
 
 
 
 
 
 
 
 
 
 
129

 
—

 
129

 
243

 
—

 
243

Total
 
 
 
 
 
 
 
 
 
 
$
1,706

 
$
(15
)
 
$
1,691

 
$
1,921

 
$
(17
)
 
$
1,904

__________________
(1)
Range of interest rates and weighted average interest rates are for the year ended December 31, 2018.
(2)
During 2017, a subsidiary of Metropolitan Life Insurance Company issued $139 million of long-term debt to a third party.
The aggregate maturities of long-term debt at December 31, 2018 for the next five years and thereafter are $0 in 2019, $3 million in 2020, $0 in 2021, $297 million in 2022, $0 in 2023 and $1.3 billion thereafter.
Unsecured senior debt which consists of senior notes and other notes rank highest in priority. Payments of interest and principal on Metropolitan Life Insurance Company’s surplus notes are subordinate to all other obligations and may be made only with the prior approval of the New York State Department of Financial Services (“NYDFS”).
Term Loans
MetLife Private Equity Holdings, LLC (“MPEH”), a wholly-owned indirect investment subsidiary, borrowed $350 million in December 2015 under a five-year credit agreement included within other notes in the table above. In November 2017, this agreement was amended to extend the maturity to November 2022, change the amount MPEH may borrow on a revolving basis to $75 million from $100 million, and change the interest rate to a variable rate of three-month London Interbank Offered Rate (“LIBOR”) plus 3.25%, payable quarterly, from a variable rate of three-month LIBOR plus 3.70%. In December 2018, this agreement was further amended to change the interest rate to a variable rate of three-month LIBOR plus 3.10%. In connection with the initial borrowing in 2015, $6 million of costs were incurred, and additional costs of $1 million were incurred in connection with the 2017 amendment, which have been capitalized and are being amortized over the term of the loans. MPEH has pledged invested assets to secure the loans; however, these loans are non-recourse to Metropolitan Life Insurance Company. In December 2018, MPEH repaid $50 million of the initial borrowing.

196
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
11. Long-term and Short-term Debt (continued)

Short-term Debt
Short-term debt with maturities of one year or less was as follows:
 
December 31,
 
2018
 
2017
 
(Dollars in millions)
Commercial paper
$
99

 
$
100

Short-term borrowings (1)
30

 
143

Total short-term debt
$
129

 
$
243

Average daily balance
$
213

 
$
129

Average days outstanding
42 days

 
97 days

__________________
(1)
Represents short-term debt related to repurchase agreements, secured by assets of a subsidiary.
During the years ended December 31, 2018, 2017 and 2016, the weighted average interest rate on short-term debt was 3.03%, 1.63% and 0.42%, respectively.
Interest Expense
Interest expense included in other expenses was $108 million, $106 million and $112 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts include $52 million of interest expense related to affiliated debt for each of the three years ended December 31, 2018, 2017 and 2016.
Credit Facility
At December 31, 2018, MetLife, Inc. and MetLife Funding, Inc., a wholly-owned subsidiary of Metropolitan Life Insurance Company (“MetLife Funding”), maintained a $3.0 billion unsecured revolving credit facility (the “Credit Facility”). When drawn upon, this facility bears interest at varying rates in accordance with the agreement.
The Company’s Credit Facility is used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. Total fees associated with the Credit Facility were $6 million, $5 million and $8 million for the years ended December 31, 2018, 2017 and 2016, respectively, and were included in other expenses.
Information on the Credit Facility at December 31, 2018 was as follows:
Borrower(s)
 
Expiration
 
Maximum
Capacity
 
Letters of Credit Used by the Company (1)
 
Letters of Credit Used by Affiliates (1)
 
Drawdowns
 
Unused
Commitments
 
 
 
 
(In millions)
MetLife, Inc. and MetLife Funding, Inc.
 
December 2021 (2)
 
$
3,000

(2)
$
412

 
$
34

 
$
—

 
$
2,554

__________________
(1)
MetLife, Inc. and MetLife Funding are severally liable for their respective obligations under the Credit Facility. MetLife Funding was not an applicant under letters of credit outstanding as of December 31, 2018 and is not responsible for any reimbursement obligations under such letters of credit.
(2)
All borrowings under the Credit Facility must be repaid by December 20, 2021, except that letters of credit outstanding upon termination may remain outstanding until December 20, 2022.
Debt and Facility Covenants
Certain of the Company’s debt instruments and the Credit Facility contain various administrative, reporting, legal and financial covenants. The Company believes it was in compliance with all applicable financial covenants at December 31, 2018.

197
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

12. Equity
Stock-Based Compensation Plans
The Company does not issue any awards payable in its common stock or options to purchase its common stock.
An affiliate employs the personnel who conduct most of the Company’s business. In accordance with a services agreement with that affiliate, the Company bears a proportionate share of stock-based compensation expense for those employees. Stock-based compensation expense relate to Stock Options, Performance Shares and Restricted Stock Units under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan and the MetLife, Inc. 2015 Stock and Incentive Compensation Plan, most of which MetLife, Inc. granted in the first quarter of each year.
The Company’s expense related to stock-based compensation included in other expenses was $35 million, $74 million and $89 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Statutory Equity and Income
See Note 3 for information on the disposition of NELICO and GALIC.
Metropolitan Life Insurance Company prepares statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the NYDFS. The NAIC has adopted the Codification of Statutory Accounting Principles (“Statutory Codification”). Statutory Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. Modifications by the state insurance department may impact the effect of Statutory Codification on the statutory capital and surplus of Metropolitan Life Insurance Company.
The state of domicile of Metropolitan Life Insurance Company imposes risk-based capital (“RBC”) requirements that were developed by the National Association of Insurance Commissioners (“NAIC”). Regulatory compliance is determined by a ratio of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”), with modifications by the state insurance department, to its authorized control level RBC, calculated in the manner prescribed by the NAIC (“ACL RBC”), based on the statutory-based filed financial statements. Companies below specific trigger levels or ratios are classified by their respective levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences is twice ACL RBC (“CAL RBC”). The CAL RBC ratios for Metropolitan Life Insurance Company were in excess of 350% and 370% at December 31, 2018 and 2017, respectively.
Metropolitan Life Insurance Company’s foreign insurance operations are regulated by applicable authorities of the jurisdictions in which each entity operates and are subject to minimum capital and solvency requirements in those jurisdictions before corrective action commences. The aggregate required capital and surplus of Metropolitan Life Insurance Company’s foreign insurance operations was $332 million and the aggregate actual regulatory capital and surplus of such operations was $378 million as of the date of the most recent required capital adequacy calculation for each jurisdiction. The Company’s foreign insurance operations exceeded the minimum capital and solvency requirements as of the date of the most recent fiscal year-end capital adequacy calculation for each jurisdiction.
Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt and valuing securities on a different basis.
In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus. The most significant assets not admitted by Metropolitan Life Insurance Company are net deferred income tax assets resulting from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within three years. Further, statutory accounting principles do not give recognition to purchase accounting adjustments.
New York has adopted certain prescribed accounting practices, that apply to Metropolitan Life Insurance Company, primarily consisting of the continuous Commissioners’ Annuity Reserve Valuation Method, which impacts deferred annuities, and the New York Special Consideration Letter, which mandates certain assumptions in asset adequacy testing. The collective impact of these prescribed accounting practices decreased the statutory capital and surplus of Metropolitan Life Insurance Company for the years ended December 31, 2018 and 2017 by $1.2 billion and $1.1 billion, respectively, compared to what capital and surplus would have been had it been measured under NAIC guidance.

198
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Equity (continued)

The tables below present amounts from Metropolitan Life Insurance Company, which are derived from the statutory–basis financial statements as filed with the NYDFS.
Statutory net income (loss) was as follows:
 
 
 
 
Years Ended December 31,
Company
 
State of Domicile
 
2018
 
2017
 
2016
 
 
 
 
(In millions)
Metropolitan Life Insurance Company (1)
 
New York
 
$
3,656

 
$
1,982

 
$
3,444

(1)
In December 2016, Metropolitan Life Insurance Company transferred all of the issued and outstanding shares of the common stock of each of NELICO and GALIC to MetLife, Inc., in the form of a non-cash extraordinary dividend.
Statutory capital and surplus was as follows at:
 
 
December 31,
Company
 
2018
 
2017
 
 
(In millions)
Metropolitan Life Insurance Company
 
$
11,098

 
$
10,384

Dividend Restrictions
Under the New York State Insurance Law, Metropolitan Life Insurance Company is permitted, without prior insurance regulatory clearance, to pay stockholder dividends to MetLife, Inc. in any calendar year based on either of two standards. Under one standard, Metropolitan Life Insurance Company is permitted, without prior insurance regulatory clearance, to pay dividends out of earned surplus (defined as positive unassigned funds (surplus), excluding 85% of the change in net unrealized capital gains or losses (less capital gains tax), for the immediately preceding calendar year), in an amount up to the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains), not to exceed 30% of surplus to policyholders as of the end of the immediately preceding calendar year. In addition, under this standard, Metropolitan Life Insurance Company may not, without prior insurance regulatory clearance, pay any dividends in any calendar year immediately following a calendar year for which its net gain from operations, excluding realized capital gains, was negative. Under the second standard, if dividends are paid out of other than earned surplus, Metropolitan Life Insurance Company may, without prior insurance regulatory clearance, pay an amount up to the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). In addition, Metropolitan Life Insurance Company will be permitted to pay a dividend to MetLife, Inc. in excess of the amounts allowed under both standards only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Financial Services (the “Superintendent”) and the Superintendent either approves the distribution of the dividend or does not disapprove the dividend within 30 days of its filing. Under the New York State Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholder.
Metropolitan Life Insurance Company paid $3.7 billion and $2.5 billion in dividends to MetLife, Inc. during the years ended December 31, 2018 and 2017, respectively, including amounts where regulatory approval was obtained as required. Under New York State Insurance Law, Metropolitan Life Insurance Company has calculated that it may pay approximately $3.1 billion to MetLife, Inc. without prior insurance regulatory approval during the year ended December 31, 2019.

199
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Equity (continued)

Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI attributable to Metropolitan Life Insurance Company was as follows:
 
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
 
Unrealized
Gains (Losses)
on Derivatives
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Plans
Adjustment
 
Total
 
(In millions)
Balance at December 31, 2015
$
3,337

 
$
1,436

 
$
(74
)
 
$
(2,014
)
 
$
2,685

OCI before reclassifications
792

 
(141
)
 
(11
)
 
(4
)
 
636

Deferred income tax benefit (expense)
(286
)
 
49

 
3

 
(5
)
 
(239
)
AOCI before reclassifications, net of income tax
3,843

 
1,344

 
(82
)
 
(2,023
)
 
3,082

Amounts reclassified from AOCI
71

 
177

 
—

 
191

 
439

Deferred income tax benefit (expense)
(26
)
 
(62
)
 
—

 
(60
)
 
(148
)
Amounts reclassified from AOCI, net of income tax
45

 
115

 
—

 
131

 
291

Dispositions (2)
(456
)
 
—

 
23

 
30

 
(403
)
Deferred income tax benefit (expense)
160

 
—

 
(8
)
 
(3
)
 
149

Dispositions, net of income tax
(296
)
 
—

 
15

 
27

 
(254
)
Balance at December 31, 2016
3,592

 
1,459

 
(67
)
 
(1,865
)
 
3,119

OCI before reclassifications
3,977

 
122

 
26

 
(30
)
 
4,095

Deferred income tax benefit (expense)
(1,287
)
 
(43
)
 
(6
)
 
11

 
(1,325
)
AOCI before reclassifications, net of income tax
6,282

 
1,538

 
(47
)
 
(1,884
)
 
5,889

Amounts reclassified from AOCI
102

 
(970
)
 
—

 
159

 
(709
)
Deferred income tax benefit (expense)
(33
)
 
338

 
—

 
(57
)
 
248

Amounts reclassified from AOCI, net of income tax
69

 
(632
)
 
—

 
102

 
(461
)
Balance at December 31, 2017
6,351

 
906

 
(47
)
 
(1,782
)
 
5,428

OCI before reclassifications
(6,326
)
 
(82
)
 
(20
)
 
67

 
(6,361
)
Deferred income tax benefit (expense)
1,381

 
19

 
—

 
(45
)
 
1,355

AOCI before reclassifications, net of income tax
1,406

 
843

 
(67
)
 
(1,760
)
 
422

Amounts reclassified from AOCI
8

 
428

 
—

 
34

 
470

Deferred income tax benefit (expense)
(2
)
 
(96
)
 
—

 
(13
)
 
(111
)
Amounts reclassified from AOCI, net of income tax
6

 
332

 
—

 
21

 
359

Cumulative effects of changes in accounting principles

(119
)
 
—

 
—

 
—

 
(119
)
Deferred income tax benefit (expense), cumulative effects of changes in accounting principles

1,222

 
207

 
(7
)
 
(379
)
 
1,043

Cumulative effects of changes in accounting principles, net of income tax (3)

1,103

 
207

 
(7
)
 
(379
)
 
924

Transfer to affiliate, net of tax (4)

—

 
—

 
—

 
1,857

 
1,857

Balance at December 31, 2018
$
2,515

 
$
1,382

 
$
(74
)
 
$
(261
)
 
$
3,562

__________________
(1)
See Note 8 for information on offsets to investments related to future policy benefits, DAC, VOBA and DSI, and the policyholder dividend obligation.
(2)
See Note 3.
(3)
See Note 1 for further information on adoption of new accounting pronouncements.
(4)
See Note 14.


200
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
12. Equity (continued)

Information regarding amounts reclassified out of each component of AOCI was as follows:
AOCI Components
 
Amounts Reclassified from AOCI
 
Consolidated Statements of
Operations Locations
 
 
Years Ended December 31,
 
 
 
 
2018
 
2017
 
2016
 
 
 
 
(In millions)
 
 
Net unrealized investment gains (losses):
 
 
 
 
 
 
 
 
Net unrealized investment gains (losses)
 
$
89

 
$
12

 
$
10

 
Net investment gains (losses)
Net unrealized investment gains (losses)
 
18

 
3

 
21

 
Net investment income
Net unrealized investment gains (losses)
 
(115
)
 
(117
)
 
(102
)
 
Net derivative gains (losses)
Net unrealized investment gains (losses), before income tax
 
(8
)
 
(102
)
 
(71
)
 
 
Income tax (expense) benefit
 
2

 
33

 
26

 
 
Net unrealized investment gains (losses), net of income tax
 
(6
)
 
(69
)
 
(45
)
 
 
Unrealized gains (losses) on derivatives - cash flow hedges:
 
 
 
 
 
 
 
 
Interest rate swaps
 
23

 
24

 
57

 
Net derivative gains (losses)
Interest rate swaps
 
18

 
16

 
12

 
Net investment income
Interest rate forwards
 
(1
)
 
(11
)
 
(1
)
 
Net derivative gains (losses)
Interest rate forwards
 
2

 
2

 
3

 
Net investment income
Foreign currency swaps
 
(469
)
 
938

 
(251
)
 
Net derivative gains (losses)
Foreign currency swaps
 
(3
)
 
(1
)
 
(1
)
 
Net investment income
Credit forwards
 
1

 
1

 
3

 
Net derivative gains (losses)
Credit forwards
 
1

 
1

 
1

 
Net investment income
Gains (losses) on cash flow hedges, before income tax
 
(428
)
 
970

 
(177
)
 
 
Income tax (expense) benefit
 
96

 
(338
)
 
62

 
 
Gains (losses) on cash flow hedges, net of income tax
 
(332
)
 
632

 
(115
)
 
 
Defined benefit plans adjustment: (1)
 
 
 
 
 
 
 
 
Amortization of net actuarial gains (losses)
 
(35
)
 
(179
)
 
(198
)
 
 
Amortization of prior service (costs) credit
 
1

 
20

 
7

 
 
Amortization of defined benefit plan items, before income tax
 
(34
)
 
(159
)
 
(191
)
 
 
Income tax (expense) benefit
 
13

 
57

 
60

 
 
Amortization of defined benefit plan items, net of income tax
 
(21
)
 
(102
)
 
(131
)
 
 
Total reclassifications, net of income tax
 
$
(359
)
 
$
461

 
$
(291
)
 
 
__________________
(1)
These AOCI components are included in the computation of net periodic benefit costs. See Note 14.

201
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

13. Other Revenues and Other Expenses
Other Revenues
Information on other revenues, which primarily includes fees related to service contracts from customers, was as follows:
 
 
Year Ended
 
 
December 31, 2018
 
 
(In millions)
Prepaid legal plans
 
$
286

Recordkeeping and administrative services (1)
 
220

Administrative services-only contracts
 
205

Other revenue from service contracts from customers
 
38

Total revenues from service contracts from customers
 
$
749

Other (2)
 
837

Total other revenues
 
$
1,586

__________________
(1)
Related to products and businesses no longer actively marketed by the Company.
(2)
Other primarily includes reinsurance ceded. See Note 6.
Other Expenses
Information on other expenses was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
General and administrative expenses
$
2,458

 
$
2,608

 
$
2,598

Pension, postretirement and postemployment benefit costs

66

 
167

 
251

Premium taxes, other taxes, and licenses & fees
366

 
273

 
367

Commissions and other variable expenses
1,757

 
1,801

 
2,366

Capitalization of DAC
(34
)
 
(61
)
 
(332
)
Amortization of DAC and VOBA
470

 
241

 
441

Interest expense on debt
108

 
106

 
112

Total other expenses
$
5,191

 
$
5,135

 
$
5,803

Capitalization of DAC and Amortization of DAC and VOBA
See Note 5 for additional information on DAC and VOBA including impacts of capitalization and amortization. See also Note 7 for a description of the DAC amortization impact associated with the closed block.
Expenses related to Debt
See Note 11 for additional information on interest expense on debt.
Affiliated Expenses
Commissions and other variable expenses, capitalization of DAC and amortization of DAC and VOBA include the impact of affiliated reinsurance transactions. See Notes 6, 11 and 18 for a discussion of affiliated expenses included in the table above.

202
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
13. Other Revenues and Other Expenses (continued)

Restructuring Charges
In 2016, the Company completed a previous enterprise-wide strategic initiative. These restructuring charges are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported in Corporate & Other. Information regarding restructuring charges was as follows:
 
 
Year Ended December 31, 2016
 
 
Severance
 
Lease and
Asset
Impairment
 
Total

 
(In millions)
Balance at January 1,
 
$
17

 
$
4

 
$
21

Restructuring charges
 
—

 
1

 
1

Cash payments
 
(17
)
 
(4
)
 
(21
)
Balance at December 31,
 
$
—

 
$
1

 
$
1

Total restructuring charges incurred since inception of initiative
 
$
306

 
$
47

 
$
353

14. Employee Benefit Plans
Pension and Other Postretirement Benefit Plans
Through September 30, 2018, the Company sponsored and administered various qualified and nonqualified defined benefit pension plans and other postretirement employee benefit plans covering employees who meet specified eligibility requirements. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits that are primarily based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as interest credits, determined annually based upon the annual rate of interest on 30-year U.S. Treasury securities, for each account balance. In September 2018, the qualified and nonqualified defined benefit pension plans were amended, effective January 1, 2023, to provide benefits accruals for all active participants under the cash balance formula and to cease future accruals under the traditional formula. The nonqualified pension plans provide supplemental benefits in excess of limits applicable to a qualified plan. Participating affiliates are allocated an equitable share of net expense related to the plans, proportionate to other expenses being allocated to these affiliates.
Through September 30, 2018, the Company also provided certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Employees of MetLife who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for the Company 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 costs of postretirement medical benefits. Employees of MetLife hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits. Participating affiliates are allocated a proportionate share of net expense and contributions related to the postemployment and other postretirement plans. In September 2018, the postretirement medical and life insurance benefit plans were amended, effective January 1, 2023, to discontinue the accrual of the employer subsidy credits for eligible employees.
As of October 1, 2018, except for the nonqualified defined benefit pension plan, the plan sponsor was changed from the Company to an affiliate (the “Transferred Plans”). The Company transferred the net benefit obligation and plan assets at book value as of September 30, 2018 as an additional paid-in-capital transaction, including the related unrecognized AOCI. The Company remains a participating affiliate of the Transferred Plans.

203
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

Obligations and Funded Status
 
December 31,
 
2018
 
2017
 
Pension
Benefits (1)
 
Other
Postretirement
Benefits
 
Pension
Benefits (1)
 
Other
Postretirement
Benefits
 
(In millions)
Change in benefit obligations:
 
 
 
 
 
 
 
Benefit obligations at January 1,
$
10,479

 
$
1,656

 
$
9,837

 
$
1,742

Transfer to affiliate (2)
(9,316
)
 
(1,648
)
 
—

 
—

Service costs
18

 
—

 
169

 
6

Interest costs
42

 
1

 
415

 
75

Plan participants’ contributions
—

 
—

 
—

 
33

Plan amendments
(20
)
 
—

 
—

 
—

Net actuarial (gains) losses
(40
)
 
(2
)
 
618

 
(96
)
Divestitures, settlements and curtailments
—

 
15

 
3

 
2

Benefits paid
(83
)
 
(1
)
 
(563
)
 
(106
)
Effect of foreign currency translation
—

 
(2
)
 
—

 
—

Benefit obligations at December 31,
1,080

 
19

 
10,479

 
1,656

Change in plan assets:
 
 
 
 
 
 
 
Estimated fair value of plan assets at January 1,
9,371

 
1,426

 
8,721

 
1,379

Transfer to affiliate (2)
(9,371
)
 
(1,426
)
 
—

 
—

Actual return on plan assets
—

 
2

 
947

 
124

Divestitures, settlements and curtailments
—

—

18

 
—

 
—

Plan participants’ contributions
—

 
—

 
—

 
33

Employer contributions
83

 
—

 
266

 
(4
)
Benefits paid
(83
)
 
(1
)
 
(563
)
 
(106
)
Foreign exchange impact
—

 
(1
)
 
—

 
—

Estimated fair value of plan assets at December 31,
—

 
18

 
9,371

 
1,426

Over (under) funded status at December 31,
$
(1,080
)
 
$
(1
)
 
$
(1,108
)
 
$
(230
)
Amounts recognized on the consolidated balance sheets:
 
 
 
 
 
 
 
Other assets
$
—

 
$
5

 
$
55

 
$
160

Other liabilities
(1,080
)
 
(6
)
 
(1,163
)
 
(390
)
Net amount recognized
$
(1,080
)
 
$
(1
)
 
$
(1,108
)
 
$
(230
)
AOCI:
 
 
 
 
 
 
 
Net actuarial (gains) losses
$
360

 
$
(5
)
 
$
2,831

 
$
(55
)
Prior service costs (credit)
(22
)
 
1

 
(10
)
 
(26
)
AOCI, before income tax
$
338

 
$
(4
)
 
$
2,821

 
$
(81
)
Accumulated benefit obligation
$
1,040

 
N/A

 
$
10,180

 
N/A

__________________
(1)
Includes nonqualified unfunded plans, for which the aggregate PBO was $1.1 billion and $1.2 billion at December 31, 2018 and 2017, respectively.
(2)
Transfer to affiliate represents the Transferred Plans’ book value as of September 30, 2018, net of the related 2018 net periodic benefit costs. See “— Net Periodic Benefit Costs.”

204
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

Information for pension plans with PBOs in excess of plan assets and accumulated benefit obligations (“ABO”) in excess of plan assets was as follows at:
 
December 31,
 
2018
 
2017
 
2018
 
2017
 
PBO Exceeds Estimated Fair Value
of Plan Assets
 
ABO Exceeds Estimated Fair Value
of Plan Assets
 
(In millions)
Projected benefit obligations
$
1,080

 
$
1,163

 
$
1,080

 
$
1,163

Accumulated benefit obligations
$
1,040

 
$
1,116

 
$
1,040

 
$
1,116

Estimated fair value of plan assets
$
—

 
$
—

 
$
—

 
$
—

Net Periodic Benefit Costs
The components of net periodic benefit costs and other changes in plan assets and benefit obligations recognized in OCI were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
Pension
Benefits
 
Other
Postretirement
Benefits
 
Pension
Benefits
 
Other
Postretirement
Benefits
 
Pension
Benefits
 
Other
Postretirement
Benefits
 
(In millions)
Net periodic benefit costs:
 
 
 
 
 
 
 
 
 
 
 
Service costs
$
123

 
$
4

 
$
169

 
$
6

 
$
203

 
$
9

Interest costs
290

 
41

 
415

 
75

 
415

 
82

Settlement and curtailment costs (1)
—

 
—

 
3

 
2

 
1

 
30

Expected return on plan assets
(394
)
 
(54
)
 
(509
)
 
(72
)
 
(527
)
 
(74
)
Amortization of net actuarial (gains) losses
142

 
(26
)
 
189

 
—

 
188

 
10

Amortization of prior service costs (credit)
(1
)
 
(14
)
 
(1
)
 
(22
)
 
(1
)
 
(6
)
Allocated to affiliates
(66
)
 
19

 
(48
)
 
1

 
(64
)
 
(9
)
Total net periodic benefit costs (credit) (2)
94

 
(30
)
 
218

 
(10
)
 
215

 
42

Other changes in plan assets and benefit obligations recognized in OCI:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial (gains) losses
(40
)
 
(4
)
 
181

 
(148
)
 
176

 
(121
)
Prior service costs (credit)
(20
)
 
—

 
—

 
—

 
(11
)
 
(40
)
Amortization of net actuarial (gains) losses
(35
)
 
—

 
(189
)
 
—

 
(188
)
 
(10
)
Amortization of prior service (costs) credit
1

 
—

 
1

 
22

 
1

 
6

Transfer to affiliate (3)
(2,389
)
 
81

 
—

 
—

 
—

 
—

Dispositions (4)
—

 
—

 
—

 
—

 
(32
)
 
2

Total recognized in OCI
(2,483
)
 
77

 
(7
)
 
(126
)
 
(54
)
 
(163
)
Total recognized in net periodic benefit costs and OCI
$
(2,389
)
 
$
47

 
$
211

 
$
(136
)
 
$
161

 
$
(121
)
__________________
(1)
The Company recognized curtailment charges in 2016 on certain postretirement benefit plans in connection with the U.S. Retail Advisor Force Divestiture. See Note 18.
(2)
Includes costs (credit) related to Transferred Plans of $65 million and ($49) million for pension benefits and other postretirement benefits, respectively, for the year ended December 31, 2018.

205
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

(3)
Transfer to affiliate represents the Transferred Plans’ book value as of September 30, 2018, net of the related 2018 other changes in plan assets and benefit obligations recognized in OCI.
(4)
See Note 3.
The estimated net actuarial (gains) losses and prior service costs (credit) for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit costs over the next year are $25 million and ($3) million, respectively.
Assumptions
Assumptions used in determining benefit obligations were as follows:
 
Pension Benefits
 
Other Postretirement Benefits
December 31, 2018
 
 
 
 
 
Weighted average discount rate
4.35%
 
3.75%
Rate of compensation increase
2.25%
-
8.50%
 
N/A
December 31, 2017
 
 
 
 
 
Weighted average discount rate
3.65%
 
3.70%
Rate of compensation increase
2.25%
-
8.50%
 
N/A
Assumptions used in determining net periodic benefit costs for the U.S. plans were as follows:
 
Pension Benefits
 
Other Postretirement Benefits
Year Ended December 31, 2018
 
 
 
 
 
Weighted average discount rate
3.65%
 
3.70%
Weighted average expected rate of return on plan assets
5.75%
 
5.11%
Rate of compensation increase
2.25%
-
8.50%
 
N/A
Year Ended December 31, 2017
 
 
 
 
 
Weighted average discount rate
4.30%
 
4.45%
Weighted average expected rate of return on plan assets
6.00%
 
5.36%
Rate of compensation increase
2.25
%
-
8.50%
 
N/A
Year Ended December 31, 2016
 
 
 
 
 
Weighted average discount rate
4.13%
 
4.37%
Weighted average expected rate of return on plan assets
6.00%
 
5.53%
Rate of compensation increase
2.25%
-
8.50%
 
N/A
The weighted average discount rate is determined annually based on the yield, measured on a yield to worst basis, of a hypothetical portfolio constructed of high quality debt instruments available on the valuation date, which would provide the necessary future cash flows to pay the aggregate PBO when due.
The weighted average expected rate of return on plan assets is based on anticipated performance of the various asset sectors in which the plan invests, weighted by target allocation percentages. Anticipated future performance is based on long-term historical returns of the plan assets by sector, adjusted for the Company’s long-term expectations on the performance of the markets. While the precise expected rate of return derived using this approach will fluctuate from year to year, the Company’s policy is to hold this long-term assumption constant as long as it remains within reasonable tolerance from the derived rate.
The weighted average expected rate of return on plan assets for use in the plan valuation in 2019 is currently anticipated to be 4.00% for other postretirement benefits.

206
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

The assumed healthcare costs trend rates used in measuring the APBO and net periodic benefit costs were as follows:
 
December 31,
 
2018
 
2017
 
Before
Age 65
 
Age 65 and
older
 
Before
Age 65
 
Age 65 and
older
Following year
6.6
%
 
6.6
%
 
5.6
%
 
6.6
%
Ultimate rate to which cost increase is assumed to decline
4.0
%
 
4.0
%
 
4.0
%
 
4.3
%
Year in which the ultimate trend rate is reached
2040

 
2040

 
2086

 
2098

Assumed healthcare costs trend rates may have a significant effect on the amounts reported for healthcare plans. A 1% change in assumed healthcare costs trend rates would have the following effects as of December 31, 2018:
 
One Percent
Increase
 
One Percent
Decrease
 
(In millions)
Effect on total of service and interest costs components
$
—

 
$
—

Effect of accumulated postretirement benefit obligations
$
1

 
$
(1
)
Plan Assets
Through September 30, 2018, the Company provided MetLife employees with benefits under various Employee Retirement Income Security Act of 1974 (“ERISA”) benefit plans. These include qualified pension plans, postretirement medical plans and certain retiree life insurance coverage. The assets of the Company’s qualified pension plans are held in an insurance group annuity contract, and the vast majority of the assets of the postretirement medical plan and backing the retiree life coverage are held in a trust which largely utilizes insurance contracts to hold the assets. All of these contracts are issued by the Company, and the assets under the contracts are held in insurance separate accounts that have been established by the Company. The underlying assets of the separate accounts are principally comprised of cash and cash equivalents, short-term investments, fixed maturity securities AFS, equity securities, derivatives, real estate, private equity investments and hedge fund investments.
The insurance contract provider engages investment management firms (“Managers”) to serve as sub-advisors for the separate accounts based on the specific investment needs and requests identified by the plan fiduciary. These Managers have portfolio management discretion over the purchasing and selling of securities and other investment assets pursuant to the respective investment management agreements and guidelines established for each insurance separate account. The assets of the qualified pension plans and postretirement medical plans (the “Invested Plans”) are well diversified across multiple asset categories and across a number of different Managers, with the intent of minimizing risk concentrations within any given asset category or with any of the given Managers.

207
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

The Invested Plans, other than those held in participant directed investment accounts, are managed in accordance with investment policies consistent with the longer-term nature of related benefit obligations and within prudent risk parameters. Specifically, investment policies are oriented toward (i) maximizing the Invested Plan’s funded status; (ii) minimizing the volatility of the Invested Plan’s funded status; (iii) generating asset returns that exceed liability increases; and (iv) targeting rates of return in excess of a custom benchmark and industry standards over appropriate reference time periods. These goals are expected to be met through identifying appropriate and diversified asset classes and allocations, ensuring adequate liquidity to pay benefits and expenses when due and controlling the costs of administering and managing the Invested Plan’s investments. Independent investment consultants are periodically used to evaluate the investment risk of the Invested Plan’s assets relative to liabilities, analyze the economic and portfolio impact of various asset allocations and management strategies and recommend asset allocations.
Derivative contracts may be used to reduce investment risk, to manage duration and to replicate the risk/return profile of an asset or asset class. Derivatives may not be used to leverage a portfolio in any manner, such as to magnify exposure to an asset, asset class, interest rates or any other financial variable. Derivatives are also prohibited for use in creating exposures to securities, currencies, indices or any other financial variable that is otherwise restricted.
As part of the plan sponsor changes, the plan assets associated with the table below were transferred to an affiliate as of October 1, 2018. The table below summarizes the actual weighted average allocation of the estimated fair value of total plan assets by major asset class at December 31, 2017 for the Invested Plans:
 
Pension Benefits
 
Other Postretirement
Benefits (1)
 
Actual 
Allocation
 
Actual 
Allocation
Asset Class
 
 
 
Fixed maturity securities AFS
82
%
 
84
%
Equity securities (2)
10
%
 
15
%
Alternative securities (3)
8
%
 
1
%
Total assets
100
%
 
100
%
__________________
(1)
Other postretirement benefits do not reflect postretirement life insurance plan assets invested in fixed maturity securities AFS.
(2)
Equity securities percentage includes derivative assets.
(3)
Alternative securities primarily include hedge, private equity and real estate funds.
Estimated Fair Value
The pension and other postretirement benefit plan assets are categorized into a three-level fair value hierarchy, as described in Note 10, based upon the significant input with the lowest level in its valuation. The Level 2 asset category includes certain separate accounts that are primarily invested in liquid and readily marketable securities. The estimated fair value of such separate accounts is based upon reported NAV provided by fund managers and this value represents the amount at which transfers into and out of the respective separate account are effected. These separate accounts provide reasonable levels of price transparency and can be corroborated through observable market data. Directly held investments are primarily invested in U.S. and foreign government and corporate securities. The Level 3 asset category includes separate accounts that are invested in assets that provide little or no price transparency due to the infrequency with which the underlying assets trade and generally require additional time to liquidate in an orderly manner. Accordingly, the values for separate accounts invested in these alternative asset classes are based on inputs that cannot be readily derived from or corroborated by observable market data.

208
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

At December 31, 2018, other postretirement plan assets measured at estimated fair value on a recurring basis were $18 million and were classified as short-term investments Level 2. At December 31, 2017, the pension and other postretirement plan assets measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy are summarized as follows:
 
December 31, 2017
 
Pension Benefits
 
Other Postretirement Benefits
 
Fair Value Hierarchy
 
 
 
Fair Value Hierarchy
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities AFS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
—

 
$
3,726

 
$
1

 
$
3,727

 
$
20

 
$
362

 
$
—

 
$
382

U.S. government bonds
1,256

 
528

 
—

 
1,784

 
269

 
6

 
—

 
275

Foreign bonds
—

 
937

 
—

 
937

 
—

 
94

 
—

 
94

Federal agencies
35

 
134

 
—

 
169

 
—

 
17

 
—

 
17

Municipals
—

 
335

 
—

 
335

 
—

 
28

 
—

 
28

Short-term investments
135

 
192

 
—

 
327

 
8

 
391

 
—

 
399

Other (1)
7

 
383

 
9

 
399

 
—

 
68

 
—

 
68

Total fixed maturity securities AFS
1,433

 
6,235

 
10

 
7,678

 
297

 
966

 
—

 
1,263

Equity securities
797

 
91

 
3

 
891

 
153

 
—

 
—

 
153

Other investments
—

 
144

 
622

 
766

 
—

 
9

 
—

 
9

Derivative assets
33

 
2

 
1

 
36

 
1

 
—

 
—

 
1

Total assets
$
2,263

 
$
6,472

 
$
636

 
$
9,371

 
$
451

 
$
975

 
$
—

 
$
1,426

__________________
(1)
Other primarily includes money market securities, mortgage-backed securities, collateralized mortgage obligations and ABS.

209
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

A rollforward of all pension and other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs was as follows:
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Pension Benefits
 
Fixed Maturity Securities AFS:
 
 
 
 
 
 
 
Corporate
 
Other (1)
 
Equity Securities
 
Other
Investments
 
Derivative
Assets
 
(In millions)
Balance, January 1, 2017
$
—

 
$
9

 
$
—

 
$
634

 
$
64

Realized gains (losses)
(10
)
 
—

 
2

 
—

 
(22
)
Unrealized gains (losses)
10

 
—

 
—

 
(12
)
 
6

Purchases, sales, issuances and settlements, net
—

 
7

 
(4
)
 
—

 
(47
)
Transfers into and/or out of Level 3
1

 
(7
)
 
5

 
—

 
—

Balance, December 31, 2017
$
1

 
$
9

 
$
3

 
$
622

 
$
1

Realized gains (losses)
—

 
—

 
—

 
—

 
—

Unrealized gains (losses)
—

 
—

 
—

 
—

 
—

Purchases, sales, issuances and settlements, net
—

 
—

 
—

 
—

 
—

Transfers into and/or out of Level 3
—

 
—

 
—

 
—

 
—

Transfer to affiliate
(1
)
 
(9
)
 
(3
)
 
(622
)
 
(1
)
Balance, December 31, 2018
$
—

 
$
—

 
$
—

 
$
—

 
$
—

__________________
(1)
Other includes ABS and collateralized mortgage obligations.
For the years ended December 31, 2018 and 2017, there were no other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
Expected Future Contributions and Benefit Payments
Benefit payments due under the nonqualified pension plans are primarily funded from the Company’s general assets as they become due under the provisions of the plans, and therefore benefit payments equal employer contributions. The Company expects to make contributions of $70 million to fund the benefit payments in 2019.
Postretirement benefits are either: (i) not vested under law; (ii) a non-funded obligation of the Company; or (iii) both. Current regulations do not require funding for these benefits. The Company uses its general assets, net of participant’s contributions, to pay postretirement medical claims as they come due. As permitted under the terms of the governing trust document, the Company may be reimbursed from plan assets for postretirement medical claims paid from their general assets.
Gross benefit payments for the next 10 years, which reflect expected future service where appropriate, are expected to be as follows:
 
Pension Benefits
 
Other Postretirement Benefits
 
(In millions)
2019
$
69

 
$
1

2020
$
73

 
$
1

2021
$
64

 
$
1

2022
$
68

 
$
1

2023
$
73

 
$
1

2024-2028
$
381

 
$
6


210
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
14. Employee Benefit Plans (continued)

Additional Information
As previously discussed, most of the assets of the pension benefit plans are held in a group annuity contract issued by the Company while some of the assets of the postretirement benefit plans are held in a trust which largely utilizes life insurance contracts issued by the Company to hold such assets. Total revenues from these contracts recognized on the consolidated statements of operations were $56 million, $56 million and $57 million for the years ended December 31, 2018, 2017 and 2016, respectively, and included policy charges and net investment income from investments backing the contracts and administrative fees. Total investment income (loss), including realized and unrealized gains (losses), credited (debited) to the account balances was ($448) million, $1.1 billion and $660 million for the years ended December 31, 2018, 2017 and 2016, respectively. The terms of these contracts are consistent in all material respects with those the Company offers to unaffiliated parties that are similarly situated.
Defined Contribution Plans
Through September 30, 2018, the Company sponsored defined contribution plans for substantially all MetLife employees under which a portion of employee contributions are matched. As of October 1, 2018, the plan’s sponsor for the defined contribution plans was moved from the Company to an affiliate. The Company contributed $42 million, $65 million and $73 million for the years ended December 31, 2018, 2017 and 2016, respectively.
15. Income Tax
The provision for income tax was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Current:
 
 
 
 
 
U.S. federal
$
217

 
$
1,511

 
$
675

U.S. state and local
9

 
4

 
5

Non-U.S.
91

 
14

 
40

Subtotal
317

 
1,529

 
720

Deferred:
 
 
 
 
 
U.S. federal
(88
)
 
(2,099
)
 
(539
)
Non-U.S.
(56
)
 
9

 
18

Subtotal
(144
)
 
(2,090
)
 
(521
)
Provision for income tax expense (benefit)
$
173

 
$
(561
)
 
$
199

 
The Company’s income (loss) before income tax expense (benefit) was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Income (loss):
 
 
 
 
 
U.S.
$
1,202

 
$
4,045

 
$
2,379

Non-U.S.
3,107

 
(1,079
)
 
(438
)
Total
$
4,309

 
$
2,966

 
$
1,941


211
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

The reconciliation of the income tax provision at the U.S. statutory rate (21% in 2018; 35% in 2017 and 2016) to the provision for income tax as reported was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Tax provision at U.S. statutory rate
$
905

 
$
1,039

 
$
679

Tax effect of:
 
 
 
 
 
Dividend received deduction
(34
)
 
(65
)
 
(79
)
Tax-exempt income
(13
)
 
(49
)
 
(38
)
Prior year tax (1)
(175
)
 
(29
)
 
(33
)
Low income housing tax credits
(284
)
 
(278
)
 
(270
)
Other tax credits
(77
)
 
(101
)
 
(98
)
Foreign tax rate differential
(8
)
 
—

 
1

Change in valuation allowance
1

 
—

 
(1
)
U.S. Tax Reform impact (2) (3)
(139
)
 
(1,089
)
 
—

Other, net
(3
)
 
11

 
38

Provision for income tax expense (benefit)
$
173

 
$
(561
)
 
$
199

__________________
(1)
As discussed further below, for the year ended December 31, 2018, prior year tax includes a $168 million non-cash benefit related to an uncertain tax position.
(2)
For the year ended December 31, 2018, U.S. Tax Reform impact includes a $139 million tax benefit related to the adjustment of deferred taxes due to the U.S. tax rate change. This excludes $12 million of tax provision at the U.S. statutory rate for a total tax reform benefit of $151 million.
(3)
For the year ended December 31, 2017, U.S. Tax Reform impact of ($1.1) billion excludes ($23) million of tax provision at the U.S. statutory rate for a total tax reform benefit of ($1.1) billion.
On December 22, 2017, President Trump signed into law U.S. Tax Reform. U.S. Tax Reform includes numerous changes in tax law, including a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, which took effect for taxable years beginning on or after January 1, 2018. U.S. Tax Reform moves the United States from a worldwide tax system to a participation exemption system by providing corporations a 100% dividends received deduction for dividends distributed by a controlled foreign corporation. To transition to that new system, U.S. Tax Reform imposed a one-time deemed repatriation tax on unremitted earnings and profits at a rate of 8.0% for illiquid assets and 15.5% for cash and cash equivalents.

212
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

The incremental financial statement impact related to U.S. Tax Reform was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
 
(In millions)
Income (loss) before provision for income tax
 
$
(58
)
 
$
(66
)
Provision for income tax expense (benefit):
 
 
 
 
Deferred tax revaluation
 
(151
)
 
(1,112
)
Total provision for income tax expense (benefit)
 
(151
)
 
(1,112
)
Income (loss), net of income tax
 
93

 
1,046

Income tax (expense) benefit related to items of other comprehensive income (loss)
 
—

 
133

Increase to net equity from U.S. Tax Reform
 
$
93

 
$
1,179

In accordance with SAB 118 issued by the U.S. Securities and Exchange Commission (“SEC”) in December 2017, the Company recorded provisional amounts for certain items for which the income tax accounting is not complete. For these items, the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform. The estimates were reported as provisional amounts during the measurement period, which did not exceed one year from the date of enactment of U.S. Tax Reform. The Company reflected adjustments to its provisional amounts upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts.
As of December 31, 2017, the following items were considered provisional estimates due to complexities and ambiguities in U.S. Tax Reform which resulted in incomplete accounting for the tax effects of these provisions. Further guidance, either legislative or interpretive, and analysis were completed during the measurement period. As a result, the following updates were made to complete the accounting for these items as of December 31, 2018:
•
Deemed Repatriation Transition Tax - The Company recorded a $1 million charge for this item for the year ended December 31, 2017. For the year ended December 31, 2018, the Company did not record an additional tax charge.
•
Global Intangible Low-Tax Income (“GILTI”) - U.S. Tax Reform imposes a minimum tax on GILTI, which is generally the excess income of foreign subsidiaries over a 10% rate of routine return on tangible business assets. For the year ended December 31, 2017, the Company did not record a tax charge for this item. In 2018, the Company established an accounting policy in which it treats taxes due on GILTI as a current-period expense when incurred. For the year ended December 31, 2018, the Company did not record a tax charge.
•
Compensation and Fringe Benefits - U.S. Tax Reform limits certain employer deductions for fringe benefit and related expenses and also repeals the exception allowing the deduction of certain performance-based compensation paid to certain senior executives. The Company recorded an $8 million tax charge, included within the deferred tax revaluation as of December 31, 2017. The Company determined that no additional adjustment was required for the year ended December 31, 2018.

213
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

•
Alternative Minimum Tax Credits - U.S. Tax Reform eliminates the corporate alternative minimum tax and allows for minimum tax credit carryforwards to be used to offset future regular tax or to be refunded 50% each tax year beginning in 2018, with any remaining balance fully refunded in 2021. However, pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued for corporations claiming refundable prior year alternative minimum tax credits are subject to a sequestration rate of 6.2%. The application of this fee to refunds in future years is subject to further guidance. Additionally, the sequestration reduction rate in effect at the time is subject to uncertainty. For the year ended December 31, 2017, the Company recorded a $7 million tax charge included within the deferred tax revaluation. For the year ended December 31, 2018, the Company determined that no additional adjustment was required. In early 2019, the Internal Revenue Service (“IRS”) issued guidance indicating that for years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits will not be subject to sequestration. The Company will incorporate the impacts of this IRS announcement in 2019.
•
Tax Credit Partnerships - The reduction in the federal corporate income tax rate due to U.S. Tax Reform required adjustments for multiple investment portfolios, including tax credit partnerships and tax-advantaged leveraged leases. Certain tax credit partnership investments derive returns in part from income tax credits. The Company recognizes changes in tax attributes at the partnership level when reported by the investee in its financial information. The Company did not receive the necessary investee financial information to determine the impact of U.S. Tax Reform on the tax attributes of its tax credit partnership investments until the third quarter of 2018. Accordingly, prior to the third quarter of 2018, the Company applied prior law to these equity method investments in accordance with SAB 118. For the year ended December 31, 2018, after receiving additional investee information, a reduction in tax credit partnerships’ equity method income of $46 million, net of income tax, was included in net investment income. The tax-advantaged leveraged lease portfolio is valued on an after-tax yield-basis. In 2018, the Company received third party data that was used to complete a comprehensive review of its portfolio to determine the full and complete impact of U.S. Tax Reform on these investments. As a result of this review, a tax benefit of $126 million was recorded for the year ended December 31, 2018.

214
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following at:
 
December 31,
 
2018
 
2017
 
(In millions)
Deferred income tax assets:
 
 
 
Policyholder liabilities and receivables
$
1,491

 
$
1,361

Net operating loss carryforwards
22

 
23

Employee benefits
518

 
595

Tax credit carryforwards
1,038

 
1,127

Litigation-related and government mandated
131

 
117

Other
—

 
437

Total gross deferred income tax assets
3,200

 
3,660

Less: Valuation allowance
21

 
20

Total net deferred income tax assets
3,179

 
3,640

Deferred income tax liabilities:
 
 
 
Investments, including derivatives
1,516

 
1,989

Intangibles
32

 
32

DAC
558

 
673

Net unrealized investment gains
987

 
2,313

Other
43

 
2

Total deferred income tax liabilities
3,136

 
5,009

Net deferred income tax asset (liability)
$
43

 
$
(1,369
)
The Company also has recorded a valuation allowance charge of $1 million related to certain U.S. state net operating loss carryforwards for the year ended December 31, 2018. The valuation allowance reflects management’s assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain U.S. state net operating loss carryforwards will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable.
U.S. state net operating loss carryforwards of $140 million at December 31, 2018 will expire beginning in 2034.

215
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

The following table sets forth the general business credits and other credit carryforwards for tax return purposes at December 31, 2018.
 
Tax Credit Carryforwards
 
General Business
Credits
 
Other
 
(In millions)
Expiration:
 
 
 
2019-2023
$
—

 
$
—

2024-2028
—

 
—

2029-2033
200

 
—

2034-2038
1,139

 
—

Indefinite
—

 
90

 
$
1,339

 
$
90

The Company participates in a tax sharing agreement with MetLife, Inc., as described in Note 1. Pursuant to this tax sharing agreement, the amounts due from affiliates included $27 million and $203 million for the years ended December 31, 2018 and 2017, respectively.
The Company files income tax returns with the U.S. federal government and various U.S. state and local jurisdictions, as well as non-U.S. jurisdictions. The Company is under continuous examination by the IRS and other tax authorities in jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction and subsidiary. The Company is no longer subject to U.S. federal, state, or local income tax examinations for years prior to 2007, except for refund claims filed in 2017 with the IRS for 2000 through 2002 to recover tax and interest predominantly related to the disallowance of certain foreign tax credits for which the Company received a statutory notice of deficiency in 2015 and paid the tax thereon. The disallowed foreign tax credits relate to certain non-U.S. investments held by Metropolitan Life Insurance Company in support of its life insurance business through a United Kingdom investment subsidiary that was structured as a joint venture until early 2009.
For tax years 2003 through 2006, the Company entered into binding agreements with the IRS under which all remaining issues, including the foreign tax credit matter noted above, for these years were resolved. Accordingly, in the fourth quarter of 2018, the Company recorded a non-cash benefit to net income of $349 million, net of tax, comprised of a $168 million tax benefit recorded in provision for income tax expense (benefit) and a $229 million interest benefit ($181 million, net of tax) included in other expenses. For tax years 2000 through 2002 (which are closed to IRS examination except for the refund claim described above) and 2007 through 2009 (which are the subject of the current IRS examination), the Company has established adequate reserves for tax liabilities. The Company continues to pursue final resolution of disallowed foreign tax credits, as well as related issues, for the open tax years in a manner consistent with the final resolution of such issues for 2003 through 2006. Although the final timing and details of any such resolution remain uncertain, and could be affected by many factors, closure with the IRS for tax years 2000 through 2002, and 2007 through 2009, may occur in 2019.


216
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
15. Income Tax (continued)

The Company’s liability for unrecognized tax benefits may increase or decrease in the next 12 months. For example, federal tax legislation and regulation could impact unrecognized tax benefits. A reasonable estimate of the increase or decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution of the pending issues will not result in a material change to its consolidated financial statements, although the resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Balance at January 1,
$
890

 
$
931

 
$
1,075

Additions for tax positions of prior years
3

 
—

 
7

Reductions for tax positions of prior years (1)
(169
)
 
(38
)
 
(109
)
Additions for tax positions of current year
3

 
4

 
6

Reductions for tax positions of current year
—

 
(1
)
 
—

Settlements with tax authorities (2)
(285
)
 
(6
)
 
(48
)
Balance at December 31,
$
442

 
$
890

 
$
931

Unrecognized tax benefits that, if recognized would impact the effective rate
$
442

 
$
890

 
$
931

__________________
(1)
The decrease in 2018 is primarily related to the non-cash benefit from the tax audit settlement discussed above.
(2)
The decrease in 2018 is primarily related to the tax audit settlement, of which $284 million was reclassified to the current income tax payable account.
The Company classifies interest accrued related to unrecognized tax benefits in interest expense, included within other expenses, while penalties are included in income tax expense.
Interest was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Interest expense (benefit) recognized on the consolidated statements of operations (1)
$
(457
)
 
$
47

 
$
(33
)
 
 
 
 
 
 
 
 
 
December 31,
 
 
 
2018
 
2017
 
 
 
(In millions)
Interest included in other liabilities on the consolidated balance sheets
 
 
$
196

 
$
653

__________________
(1)
The decrease in 2018 is primarily related to the tax audit settlement, of which $184 million was recorded in other expenses and $273 million was reclassified to the current income tax payable account.
The Company had no penalties for the years ended December 31, 2018, 2017 and 2016.

217
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)

16. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a large number of litigation matters. Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed below 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, mortgage lending bank, employer, investor, investment advisor, broker-dealer, and taxpayer.
The Company also receives and responds to subpoenas or other inquiries seeking a broad range of information 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, as well as from local and national regulators and government authorities in jurisdictions outside the United States where the Company conducts business. The issues involved in information requests and regulatory matters vary widely, but can include inquiries or investigations concerning the Company’s compliance with applicable insurance and other laws and regulations. The Company cooperates in these inquiries.
In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. 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, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. 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 reasonably estimated at December 31, 2018. 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 to management, management does not believe any such charges are likely to have a material effect on the Company’s financial position. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For matters where a loss is believed to be reasonably possible, but not probable, the Company has not made an accrual. As of December 31, 2018, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $425 million.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.



218
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

Asbestos-Related Claims
Metropolitan Life Insurance Company 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. Metropolitan Life Insurance Company has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life Insurance Company 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 Metropolitan Life Insurance Company’s employees during the period from the 1920’s through approximately the 1950’s and allege that Metropolitan Life Insurance Company learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Metropolitan Life Insurance Company 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 Metropolitan Life Insurance Company. Metropolitan Life Insurance Company employs a number of resolution strategies to manage its asbestos loss exposure, including seeking resolution of pending litigation by judicial rulings and settling individual or groups of claims or lawsuits under appropriate circumstances.
Claims asserted against Metropolitan Life Insurance Company have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. Metropolitan Life Insurance Company’s defenses (beyond denial of certain factual allegations) include that: (i) Metropolitan Life Insurance Company 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 Metropolitan Life Insurance Company; (iii) Metropolitan Life Insurance Company’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 Metropolitan Life Insurance Company, while other trial courts have denied Metropolitan Life Insurance Company’s motions. There can be no assurance that Metropolitan Life Insurance Company will receive favorable decisions on motions in the future. While most cases brought to date have settled, Metropolitan Life Insurance Company intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
The approximate total number of asbestos personal injury claims pending against Metropolitan Life Insurance Company as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims at or during those years are set forth in the following table:
 
December 31,
 
2018
 
2017
 
2016
 
(In millions, except number of claims)
Asbestos personal injury claims at year end
62,522

 
62,930

 
67,223

Number of new claims during the year
3,359

 
3,514

 
4,146

Settlement payments during the year (1)
$
51.4

 
$
48.6

 
$
50.2

__________________
(1)
Settlement payments represent payments made by Metropolitan Life Insurance Company during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life Insurance Company’s attorneys’ fees and expenses.
The number of asbestos cases that may be brought, the aggregate amount of any liability that Metropolitan Life Insurance Company may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.

219
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

The ability of Metropolitan Life Insurance Company 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 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 Metropolitan Life Insurance 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.
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 effect on the Company’s financial position.
The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. Metropolitan Life Insurance Company’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 Metropolitan Life Insurance Company, including claims settled but not yet paid; (ii) the probable and reasonably estimable liability for asbestos claims not yet asserted against Metropolitan Life Insurance Company, but which Metropolitan Life Insurance Company believes are reasonably probable of assertion; and (iii) the legal defense costs associated with the foregoing claims. Significant assumptions underlying Metropolitan Life Insurance Company’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.
Metropolitan Life Insurance Company 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. Based upon its regular reevaluation of its exposure from asbestos litigation, Metropolitan Life Insurance Company has updated its recorded liability for asbestos-related claims to $502 million at December 31, 2018.
In the Matter of Chemform, Inc. Site, Pompano Beach, Broward County, Florida
In July 2010, the Environmental Protection Agency (“EPA”) advised Metropolitan Life Insurance Company that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted Metropolitan Life Insurance Company (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. In September 2012, the EPA, Metropolitan Life Insurance Company and the third party executed an Administrative Order on Consent under which Metropolitan Life Insurance Company and the third party agreed to be responsible for certain environmental testing at the Chemform Site. The EPA may seek additional costs if the environmental testing identifies issues. The EPA and Metropolitan Life Insurance Company have reached a settlement in principle on the EPA’s claim for past costs. The Company estimates that the aggregate cost to resolve this matter, including the settlement for claims of past costs and the costs of environmental testing, will not exceed $300 thousand.

220
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

Sun Life Assurance Company of Canada Indemnity Claim
In 2006, Sun Life Assurance Company of Canada (“Sun Life”), as successor to the purchaser of Metropolitan Life Insurance Company’s Canadian operations, filed a lawsuit in Toronto, seeking a declaration that Metropolitan Life Insurance Company remains liable for “market conduct claims” related to certain individual life insurance policies sold by Metropolitan Life Insurance Company that were subsequently transferred to Sun Life. In January 2010, the court found that Sun Life had given timely notice of its claim for indemnification but, because it found that Sun Life had not yet incurred an indemnifiable loss, granted Metropolitan Life Insurance Company’s motion for summary judgment. In September 2010, Sun Life notified Metropolitan Life Insurance Company that a purported class action lawsuit was filed against Sun Life in Toronto alleging sales practices claims regarding the policies sold by Metropolitan Life Insurance Company and transferred to Sun Life (the “Ontario Litigation”). On August 30, 2011, Sun Life notified Metropolitan Life Insurance Company that another purported class action lawsuit was filed against Sun Life in Vancouver, BC alleging sales practices claims regarding certain of the same policies sold by Metropolitan Life Insurance Company and transferred to Sun Life. Sun Life contends that Metropolitan Life Insurance Company is obligated to indemnify Sun Life for some or all of the claims in these lawsuits. In September 2018, the Court of Appeal for Ontario affirmed the lower court’s decision to not certify the sales practices claims in the Ontario Litigation. These sales practices cases against Sun Life are ongoing, and the Company is unable to estimate the reasonably possible loss or range of loss arising from this litigation.
Owens v. Metropolitan Life Insurance Company (N.D. Ga., filed April 17, 2014)
Plaintiff filed this class action lawsuit on behalf of persons for whom Metropolitan Life Insurance Company established a Total Control Account (“TCA”) to pay death benefits under an ERISA plan. The action alleges that Metropolitan Life Insurance Company’s use of the TCA as the settlement option for life insurance benefits under some group life insurance policies violates Metropolitan Life Insurance Company’s fiduciary duties under ERISA. As damages, plaintiff seeks disgorgement of profits that Metropolitan Life Insurance Company realized on accounts owned by members of the class. In addition, plaintiff, on behalf of a subgroup of the class, seeks interest under Georgia’s delayed settlement interest statute, alleging that the use of the TCA as the settlement option did not constitute payment. On September 27, 2016, the court denied Metropolitan Life Insurance Company’s summary judgment motion in full and granted plaintiff’s partial summary judgment motion. On September 29, 2017, the court certified a nationwide class. The court also certified a Georgia subclass. The Company intends to defend this action vigorously.
Voshall v. Metropolitan Life Insurance Company (Superior Court of the State of California, County of Los Angeles, April 8, 2015)
Plaintiff filed this putative class action lawsuit on behalf of himself and all persons covered under a long-term group disability income insurance policy issued by Metropolitan Life Insurance Company to public entities in California between April 8, 2011 and April 8, 2015. Plaintiff alleges that Metropolitan Life Insurance Company improperly reduced benefits by including cost of living adjustments and employee paid contributions in the employer retirement benefits and other income that reduces the benefit payable under such policies. Plaintiff asserts causes of action for declaratory relief, violation of the California Business & Professions Code, breach of contract and breach of the implied covenant of good faith and fair dealing. The parties reached a settlement, which the court approved on January 3, 2019.
Martin v. Metropolitan Life Insurance Company (Superior Court of the State of California, County of Contra Costa, filed December 17, 2015)
Plaintiffs filed this putative class action lawsuit on behalf of themselves and all California persons who have been charged compound interest by Metropolitan Life Insurance Company in life insurance policy and/or premium loan balances within the last four years. Plaintiffs allege that Metropolitan Life Insurance Company has engaged in a pattern and practice of charging compound interest on life insurance policy and premium loans without the borrower authorizing such compounding, and that this constitutes an unlawful business practice under California law. Plaintiffs assert causes of action for declaratory relief, violation of California’s Unfair Competition Law and Usury Law, and unjust enrichment. Plaintiffs seek declaratory and injunctive relief, restitution of interest, and damages in an unspecified amount. On April 12, 2016, the court granted Metropolitan Life Insurance Company’s motion to dismiss. Plaintiffs appealed this ruling to the United States Court of Appeals for the Ninth Circuit. The Company intends to defend this action vigorously.

221
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

Newman v. Metropolitan Life Insurance Company (N.D. Ill., filed March 23, 2016)
Plaintiff filed this putative class action alleging causes of action for breach of contract, fraud, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, on behalf of herself and all persons over age 65 who selected a Reduced Pay at Age 65 payment feature on their long-term care insurance policies and whose premium rates were increased after age 65. Plaintiff seeks unspecified compensatory, statutory and punitive damages, as well as recessionary and injunctive relief. On April 12, 2017, the court granted Metropolitan Life Insurance Company’s motion to dismiss the action. Plaintiff appealed this ruling and the United States Court of Appeals for the Seventh Circuit reversed and remanded the case to the district court for further proceedings. The Company intends to defend this action vigorously.
Julian & McKinney v. Metropolitan Life Insurance Company (S.D.N.Y., filed February 9, 2017)
Plaintiffs filed this putative class and collective action on behalf of themselves and all current and former long-term disability (“LTD”) claims specialists between February 2011 and the present for alleged wage and hour violations under the Fair Labor Standards Act, the New York Labor Law, and the Connecticut Minimum Wage Act. The suit alleges that Metropolitan Life Insurance Company improperly reclassified the plaintiffs and similarly situated LTD claims specialists from non-exempt to exempt from overtime pay in November 2013. As a result, they and members of the putative class were no longer eligible for overtime pay even though they allege they continued to work more than 40 hours per week. Plaintiffs seek unspecified compensatory and punitive damages, as well as other relief. On March 22, 2018, the Court conditionally certified the case as a collective action, requiring that notice be mailed to LTD claims specialists who worked for the Company from February 8, 2014 to the present. The Company intends to defend this action vigorously.
Total Asset Recovery Services, LLC. v. MetLife, Inc., et al. (Supreme Court of the State of New York, County of New York, filed December 27, 2017)
Total Asset Recovery Services (“The Relator”) brought an action under the qui tam provision of the New York False Claims Act (the “Act”) on behalf of itself and the State of New York. The Relator originally filed this action under seal in 2010, and the complaint was unsealed on December 19, 2017. The Relator alleges that MetLife, Inc., Metropolitan Life Insurance Company and several other insurance companies violated the Act by filing false unclaimed property reports with the State of New York from 1986 to 2017, to avoid having to escheat the proceeds of more than 25,000 life insurance policies, including policies for which the defendants escheated funds as part of their demutualizations in the late 1990s. The Relator seeks treble damages and other relief. The defendants intend to defend this action vigorously.
Miller, et al. v. Metropolitan Life Insurance Company (S.D.N.Y., filed January 4, 2019)
Plaintiff filed a second amended complaint in this putative class action, purporting to assert claims on behalf of all persons who replaced their MetLife Optional Term Life or Group Universal Life policy with a Group Variable Universal Life policy wherein Metropolitan Life Insurance Company allegedly charged smoker rates for certain non-smokers. Plaintiff seeks unspecified compensatory and punitive damages, as well as other relief. The Company intends to defend this action vigorously.
Regulatory and Litigation Matters Related to Group Annuity Benefits
In 2018, the Company announced that it identified a material weakness in its internal control over financial reporting related to the practices and procedures for estimating reserves for certain group annuity benefits. The Company is exposed to lawsuits and regulatory investigations, and could be exposed to additional legal actions relating to these issues. These may result in payments, including damages, fines, penalties, interest and other amounts assessed or awarded by courts or regulatory authorities under applicable escheat, tax, securities, ERISA, or other laws or regulations. The Company could incur significant costs in connection with these actions.
Regulatory Matters
The NYDFS examined these issues and other unrelated issues as part of its quinquennial exam and entered into a consent order with Metropolitan Life Insurance Company on January 28, 2019. Several additional regulators have made similar inquiries and it is possible that other jurisdictions may pursue similar investigations or inquiries.

222
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

Litigation Matters
Roycroft v. MetLife, Inc., et al. (S.D.N.Y., filed June 18, 2018)
Plaintiff filed this putative class action on behalf of all persons due benefits under group annuity contracts but who did not receive the entire amount to which they were entitled. Plaintiff asserts claims for unjust enrichment, accounting, and restitution based on allegations that Metropolitan Life Insurance Company and MetLife, Inc. failed to timely pay annuity benefits to certain group annuitants. Plaintiff seeks declaratory and injunctive relief, as well as unspecified compensatory and punitive damages, and other relief. The court dismissed this matter as to all defendants on January 15, 2019.
Insolvency Assessments
Many jurisdictions in which the Company is admitted to transact business require insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers or those that may become impaired, insolvent or fail. These associations levy assessments, up to prescribed limits, on all member insurers in a particular jurisdiction on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. In addition, certain jurisdictions have government owned or controlled organizations providing life, health and property and casualty insurance to their citizens, whose activities could place additional stress on the adequacy of guaranty fund assessments. Many of these organizations have the power to levy assessments similar to those of the guaranty associations. Some jurisdictions permit member insurers to recover assessments paid through full or partial premium tax offsets.
Assets and liabilities held for insolvency assessments were as follows:
 
December 31,
 
2018
 
2017
 
(In millions)
Other Assets:
 
 
 
Premium tax offset for future discounted and undiscounted assessments
$
42

 
$
51

Premium tax offset currently available for paid assessments
43

 
49

Total
$
85

 
$
100

Other Liabilities:
 
 
 
Insolvency assessments
$
57

 
$
66


223
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

Commitments
Leases
The Company, as lessee, has entered into various lease and sublease agreements for office space and equipment. Future minimum gross rental payments relating to these lease arrangements are as follows:
 
 
Amount
 
 
(In millions)
2019
 
$
125

2020
 
137

2021
 
136

2022
 
134

2023
 
122

Thereafter
 
567

Total
 
$
1,221

Operating lease expense was $116 million, $187 million, and $204 million for the years ended December 31, 2018, 2017 and 2016, respectively. Effective January 1, 2018, the Company assigned certain leases to an affiliate. The Company, as assignor, remains liable under the leases to the extent that the affiliate, as assignee, cannot meet any obligations. Total minimum rental payments to be received in the future under non-cancelable subleases were $628 million as of December 31, 2018. Non-cancelable sublease income was $66 million, $40 million and $17 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.6 billion and $3.3 billion at December 31, 2018 and 2017, respectively.
Commitments to Fund Partnership Investments, Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $4.6 billion and $3.9 billion at December 31, 2018 and 2017, respectively.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that 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 $442 million, with a cumulative maximum of $827 million, 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. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
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.

224
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
16. Contingencies, Commitments and Guarantees (continued)

The Company’s recorded liabilities were $5 million and $4 million at December 31, 2018 and 2017, respectively, for indemnities, guarantees and commitments.
17. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for 2018 and 2017 are summarized in the table below:
 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
 
(In millions)
2018
 
 
 
 
 
 
 
 
Total revenues
 
$
8,446

 
$
14,809

 
$
9,751

 
$
9,155

Total expenses
 
$
7,711

 
$
13,709

 
$
8,847

 
$
7,585

Net income (loss)
 
$
672

 
$
1,007

 
$
816

 
$
1,641

Less: Net income (loss) attributable to noncontrolling interests
 
$
3

 
$
5

 
$
2

 
$
(4
)
Net income (loss) attributable to Metropolitan Life Insurance Company
 
$
669

 
$
1,002

 
$
814

 
$
1,645

2017
 
 
 
 
 
 
 
 
Total revenues
 
$
8,645

 
$
9,342

 
$
10,286

 
$
8,952

Total expenses
 
$
7,978

 
$
8,534

 
$
9,411

 
$
8,336

Net income (loss)
 
$
547

 
$
644

 
$
708

 
$
1,628

Less: Net income (loss) attributable to noncontrolling interests
 
$
1

 
$
2

 
$
5

 
$
(6
)
Net income (loss) attributable to Metropolitan Life Insurance Company
 
$
546

 
$
642

 
$
703

 
$
1,634

18. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include personnel, policy administrative functions and distribution services. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual cost incurred by the Company and/or affiliate. Expenses and fees incurred with affiliates related to these agreements, recorded in other expenses, were $2.1 billion, $2.2 billion and $2.1 billion for the years ended December 31, 2018, 2017 and 2016, respectively. Total revenues received from affiliates related to these agreements were $135 million, $234 million and $251 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company also entered into agreements with affiliates to provide additional services necessary to conduct the affiliates’ activities. Typical services provided under these agreements include management, policy administrative functions, investment advice and distribution services. Expenses incurred by the Company related to these agreements, included in other expenses, were $1.1 billion, $1.4 billion and $1.5 billion for the years ended December 31, 2018, 2017 and 2016, respectively, and were reimbursed to the Company by these affiliates.
In 2018, the Company and the MetLife enterprise updated its shared facilities and services structure to more efficiently share enterprise assets and services. Effective as of October 1, 2018, the Company entered into new service agreements with its affiliates, which replaced existing agreements. Under the new agreements, the Company will no longer be the primary provider of services to affiliates and will receive further services from affiliates to conduct its activities.
The Company had net payables to affiliates, related to the items discussed above, of $181 million and $205 million at December 31, 2018 and 2017, respectively.
See Notes 1, 6, 8, 11, 12 and 14 for additional information on related party transactions. Also, see Note 6 for information related to the separation of Brighthouse.

225
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (continued)
18. Related Party Transactions (continued)

Sales Distribution Services
In July 2016, MetLife, Inc. completed the U.S. Retail Advisor Force Divestiture. MassMutual assumed all of the liabilities related to such assets and that arise or occur after the closing of the sale.

226

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule I
Consolidated Summary of Investments —
Other Than Investments in Related Parties
December 31, 2018
(In millions)
Types of Investments
Cost or
Amortized Cost (1)
 
Estimated
Fair
Value
 
Amount at
Which Shown on
Balance Sheet
Fixed maturity securities AFS:
 
 
 
 
 
Bonds:
 
 
 
 
 
U.S. government and agency
$
28,139

 
$
30,161

 
$
30,161

Public utilities
6,822

 
7,149

 
7,149

Municipals
6,070

 
6,947

 
6,947

Foreign government
4,191

 
4,492

 
4,492

All other corporate bonds
72,886

 
72,766

 
72,766

Total bonds
118,108

 
121,515

 
121,515

Mortgage-backed and asset-backed securities
36,256

 
36,708

 
36,708

Redeemable preferred stock
811

 
850

 
850

Total fixed maturity securities AFS
155,175

 
159,073

 
159,073

Equity securities:
 
 
 
 
 
Common stock:
 
 
 
 
 
Industrial, miscellaneous and all other
360

 
368

 
368

Public utilities
83

 
74

 
74

Non-redeemable preferred stock
352

 
331

 
331

Total equity securities
795

 
773

 
773

Mortgage loans
63,687

 
 
 
63,687

Policy loans
6,061

 
 
 
6,061

Real estate and real estate joint ventures
6,110

 
 
 
6,110

Real estate acquired in satisfaction of debt
42

 
 
 
42

Other limited partnership interests
4,481

 
 
 
4,481

Short-term investments
1,506

 
 
 
1,506

Other invested assets
15,690

 
 
 
15,690

Total investments
$
253,547

 
 
 
$
257,423

______________
(1)
Amortized cost for fixed maturity securities AFS and mortgage loans represents original cost reduced by repayments, valuation allowances and impairments from other-than-temporary declines in estimated fair value that are charged to earnings and adjusted for amortization of premium or accretion of discount; for equity securities, cost represents original cost; for real estate, cost represents original cost reduced by impairments and depreciation; for real estate joint ventures and other limited partnership interests, cost represents original cost reduced for impairments or original cost adjusted for equity in earnings and distributions.


227

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information
December 31, 2018 and 2017
(In millions)
Segment
 
DAC
and
VOBA
 
Future Policy Benefits,
Other Policy-Related
Balances and
Policyholder Dividend
Obligation
 
Policyholder
Account
Balances
 
Policyholder
Dividends
Payable
 
Unearned
Premiums (1), (2)
 
Unearned
Revenue (1)
2018
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
403

 
$
67,770

 
$
67,233

 
$
—

 
$
137

 
$
26

MetLife Holdings
 
3,709

 
65,730

 
23,423

 
494

 
159

 
167

Corporate & Other
 
5

 
291

 
—

 
—

 
—

 
—

Total
 
$
4,117

 
$
133,791

 
$
90,656

 
$
494

 
$
296

 
$
193

2017
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
413

 
$
61,665

 
$
69,559

 
$
—

 
$
165

 
$
23

MetLife Holdings
 
3,930

 
66,753

 
24,380

 
499

 
162

 
179

Corporate & Other
 
5

 
294

 
—

 
—

 
—

 
—

Total
 
$
4,348

 
$
128,712

 
$
93,939

 
$
499

 
$
327

 
$
202

______________
(1)
Amounts are included within the future policy benefits, other policy-related balances and policyholder dividend obligation column.
(2)
Includes premiums received in advance.

228

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information — (continued)
For the Years Ended December 31, 2018, 2017 and 2016
(In millions)
Segment
 
Premiums and Universal Life
and Investment-Type
Product Policy Fees
 
Net
Investment
Income
 
Policyholder
Benefits and
Claims and
Interest Credited
to Policyholder
Account Balances
 
Amortization of
DAC and 
VOBA
Charged to
Other 
Expenses
 
Other
Expenses (1)
2018
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
24,411

 
$
6,429

 
$
25,922

 
$
75

 
$
2,810

MetLife Holdings
 
4,306

 
4,653

 
5,649

 
395

 
2,079

Corporate & Other
 
20

 
(163
)
 
5

 
—

 
917

Total
 
$
28,737

 
$
10,919

 
$
31,576

 
$
470

 
$
5,806

2017
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
20,500

 
$
6,012

 
$
22,019

 
$
56

 
$
2,680

MetLife Holdings
 
4,643

 
4,758

 
6,004

 
185

 
2,293

Corporate & Other
 
9

 
(257
)
 
4

 
—

 
1,018

Total
 
$
25,152

 
$
10,513

 
$
28,027

 
$
241

 
$
5,991

2016
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
18,909

 
$
5,811

 
$
20,263

 
$
56

 
$
2,721

MetLife Holdings
 
5,739

 
5,355

 
7,128

 
342

 
2,797

Corporate & Other
 
287

 
(83
)
 
155

 
43

 
1,044

Total
 
$
24,935

 
$
11,083

 
$
27,546

 
$
441

 
$
6,562

______________
(1)
Includes other expenses and policyholder dividends, excluding amortization of DAC and VOBA charged to other expenses.

229

Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule IV
Consolidated Reinsurance
December 31, 2018, 2017 and 2016
(Dollars in millions)
 
 
Gross Amount
 
Ceded
 
Assumed
 
Net Amount
 
% Amount
Assumed
to Net
2018
 
 
 
 
 
 
 
 
 
 
Life insurance in-force
 
$
3,736,612

 
$
260,086

 
$
453,560

 
$
3,930,086

 
11.5
%
Insurance premium
 
 
 
 
 
 
 
 
 
 
Life insurance (1)
 
$
19,673

 
$
894

 
$
725

 
$
19,504

 
3.7
%
Accident & health insurance
 
7,210

 
128

 
27

 
7,109

 
0.4
%
Total insurance premium
 
$
26,883

 
$
1,022

 
$
752

 
$
26,613

 
2.8
%
2017
 
 
 
 
 
 
 
 
 
 
Life insurance in-force
 
$
3,377,964

 
$
266,895

 
$
490,033

 
$
3,601,102

 
13.6
%
Insurance premium
 
 
 
 
 
 
 
 
 
 
Life insurance (1)
 
$
16,022

 
$
1,132

 
$
1,097

 
$
15,987

 
6.9
%
Accident & health insurance
 
7,040

 
121

 
19

 
6,938

 
0.3
%
Total insurance premium
 
$
23,062

 
$
1,253

 
$
1,116

 
$
22,925

 
4.9
%
2016
 
 
 
 
 
 
 
 
 
 
Life insurance in-force
 
$
3,013,618

 
$
277,693

 
$
777,037

 
$
3,512,962

 
22.1
%
Insurance premium
 
 
 
 
 
 
 
 
 
 
Life insurance (1)
 
$
14,931

 
$
1,101

 
$
1,668

 
$
15,498

 
10.8
%
Accident & health insurance
 
7,000

 
124

 
19

 
6,895

 
0.3
%
Total insurance premium
 
$
21,931

 
$
1,225

 
$
1,687

 
$
22,393

 
7.5
%
______________
(1)
Includes annuities with life contingencies.
For the year ended December 31, 2018, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $14.7 billion and $1.2 billion, respectively, and life insurance premiums of $117 million and $9 million, respectively. For the year ended December 31, 2017, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $16.2 billion and $1.3 billion, respectively, and life insurance premiums of $132 million and $122 million, respectively. For the year ended December 31, 2016, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $17.6 billion and $258.3 billion, respectively, and life insurance premiums of $45 million and $727 million, respectively.

230

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. The Company has designed these controls and procedures to ensure that information the Company is required to disclose in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to Company management, including the CEO and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.
Management, including the CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective as of December 31, 2018.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. In fulfilling this responsibility, management’s estimates and judgments must assess the expected benefits and related costs of control procedures. The Company’s internal control objectives include providing management with reasonable, but not absolute, assurance that the Company has safeguarded assets against loss from unauthorized use or disposition, and that the Company has executed transactions in accordance with management’s authorization and recorded them properly to permit the preparation of consolidated financial statements in conformity with GAAP.
Management evaluated the design and operating effectiveness of the Company’s internal control over financial reporting based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). In the opinion of management, Metropolitan Life Insurance Company maintained effective internal control over financial reporting as of December 31, 2018.
Changes in Internal Control Over Financial Reporting
Except with respect to our remedial actions described below, the Company did not materially change its internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act during the quarter ended December 31, 2018, and made no changes that it believes are reasonably likely to materially affect, its internal control over financial reporting.
Remediation of Material Weakness
The Company identified the following material weakness in the principles associated with both the control activities and information and communication components of the COSO framework as of December 31, 2017 in its annual report on Form 10-K for the year ended December 31, 2017:
RIS Group Annuity Reserves:
•
Ineffective design and operating effectiveness of the controls related to processes and procedures for identifying unresponsive and missing group annuity annuitants and pension beneficiaries (Control Activities); and
•
Ineffective design and operating effectiveness of the controls intended to ensure timely communication and escalation of the issue throughout the Company (Information and Communication).
The Company’s remediation steps outlined below strengthened its internal control over financial reporting. As of December 31, 2018, the Company had implemented these enhanced procedures and controls and successfully tested them. As a result, the Company concluded that it had remediated the material weakness associated with RIS Group Annuity Reserves as of that date.

231

To remediate the material weakness identified above, management performed the following actions:
RIS Group Annuity Reserves:
•
The Company engaged third party advisors and employees, supervised by MetLife, Inc.’s and the Company’s CRO, to examine and analyze the facts and circumstances giving rise to the material weakness and addressed those findings;
•
The Company changed its accounting procedures, administrative and search practices to identify, contact, and record responses from “unresponsive and missing” plan annuitants and to otherwise locate missing annuitants; and
•
The Company implemented enhanced internal controls associated with timely internal communication and escalation procedures and governance.
Item 9B. Other Information
None.

232

Part III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14. Principal Accountant Fees and Services
Deloitte & Touche LLP (“Deloitte”), the independent auditor of MetLife, Inc., has served as the independent auditor of the Company since at least 1968, but the specific year of its commencement of service to the Company has not been determined. Its long-term knowledge of the MetLife group of companies, combined with its insurance industry expertise and global presence, has enabled it to carry out its audits of the Company’s financial statements with effectiveness and efficiency. Deloitte is a registered public accounting firm with the Public Company Accounting Oversight Board (United States) (“PCAOB”) as required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Rules of the PCAOB.
Independent Auditor’s Fees for 2018 and 2017
The table below presents fees for professional services rendered by Deloitte for the audit of the Company’s annual financial statements, audit-related services, tax services and all other services for the years ended December 31, 2018 and 2017. All fees shown in the table were related to services that were approved by the Audit Committee of MetLife, Inc. (“Audit Committee”).
 
2018
 
2017
 
(In millions)
Audit fees (1)
$
41.7

 
$
43.9

Audit-related fees (2)
$
13.8

 
$
10.3

Tax fees (3)
$
1.4

 
$
2.7

All other fees (4)
$
1.3

 
$
0.9

______________
(1)
Fees for services to perform an audit or review in accordance with auditing standards of the PCAOB and services that generally only the Company’s independent auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.
(2)
Fees for assurance and related services that are traditionally performed by the Company’s independent auditor, such as audit and related services for employee benefit plan audits, due diligence related to mergers, acquisitions and divestitures, accounting consultations and audits in connection with proposed or consummated acquisitions and divestitures, control reviews, attest services not required by statute or regulation, and consultation concerning financial accounting and reporting standards.
(3)
Fees for tax compliance, consultation and planning services. Tax compliance generally involves preparation of original and amended tax returns, claims for refunds and tax payment planning services. Tax consultation and tax planning encompass a diverse range of advisory services, including assistance in connection with tax audits and filing appeals, tax advice related to mergers, acquisitions and divestitures, advice related to employee benefit plans and requests for rulings or technical advice from taxing authorities.
(4)
Fees for other types of permitted services, including employee benefit advisory services, risk and other consulting services, financial advisory services and valuation services.

233

Approval of Fees
The Audit Committee approves Deloitte’s audit and non-audit services in advance as required under Sarbanes-Oxley and SEC rules. Before the commencement of each fiscal year, the Audit Committee appoints the independent auditor to perform audit services that MetLife expects to be performed for the fiscal year and appoints the auditor to perform audit-related, tax and other permitted non-audit services. The Audit Committee or a designated member of the Audit Committee to whom authority has been delegated may, from time to time, pre-approve additional audit and non-audit services to be performed by MetLife’s independent auditor. Any pre-approval of services between Audit Committee meetings must be reported to the full Audit Committee at its next scheduled meeting.
The Audit Committee is responsible for approving fees for the audit and for any audit-related, tax or other permitted non-audit services. If the audit, audit-related, tax and other permitted non-audit fees for a particular period or service exceed the amounts previously approved, the Audit Committee determines whether or not to approve the additional fees.
Under current legal requirements, the lead or concurring audit partner for MetLife may not serve in that role for more than five consecutive fiscal years, and the Audit Committee ensures the regular rotation of the audit engagement team partners as required by law. The Chair of the Audit Committee is actively involved in the selection process for the lead and concurring partners.

234

Part IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated Financial Statements, Notes and Schedules on page 89.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to Consolidated Financial Statements, Notes and Schedules on page 89.
3. Exhibits
The exhibits are listed in the Exhibit Index which begins on page 236.
Item 16. Form 10-K Summary
None.

235

Exhibit Index
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Metropolitan Life Insurance Company, its subsidiaries or affiliates, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Metropolitan Life Insurance Company, its subsidiaries and affiliates may be found elsewhere in this Annual Report on Form 10-K and Metropolitan Life Insurance Company’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.)
 
 
 
 
Incorporated By Reference
 
 
Exhibit No.
 
Description
 
Form
 
File Number
 
Exhibit
 
Filing Date
 
Filed or Furnished Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
2.1
 
 
S-1
 
333-91517
 
2.1
 
23-Nov-99
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2
 

 
S-1/A
 
333-91517
 
2.2
 
29-Mar-00
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
 
 
8-K
 
000-55029
 
3.2
 
19-May-16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
 
8-K
 
000-55029
 
3.4
 
19-May-16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
 
8-K
 
001-15787
 
10.1
 
21-Dec-16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
23.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
 
 
 
X

236

Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
March 18, 2019
METROPOLITAN LIFE INSURANCE COMPANY
 
 
 
 
By
 
 
/s/ Steven A. Kandarian
 
 
Name:
Steven A. Kandarian
 
 
Title:
Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
  
Title
 
Date
 
 
 
 
 
/s/ Cheryl W. Grisé
 
Director
 
March 18, 2019
Cheryl W. Grisé
 
 
 
 
 
 
 
 
 
/s/ Carlos M. Gutierrez
  
Director
 
March 18, 2019
Carlos M. Gutierrez
 
 
 
 
 
 
 
 
 
/s/ Gerald L. Hassell
  
Director
 
March 18, 2019
Gerald L. Hassell
 
 
 
 
 
 
 
 
 
/s/ David L. Herzog
 
Director
 
March 18, 2019
David L. Herzog
 
 
 
 
 
 
 
 
 
/s/ R. Glenn Hubbard
  
Director
 
March 18, 2019
R. Glenn Hubbard
 
 
 
 
 
 
 
 
 
/s/ Edward J. Kelly, III
  
Director
 
March 18, 2019
Edward J. Kelly, III
 
 
 
 
 
 
 
 
 
/s/ William E. Kennard
 
Director
 
March 18, 2019
William E. Kennard
 
 
 
 
 
 
 
 
 
/s/ James M. Kilts
  
Director
 
March 18, 2019
James M. Kilts
 
 
 
 
 
 
 
 
 
/s/ Catherine R. Kinney
  
Director
 
March 18, 2019
Catherine R. Kinney
 
 
 
 
 
 
 
 
 
/s/ Diana McKenzie
 
Director
 
March 18, 2019
Diana McKenzie
 
 
 
 
 
 
 
 
 
/s/ Denise M. Morrison
  
Director
 
March 18, 2019
Denise M. Morrison
 
 
 
 

237

Signature
 
Title
 
Date
 
 
 
 
 
/s/ Steven A. Kandarian
  
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
 
March 18, 2019
Steven A. Kandarian
 
 
 
 
 
 
 
 
/s/ John D. McCallion
  
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
March 18, 2019
John D. McCallion
 
 
 
 
 
 
 
 
/s/ Tamara L. Schock
  
Executive Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
 
March 18, 2019
Tamara L. Schock
 
 
 

238