-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUjT2Fczqql6KJ5rv91xcCMszheP61cnFQ1GGUbCy2I0hn9AaD5lnGtzmKENlJyA JcXfomlXBGses4DJVjaYog== 0000950123-02-010936.txt : 20021114 0000950123-02-010936.hdr.sgml : 20021114 20021114160114 ACCESSION NUMBER: 0000950123-02-010936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METLIFE INC CENTRAL INDEX KEY: 0001099219 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 134075851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15787 FILM NUMBER: 02825163 BUSINESS ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 10-Q 1 y65151e10vq.txt METLIFE, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 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: 001-15787 METLIFE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 13-4075851 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE MADISON AVENUE NEW YORK, NEW YORK 10010-3690 (212) 578-2211 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] At November 8, 2002, 700,278,412 shares of the Registrant's Common Stock, $.01 par value per share, were outstanding. TABLE OF CONTENTS
Page PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Interim Condensed Consolidated Balance Sheets at September 30, 2002 (Unaudited) and December 31, 2001 .................................. 4 Unaudited Interim Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2002 and 2001 ..... 5 Unaudited Interim Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2002 ................ 6 Unaudited Interim Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 .................. 7 Notes to Unaudited Interim Condensed Consolidated Financial Statements 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................... 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 69 ITEM 4. CONTROLS AND PROCEDURES ....................................... 70 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ............................................. 70 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 71 Signatures ............................................................ 73 Chief Executive Officer and Chief Financial Officer Certifications .... 74
2 NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of the Registrant and its subsidiaries, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions. "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to the following: (i) changes in general economic conditions, including the performance of financial markets and interest rates; (ii) heightened competition, including with respect to pricing, entry of new competitors and the development of new products by new and existing competitors; (iii) unanticipated changes in industry trends; (iv) MetLife, Inc.'s primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends; (v) deterioration in the experience of the "closed block" established in connection with the reorganization of Metropolitan Life; (vi) catastrophe losses; (vii) adverse litigation or arbitration results; (viii) regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company's products or services; (ix) downgrades in the Company's or its affiliates' claims paying ability, financial strength or debt ratings; (x) changes in rating agency policies or practices; (xi) discrepancies between actual claims experience and assumptions used in setting prices for the Company's products and establishing the liabilities for the Company's obligations for future policy benefits and claims; (xii) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (xiii) the effects of business disruption or economic contraction due to terrorism or other hostilities; and (xiv) other risks and uncertainties described from time to time in MetLife, Inc.'s filings with the Securities and Exchange Commission, including its S-1 and S-3 registration statements. The Company specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METLIFE, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $126,316 and $112,288, respectively) $ 133,163 $ 115,398 Equity securities, at fair value (cost: $2,046 and $2,459, respectively) 1,955 3,063 Mortgage loans on real estate 23,885 23,621 Policy loans 8,366 8,272 Real estate and real estate joint ventures held-for-investment 4,377 4,061 Real estate held-for-sale 1,286 1,669 Other limited partnership interests 1,747 1,637 Short-term investments 2,658 1,203 Other invested assets 3,214 3,298 ---------- ---------- Total investments 180,651 162,222 Cash and cash equivalents 3,647 7,473 Accrued investment income 2,224 2,062 Premiums and other receivables 8,165 6,437 Deferred policy acquisition costs 11,553 11,167 Other assets 5,645 4,823 Separate account assets 56,049 62,714 ---------- ---------- Total assets $ 267,934 $ 256,898 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits $ 88,062 $ 84,924 Policyholder account balances 65,011 58,923 Other policyholder funds 5,764 5,332 Policyholder dividends payable 1,156 1,046 Policyholder dividend obligation 1,672 708 Short-term debt 878 355 Long-term debt 3,428 3,628 Current income taxes payable 403 306 Deferred income taxes payable 1,636 1,526 Payables under securities loaned transactions 16,251 12,661 Other liabilities 9,284 7,457 Separate account liabilities 56,049 62,714 ---------- ---------- Total liabilities 249,594 239,580 ---------- ---------- Commitments and contingencies (Note 9) Company-obligated mandatorily redeemable securities of subsidiary trusts 1,263 1,256 ---------- ---------- Stockholders' Equity: Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; none issued -- -- Series A junior participating preferred stock -- -- Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 786,766,664 shares issued at September 30, 2002 and December 31, 2001; 700,278,412 shares outstanding at September 30, 2002 and 715,506,525 shares outstanding at December 31, 2001 8 8 Additional paid-in capital 14,967 14,966 Retained earnings 2,393 1,349 Treasury stock, at cost; 86,488,252 shares at September 30, 2002 and 71,260,139 shares at December 31, 2001 (2,405) (1,934) Accumulated other comprehensive income 2,114 1,673 ---------- ---------- Total stockholders' equity 17,077 16,062 ---------- ---------- Total liabilities and stockholders' equity $ 267,934 $ 256,898 ========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- REVENUES Premiums $ 4,676 $ 4,282 $ 13,858 $ 12,634 Universal life and investment-type product policy fees 587 466 1,558 1,413 Net investment income 2,810 2,822 8,401 8,406 Other revenues 320 346 1,076 1,130 Net investment losses (net of amounts allocable to other accounts of $(16), $(28), $(102) and $(107), respectively) (269) (99) (547) (380) -------- -------- -------- -------- Total revenues 8,124 7,817 24,346 23,203 -------- -------- -------- -------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment losses of $(5), $(29), $(76) and $(92), respectively) 4,739 4,723 14,239 13,447 Interest credited to policyholder account balances 736 745 2,177 2,228 Policyholder dividends 504 547 1,489 1,567 Other expenses (excludes amounts directly related to net investment losses of $(11), $1, $(26) and $(15), respectively) 1,707 1,588 4,978 4,893 -------- -------- -------- -------- Total expenses 7,686 7,603 22,883 22,135 -------- -------- -------- -------- Income from continuing operations before provision for income taxes 438 214 1,463 1,068 Provision for income taxes 124 69 473 360 -------- -------- -------- -------- Income from continuing operations 314 145 990 708 Income from discontinued operations, net of income taxes 19 17 54 61 -------- -------- -------- -------- Income before cumulative effect of change in accounting 333 162 1,044 769 Cumulative effect of change in accounting (5) -- -- -- -------- -------- -------- -------- Net income $ 328 $ 162 $ 1,044 $ 769 ======== ======== ======== ======== Income from continuing operations per share Basic $ 0.45 $ 0.20 $ 1.40 $ 0.95 ======== ======== ======== ======== Diluted $ 0.43 $ 0.19 $ 1.35 $ 0.91 ======== ======== ======== ======== Net income per share Basic $ 0.47 $ 0.22 $ 1.48 $ 1.03 ======== ======== ======== ======== Diluted $ 0.45 $ 0.21 $ 1.42 $ 0.99 ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (DOLLARS IN MILLIONS)
ACCUMULATED OTHER COMPREHENSIVE INCOME ----------------------------------- NET UNREALIZED INVESTMENT FOREIGN MINIMUM ADDITIONAL TREASURY AND CURRENCY PENSION COMMON PAID-IN RETAINED STOCK DERIVATIVE TRANSLATION LIABILITY STOCK CAPITAL EARNINGS AT COST GAINS ADJUSTMENT ADJUSTMENT TOTAL ------ ---------- -------- ------- ---------- ----------- ---------- ------- Balance at January 1, 2002 $ 8 $ 14,966 $ 1,349 $(1,934) $ 1,879 $ (160) $ (46) $16,062 Treasury stock transactions and exercises of stock options, net 1 (471) (470) Comprehensive income: Net income 1,044 1,044 Other comprehensive income: Unrealized losses on derivative instruments, net of income taxes (24) (24) Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes 545 545 Foreign currency translation adjustments (80) (80) ------- Other comprehensive income 441 ------- Comprehensive income 1,485 ------ -------- -------- ------- -------- -------- -------- ------- Balance at September 30, 2002 $ 8 $ 14,967 $ 2,393 $(2,405) $ 2,400 $ (240) $ (46) $17,077 ====== ======== ======== ======= ======== ======== ======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (DOLLARS IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2002 2001 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,540 $ 2,939 CASH FLOW FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturities 46,334 40,705 Equity securities 1,540 419 Mortgage loans on real estate 1,923 1,433 Real estate and real estate joint ventures 441 163 Other limited partnership interests 240 267 Purchases of: Fixed maturities (58,096) (42,169) Equity securities (833) (1,449) Mortgage loans on real estate (2,271) (2,433) Real estate and real estate joint ventures (330) (325) Other limited partnership interests (218) (290) Net change in short-term investments (1,213) 252 Purchase of businesses, net of cash received (879) (16) Net change in payables under securities loaned transactions 3,590 822 Other, net (381) (228) -------- -------- Net cash used in investing activities (10,153) (2,849) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Policyholder account balances: Deposits 19,571 20,283 Withdrawals (15,636) (17,864) Net change in short-term debt 523 (385) Long-term debt issued 10 83 Long-term debt repaid (210) (179) Net treasury stock acquired (471) (1,017) -------- -------- Net cash provided by financing activities 3,787 921 -------- -------- Change in cash and cash equivalents (3,826) 1,011 Cash and cash equivalents, beginning of period 7,473 3,434 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,647 $ 4,445 ======== ======== Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest $ 264 $ 257 ======== ======== Income taxes $ 177 $ (183) ======== ======== Non-cash transactions during the period: Business acquisitions - assets $ 2,630 $ 92 ======== ======== Business acquisitions - liabilities $ 1,751 $ 76 ======== ======== Business dispositions - assets $ -- $ 102 ======== ======== Business dispositions - liabilities $ -- $ 44 ======== ======== Real estate acquired in satisfaction of debt $ 20 $ 11 ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 METLIFE, INC. NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS MetLife, Inc. (the "Holding Company") and its subsidiaries (together with the Holding Company, "MetLife" or the "Company") is a leading provider of insurance and financial services to a broad section of individual and institutional customers. The Company offers life insurance, annuities, automobile and property insurance and mutual funds to individuals and group insurance, reinsurance, as well as retirement and savings products and services to corporations and other institutions. BASIS OF PRESENTATION The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The most significant estimates include those used in determining investment impairments, the fair value of derivatives, deferred policy acquisition costs, the liability for future policyholder benefits, accounting for reinsurance transactions and the liability for litigation matters. Actual results could differ from those estimates. The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Holding Company and its subsidiaries, partnerships and joint ventures in which the Company has a majority voting interest. 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. Intercompany accounts and transactions have been eliminated. The Company uses the equity method to account for its investments in real estate joint ventures and other limited partnership interests in which it does not have a controlling interest, but has more than a minimal interest. Minority interest related to consolidated entities included in other liabilities is $480 million and $442 million at September 30, 2002 and December 31, 2001, respectively. Certain amounts in the prior years' unaudited interim condensed consolidated financial statements have been reclassified to conform with the 2002 presentation. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company, its consolidated results of operations and its consolidated cash flows. Interim results are not necessarily indicative of full year performance. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2001 included in MetLife, Inc.'s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"). FEDERAL INCOME TAXES Federal income taxes for interim periods have been computed using an estimated annual effective tax rate. This rate is revised, if necessary, at the end of each successive interim period to reflect the current estimate of the annual effective tax rate. APPLICATION OF ACCOUNTING PRONOUNCEMENTS Effective April 1, 2001, the Company adopted certain additional accounting and reporting requirements of Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement for Financial Accounting Standards Board ("FASB") Statement No. 125, relating to the derecognition of transferred assets and extinguished liabilities and the reporting of servicing assets and liabilities. The adoption of these requirements did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. 8 Effective April 1, 2001, the Company adopted Emerging Issues Task Force ("EITF") 99-20, Recognition of Interest Income and Impairment on Certain Investments ("EITF 99-20"). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific evaluation methods to these securities for an other-than-temporary decline in value. The adoption of EITF 99-20 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance and Documentation Issues ("SAB 102"). SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. The application of SAB 102 by the Company did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective July 1, 2001, the Company adopted SFAS No. 141, Business Combinations ("SFAS 141"). SFAS 141 requires the purchase method of accounting for all business combinations and separate recognition of intangible assets apart from goodwill if such intangible assets meet certain criteria. In accordance with SFAS 141, the elimination of $5 million of negative goodwill was reported in income in the first quarter of 2002 as a cumulative effect of a change in accounting. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 eliminates the systematic amortization and establishes criteria for measuring the impairment of goodwill and certain other intangible assets by reporting unit. The Company did not amortize goodwill during 2002. For the three months and nine months ended September 30, 2001, the Company recorded amortization of goodwill of $13 million and $37 million, respectively. The Company has completed the required impairment tests of goodwill and indefinite-lived intangible assets. As a result of these tests, the Company recorded a $5 million charge to earnings relating to the impairment of certain goodwill assets in the third quarter of 2002 as a cumulative effect of a change in accounting. There was no impairment of intangible assets or significant reclassifications between goodwill and other intangible assets at January 1, 2002. Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 provides a single model for accounting for long-lived assets to be disposed of by superseding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). Under SFAS 144, discontinued operations are measured at the lower of carrying value or fair value less costs to sell, rather than on a net realizable value basis. Future operating losses relating to discontinued operations also are no longer recognized before they occur. SFAS 144 (i) broadens the definition of a discontinued operation to include a component of an entity (rather than a segment of a business); (ii) requires long-lived assets to be disposed of other than by sale to be considered held and used until disposed; and (iii) retains the basic provisions of (a) APB 30 regarding the presentation of discontinued operations in the statements of income, (b) SFAS 121 relating to recognition and measurement of impaired long-lived assets (other than goodwill), and (c) SFAS 121 relating to the measurement of long-lived assets classified as held-for-sale. Adoption of SFAS 144 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements for 2002 other than the reclassification to discontinued operations of net investment income and net investment gains and losses related to operations of real estate on which the Company initiated disposition activities subsequent to January 1, 2002. See note 5. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In addition to amending or rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 generally precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 also requires sale-leaseback treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. SFAS 145 is effective for fiscal years beginning after May 15, 2002, and is not expected to have a significant impact on the Company's consolidated results of operations, financial position or cash flows. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), which must be adopted for exit and disposal activities initiated after December 31, 2002. SFAS 146 will require that a liability for a 9 cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required by EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). As discussed in Note 8, in the fourth quarter of 2001, the Company recorded a charge of $330 million, net of income taxes of $169 million, associated with business realignment initiatives using the EITF 94-3 accounting guidance. In the first quarter of 2003, the Company will prospectively adopt the fair value-based employee stock-based compensation expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). The Company currently applies the intrinsic value-based expense provisions set forth in APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25"). SFAS 123 states that the adoption of the fair value-based method is a change to a preferable method of accounting. The estimated impact of the adoption of the fair value-based method in 2002 would be a decrease to net income for the full year of approximately $16 million to $19 million, net of income taxes of $9 million to $11 million, respectively. This estimate is based on assumptions as of September 30, 2002. 2. SEPTEMBER 11, 2001 TRAGEDIES On September 11, 2001 a terrorist attack occurred in New York, Washington D.C. and Pennsylvania (collectively, the "tragedies") triggering a significant loss of life and property which had an adverse impact on certain of the Company's businesses. The Company has direct exposures to this event with claims arising from its Individual, Institutional, Reinsurance and Auto & Home insurance coverages, and it believes the majority of such claims have been reported or otherwise analyzed by the Company. The Company's estimate of the total insurance losses related to the tragedies Was $208 million, net of income taxes of $117 million for the year ended December 31, 2001. This estimate has been and will continue to be subject to revision in subsequent periods as claims are received from insureds and claims to reinsurers are identified and processed. Any revision to the estimate of gross losses and reinsurance recoveries in subsequent periods will affect net income in such periods. Reinsurance recoveries are dependent on the continued creditworthiness of the reinsurers, which may be adversely affected by their other reinsured losses in connection with the tragedies. As of September 30, 2002, the Company's liability for future claims associated with the tragedies was $86 million. The long-term effects of the tragedies on the Company's businesses cannot be assessed at this time. The tragedies have had significant adverse effects on the general economic, market and political conditions, increasing many of the Company's business risks. In particular, the declines in share prices experienced after the reopening of the United States equity markets following the tragedies have contributed, and may continue to contribute, to a decline in separate account assets, which in turn could have an adverse effect on fees earned in the Company's businesses. In addition, the Institutional segment has received and expects to continue to receive disability claims from individuals suffering from mental and nervous disorders resulting from the tragedies. This may lead to a revision in the Company's estimated insurance losses related to the tragedies. The majority of the Company's disability policies include a provision that such claims be submitted within two years of the traumatic event. The Company's general account investment portfolios include investments, primarily comprised of fixed income securities, in industries that were affected by the tragedies, including airline, insurance, other travel and lodging. Exposures to these industries also exist through mortgage loans and investments in real estate. The market value of the Company's investment portfolio exposed to industries affected by the tragedies was approximately $3 billion at September 30, 2002. 10 3. EARNINGS PER SHARE The following presents a reconciliation of the weighted average shares used in calculating basic earnings per share to those used in calculating diluted earnings per share:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Weighted average common stock outstanding for basic earnings per share 701,541,455 735,662,211 706,055,177 747,236,338 Incremental shares from assumed: Conversion of forward purchase contracts 21,213,435 25,553,409 25,758,555 26,593,205 Exercise of stock options -- -- 5,127 93,614 ------------ ------------ ------------ ------------ Weighted average common stock outstanding for diluted earnings per share 722,754,890 761,215,620 731,818,859 773,923,157 ============ ============ ============ ============ INCOME FROM CONTINUING OPERATIONS $ 314 $ 145 $ 990 $ 708 ============ ============ ============ ============ Basic earnings per share $ 0.45 $ 0.20 $ 1.40 $ 0.95 ============ ============ ============ ============ Diluted earnings per share $ 0.43 $ 0.19 $ 1.35 $ 0.91 ============ ============ ============ ============ INCOME FROM DISCONTINUED OPERATIONS $ 19 $ 17 $ 54 $ 61 ============ ============ ============ ============ Basic earnings per share $ 0.03 $ 0.02 $ 0.08 $ 0.08 ============ ============ ============ ============ Diluted earnings per share $ 0.03 $ 0.02 $ 0.07 $ 0.08 ============ ============ ============ ============ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $ (5) $ -- $ -- $ -- ============ ============ ============ ============ Basic earnings per share $ (0.01) $ -- $ -- $ -- ============ ============ ============ ============ Diluted earnings per share $ (0.01) $ -- $ -- $ -- ============ ============ ============ ============ NET INCOME $ 328 $ 162 $ 1,044 $ 769 ============ ============ ============ ============ Basic earnings per share $ 0.47 $ 0.22 $ 1.48 $ 1.03 ============ ============ ============ ============ Diluted earnings per share $ 0.45 $ 0.21 $ 1.42 $ 0.99 ============ ============ ============ ============
On February 19, 2002, the Holding Company's Board of Directors authorized a $1 billion common stock repurchase program. This program began after the completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of which authorized the repurchase of $1 billion of common stock. Under these authorizations, the Holding Company may purchase common stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. For the nine months ended September 30, 2002 and 2001, 15,244,492 and 34,891,879 shares of common stock, respectively, were acquired for $471 million and $1,019 million, respectively. During the nine months ended September 30, 2002 and 2001, 16,379 and 64,620 of these shares were reissued for $480 thousand and $2 million, respectively. The Company recently announced that it plans no further share repurchases in 2002. On October 22, 2002, the Company announced the declaration by its Board of Directors of a dividend of $0.21 per common share payable on December 13, 2002 to shareholders of record on November 8, 2002. 11 4. NET INVESTMENT LOSSES Net investment losses, including changes in valuation allowances, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Fixed maturities $ (323) $ (87) $ (698) $ (427) Equity securities (38) 5 222 30 Mortgage loans on real estate -- (44) (22) (49) Real estate and real estate joint ventures (1) (9) (25) (18) (1) Other limited partnership interests 42 (32) 24 (130) Sales of businesses -- 25 -- 25 Other 43 31 (157) 65 ------ ------ ------ ------ (285) (127) (649) (487) Amounts allocable to: Deferred policy acquisition costs 11 (1) 26 15 Participating contracts (2) -- (2) -- Policyholder dividend obligation 7 29 78 92 ------ ------ ------ ------ Total net investment losses $ (269) $ (99) $ (547) $ (380) ====== ====== ====== ======
- ---------- (1) Excludes amounts related to real estate operations reported as discontinued operations in accordance with SFAS 144. Investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) deferred policy acquisition cost amortization, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. This presentation may not be comparable to presentations made by other insurers. 5. DISCONTINUED OPERATIONS The Company actively manages its real estate portfolio with the objective to maximize earnings through selective acquisitions and dispositions. Accordingly, the Company is selling certain real estate holdings out of its portfolio. In accordance with SFAS No. 144, income related to real estate sold or classified as held-for-sale for transactions initiated on or after January 1, 2002 is presented as discontinued operations. The following table presents the components of income from discontinued operations:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Net investment income $ 29 $ 25 $ 88 $ 91 Net investment losses (1) -- (8) -- ------ ------ ------ ------ Total revenues 28 25 80 91 Provision for income taxes 9 8 26 30 ------ ------ ------ ------ Income from discontinued operations $ 19 $ 17 $ 54 $ 61 ====== ====== ====== ======
The carrying value of real estate related to discontinued operations was $1,249 million and $1,572 million at September 30, 2002 and December 31, 2001, respectively. See note 11 for net investment income and net investment losses by business segment. 12 6. DERIVATIVE INSTRUMENTS The Company uses derivative instruments to manage risk through one of four principal risk management strategies: the hedging of liabilities, invested assets, portfolios of assets or liabilities and anticipated transactions. Additionally, Metropolitan Life Insurance Company ("Metropolitan Life") enters into income generation and replication derivative transactions as permitted by its derivative use plan approved by the New York State Insurance Department (the "Department"). The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit and foreign currency swaps, foreign exchange contracts, and options, including caps and floors. On the date the Company enters into a derivative contract, management determines the purpose of the derivative and designates the derivative as a hedge, if appropriate, of the identified exposure (fair value, cash flow or foreign currency). If a derivative does not qualify for hedge accounting, according to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the derivative is recorded at fair value and changes in its fair value are reported in net investment gains or losses. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company generally determines hedge effectiveness based on total changes in fair value of a derivative instrument. The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) the derivative expires or is sold, terminated, or exercised, (iii) the derivative is de-designated as a hedge instrument, (iv) it is probable that the forecasted transaction will not occur, (v) a hedged firm commitment no longer meets the definition of a firm commitment or (vi) management determines that designation of the derivative as a hedge instrument is no longer appropriate. The table below provides a summary of the carrying value, notional amount and fair value of derivatives by hedge accounting classification at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 --------------------------------------------- --------------------------------------------- FAIR VALUE FAIR VALUE CARRYING NOTIONAL --------------------- CARRYING NOTIONAL --------------------- VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES -------- -------- ------- ----------- -------- -------- ------- ----------- (DOLLARS IN MILLIONS) BY TYPE OF HEDGE Fair value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Cash flow 42 726 63 21 60 607 61 1 Non-qualifying 67 14,043 285 218 180 13,616 226 46 ------- ------- ------- ------- ------- ------- ------- ------- Total $ 109 $14,769 $ 348 $ 239 $ 240 $14,223 $ 287 $ 47 ======= ======= ======= ======= ======= ======= ======= =======
For the three months and nine months ended September 30, 2002 and 2001, the amount related to hedge ineffectiveness was insignificant and there were no discontinued hedges. At September 30, 2002 and December 31, 2001, the accumulated gain in other comprehensive income relating to cash flow hedges was $33 million and $71 million, respectively. For the three months ended September 30, 2002 and 2001, the Company recognized other comprehensive losses of $24 million and other comprehensive income of $14 million, respectively, relating to the effective portion of cash flow hedges. For the nine months ended September 30, 2002 and 2001, the Company recognized other comprehensive losses of $75 million and other comprehensive income of $52 million, respectively, relating to the effective portion of cash flow hedges. For the three months ended September 30, 2002 and 2001, $3 million and $15 million, respectively, of other comprehensive income was reclassified into net investment income. During the nine months ended September 30, 2002 and 2001, $9 million and $15 million, respectively, of other comprehensive income was reclassified into net investment income. During the three months and nine months ended September 30, 2002, $47 million of other comprehensive losses were reclassified into net investment gains and losses. There were no reclassifications of other comprehensive income to net investment gains and losses for the three months and nine months ended September 30, 2001. Primarily as a result of the initial adoption of SFAS No. 133, approximately $11 million of gains reported in accumulated other comprehensive income are expected to be reclassified during the year ending December 31, 2002 into net investment income as the underlying investments mature or expire according to their original terms. Reclassifications are recognized over the life of the hedged item. As a result of cash flow hedges of forecasted transactions entered into during 2002, 13 approximately $19 million of losses reported in accumulated other comprehensive income are expected to be reclassified during the year ending December 31, 2002 into net investment gains and losses as the forecasted transactions occur. For the three months ended September 30, 2002 and 2001, the Company recognized net investment income of $3 million and $8 million, respectively, and net investment gains of $21 million and $23 million, respectively, from all derivatives not qualifying as accounting hedges. For the nine months ended September 30, 2002 and 2001, the Company recognized net investment income of $23 million and $41 million, respectively, and net investment losses of $129 million and net investment gains of $62 million, respectively, from all derivatives not qualifying as accounting hedges. The use of these non-speculative derivatives is permitted by the Department. 7. CLOSED BLOCK On April 7, 2000, (the "date of demutualization"), Metropolitan Life 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 (the "Superintendent") approving Metropolitan Life's plan of reorganization, as amended (the "plan"). On the date of demutualization, Metropolitan Life established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life. The following table presents closed block liabilities and assets designated to the closed block at: SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ (DOLLARS IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits $ 40,885 $ 40,325 Other policyholder funds 265 321 Policyholder dividends payable 848 757 Policyholder dividend obligation 1,672 708 Payables under securities loaned transactions 4,094 3,350 Payables on securities purchased 325 -- Other liabilities 390 90 ---------- ---------- Total closed block liabilities 48,479 45,551 ---------- ---------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $27,688 and $25,761, respectively) 29,282 26,331 Equity securities, at fair value (cost: $546 and $240, respectively) 502 282 Mortgage loans on real estate 6,697 6,358 Policy loans 3,937 3,898 Short-term investments 83 170 Other invested assets 362 159 ---------- ---------- Total investments 40,863 37,198 Cash and cash equivalents 461 1,119 Accrued investment income 568 550 Deferred income taxes 1,158 1,060 Premiums and other receivables 131 244 ---------- ---------- Total assets designated to the closed block 43,181 40,171 ---------- ---------- Excess of closed block liabilities over assets designated to the closed block 5,298 5,380 ---------- ---------- Amounts included in accumulated other comprehensive income: Net unrealized investment gains, net of deferred income taxes of $561 and $219, respectively 985 389 Unrealized derivative gains, net of deferred income taxes of $13 and $9, respectively 19 17 Allocated to policyholder dividend obligation, net of deferred income taxes of $606 and $255, respectively (1,066) (453) ---------- ---------- (62) (47) ---------- ---------- Maximum future earnings to be recognized from closed block assets and liabilities $ 5,236 $ 5,333 ========== ==========
14 Information regarding the policyholder dividend obligation is as follows:
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ (DOLLARS IN MILLIONS) Balance at beginning of period $ 708 $ 385 Impact on income before gains allocable to policyholder dividend obligation 77 159 Net investment losses (77) (159) Change in unrealized investment and derivative gains 964 323 ---------- ---------- Balance at end of period $ 1,672 $ 708 ========== ==========
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 851 $ 863 $ 2,563 $ 2,638 Net investment income and other revenues 645 659 1,925 1,904 Net investment gains (losses) (net of amounts allocable to the policyholder dividend obligation of $(7), $(29), $(78) and $(92), respectively) 4 (9) 47 (53) -------- -------- -------- -------- Total revenues 1,500 1,513 4,535 4,489 -------- -------- -------- -------- EXPENSES Policyholder benefits and claims 913 939 2,720 2,784 Policyholder dividends 426 384 1,224 1,150 Change in policyholder dividend obligation (excludes amounts directly related to net investment losses of $(7), $(29), $(78) and $(92), respectively) 6 29 77 92 Other expenses 76 84 234 292 -------- -------- -------- -------- Total expenses 1,421 1,436 4,255 4,318 -------- -------- -------- -------- Revenues net of expenses before income taxes 79 77 280 171 Income taxes 25 27 98 62 -------- -------- -------- -------- Revenues net of expenses and income taxes $ 54 $ 50 $ 182 $ 109 ======== ========= ======== ========
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN MILLIONS) Balance at end of period $ 5,236 $ 5,403 $ 5,236 $ 5,403 Less: Reallocation of assets 85 -- 85 -- Balance at beginning of period 5,205 5,453 5,333 5,512 -------- -------- -------- -------- Change during the period $ (54) $ (50) $ (182) $ (109) ======== ======== ======== ========
During the three months ended September 30, 2002, the allocation of assets to the closed block was revised to appropriately classify assets in accordance with the plan of demutualization. The reallocation of assets had no impact on consolidated assets or liabilities. Metropolitan Life charges the closed block with federal income taxes, state and local premium taxes, and other additive state or local taxes, as well as investment management expenses relating to the closed block as provided in the plan. Metropolitan Life also charges the closed block for maintaining the policies included in the closed block. 15 Many of the derivative instrument strategies used by the Company are also used for the closed block. The table below provides a summary of the carrying value, notional amount and fair value of derivatives by hedge accounting classification at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------------------------------- ------------------------------------------- FAIR VALUE FAIR VALUE CARRYING NOTIONAL ---------------------- CARRYING NOTIONAL ---------------------- VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES -------- -------- -------- ----------- -------- -------- -------- ----------- (DOLLARS IN MILLIONS) BY TYPE OF HEDGE Fair value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Cash flow 37 159 37 -- 22 171 22 -- Non-qualifying 5 211 11 6 8 112 13 5 ------- ------- ------- ------- ------- ------- ------- ------- Total $ 42 $ 370 $ 48 $ 6 $ 30 $ 283 $ 35 $ 5 ======= ======= ======= ======= ======= ======= ======= =======
For the three months and nine months ended September 30, 2002 and 2001, the amount related to hedge ineffectiveness was insignificant and there were no discontinued hedges. At September 30, 2002 and December 31, 2001, the accumulated gain in other comprehensive income relating to cash flow hedges was $32 million and $26 million, respectively. For the three months ended September 30, 2002 and 2001, the closed block recognized other comprehensive income of $13 million and other comprehensive losses of $8 million, respectively, relating to the effective portion of cash flow hedges. For the nine months ended September 30, 2002 and 2001, the closed block recognized other comprehensive income of $15 million and $14 million, respectively, relating to the effective portion of cash flow hedges. During the three months ended September 30, 2002 and 2001, $1 million and $2 million, respectively, of other comprehensive income was reclassified into net investment income. During the nine months ended September 30, 2002 and 2001, $3 million and $2 million, respectively, of other comprehensive income was reclassified into net investment income. Approximately $4 million of the pre-tax gain reported in accumulated other comprehensive income is expected to be reclassified into net investment income during the year ending December 31, 2002 as the underlying investments mature or expire according to their original terms. The reclassifications are recognized over the life of the hedged item. For the three months ended September 30, 2002 the closed block recognized net investment income of $1 million from all derivatives not designated as accounting hedges. The closed block did not recognize net investment income for the three months ended September 30, 2001. For the three months ended September 30, 2002 and 2001, the closed block recognized net investment gains of $5 million and net investment losses of $10 million, respectively, from all derivatives not designated as accounting hedges. For each of the nine months ended September 30, 2002 and 2001, the closed block recognized net investment income of $1 million and for the nine months ended September 30, 2002 and 2001, the closed block recognized net investment losses of $2 million and $6 million, respectively, in each case from all derivatives not designated as accounting hedges. The use of these non-speculative derivatives is permitted by the Department. 8. BUSINESS REALIGNMENT INITIATIVES During the fourth quarter of 2001, the Company implemented several business realignment initiatives, which resulted from a strategic review of operations and an on-going commitment to reduce expenses. The following table represents the original expense recorded in the fourth quarter of 2001 and the remaining liability as of September 30, 2002:
TOTAL 2001 REMAINING LIABILITY EXPENSE AT SEPTEMBER 30, 2002 ------------ --------------------- (DOLLARS IN MILLIONS) EXPENSE TYPE Severance and severance-related costs $ 44 $ 25 Facilities costs 68 32 Business exit costs 387 85 ------------ ------------ Total $ 499 $ 142 ============ ============
The severance and severance-related costs recorded in 2001 reflects 1,400 anticipated terminations. As of September 30, 2002, there are approximately 300 terminations to be completed. 16 9. COMMITMENTS AND CONTINGENCIES SALES PRACTICES CLAIMS Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company ("New England Mutual") and General American Life Insurance Company ("General American") have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." In December 1999, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. The class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. Similar sales practices class actions against New England Mutual, with which Metropolitan Life merged in 1996, and General American, which was acquired in 2000, have been settled. In October 2000, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by New England Mutual between January 1, 1983 through August 31, 1996. The class includes owners of approximately 600,000 in-force or terminated policies. A federal district court has approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by General American between January 1, 1982 through December 31, 1996. An appellate court has affirmed the order approving the settlement. The class includes owners of approximately 250,000 in-force or terminated policies. Implementation of the General American class action settlement is proceeding. Certain class members have opted out of the class action settlements noted above and have brought or continued non-class action sales practices lawsuits. As of September 30, 2002, there are approximately 425 sales practices lawsuits pending against Metropolitan Life, approximately 60 sales practices lawsuits pending against New England Mutual and approximately 45 sales practices lawsuits pending against General American. Metropolitan Life, New England Mutual and General American continue to defend themselves vigorously against these lawsuits. Some individual sales practices claims have been resolved through settlement, won by dispositive motions, or, in a few instances, have gone to trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sales of individual life insurance may be commenced in the future. The Metropolitan Life class action settlement did not resolve two putative class actions involving sales practices claims filed against Metropolitan Life in Canada, and these actions remain pending. In March 2002, a purported class action complaint was filed in the United States District Court for the District of Kansas by S-G Metals Industries, Inc. against New England Mutual. The complaint seeks certification of a class on behalf of corporations and banks that purchased participating life insurance policies, as well as persons who purchased participating policies for use in pension plans or through work site marketing. These policyholders were not part of the New England Mutual class action settlement noted above. New England Mutual intends to defend itself vigorously against the case. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all reasonably probable and estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. See Note 11 of Notes to Consolidated Financial Statements for the year ended December 31, 2001 included in MetLife, Inc.'s Annual Report on Form 10-K filed with the SEC for information regarding reinsurance contracts related to sales practices claims. Regulatory authorities in a small number of states have had investigations or inquiries relating to Metropolitan Life's, New England Mutual's or General American's sales of individual life insurance policies or annuities. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. ASBESTOS-RELATED CLAIMS Metropolitan Life is also a defendant in thousands of lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. Metropolitan Life has never engaged in the business of 17 manufacturing, producing, distributing or selling asbestos or asbestos- containing products. Rather, these lawsuits have principally been based upon allegations relating to certain research, publication and other activities of one or more of Metropolitan Life's employees during the period from the 1920's through approximately the 1950's and alleging that Metropolitan Life learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. While Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse judgments in respect of these claims, most of the cases have been resolved by settlements. Metropolitan Life intends to continue to exercise its best judgment regarding settlement or defense of such cases, including when trials of these cases are appropriate. The number of such cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. See Note 11 of Notes to Consolidated Financial Statements for the year ended December 31, 2001 included in the MetLife, Inc. Annual Report on Form 10-K filed with the SEC for information regarding historical asbestos claims information and insurance policies obtained in 1998 related to asbestos-related claims. During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500 million, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. As a result of the excess insurance policies, $878 million is recorded as a recoverable at September 30, 2002. Although amounts paid in any given year that are recoverable under the policies will be reflected as a reduction in the Company's operating cash flows for that year, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to the Company at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to the Company if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. It is likely that a claim will be made under the excess insurance policies in 2003 for a portion of the amounts paid with respect to asbestos litigation in 2002. As the performance of the Standard & Poor's 500 Index impacts the return in the reference fund, it is possible that loss reimbursements to the Company in 2003 and in the recoverable with respect to later periods may be less than the amount submitted. Such forgone loss reimbursements may be recovered upon commutation. If at some point in the future, the Company believes the liability for probable and estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be deferred and amortized into income over the estimated remaining settlement period of the insurance policies. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all reasonably probable and estimable losses for asbestos-related claims. Estimates of the Company's asbestos exposure are very difficult to predict due to the limitations of available data and the substantial difficulty of predicting with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims and the impact of any possible future adverse verdicts and their amounts. Recent bankruptcies of other companies involved in asbestos litigation, as well as advertising by plaintiffs' asbestos lawyers, may be resulting in an increase in the number of claims and the cost of resolving claims, as well as the number of trials and possible verdicts Metropolitan Life may experience. Plaintiffs are seeking additional funds from defendants, including Metropolitan Life, in light of such recent bankruptcies by certain other defendants. As reported in MetLife, Inc.'s Annual Report on Form 10-K, Metropolitan Life received approximately 59,500 asbestos-related claims in 2001. During the first nine months of 2002 and 2001, Metropolitan Life received approximately 45,200 and 49,500 asbestos-related claims, respectively. Metropolitan Life is studying its recent claims experience, published literature regarding asbestos claims experience in the United States and numerous variables that can affect its asbestos liability exposure, including the recent bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the previously recorded asbestos liability. It is reasonably possible that the Company's total exposure to asbestos claims may be greater than the liability recorded by the Company in its consolidated financial statements and that future charges to income may be necessary. While the potential future charges could be material in particular quarterly or annual periods in which they are recorded, based on information currently known by management, it does not believe any such charges are likely to have a material adverse effect on the Company's consolidated financial position. 18 PROPERTY AND CASUALTY ACTIONS Purported class action suits involving claims by policyholders for the alleged diminished value of automobiles after accident-related repairs have been filed in Rhode Island, Texas, Georgia and Tennessee against Metropolitan Property and Casualty Insurance Company. Rhode Island and Texas trial courts denied plaintiffs' motions for class certification and a hearing on plaintiffs' motion in Tennessee for class certification is to be scheduled. A settlement has been reached in the Georgia class action; the Company determined to settle the case in light of a Georgia Supreme Court decision involving another insurer. The settlement is being implemented. A purported class action has been filed against Metropolitan Property and Casualty Insurance Company's subsidiary, Metropolitan Casualty Insurance Company, in Florida. The complaint alleges breach of contract and unfair trade practices with respect to allowing the use of parts not made by the original manufacturer to repair damaged automobiles. Discovery is ongoing and a motion for class certification is pending. A two-plaintiff individual lawsuit brought in Alabama alleging that Metropolitan Property and Casualty Insurance Company and CCC, a valuation company, violated state law by failing to pay the proper valuation amount for a total loss has been settled. Total loss valuation methods also are the subject of national class actions involving other insurance companies. A Pennsylvania state court purported class action lawsuit filed in 2001 alleges that Metropolitan Property and Casualty Insurance Company improperly took depreciation on partial homeowner losses where the insured replaced the covered item. In addition, in Florida, Metropolitan Property and Casualty Insurance Company has been named in a class action alleging that it improperly established preferred provider organizations (hereinafter "PPO"). Other insurers have been named in both the Pennsylvania and the PPO cases. Metropolitan Property and Casualty Insurance Company and Metropolitan Casualty Insurance Company are vigorously defending themselves against these lawsuits. DEMUTUALIZATION ACTIONS Several lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's plan of reorganization and the adequacy and accuracy of Metropolitan Life's disclosure to policyholders regarding the plan. These actions name as defendants some or all of Metropolitan Life, the Holding Company, the individual directors, the Superintendent and the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit Suisse First Boston. Five purported class actions pending in the Supreme Court of the State of New York for New York County have been consolidated within the commercial part. Metropolitan Life has moved to dismiss these consolidated cases on a variety of grounds. In addition, there remains a separate purported class action in New York state court in New York County that Metropolitan Life also has moved to dismiss. Another purported class action in New York state court in Kings County has been voluntarily held in abeyance by plaintiffs. The plaintiffs in the state court class actions seek injunctive, declaratory and compensatory relief, as well as an accounting and, in some instances, punitive damages. Some of the plaintiffs in the above described actions also have brought a proceeding under Article 78 of New York's Civil Practice Law and Rules challenging the Opinion and Decision of the Superintendent who approved the plan. In this proceeding, petitioners seek to vacate the Superintendent's Opinion and Decision and enjoin him from granting final approval of the plan. This case also is being held in abeyance by plaintiffs. Another purported class action was filed in the Supreme Court of the State of New York for New York County on behalf of a purported class of beneficiaries of Metropolitan Life annuities purchased to fund structured settlements claiming that the class members should have received common stock or cash in connection with the demutualization. Metropolitan Life's motion to dismiss this case was granted in a decision filed on October 31, 2002. Three purported class actions were filed in the United States District Court for the Eastern District of New York claiming violation of the Securities Act of 1933. The plaintiffs in these actions, which have been consolidated, claim that the Policyholder Information Booklets relating to the plan failed to disclose certain material facts and seek rescission and compensatory damages. Metropolitan Life's motion to dismiss these three cases was denied in 2001. A purported class action also was filed in the United States District Court for the Southern District of New York seeking damages from Metropolitan Life and the Holding Company for alleged violations of various provisions of the Constitution of the United States in connection with the plan of reorganization. In 2001, pursuant to a motion to dismiss filed by Metropolitan Life, this case was dismissed by the District Court. Plaintiffs have appealed to the United States Court of Appeals for the Second Circuit. Metropolitan Life, the Holding Company and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims in these actions. In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario, Canada on behalf of a proposed class of certain former Canadian policyholders against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance Company of Canada. Plaintiffs' allegations concern the way that their policies were treated in connection with the demutualization of Metropolitan Life; they seek damages, declarations, and other non-pecuniary relief. The defendants believe they have meritorious defenses to the plaintiffs' claims and will contest vigorously all of plaintiffs' claims in this matter. In July 2002, a lawsuit was filed in the United States District Court for the Eastern District of Texas on behalf of a proposed class comprised of the settlement class in the Metropolitan Life sales practices class action settlement approved in December 1999 by the 19 United States District Court for the Western District of Pennsylvania. The Holding Company, Metropolitan Life, the trustee of the policyholder trust, certain present and former individual directors and officers of Metropolitan Life are named as defendants. Plaintiffs' allegations concern the treatment of the cost of the settlement in connection with the demutualization of Metropolitan Life and the adequacy and accuracy of the disclosure, particularly with respect to those costs. Plaintiffs seek compensatory, treble and punitive damages, as well as attorneys' fees and costs. The defendants believe they have meritorious defenses to the plaintiffs' claims and will contest them vigorously. RACE-CONSCIOUS UNDERWRITING CLAIMS Insurance Departments in a number of states initiated inquiries in 2000 about possible race-conscious underwriting of life insurance. These inquiries generally have been directed to all life insurers licensed in their respective states, including Metropolitan Life and certain of its subsidiaries. The Department has commenced examinations of certain domestic life insurance companies, including Metropolitan Life, concerning possible past race-conscious underwriting practices. Metropolitan Life has cooperated fully with that inquiry. Four purported class action lawsuits filed against Metropolitan Life in 2000 and 2001 alleging racial discrimination in the marketing, sale, and administration of life insurance policies have been consolidated in the United States District Court for the Southern District of New York. The plaintiffs seek unspecified monetary damages, punitive damages, reformation, imposition of a constructive trust, a declaration that the alleged practices are discriminatory and illegal, injunctive relief requiring Metropolitan Life to discontinue the alleged discriminatory practices and adjust policy values, and other relief. Metropolitan Life has entered into settlement agreements to resolve the regulatory examination and the actions pending in the United States District Court for the Southern District of New York. The class action settlement, which has received preliminary approval from the court, must receive final approval before it can be implemented. A fairness hearing has been set for February 7, 2003. The regulatory settlement agreement is conditioned upon final approval of the class action settlement. Metropolitan Life recorded a charge in the fourth quarter of 2001 in connection with the anticipated resolution of these matters and believes that charge is adequate to cover the costs associated with these settlements. Twelve lawsuits involving approximately 100 non-Caucasian plaintiffs suing Metropolitan Life in their individual capacities are pending in state court in Tennessee. The complaints, which were filed in 2001, allege under state common law theories that Metropolitan Life discriminated against non-Caucasians in the sale, formation and administration of life insurance policies. The plaintiffs have stipulated that they do not seek and will not accept more than $74,000 per person if they prevail on their claims. Early in 2002, two individual actions were filed against Metropolitan Life in federal court in Alabama alleging both federal and state law claims of racial discrimination in connection with the sale of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in the Tennessee and Alabama actions. OTHER In 2001, a putative class action was filed against Metropolitan Life in the United States District Court for the Southern District of New York alleging gender discrimination and retaliation in the MetLife Financial Services unit of the Individual segment. The plaintiffs seek unspecified compensatory damages, punitive damages, a declaration that the alleged practices are discriminatory and illegal, injunctive relief requiring Metropolitan Life to discontinue the alleged discriminatory practices, an order restoring class members to their rightful positions (or appropriate compensation in lieu thereof), and other relief. Metropolitan Life is vigorously defending itself against these allegations. A lawsuit has been filed against Metropolitan Life in Ontario, Canada by Clarica Life Insurance Company regarding the sale of the majority of Metropolitan Life's Canadian operation to Clarica in 1998. Clarica alleges that Metropolitan Life breached certain representations and warranties contained in the sale agreement, that Metropolitan Life made misrepresentations upon which Clarica relied during the negotiations and that Metropolitan Life was negligent in the performance of certain of its obligations and duties under the sale agreement. Metropolitan Life is vigorously defending itself against this lawsuit. A putative class action lawsuit is pending in the District of Columbia federal district court, in which plaintiffs allege that they were denied certain ad hoc pension increases awarded to retirees under the Metropolitan Life retirement plan. The ad hoc pension increases were awarded only to retirees (i.e., individuals who were entitled to an immediate retirement benefit upon their termination of employment) and not available to individuals like plaintiffs whose employment, or whose spouses' employment, had terminated before they became eligible for an immediate retirement benefit. The district court denied the parties' cross-motions for summary judgment to allow for discovery. Discovery has not yet commenced pending the court's ruling as to the timing of a class certification motion. The plaintiffs seek to represent a class consisting of former Metropolitan Life employees, or their surviving spouses, who are receiving deferred vested annuity payments under the retirement plan and who were allegedly eligible to receive the ad hoc pension 20 increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001, as well as increases awarded in earlier years. Metropolitan Life is vigorously defending itself against these allegations. A reinsurer of universal life policy liabilities of Metropolitan Life and certain affiliates is seeking rescission and has commenced an arbitration proceeding claiming that, during underwriting, material misrepresentations or omissions were made. The reinsurer also has sent a notice purporting to increase reinsurance premium rates. Metropolitan Life and its affiliates intend to vigorously defend themselves against the claims of the reinsurer, including the purported rate increase. Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. SUMMARY It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted above in connection with specific matters. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's operating results or cash flows in particular quarterly or annual periods. 10. COMPREHENSIVE INCOME Comprehensive income is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN MILLIONS) Net income $ 328 $ 162 $ 1,044 $ 769 Other comprehensive income: Cumulative effect of change in accounting for derivatives, net of income taxes -- -- -- 32 Unrealized gains (losses) on derivative instruments, net of income taxes 13 9 (24) 34 Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes 736 546 545 788 Foreign currency translation adjustments (104) (46) (80) (67) -------- -------- -------- -------- Other comprehensive income 645 509 441 787 -------- -------- -------- -------- Comprehensive income $ 973 $ 671 $ 1,485 $ 1,556 ======== ======== ======== ========
21 11. BUSINESS SEGMENT INFORMATION
Auto & For the three months ended September 30, 2002 Individual Institutional Reinsurance Home - --------------------------------------------- ---------- ------------- ----------- ------ Premiums $ 1,080 $ 2,050 $ 461 $ 711 Universal life and investment-type product policy fees 375 148 -- -- Net investment income 1,592 964 95 44 Other revenues 95 154 16 11 Net investment (losses) gains (26) (201) 4 (8) Income (loss) from continuing operations before provision for income taxes 315 156 39 56
Asset Corporate For the three months ended September 30, 2002 Management International & Other Total - --------------------------------------------- ---------- ------------- --------- ------- Premiums $ -- $ 381 $ (7) $ 4,676 Universal life and investment-type product policy fees -- 64 -- 587 Net investment income 17 133 (35) 2,810 Other revenues 37 2 5 320 Net investment (losses) gains -- 6 (44) (269) Income (loss) from continuing operations before provision for income taxes 1 61 (190) 438
Auto & For the three months ended September 30, 2001 Individual Institutional Reinsurance Home - --------------------------------------------- ---------- ------------- ----------- ------ Premiums $ 1,093 $ 1,896 $ 392 $ 692 Universal life and investment-type product policy fees 319 139 -- -- Net investment income 1,551 983 103 48 Other revenues 119 155 12 6 Net investment (losses) gains (43) (37) (12) -- Income (loss) from continuing operations before provision for income taxes 204 (9) 13 28
Asset Corporate For the three months ended September 30, 2001 Management International & Other Total - --------------------------------------------- ---------- ------------- --------- ------- Premiums $ -- $ 210 $ (1) $ 4,282 Universal life and investment-type product policy fees -- 8 -- 466 Net investment income 18 63 56 2,822 Other revenues 42 4 8 346 Net investment (losses) gains 25 (9) (23) (99) Income (loss) from continuing operations before provision for income taxes 29 9 (60) 214
Auto & For the nine months ended September 30, 2002 Individual Institutional Reinsurance Home - -------------------------------------------- ---------- ------------- ----------- ------ Premiums $ 3,258 $ 6,072 $ 1,408 $2,105 Universal life and investment-type product policy fees 1,012 468 -- -- Net investment income 4,674 2,940 296 135 Other revenues 325 482 35 27 Net investment (losses) gains (112) (392) 6 (40) Income (loss) from continuing operations before provision for income taxes 779 706 109 112
Asset Corporate For the nine months ended September 30, 2002 Management International & Other Total - -------------------------------------------- ---------- ------------- --------- ------- Premiums $ -- $ 1,030 $ (15) $13,858 Universal life and investment-type product policy fees -- 78 -- 1,558 Net investment income 46 303 7 8,401 Other revenues 127 8 72 1,076 Net investment (losses) gains (4) (8) 3 (547) Income (loss) from continuing operations before provision for income taxes 7 71 (321) 1,463
Auto & For the nine months ended September 30, 2001 Individual Institutional Reinsurance Home - -------------------------------------------- ---------- ------------- ----------- ------ Premiums $ 3,306 $ 5,503 $ 1,197 $2,047 Universal life and investment-type product policy fees 942 443 -- -- Net investment income 4,620 2,957 288 150 Other revenues 384 485 28 18 Net investment (losses) gains (157) (154) 2 (6) Income (loss) from continuing operations before provision for income taxes 640 476 78 (9)
Asset Corporate For the nine months ended September 30, 2001 Management International & Other Total - -------------------------------------------- ---------- ------------- --------- ------- Premiums $ -- $ 583 $ (2) $12,634 Universal life and investment-type product policy fees -- 28 -- 1,413 Net investment income 54 189 148 8,406 Other revenues 154 10 51 1,130 Net investment (losses) gains 25 19 (109) (380) Income (loss) from continuing operations before provision for income taxes 39 69 (225) 1,068
At September 30, At December 31, 2002 2001 ---------------- --------------- Assets Individual $ 133,551 $ 131,314 Institutional 92,857 89,661 Reinsurance 8,845 7,911 Auto & Home 4,950 4,581 Asset Management 186 256 International 8,377 5,308 Corporate & Other 19,168 17,867 ------------ ------------ Total $ 267,934 $ 256,898 ============ ============
As part of the acquisition of GenAmerica Financial Corporation in 2000, the Company acquired Conning Corporation ("Conning"), the results of which were included in the Asset Management segment due to the types of products and strategies employed by the entity from its acquisition date to July 2001, the date of its disposition. The Company sold Conning, receiving $108 million in the transaction, and reported a gain of approximately $16 million, net of income taxes of $9 million, in the third quarter of 2001. Corporate & Other consists of various start-up and run-off entities, including MetLife Bank, N.A., as well as the elimination of all intersegment amounts. The principal component of the intersegment amounts relates to intersegment loans, which bear interest rates commensurate with the terms of the related borrowings. 22 The International segment's assets at September 30, 2002 and results of operations for the three months and nine months ended September 30, 2002 include those assets and results of operations of Aseguradora Hidalgo S.A. ("Hidalgo"), a Mexican life insurer that was acquired on June 20, 2002. Net investment income and net investment gains and losses are based upon the actual results of each segment's specifically identifiable asset portfolio. Other costs and operating costs were allocated to each of the segments based upon: (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. The following amounts are reported as discontinued operations in accordance with SFAS 144:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Net investment income Individual $ 13 $ 12 $ 42 $ 43 Institutional 6 6 18 18 Corporate & Other 10 7 28 30 ------ ------ ------ ------ Total net investment income $ 29 $ 25 $ 88 $ 91 ====== ====== ====== ====== Net investment losses Individual $ (1) $ -- $ (1) $ -- Corporate & Other -- -- (7) -- ------ ------ ------ ------ Total net investment losses $ (1) $ -- $ (8) $ -- ====== ====== ====== ======
Revenues derived from any one customer did not exceed 10% of consolidated revenues for the three months and nine months ended September 30, 2002. Revenues from domestic operations were $7,538 million and $7,541 million for the three months ended September 30, 2002 and 2001, respectively, which represented 93% and 96% of consolidated revenues for the three months ended September 30, 2002 and 2001, respectively. Revenues from domestic operations were $22,935 million and $22,374 million for the nine months ended September 30, 2002 and 2001, respectively, which represented 94% and 96% of consolidated revenues for the nine months ended September 30, 2002 and 2001, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this discussion, the terms "MetLife" or the "Company" refer to MetLife, Inc. (the "Holding Company"), a Delaware corporation, and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements and notes thereto included elsewhere herein. RECENT REGULATORY AND LEGISLATIVE DEVELOPMENTS REGULATORY DEVELOPMENTS In an effort to help restore confidence in Corporate America, a variety of new laws and regulatory initiatives have been introduced that have changed or will change the reporting practices of public companies. One such initiative was the announcement by the Securities and Exchange Commission (the "SEC") that it would review the annual reports on Form 10-K submitted by all Fortune 500 companies in 2002. As previously disclosed by the Holding Company in its quarterly report on Form 10-Q for the quarter ended June 30, 2002, the Holding Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 10-K") was reviewed by the SEC. The Holding Company received correspondence from the SEC in connection with this review in July, September and October 2002. The Holding Company responded, on a timely basis, to all of the SEC's comments and has included a number of supplemental disclosures in its Forms 10-Q for the quarters ended June 30, 2002 and September 30, 2002. The Company has been informed by the SEC that they have no further comments on the 2001 10-K and that they have concluded their review. 23 LEGISLATIVE DEVELOPMENTS On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). Among other things, the Act includes a provision that bars companies that are subject to the reporting requirements of the U.S. securities laws from extending or maintaining credit, or arranging for or renewing an extension of credit, in the form of a personal loan to or for any director or executive officer (or their equivalent). This provision could be interpreted to apply to split dollar life insurance arrangements. If this provision of the Act is interpreted to include split dollar life insurance within the meaning of "personal loan," then this provision could result in significantly reduced sales of the Company's split dollar life insurance products and could significantly increase lapse rates on existing policies. The Company does not expect such interpretation to have a material adverse impact on its financial condition. In addition, the Act also requires the chief executive officer and the chief financial officer to certify, among other things, that their company's periodic reports containing financial statements, filed with the SEC, fully comply with applicable regulations and the information in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Such officers of the Holding Company have signed their respective certifications on November 14, 2002. These certifications have been submitted to the SEC. SENSITIVITY TO FINANCIAL MARKETS The volatility of the equity market and its year to date decline have negatively impacted the insurance and investment results of certain MetLife businesses. In variable life and variable annuities (product lines of the Individual segment), the Company earns management fees based primarily on the level of account balances in separate accounts, which have been reduced by the downturn in the equity markets. This has resulted in lower fee income. This reduction in fees also impacts the future results of these products because, as profitability decreases, the amortization expense of deferred policy acquisition costs related to these products increases. An additional effect of depressed equity markets on life and annuity products is the potential need to increase liabilities for certain policy features that are linked to investment market performance. One such feature is the guaranteed minimum death benefit. This provision, which is available on many of the Company's annuity products, provides for a guaranteed minimum death benefit which can, in some instances, be higher than the annuity account balance since that balance may be based upon the performance of the equity markets. Certain other products and services (such as asset management and brokerage) are also linked to investment market performance and may be negatively affected if equity markets remain at recent lower levels. The Company also derives revenues in the form of income received from various investments included in its general account. Some of these investments, including limited partnerships, corporate joint ventures, public equity securities and other structured securities are either directly or indirectly affected by the performance and volatility of the equity markets. The continued downturn in the equity markets is likely to adversely impact the returns on the Company's general account investment portfolio. Pension expense levels in future periods are partially linked to actual investment performance of the underlying plan assets, as well as expectations about future investment performance. Since approximately 45% (based on fair value) of the Company's pension fund assets were comprised of equity-related investments at January 1, 2002 and overall equity markets have declined year to date, it is likely that pension expense will increase in future periods compared to 2002 levels and it is possible that pension fund contributions (which contributions were not necessary for over a decade due to historic funding levels) could resume. If current depressed market conditions persist at December 31, 2002 and the Company does not make a pension fund contribution prior to year end, the Company may be required to record a significant minimum pension liability adjustment through other comprehensive income during the fourth quarter of 2002. A portion of the Company's earnings from insurance products and investments (including securities lending and mortgage loan prepayments) are dependent on the level of interest rates and the shape of the yield curve. Future changes in those factors may result in reductions in the spread between income earned and interest credited or paid. The Company engages in an active asset-liability management process to mitigate the effects of changes in interest rates or changes in the shape of the yield curve. ACQUISITIONS AND DISPOSITIONS On June 20, 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo"). The purchase price is subject to adjustment under certain provisions of the purchase agreement. As a result of the acquisition, the Company anticipates that Hidalgo and Seguros Genesis, S.A., ("MetLife Genesis"), MetLife's wholly-owned Mexican subsidiary headquartered in Mexico City, will be integrated and will operate as a combined entity. In November 2001, the Company acquired Compania de Seguros de Vida Santander S.A. and Compania de Reaseguros de Vida Soince Re S.A., wholly-owned subsidiaries of Santander Central Hispano in Chile. These acquisitions marked MetLife's entrance into the Chilean insurance market. 24 In July 2001, the Company completed its sale of Conning Corporation ("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial Corporation ("GenAmerica") in 2000. In May 2001, the Company acquired Seguradora America Do Sul S.A. ("Seasul"), a life and pension company in Brazil. Seasul has been integrated into MetLife's wholly-owned Brazilian subsidiary, Metropolitan Life Seguros e Previdencia Privada S.A, or "MetLife Brazil." In February 2001, the Holding Company consummated the purchase of Grand Bank, N.A., which was renamed MetLife Bank, N.A. ("MetLife Bank"). MetLife Bank provides banking services to individuals and small businesses in the Princeton, New Jersey area. On February 12, 2001, the Federal Reserve Board approved the Holding Company's application for bank holding company status and to become a financial holding company upon its acquisition of Grand Bank, N.A. SUMMARY OF CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The critical accounting policies and related judgments underlying the Company's unaudited interim condensed consolidated financial statements are summarized below. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. INVESTMENTS The Company's principal investments are in fixed maturities, mortgage loans and real estate, all of which are exposed to three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of income, impairments and the determination of fair values. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described below, 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. In addition, the earnings on certain investments are dependent upon market conditions which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. DERIVATIVES The Company enters into freestanding derivative transactions to manage the risk associated with variability in cash flows related to the Company's financial assets and liabilities or to changing fair values. The Company also purchases investment securities and issues certain insurance and reinsurance policies with embedded derivatives. The associated financial statement risk is the volatility in net income which can result from (i) changes in fair value of derivatives not qualifying as accounting hedges, and (ii) ineffectiveness of designated hedges in an environment of changing interest rates or fair values. In addition, accounting for derivatives is complex, as evidenced by significant interpretations of the primary accounting standards which continue to evolve, as well as the significant judgments and estimates involved in determining fair value in the absence of quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances; however, the use of different assumptions may have a material effect on the estimated fair value amounts. DEFERRED POLICY ACQUISITION COSTS The Company incurs significant costs in connection with acquiring new insurance business. These costs, which vary with and are primarily related to the production of new business, are deferred. The recovery of such costs is dependent on the future profitability of the related business. The amount of future profit is dependent principally on investment returns, mortality, morbidity, persistency, expenses to administer the business and certain economic variables, such as inflation. These factors enter into management's estimates of gross margins and profits which generally are used to amortize certain of such costs. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross margins and profits are less than amounts deferred. 25 FUTURE POLICY BENEFITS The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, annuities and disability insurance. Generally, amounts are payable over an extended period of time and the profitability of the products is dependent on the pricing of the products. Principal assumptions used in pricing policies and in the establishment of liabilities for future policy benefits are mortality, morbidity, expenses, persistency, investment returns and inflation. Differences between the actual experience and assumptions used in pricing the policies and in the establishment of liabilities result in variances in profit and could result in losses. The Company establishes liabilities for unpaid claims and claims expenses for property and casualty insurance. Pricing of this insurance takes into account the expected frequency and severity of losses, the costs of providing coverage, competitive factors, characteristics of the insured and the property covered, and profit considerations. Liabilities for property and casualty insurance are dependent on estimates of amounts payable for claims reported but not settled and claims incurred but not reported. These estimates are influenced by historical experience and actuarial assumptions of current developments, anticipated trends and risk management strategies. REINSURANCE The Company enters into reinsurance transactions as both a provider and a purchaser of 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. The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish policy benefits and evaluates the financial strength of counterparties to its reinsurance agreements. Additionally, for each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the Company is subject or features that delay the timely reimbursement of claims. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. LITIGATION The Company is a party to a number of legal actions. Given the inherent unpredictability of litigation, it is difficult to estimate the impact of litigation on the Company's consolidated financial position. 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 are especially difficult to estimate due to the limitation of available data and uncertainty around numerous variables used to determine amounts recorded. It is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's net income or cash flows in particular quarterly or annual periods. See "Legal Proceedings." 26 RESULTS OF OPERATIONS The following table presents consolidated financial information for the Company for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 4,676 $ 4,282 $ 13,858 $ 12,634 Universal life and investment-type product policy fees 587 466 1,558 1,413 Net investment income 2,810 2,822 8,401 8,406 Other revenues 320 346 1,076 1,130 Net investment losses (net of amounts allocable to other accounts of $(16), $(28), $(102) and $(107), respectively) (269) (99) (547) (380) -------- -------- -------- -------- Total revenues 8,124 7,817 24,346 23,203 -------- -------- -------- -------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment losses of $(5), $(29), $(76) and $(92), respectively) 4,739 4,723 14,239 13,447 Interest credited to policyholder account balances 736 745 2,177 2,228 Policyholder dividends 504 547 1,489 1,567 Other expenses (excludes amounts directly related to net investment losses of $(11), $1, $(26) and $(15), respectively) 1,707 1,588 4,978 4,893 -------- -------- -------- -------- Total expenses 7,686 7,603 22,883 22,135 -------- -------- -------- -------- Income from continuing operations before provision for income taxes 438 214 1,463 1,068 Provision for income taxes 124 69 473 360 -------- -------- -------- -------- Income from continuing operations 314 145 990 708 Income from discontinued operations, net of income taxes 19 17 54 61 -------- -------- -------- -------- Income before cumulative effect of change in accounting 333 162 1,044 769 Cumulative effect of change in accounting (5) -- -- -- -------- -------- -------- -------- Net income $ 328 $ 162 $ 1,044 $ 769 ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 -- THE COMPANY Premiums increased by $394 million, or 9%, to $4,676 million for the three months ended September 30, 2002 from $4,282 million for the comparable 2001 period. This variance is primarily attributable to increases in the International, Institutional and Reinsurance segments. The June 2002 acquisition of Hidalgo and the November 2001 acquisitions in Chile, as well as growth in South Korea, Spain and Mexico, are the primary drivers of the $171 million increase in International. A $154 million increase in Institutional is largely due to sales growth in its group life, dental, disability and long-term care businesses, as well as additional premiums from existing customers in the retirement and savings business. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business all contributed to a $69 million increase in the Reinsurance segment. Universal life and investment-type product policy fees increased by $121 million, or 26%, to $587 million for the three months ended September 30, 2002 from $466 million for the comparable 2001 period. This variance is primarily attributable to the International and Individual segments. A $56 million increase in International is due to the acquisition of Hidalgo and acquisitions in Chile. A $56 million favorable variance in Individual is largely attributable to an increase in policy fees from insurance products, primarily due to higher revenue from insurance fees. These increases are partially offset by lower policy fees from annuity and investment-type products resulting generally from poor equity market performance. Management would expect policy fees from annuity and investment-type products to continue to be adversely impacted while revenues from insurance fees on variable life products would be expected to rise if average separate account asset levels continue to decline. Net investment income decreased by $12 million, to $2,810 million for the three months ended September 30, 2002 from $2,822 million for the comparable 2001 period. This variance is primarily attributable to decreases of (i) $35 million, or 44%, in income from other invested assets, (ii) $31 million, or 39%, in income from cash and cash equivalents and short-term investments, and (iii) $7 million, or 35%, in income from equity securities and other limited partnership interests. These variances are partially offset by 27 increases of (i) $34 million, or 2%, in income from fixed maturities, (ii) $17 million, or 15%, in income from real estate and real estate joint ventures, and (iii) $10 million, or 8%, in income on policy loans. The decrease in net investment income from other invested assets to $44 million in 2002 from $79 million in 2001 is primarily due to lower income from derivative transactions, as well as decreased funds withheld at interest. The decrease in income from cash and cash equivalents and short-term investments to $49 million from $80 million is due to a drop in interest rates. The decline in income from equity securities and other limited partnership interests to $13 million from $20 million is due to lower corporate partnership operating results. The increase in income from fixed maturities to $2,038 million from $2,004 million is attributable to a higher asset base, primarily resulting from the acquisitions in Mexico and Chile, partially offset by decreased income due to lower reinvestment rates and reduced income from equity-linked notes. The increase in income from real estate and real estate joint ventures to $131 million from $114 million is primarily due to the transfer of the Company's One Madison Avenue, New York property to an investment property in the first quarter of 2002. The increase in income from policy loans to $139 million from $129 million is largely due to increased loans outstanding. The decline in net investment income is attributable to decreases in Corporate & Other as well as the Institutional and Reinsurance segments, partially offset by increases in the International and Individual segments. The decline in Corporate & Other of $91 million was primarily due to a lower asset base, resulting from funding the International acquisitions in Mexico and Chile and the Company's common share repurchases. A decline in corporate partnership income also contributed to this variance. A $19 million decrease in the Institutional segment predominantly resulted from lower income from equity-linked notes. The Reinsurance segment's net investment income declined by $8 million generally due to a decline in funds withheld at interest. These unfavorable variances were partially offset by a $70 million increase in International and a $41 million increase in Individual. Individual increased due to a higher general account asset base, as well as sales of underlying assets in corporate partnerships. International increased as a result of the acquisitions in Mexico and Chile. Other revenues decreased by $26 million, or 8%, to $320 million for the three months ended September 30, 2002 from $346 million for the comparable 2001 period. This variance is primarily attributable to a $24 million decrease in the Individual segment resulting from lower commission and fee income associated with decreased volume in the broker/dealer and other subsidiaries. This decline is largely due to the depressed equity markets. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) deferred policy acquisition cost amortization, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. Net investment losses increased by $170 million, or 172%, to $269 million for the three months ended September 30, 2002 from $99 million for the comparable 2001 period. This increase reflects total investment losses, before offsets, of $285 million (including gross gains of $525 million, gross losses of $255 million and writedowns of $555 million), an increase of $158 million, or 124%, from $127 million in 2001. Offsets include the amortization of deferred policy acquisition costs of $11 million and ($1) million in 2002 and 2001, respectively, changes in the policyholder dividend obligation of $7 million and $29 million in 2002 and 2001, respectively, and adjustments to participating contracts of $(2) million in 2002. The increase in total investment losses is due to the continued recognition of deteriorating credits in the portfolio, consistent with depressed economic conditions since 2001. The Company believes its policy of netting related policyholder amounts against investment gains and losses provides important information in evaluating its performance. Investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. The Company believes its presentation enables readers to easily exclude investment gains and losses and the related effects on the unaudited interim condensed consolidated statements of income when evaluating its performance. The Company's presentation of investment gains and losses, net of policyholder amounts, may be different from the presentation used by other insurance companies and, therefore, amounts in its unaudited interim condensed consolidated statements of income may not be comparable to amounts reported by other insurers. Policyholder benefits and claims increased by $16 million, or less than 1%, to $4,739 million for the three months ended September 30, 2002 from $4,723 million for the comparable 2001 period. This variance is attributable to an increase in the International segment, offset by decreases in the Institutional and Individual segments. A $194 million increase in International is primarily due to the June 2002 acquisition of Hidalgo, the November 2001 acquisitions in Chile and business growth in Mexico, excluding Hidalgo, South Korea, and Spain. The decline in Institutional of $107 million is primarily due to the establishment of a liability in 2001 related to the September 11, 2001 tragedies, partially offset by an increase in policyholder benefits and claims, which 28 is commensurate with the increase in premiums discussed above. In addition, a decline of $75 million in Individual is primarily due to an amendment to expand the Company's coverage under an existing reinsurance agreement, the establishment of liabilities for the September 11, 2001 tragedies in the previous year and a reduction in the policyholder dividend obligation associated with the closed block. These variances are partially offset by an increase in the liability associated with guaranteed minimum death benefits on variable and fixed annuities. Interest credited to policyholder account balances decreased by $9 million, or 1%, to $736 million for the three months ended September 30, 2002 from $745 million for the comparable 2001 period. This variance is attributable to decreases in the Institutional and Individual segments, partially offset by an increase in the International segment. A decrease of $13 million in Institutional is primarily due to a decline in average crediting rates resulting from the current interest rate environment. A decrease of $8 million in Individual is due to a slight decline in crediting rates, partially offset by an increase in the underlying policyholder account balances. These decreases are partially offset by a $17 million increase in International primarily due to the acquisition of Hidalgo, partially offset by a decline in Spain due to the cessation of product lines offered through a joint venture with Banco Santander in 2001. Policyholder dividends decreased by $43 million, or 8%, to $504 million for the three months ended September 30, 2002 from $547 million for the comparable 2001 period. This variance is primarily attributable to a decrease of $62 million in the Institutional segment, partially offset by an increase of $18 million in the Individual segment. The decline in Institutional is largely attributable to unfavorable mortality experience of several large group clients. Institutional policyholder dividends vary from period to period based on participating contract experience. The increase in Individual is predominantly due to an increase in the invested assets supporting the policies associated with this segment's large block of traditional life insurance business. Other expenses increased by $119 million, or 7%, to $1,707 million for the three months ended September 30, 2002 from $1,588 million for the comparable 2001 period. Excluding the capitalization and amortization of deferred policy acquisition costs, which are discussed below, other expenses increased by $78 million, or 4%, to $1,820 million in 2002 from $1,742 million in 2001. Excluding the change in accounting as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which eliminates the amortization of goodwill and certain other intangibles, other expenses increased by $89 million. This variance is attributable to the International, Reinsurance, and Institutional segments, partially offset by a decline in the Individual segment. A $58 million increase in International results primarily from the acquisition of Hidalgo and the acquisitions in Chile. A $33 million increase in Reinsurance is largely due to an increase in allowances paid on reinsurance contracts. An increase of $10 million in Institutional is attributable to growth in operational expenses in group insurance. This increase is commensurate with the aforementioned premium growth. These increases are partially offset by a decrease in Individual of $17 million due to continued expense management initiatives, including reduced compensation-related expenses, a refund of interest associated with a prior year tax payment and reductions in volume-related commission expenses in the broker-dealer and other subsidiaries. These declines are partially offset by higher pension and post-retirement benefit expenses and an increase in expenses stemming from sales growth in new annuity and investment-type products. Deferred policy acquisition costs are principally amortized in proportion to gross margins or profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisitions costs increased by $65 million, or 12%, to $601 million for the three months ended September 30, 2002 from $536 million for the comparable 2001 period. This variance is primarily due to a $40 million increase in the Individual segment as a result of higher sales of variable and universal life insurance policies as well as annuity and investment-type products, which results in higher commissions and other deferrable expenses. In addition, an $18 million increase in International is primarily due to the June 2002 acquisition of Hidalgo. Total amortization of deferred policy acquisition costs increased by $94 million, or 25%, to $477 million in 2002 from $383 million in 2001. Amortization of $488 million and $382 million is allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each period is allocated to investment gains and losses. The increase in amortization allocated to other expenses is largely attributable to the Individual segment. The $91 million increase in Individual is due primarily to the impact of the depressed equity markets and refinements in the calculation of estimated gross margins and profits. Income tax expense for the three months ended September 30, 2002 was $124 million, or 28% of income from continuing operations before provision for income taxes, compared with $69 million, or 32%, for the comparable 2001 period. The 2002 and 2001 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income. 29 In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), income related to the Company's real estate which was identified as held-for-sale on or after January 1, 2002 is presented as discontinued operations. The income from discontinued operations is comprised of net investment income and net investment losses related to 55 properties that the Company began marketing for sale on or after January 1, 2002. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 -- THE COMPANY Premiums increased by $1,224 million, or 10%, to $13,858 million for the nine months ended September 30, 2002 from $12,634 million for the comparable 2001 period. This variance is primarily attributable to increases in the Institutional, International and Reinsurance segments. A $569 million increase in Institutional is largely due to sales growth in group life, dental, disability and long-term care businesses, as well as additional premiums from existing customers in the retirement and savings business. The sale of an annuity contract in the first quarter of 2002 to a Canadian trust company, the June 2002 acquisition of Hidalgo and the 2001 acquisitions in Chile and Brazil are the primary drivers of a $447 million increase in International. In addition, business growth in South Korea, Spain and Mexico, excluding Hidalgo, also contributed to this variance. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business all contributed to a $211 million increase in the Reinsurance segment. Universal life and investment-type product policy fees increased by $145 million, or 10%, to $1,558 million for the nine months ended September 30, 2002 from $1,413 million for the comparable 2001 period. This variance is primarily attributable to the Individual, International and Institutional segments. A $70 million favorable variance in Individual is principally due to an increase in policy fees from insurance products, primarily due to higher revenue from insurance fees. This increase is partially offset by lower policy fees from annuity and investment-type products resulting generally from poor equity market performance. Management would expect policy fees from annuity and investment-type products to continue to be adversely impacted, while revenues from insurance fees on variable life products would be expected to rise if average separate account asset levels continue to decline. A $50 million increase in International is largely due to the acquisition of Hidalgo and the acquisitions in Chile, partially offset by a decrease in Spain due to the cessation of product lines offered through a joint venture with Banco Santander in 2001. A $25 million increase in Institutional is principally due to a fee related to the termination of a portion of a bank-owned life insurance contract, as well as growth in existing business in the group universal life product. Net investment income decreased by $5 million, or less than 1%, to $8,401 for the nine months ended September 30, 2002 from $8,406 for the comparable 2001 period. This variance is primarily attributable to decreases of (i) $47 million, or 22%, in income on cash and cash equivalents and short-term investments, (ii) $41 million, or 22%, in income on other invested assets, and (iii) $9 million, or 12%, in income from equity securities and other limited partnership interests. These variances are partially offset by increases of (i) $41 million, or 1%, in income from fixed maturities, (ii) $30 million, or 8%, in income from real estate and real estate joint ventures, (iii) $10 million, or 1%, in income on mortgage loans, and (iv) $9 million, or 2%, in income on policy loans. The decrease in income from cash and cash equivalents and short-term investments to $170 million from $217 million is due to declining interest rates. The decrease in net investment income from other invested assets to $146 million in 2002 from $187 million in 2001 is largely attributable to lower derivative income. The decline in income from equity securities and other limited partnership interests to $65 million from $74 million is due to a decrease in dividend income from equity securities. The increase in income from fixed maturities to $5,997 million from $5,956 million is primarily due to securities lending income resulting from increased activity in addition to a program expansion, partially offset by lower income on equity-linked notes and declining interest rates on reinvestments. The increase in income from real estate and real estate joint ventures to $396 million from $366 million is primarily due to the transfer of the Company's One Madison Avenue, New York property to an investment property in 2002. The increase in income on mortgage loans to $1,391 million from $1,381 is due to a higher asset base, partially offset by lower mortgage rates. The increase in income from policy loans to $407 million from $398 million is largely due to increased loans outstanding. The decline in net investment income is attributable to decreases in Corporate & Other as well as the Institutional and Auto & Home segments, partially offset by increases in the International, and Individual segments. A $141 million decrease in Corporate & Other is due to a lower asset base, as a result of funding International acquisitions in Mexico and Chile and the Company's common share repurchases. A decline in corporate partnership income also contributed to this variance. Institutional decreased by $17 million due primarily to lower income from equity-linked notes. Auto & Home income declined by $15 million primarily due to a lower asset base and lower rates on reinvested assets. International income increased by $114 million due to a higher asset base resulting from the acquisitions in Chile and Mexico. Individual's income increased by $54 million due to a higher asset base and higher income from corporate partnerships, partially offset by lower market rates on reinvestments. 30 Other revenues decreased by $54 million, or 5%, to $1,076 million for the nine months ended September 30, 2002 from $1,130 million for the comparable 2001 period. This variance is primarily attributable to decreases in the Individual and Asset Management segments, partially offset by an increase in Corporate & Other and the Auto & Home segment. Individual decreased by $59 million primarily as a result of lower commission and fee income associated with decreased volume in the broker/dealer and other subsidiaries. This decline in volume is largely due to the depressed equity markets. A $27 million decrease in Asset Management is primarily due to the sale of Conning in July 2001. These variances were partially offset by an increase of $21 million in Corporate & Other principally due to the recognition of an experience refund earned on a reinsurance treaty triggered by fewer claims and favorable mortality experience from a previously established liability related to a sales practice class action settlement recorded in 1999, partially offset by investment income earned on experience funds with reinsurers in 2001. In addition, an increase of $9 million in Auto & Home was principally due to income earned on corporate-owned life insurance ("COLI") purchased in the second quarter of 2002, as well as higher fees on installment payments. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) deferred policy acquisition cost amortization, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. Net investment losses increased by $167 million, or 44%, to $547 million for the nine months ended September 30, 2002 from $380 million for the comparable 2001 period. This increase reflects total investment losses, before offsets, of $649 million (including gross gains of $1,593 million, gross losses of $1,080, and writedowns of $1,162 million), an increase of $162 million, or 33%, from $487 million in 2001. Offsets include the amortization of deferred policy acquisition costs of $26 million and $15 million in 2002 and 2001, respectively, changes in the policyholder dividend obligation of $78 million and $92 million in 2002 and 2001, respectively, and adjustments to participating contracts of $(2) million in 2002. The increase in gross investment losses is due to the continued recognition of deteriorating credits in the portfolio, consistent with depressed economic conditions since 2001. The Company believes its policy of netting related policyholder amounts against investment gains and losses provides important information in evaluating its performance. Investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. The Company believes its presentation enables readers to easily exclude investment gains and losses and the related effects on the unaudited interim condensed consolidated statements of income when evaluating its performance. The Company's presentation of investment gains and losses, net of policyholder amounts, may be different from the presentation used by other insurance companies and, therefore, amounts in its unaudited interim condensed consolidated statements of income may not be comparable to amounts reported by other insurers. Policyholder benefits and claims increased by $792 million, or 6%, to $14,239 million for the nine months ended September 30, 2002 from $13,447 million for the comparable 2001 period. This variance is attributable to increases in the International, Institutional and Reinsurance segments partially offset by a decrease in the Auto & Home segment. A $478 million increase in International is primarily due to the acquisition of Hidalgo, the acquisitions in Chile and Brazil, the aforementioned sale of an annuity contract and business growth in South Korea, Spain and Mexico, excluding Hidalgo. The increase in Institutional of $328 million is primarily due to the growth in premiums as discussed above largely offset by the establishment of a liability in 2001 related to the September 11, 2001 tragedies. The increase in Reinsurance of $139 million is commensurate with the growth in premiums discussed above. These increases were partially offset by a decrease of $96 million in the Auto & Home segment. This variance is largely due to improved claim frequency resulting from milder winter weather, lower catastrophe levels and fewer personal umbrella claims, partially offset by an increase in current year bodily injury and no-fault severities and costs associated with the processing of the New York assigned risk business. Interest credited to policyholder account balances decreased by $51 million, or 2%, to $2,177 million for the nine months ended September 30, 2002 from $2,228 million for the comparable 2001 period. This variance is attributable to a decrease in the Institutional segment, partially offset by increases in the Reinsurance and International segments. A $74 million decrease in Institutional is primarily due to a decline in average crediting rates resulting from the current interest rate environment. This variance was offset by an increase of $13 million in Reinsurance due primarily to new single premium deferred annuity coinsurance agreements in the first quarter of 2002 and the third quarter of 2001. In addition, an increase of $11 million in International is principally due to the acquisition of Hidalgo, partially offset by a decrease in Spain due to the cessation of product lines offered through a joint venture with Banco Santander in 2001, and a reduction in the number of investment type policies in-force in South Korea. Policyholder dividends decreased by $78 million, or 5%, to $1,489 million for the nine months ended September 30, 2002 from 31 $1,567 million for the comparable 2001 period. This variance is primarily attributable to a decrease of $129 million in the Institutional segment, partially offset by an increase of $52 million in the Individual segment. The Institutional decline is largely attributable to unfavorable mortality experience of several large group clients. Institutional policyholder dividends vary from period to period based on participating contract experience. The increase in Individual is due to an increase in the invested assets supporting the policies associated with this segment's large block of traditional life insurance business. Other expenses increased by $85 million, or 2%, to $4,978 million for the nine months ended September 30, 2002 from $4,893 million for the comparable 2001 period. Excluding the capitalization and amortization of deferred policy acquisition costs, which are discussed below, other expenses increased by $128 million, or 2%, to $5,437 million in 2002 from $5,309 million in 2001. Excluding the change in accounting as prescribed by SFAS 142, which eliminates the amortization of goodwill and certain other intangibles, other expenses increased by $165 million. This increase is primarily attributable to the International and Reinsurance segments and Corporate & Other, partially offset by a decrease in the Asset Management segment. An increase of $99 million in International expenses is primarily due to the acquisition of Hidalgo, the acquisitions in Chile and Brazil, as well as business growth in South Korea, Mexico, excluding Hidalgo, Hong Kong and Spain. An increase in Corporate & Other of $76 million is primarily due to an increase in litigation costs. The 2002 period includes amounts to cover costs associated with the resolution of federal government investigations of General American Life Insurance Company's ("General American") former Medicare business. A $28 million increase in Reinsurance is due to increases in allowances paid on reinsurance contracts. These variances are partially offset by a $31 million decrease in Asset Management primarily due to the sale of Conning on July 2, 2001. In addition, a decrease in Individual of $13 million is due to continued expense management initiatives, including reduced compensation-related expenses, a refund of interest associated with a prior year tax payment and reductions in volume-related commission expenses in the broker-dealer and other subsidiaries. These declines are partially offset by higher pension and post-retirement benefit expenses and an increase in expenses stemming from sales growth in new annuity and investment-type products. Deferred policy acquisition costs are principally amortized in proportion to gross margins or profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisitions costs increased by $148 million, or 10%, to $1,627 million for the nine months ended September 30, 2002 from $1,479 million for the comparable 2001 period. This variance is primarily due to increases in the Individual and International segments. A $127 million increase in Individual is due to higher sales of variable and universal life insurance policies and annuity and investment-type products, resulting in higher commissions and other deferrable expenses. A $32 million increase in International is due to the acquisition of Hidalgo and the aforementioned premium growth in South Korea, partially offset by a decline in Argentina's business due to current economic conditions. Total amortization of deferred policy acquisitions costs increased by $94 million, or 9%, to $1,142 million in 2002 from $1,048 in 2001. Amortization of $1,168 million and $1,063 million are allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each period is allocated to investment gains and losses. The increase in amortization allocated to other expenses is attributable to increases in the Individual and International segments. An increase of $78 million in Individual is due primarily to the impact of the depressed equity markets and refinements in the calculation of estimated gross margins and profits. An increase in International of $27 million is largely due to the aforementioned premium growth in South Korea, the acquisition of Hidalgo and the acquisitions in Chile. Income tax expense for the nine months ended September 30, 2002 was $473 million, or 32% of income from continuing operations before provision for income taxes, compared with $360 million, or 34%, for the comparable 2001 period. The 2002 and 2001 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income, partially offset by the inability to record tax benefits on certain foreign capital losses. In accordance with SFAS 144, income related to the Company's real estate which was identified as held-for-sale on or after January 1, 2002 is presented as discontinued operations. The income from discontinued operations is comprised of net investment income and net investment losses related to 55 properties that the Company began marketing for sale on or after January 1, 2002. 32 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 2002 2001 2002 2001 ------- ------- ------- ------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 1,080 $1,093 $ 3,258 $ 3,306 Universal life and investment-type product policy fees 375 319 1,012 942 Net investment income 1,592 1,551 4,674 4,620 Other revenues 95 119 325 384 Net investment losses (26) (43) (112) (157) ------- ------- ------- ------- Total revenues 3,116 3,039 9,157 9,095 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims 1,222 1,297 3,717 3,773 Interest credited to policyholder account balances 437 445 1,332 1,333 Policyholder dividends 459 441 1,379 1,327 Other expenses 683 652 1,950 2,022 ------- ------- ------- ------- Total expenses 2,801 2,835 8,378 8,455 ------- ------- ------- ------- Income from continuing operations before provision for income taxes 315 204 779 640 Provision for income taxes 112 75 279 249 ------- ------- ------- ------- Income from continuing operations 203 129 500 391 Income from discontinued operations, net of income taxes 7 8 26 27 ------- ------- ------- ------- Net income $ 210 $ 137 $ 526 $ 418 ======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 -- INDIVIDUAL Premiums decreased by $13 million, or 1%, to $1,080 million for the three months ended September 30, 2002 from $1,093 million for the comparable 2001 period. Premiums from insurance products decreased by $33 million, primarily resulting from a third quarter 2002 amendment of a reinsurance agreement to increase the amount of insurance ceded from 50% to 100%. This amendment was effective January 1, 2002. This decline is partially offset by policyholders expanding their traditional life insurance coverage through the purchase of additional insurance with dividend proceeds. Premiums from annuity and investment products increased by $20 million as a result of higher sales of fixed annuities and supplementary contracts with life contingencies. Universal life and investment-type product policy fees increased by $56 million, or 18%, to $375 million for the three months ended September 30, 2002 from $319 million for the comparable 2001 period. Policy fees from insurance products increased by $61 million, primarily due to higher revenue from insurance fees which increase as the average separate account asset base supporting the underlying minimum death benefit declines in response to poor equity market performance. Policy fees from annuity and investment-type products decreased by $5 million, primarily due to declines in the average separate account asset base resulting generally from poor equity market performance. Policy fees from annuity and investment-type products are typically calculated as a percentage of the average separate account assets. Such assets can fluctuate for several reasons, including equity market performance. If average separate account asset levels continue to decline, management expects that policy fees from annuity and investment-type products will continue to be adversely impacted, while revenues from insurance fees on variable life products are expected to rise. Other revenues decreased by $24 million, or 20%, to $95 million for the three months ended September 30, 2002 from $119 million for the comparable 2001 period, predominantly due to lower commission and fee income associated with decreased volume in the broker/dealer and other subsidiaries which is largely due to the depressed equity markets. Policyholder benefits and claims decreased by $75 million, or 6%, to $1,222 million for the three months ended September 30, 2002 from $1,297 million for the comparable 2001 period. Policyholder benefits and claims for insurance products decreased by $103 million primarily due to the impact of the aforementioned reinsurance transaction, the establishment of liabilities for the September 33 11, 2001 tragedies in the previous year and a reduction in the policyholder dividend obligation associated with the closed block. Policyholder benefits and claims for annuity and investment products increased by $28 million, largely due to an increase in the liability associated with guaranteed minimum death benefits on variable and fixed annuities and unfavorable mortality experience. Interest credited to policyholder account balances decreased by $8 million, or 2%, to $437 million for the three months ended September 30, 2002 from $445 million for the comparable 2001 period, primarily due to a slight decline in crediting rates, partially offset by an increase in the underlying policyholder account balances which is largely attributable to sales growth. Policyholder dividends increased by $18 million, or 4%, to $459 million for the three months ended September 30, 2002 from $441 million for the comparable 2001 period due to an increase in the invested assets supporting the policies associated with this segment's large block of traditional individual life insurance business. Other expenses increased by $31 million, or 5%, to $683 for the three months ended September 30, 2002 from $652 million for the comparable 2001 period. Excluding the capitalization and amortization of deferred policy acquisition costs which are discussed below, other expenses decreased by $20 million, or 3%, to $698 million in 2002 from $718 million in 2001. Other expenses related to insurance products decreased by $32 million which is attributable to continued expense management, including reduced compensation-related expenses, a refund of interest associated with a prior year tax payment, and reductions in volume-related commission expenses in the broker-dealer and other subsidiaries. These declines are partially offset by increased pension and post retirement benefit expenses due to the cessation of transition asset amortization, the impact of market changes on pension assets, changes in actuarial assumptions and demographic changes. Other expenses related to annuity and investment products increased by $12 million. This increase is primarily due to a rise in sales of new annuity and investment-type products. Deferred policy acquisition costs are principally amortized in proportion to gross margins or gross profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisition costs increased by $40 million, or 18%, to $262 million for the three months ended September 30, 2002 from $222 million for the comparable 2001 period, due to higher sales of variable and universal life insurance policies as well as annuity and investment-type products, resulting in higher commissions and other deferrable expenses. Total amortization of deferred policy acquisition costs increased by $79 million, or 50%, to $236 million in 2002 from $157 million in 2001. Amortization of deferred policy acquisition costs of $247 million and $156 million is allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each year is allocated to investment gains and losses. Increases in amortization of deferred policy acquisition costs allocated to other expenses of $49 million and $42 million related to insurance products and annuity and investment-type products, respectively, are attributable to the impact of the depressed equity markets and refinements in the calculation of estimated gross margins. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 -- INDIVIDUAL Premiums decreased by $48 million, or 1%, to $3,258 million for the nine months ended September 30, 2002 from $3,306 million for the comparable 2001 period. Premiums from insurance products decreased by $70 million, primarily resulting from a third quarter 2002 amendment of a reinsurance agreement to increase the amount of insurance ceded from 50% to 100%. This amendment was effective January 1, 2002. Also contributing to the decline is the continued shift in policyholders' preference from traditional policies to annuity and investment-type products. These decreases are partially offset by policyholders expanding their traditional life insurance coverage through the purchase of additional insurance with dividend proceeds in the third quarter of 2002. Premiums from annuity and investment products increased by $22 million as a result of higher sales of fixed annuities and supplementary contracts with life contingencies. Universal life and investment-type product policy fees increased by $70 million, or 7%, to $1,012 million for the nine months ended September 30, 2002 from $942 million for the comparable 2001 period. Policy fees from insurance products increased by $87 million primarily due to higher revenue from insurance fees, which increase as the average separate account asset base supporting the underlying minimum death benefit declines in response to poor equity market performance. Policy fees from annuity and investment-type products decreased by $17 million primarily due to declines in the average separate account asset base resulting generally from poor equity market performance. Policy fees from annuity and investment-type products are typically calculated as a percentage of average separate account assets. Such assets can fluctuate depending on equity market performance. If average separate account asset 34 levels continue to decline, management expects that policy fees from annuity and investment-type products will continue to be adversely impacted, while revenues from insurance fees on variable life products are expected to rise. Other revenues decreased by $59 million, or 15%, to $325 million for the nine months ended September 30, 2002 from $384 million for the comparable 2001 period, largely due to lower commission and fee income associated with a volume decline in the broker/dealer and other subsidiaries which is principally due to the depressed equity markets. Policyholder benefits and claims decreased by $56 million, or 1%, to $3,717 million for the nine months ended September 30, 2002 from $3,773 million for the comparable 2001 period. Policyholder benefits and claims for insurance products decreased by $107 million, primarily due to the impact of the aforementioned reinsurance transaction, the establishment of liabilities for the September 11, 2001 tragedies in the previous year and a reduction in the policyholder dividend obligation associated with the closed block. Policyholder benefits and claims for annuity and investment products increased by $51 million largely due to an increase in the liability associated with guaranteed minimum death benefits on variable and fixed annuities and unfavorable mortality experience. Interest credited to policyholder account balances remained essentially unchanged at $1,332 million for the nine months ended September 30, 2002 compared with $1,333 for the nine months ended September 30, 2001. Although interest credited expense remained relatively constant period over period, the decline in interest crediting rates was offset by an increase in policyholder account balances which is primarily attributable to sales growth. Policyholder dividends increased by $52 million, or 4%, to $1,379 million for the nine months ended September 30, 2002 from $1,327 million for the comparable 2001 period due to the increase in the invested assets supporting the policies associated with this segment's large block of traditional individual life insurance business. Other expenses decreased by $72 million, or 4%, to $1,950 million for the nine months ended September 30, 2002 from $2,022 million for the comparable 2001 period. Excluding the capitalization and amortization of deferred policy acquisition costs, which are discussed below, other expenses decreased by $22 million, or 1%, to $2,153 million in 2002 from $2,175 million in 2001. Other expenses related to insurance products decreased by $63 million, which is attributable to continued expense management, including reduced compensation-related expenses, a refund of interest associated with a prior year tax payment, and reductions in volume-related commission expenses in the broker-dealer and other subsidiaries. These declines are partially offset by increased pension and post retirement benefit expenses due to the cessation of transition asset amortization, the impact of market changes on pension assets, changes in actuarial assumptions and demographic changes. Other expenses related to annuity and investment products increased by $41 million. This increase is due to a rise in sales of new annuity and investment-type products. Although there are expense savings for annuities, those savings are offset by higher commissions and other deferrable expenses from new product sales and increased pension and post-retirement benefit expenses. Deferred policy acquisition costs are principally amortized in proportion to gross margins or gross profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisition costs increased by $126 million, or 20%, to $764 million for the nine months ended September 30, 2002 from $638 million for the comparable 2001 period due to higher sales of variable and universal life insurance policies as well as annuity and investment-type products, resulting in higher commissions and other deferrable expenses. Total amortization of deferred policy acquisition costs increased by $65 million, or 14%, to $535 million in 2002 from $470 million in 2001. Amortization of deferred policy acquisition costs of $561 million and $485 million is allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each year is allocated to investment gains and losses. Increases in amortization of deferred policy acquisition costs allocated to other expenses of $56 million and $20 million related to insurance products and annuity and investment products, respectively, are due to the impact of the depressed equity markets and refinements in the calculation of estimated gross margins. 35 INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 2002 2001 2002 2001 ------- ------- ------- ------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 2,050 $ 1,896 $ 6,072 $ 5,503 Universal life and investment-type product policy fees 148 139 468 443 Net investment income 964 983 2,940 2,957 Other revenues 154 155 482 485 Net investment losses (201) (37) (392) (154) ------- ------- ------- ------- Total revenues 3,115 3,136 9,570 9,234 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims 2,331 2,438 6,960 6,632 Interest credited to policyholder account balances 236 249 696 770 Policyholder dividends 29 91 66 195 Other expenses 363 367 1,142 1,161 ------- ------- ------- ------- Total expenses 2,959 3,145 8,864 8,758 ------- ------- ------- ------- Income (loss) from continuing operations before provision (benefit) for income taxes 156 (9) 706 476 Provision (benefit) for income taxes 55 (14) 246 157 ------- ------- ------- ------- Income from continuing operations 101 5 460 319 Income from discontinued operations, net of income taxes 4 4 12 12 ------- ------- ------- ------- Net income $ 105 $ 9 $ 472 $ 331 ======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 -- INSTITUTIONAL Premiums increased by $154 million, or 8%, to $2,050 million for the three months ended September 30, 2002 from $1,896 million for the comparable 2001 period. Group insurance premiums increased by $119 million as a result of higher sales in this segment's group life, dental, disability and long-term care businesses. Retirement and savings premiums increased by $35 million as a result of higher premiums received from existing customers in 2002. Retirement and savings premium levels are significantly influenced by large transactions and, as a result, can often fluctuate from period to period. Universal life and investment-type product policy fees increased by $9 million, or 6%, to $148 million for the three months ended September 30, 2002 from $139 million for the comparable 2001 period. This rise in fees reflects growth in existing business in the group universal life product. Other revenues decreased by $1 million, or 1%, to $154 million for the three months ended September 30, 2002 from $155 million for the comparable 2001 period. A decrease of $8 million in retirement and savings is mainly attributable to a reduction in administrative fees as a result of the Company's exit from the large market 401(k) business in late 2001, as well as lower fees earned on investments in separate accounts. This decrease is offset by a $7 million increase in group insurance due to growth in the administrative services businesses. Policyholder benefits and claims decreased by $107 million, or 4%, to $2,331 million for the three months ended September 30, 2002 from $2,438 million for the comparable 2001 period. Group insurance decreased by $128 million which is primarily attributable to $291 million in claims related to the September 11, 2001 tragedies. This decline was offset by growth in this segment's group life, dental, disability and long-term care businesses, commensurate with the aforementioned premium growth. Retirement and savings increased by $21 million commensurate with the aforementioned premium growth. Interest credited to policyholders decreased by $13 million, or 5%, to $236 million for the three months ended September 30, 2002 from $249 million for the comparable 2001 period. Decreases of $7 million and $6 million in group insurance and retirement and savings, respectively, are largely due to a decline in the average crediting rates in the third quarter of 2002 as a result of the current interest rate environment. 36 Policyholder dividends decreased by $62 million, or 68%, to $29 million for the three months ended September 30, 2002 from $91 million for the comparable 2001 period. This decline is largely attributable to unfavorable mortality experience of several large group clients. Policyholder dividends vary from period to period based on participating contract experience. Other expenses decreased by $4 million, or 1%, to $363 million for the three months ended September 30, 2002 from $367 million in the comparable 2001 period. Retirement and savings decreased by $23 million primarily due to the Company's exit from the large market 401(k) business in late 2001, partially offset by increased pension and post retirement benefit expenses due primarily to the cessation of transition asset amortization and the impact of market changes on pension assets. A $19 million increase in group insurance is mainly attributable to growth in operational expenses for the small business center products, increased pension and post retirement benefit expenses and higher non-deferrable expenses, including certain premium taxes and commissions. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 -- INSTITUTIONAL Premiums increased by $569 million, or 10%, to $6,072 million for the nine months ended September 30, 2002 from $5,503 million for the comparable 2001 period. Retirement and savings premiums increased by $321 primarily due to the sale of a significant contract in the second quarter 2002. In addition, group insurance premiums increased by $248 million as a result of growth in this segment's group life, dental, disability and long-term care businesses. Universal life and investment-type product policy fees increased by $25 million, or 6%, to $468 million for the nine months ended September 30, 2002 from $443 million for the comparable 2001 period. This increase is primarily attributable to a fee resulting from the termination of a portion of a bank-owned life insurance contract, as well as growth in existing business in the group universal life product. Other revenues decreased by $3 million, or 1%, to $482 million for the nine months ended September 30, 2002 from $485 million for the comparable 2001 period. A decrease of $27 million in retirement and savings is primarily due to a reduction in administrative fees as a result of the Company's exit from the large market 401(k) business in late 2001, as well as lower fees earned on investments in separate accounts. This decrease is partially offset by a $24 million increase in group insurance due to growth in the administrative service businesses and a one-time settlement received in 2002 related to the Company's former medical business. Policyholder benefits and claims increased by $328 million, or 5%, to $6,960 million for the nine months ended September 30, 2002 from $6,632 million for the comparable 2001 period. Retirement and savings increased by $269 million commensurate with the aforementioned premium growth. Group insurance increased by $59 million. Growth in this segment's group life, dental, disability and long-term care businesses is largely offset by $291 million in claims related to the September 11, 2001 tragedies. Interest credited to policyholders decreased by $74 million, or 10%, to $696 million for the nine months ended September 30, 2002 from $770 million for the comparable 2001 period. Decreases of $39 million and $35 million in group insurance and retirement and savings, respectively, are primarily attributable to declines in the average crediting rates in 2002 as a result of the current interest rate environment. Policyholder dividends decreased by $129 million, or 66%, to $66 million for the nine months ended September 30, 2002 from $195 million for the comparable 2001 period. This decline is largely attributable to unfavorable mortality experience of several large group clients. Policyholder dividends vary from period to period based on participating contract experience. Other expenses decreased by $19 million, or 2%, to $1,142 million for the nine months ended September 30, 2002 from $1,161 million in the comparable 2001 period. Retirement and savings decreased by $60 million primarily due to the Company's exit from the large market 401(k) business in late 2001, partially offset by increased pension and post retirement benefit expenses due primarily to the cessation of transition asset amortization and the impact of market changes on pension assets. A $41 million increase in group insurance is mainly attributable to growth in operational expenses for the small business center products, increased pension and post retirement benefit expenses and higher non-deferrable expenses, including certain premium taxes and commissions. 37 REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 ------ ------ ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums $ 461 $ 392 $1,408 $1,197 Net investment income 95 103 296 288 Other revenues 16 12 35 28 Net investment gains (losses) 4 (12) 6 2 ------ ------ ------ ------ Total revenues 576 495 1,745 1,515 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims 337 318 1,111 972 Interest credited to policyholder account balances 31 36 97 84 Policyholder dividends 6 5 17 16 Other expenses 142 106 354 309 ------ ------ ------ ------ Total expenses 516 465 1,579 1,381 ------ ------ ------ ------ Income before provision for income taxes 60 30 166 134 Provision for income taxes 14 4 39 30 Minority interest 21 17 57 56 ------ ------ ------ ------ Net income $ 25 $ 9 $ 70 $ 48 ====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 - REINSURANCE Premiums increased by $69 million, or 18%, to $461 million for the three months ended September 30, 2002 from $392 million for the comparable 2001 period. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business all contributed to the premium growth. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period. Other revenues increased by $4 million, or 33%, to $16 million for the three months ended September 30, 2002 from $12 million for the comparable 2001 period. This increase is due to fees earned on financial reinsurance which can vary from period to period. Policyholder benefits and claims increased by $19 million, or 6%, to $337 million for the three months ended September 30, 2002 from $318 million for the comparable 2001 period. Policyholder benefits and claims were 73% of premiums for the three months ended September 30, 2002 compared to 81% in the comparable 2001 period. The decrease in policyholder benefits and claims as a percentage of premiums is primarily attributable to favorable claims experience in the third quarter of 2002 and the prior year impact of claims associated with the September 11, 2001 tragedies. The level of claims may fluctuate from period to period, but exhibits less volatility over the long term. Interest credited to policyholder account balances decreased by $5 million, or 14%, to $31 million for the three months ended September 30, 2002 from $36 million for the comparable 2001 period. The decrease is due to underlying asset performance which reduces policyholder account balances. This decrease is partially offset by an increase in interest credited expense on new single premium deferred annuity coinsurance agreements which became effective in the first quarter of 2002 and third quarter of 2001. Policyholder dividends were essentially unchanged at $6 million for the three months ended September 30, 2002, compared with $5 million for the comparable 2001 period. Other expenses increased by $36 million, or 34%, to $142 million for the three months ended September 30, 2002 from $106 million for the comparable 2001 period. These expenses fluctuate depending on the mix of the underlying insurance products being reinsured since allowances paid and the related capitalization and amortization can vary significantly based on the type of business and the reinsurance treaty. Minority interest reflects third-party ownership interests in Reinsurance Group of America, Incorporated ("RGA"). 38 NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 -- REINSURANCE Premiums increased by $211 million, or 18%, to $1,408 million for the nine months ended September 30, 2002 from $1,197 million for the comparable 2001 period. New premiums from facultative and automatic treaties and renewal premium on existing blocks of business all contributed to the premium growth. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period. Other revenues increased by $7 million, or 25%, to $35 million for the nine months ended September 30, 2002 from $28 million for the comparable 2001 period. This increase is due to fees earned on financial reinsurance which can vary from period to period. Policyholder benefits and claims increased by $139 million, or 14%, to $1,111 million for the nine months ended September 30, 2002 from $972 million for the comparable 2001 period. Policyholder benefits and claims were 79% of premiums for the nine months ended September 30, 2002 compared to 81% in the comparable 2001 period. The decrease in policyholder benefits and claims as a percentage of premiums is primarily attributable to favorable claims experience in the third quarter of 2002 and the prior year impact of claims associated with the September 11, 2001 tragedies. The level of claims may fluctuate from period to period, but exhibits less volatility over the long term. Interest credited to policyholder account balances increased by $13 million, or 15%, to $97 million for the nine months ended September 30, 2002 from $84 million for the comparable 2001 period. Contributing to this growth were new single premium deferred annuity coinsurance agreements which became effective in the first quarter of 2002 and third quarter of 2001. Policyholder dividends were essentially unchanged at $17 million for the nine months ended September 30, 2002, as compared with $16 million for the comparable 2001 period. Other expenses increased by $45 million, or 15%, to $354 million for the nine months ended September 30, 2002 from $309 million for the comparable 2001 period. These expenses fluctuate depending on the mix of the underlying insurance products being reinsured as allowances paid and the related capitalization and amortization can vary significantly based on the type of business and the reinsurance treaty. Minority interest reflects third-party ownership interests in RGA. 39 AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ----------------------- 2002 2001 2002 2001 ------- ------- ------- ------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 711 $ 692 $ 2,105 $ 2,047 Net investment income 44 48 135 150 Other revenues 11 6 27 18 Net investment losses (8) -- (40) (6) ------- ------- ------- ------- Total revenues 758 746 2,227 2,209 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims 497 512 1,509 1,605 Other expenses 205 206 606 613 ------- ------- ------- ------- Total expenses 702 718 2,115 2,218 ------- ------- ------- ------- Income (Loss) before provision (benefit) for income taxes 56 28 112 (9) Provision (Benefit) for income taxes 13 6 24 (14) ------- ------- ------- ------- Net income $ 43 $ 22 $ 88 $ 5 ======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 - AUTO & HOME Premiums increased by $19 million, or 3%, to $711 million for the three months ended September 30, 2002 from $692 million for the comparable 2001 period. Auto and property premiums increased by $16 million and $1 million, respectively, primarily due to an increase in average premium earned per policy resulting from rate increases. The impact on premiums from rate increases was partially offset by an expected reduction in retention. Premiums from other personal lines increased by $2 million. Other revenues increased by $5 million, or 83%, to $11 million for the three months ended September 30, 2002 from $6 million for the comparable 2001 period. This increase was primarily due to income earned on COLI that was purchased in the second quarter of 2002, as well as higher fees on installment payments. Policyholder benefits and claims decreased by $15 million, or 3%, to $497 million for the three months ended September 30, 2002 from $512 million for the comparable 2001 period. Auto policyholder benefits and claims decreased by $9 million largely due to a $7 million decrease in catastrophe losses and improvements in auto frequency, partially offset by increases in severity. Property policyholder benefits and claims decreased by $8 million due to better catastrophe experience. Property catastrophes represented 3.3% of the property loss ratio in 2002 compared to 7.8% in 2001. Other policyholder benefits and claims increased by $2 million due to increased personal umbrella losses. This line of business tends to be volatile in the short-term due to low premium volume and high liability limits. Other expenses decreased by $1 million, or less than 1%, to $205 million for the three months ended September 30, 2002 from $206 million for the comparable 2001 period. This decrease is due to the elimination of the amortization of goodwill, reduced employee head-count and reduced expenses associated with the consolidation of the St. Paul companies acquired in 1999. These declines are partially offset by an increase in expenses related to the outsourced New York assigned risk business. The expense ratio decreased to 28.9% in 2002 from 29.6% in 2001. The effective income tax rates for the three months ended September 30, 2002 and 2001 differ from the corporate tax rate of 35% due to the impact of non-taxable investment income. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - AUTO & HOME Premiums increased by $58 million, or 3%, to $2,105 million for the nine months ended September 30, 2002 from $2,047 million for the comparable 2001 period. Auto and property premiums increased by $48 million and $4 million, respectively, primarily due to increases in average premium earned per policy resulting from rate increases. The impact on premiums from rate increases was 40 partially offset by an expected reduction in retention and a reduction in new business sales. Premiums from other personal lines increased by $6 million. Other revenues increased by $9 million, or 50%, to $27 million for the nine months ended September 30, 2002 from $18 million for the comparable 2001 period. This increase was primarily due to income earned on COLI purchased in the second quarter of 2002, as well as higher fees on installment payments. Policyholder benefits and claims decreased by $96 million, or 6%, to $1,509 million for the nine months ended September 30, 2002 from $1,605 million for the comparable 2001 period. Auto policyholder benefits and claims increased by $13 million largely due to an increase in current year bodily injury and no-fault severities. Costs associated with the processing of the New York assigned risk business also contributed to this increase. These increases were partially offset by improved claim frequency resulting from milder winter weather, underwriting and agency management actions, as well as lower catastrophe losses. Property policyholder benefits and claims decreased by $98 million due to improved claim frequency resulting from milder winter weather, underwriting and agency management actions and a $31 million reduction in catastrophe losses. Property catastrophes represented 7.1% of the property loss ratio in 2002 compared to 16.0% in 2001. Other policyholder benefits and claims decreased by $11 million due to fewer personal umbrella claims. This line of business tends to be volatile in the short-term due to low premium volume and high liability limits. Other expenses decreased by $7 million, or 1%, to $606 million for the nine months ended September 30, 2002 from $613 million for the comparable 2001 period. This decrease is primarily due to the elimination of the amortization of goodwill, reduced employee head-count and reduced expenses associated with the consolidation of the St. Paul companies acquired in 1999. These declines are partially offset by an increase in expenses related to the outsourced New York assigned risk business. The expense ratio decreased to 28.8% in 2002 from 29.9% in 2001. The effective income tax rates for the nine months ended September 30, 2002 and 2001 differ from the corporate tax rate of 35% due to the impact of non-taxable investment income. 41 ASSET MANAGEMENT The following table presents consolidated financial information for the Asset Management segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------ ------------------- 2002 2001 2002 2001 ----- ----- ----- ----- (DOLLARS IN MILLIONS) REVENUES Net investment income $ 17 $ 18 $ 46 $ 54 Other revenues 37 42 127 154 Net investment gains (losses) -- 25 (4) 25 ----- ----- ----- ----- Total revenues 54 85 169 233 ----- ----- ----- ----- OTHER EXPENSES 53 56 162 194 ----- ----- ----- ----- Income before provision for income taxes 1 29 7 39 Provision for income taxes 1 11 3 14 ----- ----- ----- ----- Net income $ -- $ 18 $ 4 $ 25 ===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 - ASSET MANAGEMENT Other revenues, which primarily consist of management and advisory fees from third parties, decreased by $5 million, or 12%, to $37 million for the three months ended September 30, 2002 from $42 million for the comparable 2001 period. This decrease is primarily the result of lower average assets under management on which these fees are earned, partially offset by incentive and performance fees earned in 2002. Assets under management were $45 billion at September 30, 2002 as compared to $51 billion at September 30, 2001. The $6 billion decrease is primarily due to customer withdrawals, as well as the downturn in the equity markets. Other expenses decreased by $3 million, or 5%, to $53 million for the three months ended September 30, 2002 from $56 million for the comparable 2001 period. This decrease is due to reductions in marketing expenses and expenses related to fund reimbursements, as well as a decline in distribution plan payments to financial intermediaries, as a result of lower mutual fund assets under management. This decrease was partially offset by an increase of $2 million in employee compensation due to severance-related expenses resulting from third quarter 2002 staff reductions. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - ASSET MANAGEMENT Other revenues, which primarily consist of management and advisory fees from third parties, decreased by $27 million, or 18%, to $127 million for the nine months ended September 30, 2002 from $154 million for the comparable 2001 period. The most significant factor contributing to this decline is a $31 million decrease resulting from the sale of Conning, which occurred on July 2, 2001. Excluding the impact of this transaction, other revenues increased $4 million, or 3%, to $127 million in 2002 from $123 million in 2001. This increase is primarily the result of incentive and performance fees earned in the second and third quarters of 2002 from certain real estate and hedge fund products, partially offset by lower fees earned on average assets under management as discussed above. Other expenses decreased by $32 million, or 16%, to $162 million for the nine months ended September 30, 2002 from $194 million for the comparable 2001 period. Excluding the impact of the sale of Conning, other expenses increased by $2 million, or 1%, to $162 million in 2002 from $160 million in 2001. The increase is primarily due to severance-related expenses incurred in the third quarter of 2002 as a result of staff reductions. 42 INTERNATIONAL The following table presents consolidated financial information for the International segment for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ----------------------- 2002 2001 2002 2001 ------- ------- ------- ------- (DOLLARS IN MILLIONS) REVENUES Premiums $ 381 $ 210 $ 1,030 $ 583 Universal life and investment-type product policy fees 64 8 78 28 Net investment income 133 63 303 189 Other revenues 2 4 8 10 Net investment gains (losses) 6 (9) (8) 19 ------- ------- ------- ------- Total revenues 586 276 1,411 829 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims 352 158 941 463 Interest credited to policyholder account balances 32 15 52 41 Policyholder dividends 10 10 27 29 Other expenses 131 84 320 227 ------- ------- ------- ------- Total expenses 525 267 1,340 760 ------- ------- ------- ------- Income from continuing operations before provision for income taxes 61 9 71 69 Provision for income taxes 16 4 28 10 ------- ------- ------- ------- Income from continuing operations 45 5 43 59 Cumulative effect of change in accounting (5) -- -- -- ------- ------- ------- ------- Net income $ 40 $ 5 $ 43 $ 59 ======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 - INTERNATIONAL Premiums increased by $171 million, or 81%, to $381 million for the three months ended September 30, 2002 from $210 million for the comparable 2001 period. The June 2002 acquisition of Hidalgo and the November 2001 acquisitions in Chile increased premiums by $96 million and $29 million, respectively. South Korea's premiums increased by $26 million, primarily due to a larger professional sales force and improved agent productivity. Spain's premiums increased by $9 million due primarily to continued growth in the direct auto business. Mexico's premiums, excluding Hidalgo, increased by $3 million, primarily due to increases in its group life, major medical business and individual life business. The remainder of the variance is attributable to minor fluctuations in several countries. Universal life and investment type-product policy fees increased by $56 million, or 700%, to $64 million for the three months ended September 30, 2002 from $8 million for the comparable 2001 period. The acquisition of Hidalgo resulted in a $52 million increase and the remaining $4 million increase was attributable to the acquisitions in Chile. Other revenues decreased by $2 million, or 50%, to $2 million for the three months ended September 30, 2002 from $4 million for the comparable 2001 period. Spain's other revenue decreased due to income received from Banco Santander for leasing of available office space which ceased in 2001. Policyholder benefits and claims increased by $194 million, or 123%, to $352 million for the three months ended September 30, 2002 from $158 million for the three months ended September 30, 2001. The acquisition of Hidalgo and the acquisitions in Chile increased policyholder and benefit claims by $102 million and $47 million, respectively. Policyholder benefits and claims for South Korea, Spain and Mexico, excluding Hidalgo, increased by $20 million, $15 million and $4 million, respectively, commensurate with the overall premium increase discussed above. The remainder of the variance is attributable to minor fluctuations in several countries. Interest credited to policyholder account balances increased by $17 million, or 113%, to $32 million for the three months ended September 30, 2002 from $15 million for the comparable 2001 period. A $21 million increase due to the acquisition of Hidalgo is partially offset by a $3 million decrease in Spain. This decrease is due to lower assets under management, as a result of the cessation of product lines offered through a joint venture with Banco Santander in 2001. The remainder of the variance is attributable to minor fluctuations in several countries. 43 Policyholder dividends were $10 million for both the three months ended September 30, 2002 and 2001. Other expenses increased by $47 million, or 56%, to $131 million for the three months ended September 30, 2002 from $84 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile resulted in increases of $40 million and $5 million, respectively. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - INTERNATIONAL Premiums increased by $447 million, or 77%, to $1,030 million for the nine months ended September 30, 2002 from $583 million for the comparable 2001 period. A portion of this variance is attributable to a $108 million increase due to a sale of an annuity contract in the first quarter of 2002 to a Canadian trust company. The acquisition of Hidalgo and the acquisitions in Chile and Brazil increased premiums by $96 million, $91 million and $16 million, respectively. South Korea's premiums increased by $65 million primarily due to a larger professional sales force and improved agent productivity. Mexico's premiums, excluding Hidalgo, increased by $54 million, primarily due to increases in its group life, major medical and individual life businesses. Spain's premiums increased by $15 million due primarily to continued growth in the direct auto business. The remainder of the variance is attributable to minor fluctuations in several countries. Universal life and investment type-product policy fees increased by $50 million, or 179%, to $78 million for the nine months ended September 30, 2002 from $28 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile resulted in increases of $52 million and $4 million, respectively. These variances were partially offset by a decrease of $5 million in Spain due to a reduction in fees caused by a decline in assets under management, as a result of the cessation of product lines offered through a joint venture with Banco Santander in 2001. Other revenues decreased by $2 million, or 20%, to $8 million for the nine months ended September 30, 2002 from $10 million for the comparable 2001 period. Canada's other revenue decreased by $1 million primarily due to the favorable settlement of two legal cases that occurred in 2001. The remainder of the variance is attributable to minor fluctuations in several countries. Policyholder benefits and claims increased by $478 million, or 103%, to $941 million for the nine months ended September 30, 2002 from $463 million for the comparable 2001 period. The acquisitions in Chile and the acquisition of Hidalgo increased policyholder benefits and claims by $129 million and $102 million, respectively. In addition, $108 million of this increase is attributable to an increase in liabilities for the aforementioned sale of an annuity contract in Canada. Mexico, excluding Hidalgo, South Korea and Brazil's policyholder benefits and claims increased by $56 million, $47 million and $9 million, respectively, commensurate with the overall premium increase discussed above. Spain had an increase in policyholder benefits and claims of $13 million primarily due to the aforementioned increase in the direct auto business. The remainder of the variance is attributable to minor fluctuations in several countries. Interest credited to policyholder account balances increased by $11 million, or 27%, to $52 million for the nine months ended September 30, 2002 from $41 million for the comparable 2001 period. A $21 million increase due to the acquisition of Hidalgo was partially offset by a decrease of $8 million in Spain. This decrease is primarily due to a decline in assets under management, as a result of the cessation of product lines offered through a joint venture with Banco Santander in 2001. In addition, South Korea's interest credited to policyholder account balances decreased by $2 million due to a reduction in the number of investment-type policies in force. Policyholder dividends decreased by $2 million, or 7%, to $27 million for the nine months ended September 30, 2002 from $29 million for the comparable 2001 period. A $4 million decrease in Mexico, excluding Hidalgo, resulting from lower experience refunds directly related to the Mexican block of business was partially offset by an increase of $2 million attributable to the acquisition of Hidalgo. Other expenses increased by $93 million, or 41%, to $320 million for the nine months ended September 30, 2002 from $227 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile and Brazil resulted in increases of $40 million, $19 million and $9 million, respectively. South Korea's and Mexico's, excluding Hidalgo, other expenses increased by $22 million and $8 million, respectively, primarily due to increased commissions as a result of the increased sales discussed above. These increases were partially offset by a decrease of $6 million in Spain's other expenses due primarily to the cessation of product lines offered through a joint venture with Banco Santander in 2001. The remainder of the variance is attributable to minor fluctuations in several countries. 44 CORPORATE & OTHER THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001 - CORPORATE & OTHER Excluding the elimination of intercompany activity, other revenues and other expenses are essentially unchanged for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - CORPORATE & OTHER Other revenues increased by $21 million, or 41%, to $72 million for the nine months ended September 30, 2002 from $51 million for the comparable 2001 period. This increase is due to the recognition of a refund earned on a reinsurance treaty triggered by a sales practices liability release in 2002, partially offset by a decrease in investment income earned on experience funds with reinsurers in 2001. Other expenses increased by $76 million, or 24%, to $387 million for the nine months ended September 30, 2002 from $311 million for the comparable 2001 period. The most significant component of this variance is an increase in litigation costs. The 2002 period includes amounts to cover costs associated with the resolution of federal government investigations of General American's former Medicare business. In addition, there were higher levels of debt outstanding in 2002 as compared to 2001. LIQUIDITY AND CAPITAL RESOURCES THE HOLDING COMPANY The primary uses of liquidity of the Holding Company include: cash dividends on common stock, debt service on outstanding debt, including the interest payments on debentures issued to MetLife Capital Trust I and senior notes, contributions to subsidiaries, payment of general operating expenses and the repurchase of the Company's common stock. The Holding Company irrevocably guarantees, on a senior and unsecured basis, the payment in full of distributions on the capital securities and the stated liquidation amount of the capital securities, in each case to the extent of available trust funds. The primary source of the Holding Company's liquidity is dividends it receives from Metropolitan Life and other subsidiaries. Other sources of liquidity also include programs for short- and long-term borrowing, as needed, arranged through the Holding Company and MetLife Funding, Inc. ("MetLife Funding"), a subsidiary of Metropolitan Life. In addition, the Holding Company filed a $4.0 billion shelf registration statement, effective June 1, 2001, with the SEC which permits the registration and issuance of debt and equity securities as described more fully therein. In connection with this registration statement, the Company issued $1.25 billion of senior debt in November 2001. As of September 30, 2002, $2.75 billion of securities remain unissued. See "-- The Company-Financing" below. Under the New York Insurance Law, Metropolitan Life is permitted without prior insurance regulatory clearance to pay a stockholder dividend to the Holding Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its statutory surplus as of the immediately preceding calendar year, and (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). Metropolitan Life will be permitted to pay a stockholder dividend to the Holding Company in excess of the lesser of such amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Insurance (the "Superintendent") and the Superintendent does not disapprove the distribution. Metropolitan Life previously reported surplus and the asset valuation reserve at December 31, 2001 of $5.4 billion and $3.7 billion, respectively. During the second quarter of 2002, Metropolitan Life recorded certain corrections to its statutory results that related to prior periods. Adjusted statutory surplus and the asset valuation reserve are $5.3 billion and $3.5 billion, respectively, at December 31, 2001. Under the New York 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 stockholders. The New York State Insurance Department (the "Department") has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. Management of the Company cannot provide assurance that Metropolitan Life will have statutory earnings to support payment of dividends to the Holding Company in an amount sufficient to fund its cash requirements and pay cash dividends or that the Superintendent will not disapprove any dividends that Metropolitan Life must submit for the Superintendent's consideration. MetLife's other insurance subsidiaries are also subject to restrictions on the payment of dividends to their respective parent companies. 45 The dividend limitation is based on statutory financial results. Statutory accounting practices, as prescribed by the Department, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to deferred policy acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions, goodwill and surplus notes. Based on the historic cash flows and the current financial results of Metropolitan Life, subject to any dividend limitations which may be imposed upon Metropolitan Life or its subsidiaries by regulatory authorities, management believes that cash flows from operating activities, together with the dividends Metropolitan Life is permitted to pay without prior insurance regulatory clearance, will be sufficient to enable the Holding Company to make payments on the debentures issued to MetLife Capital Trust I and the senior notes, make dividend payments on its common stock, pay all operating expenses and meet its other obligations. On February 19, 2002, the Holding Company's Board of Directors authorized a $1 billion common stock repurchase program. This program began after the completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of which authorized the repurchase of $1 billion of common stock. Under these authorizations, the Holding Company may purchase common stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. For the nine months ended September 30, 2002 and 2001, 15,244,492 and 34,891,879 shares of common stock, respectively, have been acquired for $471 million and $1,019 million, respectively. During the nine months ended September 30, 2002 and 2001, 16,379 and 64,620 of these shares were reissued for $480 thousand and $2 million, respectively. The Company recently announced that it plans no further share repurchases in 2002. Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies - Capital. MetLife, Inc. and its insured depository institution subsidiary are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. At September 30, 2002 MetLife and its insured depository institution subsidiary were in compliance with the aforementioned guidelines. THE COMPANY Liquidity Sources. The Company's principal cash inflows from its insurance activities come from life insurance premiums, automobile and property premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contract holder and policyholder withdrawal. The Company seeks to include provisions limiting withdrawal rights on many of its products, including general account institutional pension products (generally group annuities, including guaranteed interest contracts and certain deposit fund liabilities) sold to employee benefit plan sponsors. The Company's principal cash inflows from its investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income. The primary liquidity concerns with respect to these cash inflows are the risk of default by debtors, and interest rate and other market volatilities. The Company closely monitors and manages these risks. Additional sources of liquidity to meet unexpected cash outflows are available from the Company's portfolio of liquid assets. These liquid assets include substantial holdings of U.S. Treasury securities, short-term investments, marketable fixed maturity securities and common stocks. The Company's available portfolio of liquid assets was approximately $122 billion and $108 billion at September 30, 2002 and December 31, 2001, respectively. Sources of liquidity also include facilities for short- and long-term borrowing as needed, arranged through the Holding Company and MetLife Funding. See "--Financing" below. Liquidity Uses. The Company's principal cash outflows primarily relate to the liabilities associated with its various life insurance, automobile and property, annuity and group pension products, operating expenses and income taxes, as well as principal and interest on its outstanding debt obligations. Liabilities arising from its insurance activities primarily relate to benefit payments under the above-named products, as well as payments for policy surrenders, withdrawals and loans. Additional cash outflows include those related to obligations of securities lending activities, investments in real estate, limited partnerships and joint ventures, as well as legal liabilities. 46 The Company's management believes that its sources of liquidity are more than adequate to meet its current cash requirements. The nature of the Company's diverse product portfolio and customer base lessen the likelihood that normal operations will result in any significant strain on liquidity in 2002 or 2003. The following table summarizes major contractual obligations, apart from those arising from its ordinary product and investment purchase activities:
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 THEREAFTER ------ ------ ------ ------ ------ ------ ---------- Long-term debt $3,442 $ 2 $ 447 $ 27 $ 379 $ 603 $1,984 Operating leases 875 40 140 119 104 87 385 Company-obligated securities 1,356 -- -- -- 1,006 -- 350 Partnership investments 1,752 1,752 -- -- -- -- -- Mortgage commitments 474 409 65 -- -- -- -- ------ ------ ------ ------ ------ ------ ------ Total $7,899 $2,203 $ 652 $ 146 $1,489 $ 690 $2,719 ====== ====== ====== ====== ====== ====== ======
The Company's committed and unsecured credit facilities aggregating $2.4 billion are principally used as back-up for the Company's commercial paper program. Two facilities totaling $1.1 billion will expire in 2003 and the remaining facilities will expire in 2005. At September 30, 2002, the Company had outstanding approximately $599 million in letters of credit from various banks, all of which expire within one year. Since commitments associated with letters of credit and financing arrangements may expire unused, the amounts do not necessarily reflect the actual future cash funding requirements. On July 11, 2002, an affiliate of the Company elected not to make future payments required by the terms of a non-recourse loan obligation. The book value of this loan was $15 million at September 30, 2002. The Company's exposure under the terms of the applicable loan agreement is limited solely to its investment in certain securities held by an affiliate. In October 2002, the Holding Company contributed $500 million in cash and short-term securities to Metropolitan Life Insurance Company. Litigation. Various litigation claims and assessments against the Company have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's operating results or cash flows in particular quarterly or annual periods. See "Legal Proceedings." Risk-Based Capital ("RBC"). Section 1322 of the New York Insurance Law requires that New York domestic life insurers report their RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items and similar rules apply to each of the Company's domestic insurance subsidiaries. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Section 1322 gives the Superintendent explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. At December 31, 2001, Metropolitan Life's and each of the other U.S. insurance subsidiaries' total adjusted capital was in excess of each of the RBC levels required by each state of domicile. The National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles (the "Codification"), which is intended to standardize regulatory accounting and reporting to state insurance departments and became effective January 1, 2001. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The Department required adoption of the Codification with certain modifications for the preparation of statutory financial statements effective January 1, 2001. The Department has adopted a modification to its regulations to be consistent with Codification, effective December 31, 2002, with respect to the admissibility of deferred income taxes by New York insurers, subject to certain limitations. Further modifications by state insurance departments may impact the effect of the Codification on the statutory capital and surplus of Metropolitan Life and the Holding Company's other insurance subsidiaries. 47 Financing. MetLife Funding serves as a centralized finance unit for Metropolitan Life. Pursuant to a support agreement, Metropolitan Life has agreed to cause MetLife Funding to have a tangible net worth of at least one dollar. At September 30, 2002 and December 31, 2001, MetLife Funding had a tangible net worth of $10.3 million and $10.6 million, respectively. MetLife Funding raises funds from various funding sources and uses the proceeds to extend loans, through MetLife Credit Corp., a subsidiary of Metropolitan Life, to the Holding Company, Metropolitan Life and other affiliates. MetLife Funding manages its funding sources to enhance the financial flexibility and liquidity of Metropolitan Life and other affiliated companies. At September 30, 2002 and December 31, 2001, MetLife Funding had total outstanding liabilities, including accrued interest payable, of $656 million and $133 million, respectively, consisting primarily of commercial paper. The Holding Company is authorized to raise funds from various funding sources and uses the proceeds for general corporate purposes. At September 30, 2002 and December 31, 2001, the Holding Company had no short-term debt outstanding. In November 2001, the Holding Company issued $750 million 6.125% senior notes due 2011 and $500 million 5.25% senior notes due 2006 (collectively, "Senior Notes"), under the shelf registration statement discussed above in " -- the Holding Company." The Company also maintained approximately $2.4 billion in committed credit facilities at September 30, 2002 and December 31, 2001. At September 30, 2002 and December 31, 2001, there was approximately $26 million and $24 million outstanding, respectively, under these facilities. At September 30, 2002 and December 31, 2001, there was $599 million and $473 million, respectively, outstanding in letters of credit from various banks. Support Agreements. In addition to its support agreement with MetLife Funding described above, Metropolitan Life has entered into a net worth maintenance agreement with New England Life Insurance Company ("New England Life"), whereby it is obligated to maintain New England Life's statutory capital and surplus at the greater of $10 million or the amount necessary to prevent certain regulatory action by Massachusetts, the state of domicile of this subsidiary. The capital and surplus of New England Life at September 30, 2002 was in excess of the amount that would trigger such an event. In connection with the Company's acquisition of GenAmerica, Metropolitan Life entered into a net worth maintenance agreement with General American Life Insurance Company ("General American"), whereby Metropolitan Life is obligated to maintain General American's statutory capital and surplus at the greater of $10 million or the amount necessary to maintain the capital and surplus of General American at a level not less than 180% of the NAIC Risk Based Capitalization Model. The capital and surplus of General American at December 31, 2001 was in excess of the required amount. Metropolitan Life has also entered into arrangements with some of its other subsidiaries and affiliates to assist such subsidiaries and affiliates in meeting various jurisdictions' regulatory requirements regarding capital and surplus. In addition, Metropolitan Life has entered into a support arrangement with respect to reinsurance obligations of a subsidiary. Management does not anticipate that these arrangements will place any significant demands upon the Company's liquidity resources. The Holding Company has agreed to make capital contributions, in any event not to exceed $120 million, to Metropolitan Insurance and Annuity Company ("MIAC") in the aggregate amount of the excess of (i) the debt service payments required to be made, and the capital expenditure payments required to be made or reserved for, in connection with the affiliated borrowings arranged in December 2001 to fund the purchase by MIAC of certain real estate properties from Metropolitan Life during the two year period following the date of borrowings, over (ii) the cash flows generated by these properties. Consolidated Cash Flows. Net cash provided by operating activities was $2,540 million and $2,939 million for the nine months ended September 30, 2002 and 2001, respectively. The fluctuation in cash provided by the Company's operations between periods is primarily due to a decrease in income taxes payable and an increase in premiums and other receivables, partially offset by an increase in other liabilities. Net cash provided by operating activities in the periods presented was more than adequate to meet liquidity requirements. Net cash used in investing activities was $10,153 million and $2,849 million for the nine months ended September 30, 2002 and 2001, respectively. Purchases of investments exceeded sales, maturities and repayments by $11,270 million and $3,679 million in the 2002 and 2001 periods, respectively. The net purchases were primarily attributable to cash received from the senior notes offering in the fourth quarter of 2001 that was reinvested in long-term bonds and short-term investments during the first quarter of 2002. Net cash provided by financing activities was $4,476 million and $823 million for the nine months ended September 30, 2002 and 2001, respectively. Deposits to policyholders' account balances exceeded withdrawals by $4,624 million and $2,321 million for the 48 nine months ended September 30, 2002 and 2001, respectively. Short-term financing increased by $523 million in 2002 as compared with a decrease of $385 million in 2001. The operating, investing and financing activities described above resulted in a $3,826 decrease in cash and cash equivalents for the nine months ended September 30, 2002 and a $1,011 million increase in cash and cash equivalents for the comparable 2001 period. EFFECTS OF INFLATION The Company does not believe that inflation has had a material effect on its consolidated results of operations, except insofar as inflation may affect interest rates. ACCOUNTING STANDARDS During 2002, the Company adopted or applied the following accounting standards: (i) SFAS No. 141, Business Combinations ("SFAS 141"), (ii) SFAS No. 142 and (iii) SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). In accordance with SFAS 141, the Company eliminated $5 million of negative goodwill in the first quarter of 2002, which reflects a cumulative effect of a change in accounting. On January 1, 2002, the Company adopted SFAS 142. The Company did not amortize goodwill during 2002. For the three months and nine months ended September 30, 2001, the Company recorded amortization of goodwill of $13 million and $37 million, respectively. The Company has completed the required impairment tests of goodwill and indefinite-lived intangible assets. As a result of these tests, the Company recorded a $5 million charge to earnings relating to the impairment of certain goodwill assets in the third quarter of 2002 as a cumulative effect of a change in accounting. There was no impairment of intangible assets or significant reclassifications between goodwill and other intangible assets at January 1, 2002. Adoption of SFAS 144 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements for 2002 other than the reclassifications to discontinued operations of net investment income and net investment gains and losses related to operations of real estate on which the Company initiated disposition activities subsequent to January 1, 2002. The Financial Accounting Standards Board ("FASB") is currently deliberating the issuance of an interpretation of SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, to provide additional guidance to assist companies in identifying and accounting for special purpose entities ("SPEs"), including when SPEs should be consolidated by the investor. The interpretation would introduce a concept that consolidation would be required by the primary beneficiary of the activities of an SPE unless the SPE can meet certain independent economic substance criteria. It is not possible to determine at this time what conclusions will be included in the final interpretation; however, the result could impact the Company's accounting treatment of these entities. The FASB is currently deliberating the issuance of a proposed statement that would further amend SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The proposed statement will address and resolve certain pending Derivatives Implementation Group ("DIG") issues. The outcome of the pending DIG issues and other provisions of the statement could impact the Company's accounting for beneficial interests, loan commitments and other transactions deemed to be derivatives under the proposed statement. In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In addition to amending or rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 generally precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 also requires sale-leaseback treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. SFAS 145 is effective for fiscal years beginning after May 15, 2002, and is not expected to have a significant impact on the Company's consolidated results of operations, financial position or cash flows. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), which must be adopted for exit and disposal activities initiated after December 31, 2002. SFAS 146 will require that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required by Emerging Issues Task Force ("EITF") 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). In the fourth quarter of 2001, the Company recorded a charge of $330 million, net of income taxes of $169 million, associated with business realignment initiatives using the EITF 94-3 accounting guidance. 49 In the first quarter of 2003, the Company will adopt the fair value-based employee stock-based compensation expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") prospectively. The Company currently applies the intrinsic value-based expense provisions set forth in APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123 states that the adoption of the fair value-based method is a change to a preferable method of accounting. The estimated impact of the adoption of the fair value-based method in 2002 would be a decrease to net income for the full year of approximately $16 million to $19 million, net of income taxes of $9 million to $11 million, respectively. This estimate is based on assumptions as of September 30, 2002. INVESTMENTS The Company had total cash and invested assets at September 30, 2002 of $184.3 billion. In addition, the Company had $56 billion held in its separate accounts, for which the Company generally does not bear investment risk. The Company's primary investment objective is to maximize net income consistent with acceptable risk parameters. The Company is exposed to three primary sources of investment risk: - credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; - interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates; and - market valuation risk for equity holdings. The Company manages risk through in-house fundamental analysis of the underlying obligors, issuers, transaction structures and real estate properties. The Company also manages credit risk and market valuation risk through industry and issuer diversification and asset allocation. For real estate and agricultural assets, the Company manages credit risk and valuation risk through geographic, property type, and product type diversification and asset allocation. The Company manages interest rate risk as part of its asset and liability management strategies, product design, such as the use of market value adjustment features and surrender charges, and proactive monitoring and management of certain non-guaranteed elements of its products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. The following table summarizes the Company's cash and invested assets at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 --------------------- --------------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Fixed maturities available-for-sale, at fair value $133,163 72.3% $115,398 68.0% Mortgage loans on real estate 23,885 13.0 23,621 13.9 Policy loans 8,366 4.5 8,272 4.9 Real estate and real estate joint ventures held-for-investment 4,377 2.4 4,061 2.4 Cash and cash equivalents 3,647 2.0 7,473 4.4 Equity securities and other limited partnership interests 3,702 2.0 4,700 2.8 Other invested assets 3,214 1.7 3,298 1.9 Short-term investments 2,658 1.4 1,203 0.7 Real estate held-for-sale 1,286 0.7 1,669 1.0 -------- ----- -------- ----- Total cash and invested assets $184,298 100.0% $169,695 100.0% ======== ===== ======== =====
50 INVESTMENT RESULTS The annualized yields on general account cash and invested assets, excluding net investment gains and losses, were 7.1% and 7.5% for the three months ended September 30, 2002 and 2001, respectively, and 7.2% and 7.6% for the nine months ended September 30, 2002 and 2001, respectively. The following table illustrates the annualized yields on average assets for each of the components of the Company's investment portfolio for the three months and nine months ended September 30, 2002 and 2001:
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------------------------- --------------------------------------- 2002 2001 2002 2001 ----------------- ------------------ ------------------ ----------------- YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT --------- ------ --------- ------ --------- ------ --------- ------ (DOLLARS IN MILLIONS) Fixed Maturities: (2) Investment income 7.45% $ 2,038 7.84% $ 2,004 7.51% $ 5,997 7.80% $ 5,956 Net investment losses (323) (87) (698) (427) --------- --------- --------- --------- Total $ 1,715 $ 1,917 $ 5,299 $ 5,529 --------- --------- --------- --------- Ending assets $ 133,163 $ 117,145 $ 133,163 $ 117,145 --------- --------- --------- --------- Mortgage Loans: (3) Investment income 7.68% $ 457 8.06% $ 458 7.82% $ 1,391 8.24% $ 1,381 Net investment losses -- (44) (22) (49) --------- --------- --------- --------- Total $ 457 $ 414 $ 1,369 $ 1,332 --------- --------- --------- --------- Ending assets $ 23,885 $ 22,920 $ 23,885 $ 22,920 --------- --------- --------- --------- Real Estate, Real Estate Joint Ventures and Real Estate Held-For-Sale: (4) Investment income, net of expenses 10.99% $ 160 10.22% $ 139 11.13% $ 484 11.16% $ 457 Net investment losses (10) (25) (26) (1) --------- --------- --------- --------- Total $ 150 $ 114 $ 458 $ 456 --------- --------- --------- --------- Ending assets $ 5,663 $ 5,476 $ 5,663 $ 5,476 --------- --------- --------- --------- Policy Loans: Investment income 6.66% $ 139 6.36% $ 129 6.52% $ 407 6.52% $ 398 --------- --------- --------- --------- Ending assets $ 8,366 $ 8,163 $ 8,366 $ 8,163 --------- --------- --------- --------- Equity Securities and Other Limited Partnership Interests: Investment income 1.56% $ 13 1.87% $ 20 2.31% $ 65 2.49% $ 74 Net investment gains (losses) 4 (27) 246 (100) --------- --------- --------- --------- Total $ 17 $ (7) $ 311 $ (26) --------- --------- --------- --------- Ending assets $ 3,702 $ 4,661 $ 3,702 $ 4,661 --------- --------- --------- --------- Cash, Cash Equivalents and Short-term Investments: Investment income 3.68% $ 49 6.23% $ 80 3.75% $ 170 5.75% $ 217 Net investment gains (losses) -- -- 1 (5) --------- --------- --------- --------- Total $ 49 $ 80 $ 171 $ 212 --------- --------- --------- --------- Ending assets $ 6,305 $ 5,457 $ 6,305 $ 5,457 --------- --------- --------- --------- Other Invested Assets: Investment income 5.44% $ 44 9.61% $ 79 5.87% $ 146 7.65% $ 187 Net investment gains (losses) 43 31 (158) 70 --------- --------- --------- --------- Total $ 87 $ 110 $ (12) $ 257 --------- --------- --------- --------- Ending assets $ 3,214 $ 3,250 $ 3,214 $ 3,250 --------- --------- --------- --------- Total Investments: Investment income before expenses and fees 7.28% $ 2,900 7.70% $ 2,909 7.33% $ 8,660 7.70% $ 8,670 Investment expenses and fees (0.15%) (61) (0.16%) (62) (0.15%) (171) (0.15%) (173) ---- --------- ---- --------- ---- --------- ----- --------- Net investment income (4) 7.13% $ 2,839 7.54% $ 2,847 7.18% $ 8,489 7.55% $ 8,497 Net investment losses (4) (286) (152) (657) (512) Adjustments to investment gains (losses)(5) 16 28 102 107 Gains from sales of subsidiaries -- 25 -- 25 --------- --------- --------- --------- Total $ 2,569 $ 2,748 $ 7,934 $ 8,117 ========= ========= ========= =========
(1) Yields are based on quarterly average asset carrying values for the three months and nine months ended September 30, 2002 and 2001, excluding recognized and unrealized gains and losses, and for yield calculation purposes, average assets exclude collateral associated with the Company's securities lending program. (2) Included in fixed maturities are equity-linked notes of $793 million and $1,125 million at September 30, 2002 and 2001, respectively, which include an equity-like component as part of the notes' return. Investment income for fixed maturities includes prepayment fees and income from the securities lending program. Fixed maturity investment income has been reduced by rebates paid under the program. (3) Investment income from mortgage loans includes prepayment fees. 51 (4) Real estate and real estate joint venture income is shown net of depreciation of $52 million and $54 million for the three months ended September 30, 2002 and 2001, respectively, and $166 million and $162 million for the nine months ended September 30, 2002 and 2001, respectively. Real estate and real estate joint venture income includes amounts classified as discontinued operations of $29 million and $25 million for the three months ended September 30, 2002 and 2001, respectively, and $88 million and $91 million for the nine months ended September 30, 2002 and 2001, respectively. These amounts are net of depreciation of $10 million and $20 million for the three months ended September 30, 2002 and 2001, respectively, and $44 and $58 million for the nine months ended September 30, 2002 and 2001, respectively. Net investment losses includes $1 million and $8 million classified as discontinued operations for the three months and nine months ended September 30, 2002, respectively. (5) Adjustments to investment gains and losses include amortization of deferred policy acquisition costs, charges and credits to participating contracts, and adjustments to the policyholder dividend obligation resulting from investment gains and losses. FIXED MATURITIES Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 72.3% and 68.0% of total cash and invested assets at September 30, 2002 and December 31, 2001, respectively. Based on estimated fair value, public fixed maturities represented $113,731 million, or 85.4%, and $96,579 million, or 83.7%, of total fixed maturities at September 30, 2002 and December 31, 2001, respectively. Based on estimated fair value, private fixed maturities represented $19,432 million, or 14.6%, and $18,819 million, or 16.3%, of total fixed maturities at September 30, 2002 and December 31, 2001, respectively. The Company invests in privately placed fixed maturities to (i) obtain higher yields than can ordinarily be obtained with comparable public market securities, (ii) provide the Company with protective covenants, call protection features and, where applicable, a higher level of collateral, and (iii) increase diversification. However, the Company may not freely trade its privately placed fixed maturities because of restrictions imposed by federal and state securities laws and illiquid trading markets. In cases where quoted market prices are not available, fair values are estimated using present value or valuation techniques. The fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counter-party. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer and quoted market prices of comparable securities. The Securities Valuation Office of the NAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC designations." The NAIC ratings are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC ratings 1 and 2 include bonds considered investment grade (rated "Baa3" or higher by Moody's Investors Services ("Moody's"), or rated "BBB-" or higher by Standard & Poor's ("S&P")) by such rating organizations. NAIC ratings 3 through 6 include bonds considered below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P). 52 The following table presents the Company's total fixed maturities by Nationally Recognized Statistical Rating Organizations designation and the equivalent ratings of the NAIC, as well as the percentage, based on estimated fair value, that each designation comprises at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 --------------------------------------- -------------------------------------- ESTIMATED ESTIMATED NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF RATING DESIGNATION (1) COST VALUE TOTAL COST VALUE TOTAL - ------ -------------- -------- -------- ----- -------- -------- ----- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A $ 84,065 $ 90,651 68.1% $ 72,098 $ 75,265 65.2% 2 Baa 30,118 31,290 23.5 29,128 29,581 25.6 3 Ba 6,653 6,324 4.8 6,021 5,856 5.1 4 B 3,410 3,096 2.3 3,205 3,100 2.7 5 Caa and lower 937 840 0.6 726 597 0.5 6 In or near default 322 275 0.2 327 237 0.2 -------- -------- ----- -------- -------- ----- Subtotal 125,505 132,476 99.5 111,505 114,636 99.3 Redeemable preferred stock 811 687 0.5 783 762 0.7 -------- -------- ----- -------- -------- ----- Total fixed maturities $126,316 $133,163 100.0% $112,288 $115,398 100.0% ======== ======== ===== ======== ======== =====
- ---------- (1) Amounts presented are based on rating agency designations. Comparisons between NAIC ratings and rating agency designations are published by the NAIC. Based on estimated fair values, investment grade fixed maturities comprised 91.6% and 90.8% of total fixed maturities in the general account at September 30, 2002 and December 31, 2001, respectively. The following table shows the amortized cost and estimated fair value of fixed maturities, by contractual maturity dates (excluding scheduled sinking funds) at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------------- ------------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE -------- -------- -------- -------- (DOLLARS IN MILLIONS) Due in one year or less $ 4,619 $ 4,686 $ 4,001 $ 4,049 Due after one year through five years 26,645 27,698 20,168 20,841 Due after five years through ten years 20,943 22,428 22,937 23,255 Due after ten years 31,600 33,869 30,565 32,017 -------- -------- -------- -------- Subtotal 83,807 88,681 77,671 80,162 Mortgage-backed and other asset-backed securities 41,698 43,795 33,834 34,474 -------- -------- -------- -------- Subtotal 125,505 132,476 111,505 114,636 Redeemable preferred stock 811 687 783 762 -------- -------- -------- -------- Total fixed maturities $126,316 $133,163 $112,288 $115,398 ======== ======== ======== ========
53 The Company diversifies its fixed maturities by security sector. The following tables set forth the amortized cost, gross unrealized gain or loss and estimated fair value of the Company's fixed maturities by sector, as well as the percentage of the total fixed maturities holdings that each security sector is comprised at:
SEPTEMBER 30, 2002 ----------------------------------------------------------------------------- GROSS UNREALIZED AMORTIZED -------------------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL -------- -------- -------- ---------- ----- (DOLLARS IN MILLIONS) Corporate securities $ 65,563 $ 4,363 $ 1,723 $ 68,203 51.2% Mortgage-backed securities 32,005 1,968 19 33,954 25.5 U.S. treasuries/agencies 8,493 1,601 1 10,093 7.6 Asset-backed securities 9,693 300 152 9,841 7.4 Foreign government securities 6,065 407 157 6,315 4.7 Other fixed income assets 4,497 378 118 4,757 3.6 -------- -------- -------- -------- ----- Total $126,316 $ 9,017 $ 2,170 $133,163 100.0% ======== ======== ======== ======== =====
DECEMBER 31, 2001 ---------------------------------------------------------------------------- GROSS UNREALIZED AMORTIZED -------------------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL -------- -------- -------- ---------- ----- (DOLLARS IN MILLIONS) Corporate securities $ 61,984 $ 2,211 $ 1,539 $ 62,656 54.3% Mortgage-backed securities 25,723 661 56 26,328 22.8 U.S. treasuries/agencies 8,230 1,026 43 9,213 8.0 Asset-backed securities 8,111 245 210 8,146 7.1 Foreign government securities 4,512 419 41 4,890 4.2 Other fixed income assets 3,728 509 72 4,165 3.6 -------- -------- -------- -------- ----- Total $112,288 $ 5,071 $ 1,961 $115,398 100.0% ======== ======== ======== ======== =====
Problem, Potential Problem and Restructured Fixed Maturities. The Company monitors fixed maturities to identify investments that management considers to be problems or potential problems. The Company also monitors investments that have been restructured. The Company defines problem securities in the fixed maturities category as securities with principal or interest payments in default, securities to be restructured pursuant to commenced negotiations, or securities issued by a debtor that has entered into bankruptcy. The Company defines potential problem securities in the fixed maturity category as securities of an issuer deemed to be experiencing significant operating problems or difficult industry conditions. The Company uses various criteria, including the following, to identify potential problem securities: - debt service coverage or cash flow falling below certain thresholds which vary according to the issuer's industry and other relevant factors; - significant declines in revenues or margins; - violation of financial covenants; - public securities trading at a substantial discount deemed to be other-than-temporary as a result of specific credit concerns; and - other subjective factors. The Company defines restructured securities in the fixed maturities category as securities to which the Company has granted a concession that it would not have otherwise considered but for the financial difficulties of the obligor. The Company enters into a restructuring when it believes it will realize a greater economic value under the new terms rather than through liquidation or disposition. The terms of the restructuring may involve some or all of the following characteristics: a reduction in the interest rate, an extension of the maturity date, an exchange of debt for equity or a partial forgiveness of principal or interest. 54 The following table presents the estimated fair value of the Company's total fixed maturities classified as performing, potential problem, problem and restructured fixed maturities at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 --------------------------- --------------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- -------- ---------- -------- (DOLLARS IN MILLIONS) Performing $132,257 99.4% $114,879 99.6% Potential problem 539 0.4 386 0.3 Problem 330 0.2 111 0.1 Restructured 37 0.0 22 0.0 -------- -------- -------- -------- Total $133,163 100.0% $115,398 100.0% ======== ======== ======== ========
Fixed Maturity Impairment. The Company classifies all of its fixed maturities as available-for-sale and marks them to market through other comprehensive income. All securities with gross unrealized losses at the consolidated balance sheet date are subjected to the Company's process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be so impaired. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described below, about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following: - The length of time and the extent to which the market value has been below amortized cost; - The potential for impairments of securities when the issuer is experiencing significant financial difficulties, including a review of all securities of the issuer, including its known subsidiaries and affiliates, regardless of the form of the Company's ownership; - The potential for impairments in an entire industry sector or sub-sector; - The potential for impairments in certain economically depressed geographic locations; - The potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; and - Other subjective factors, including concentrations and information obtained from regulators and rating agencies. The Company records writedowns as investment losses and adjusts the cost basis of the fixed maturities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Writedowns of fixed maturities were $501 million and $38 million for the three months ended September 30, 2002 and 2001, respectively. The Company's three largest writedowns totaled $147 million for the three months ended September 30, 2002. Writedowns of fixed maturities were $1,026 million and $215 million for the nine months ended September 30, 2002 and 2001, respectively. The Company's three largest writedowns totaled $291 million for the nine months ended September 30, 2002. The circumstances that gave rise to these impairments were financial restructurings or bankruptcy filings. During the three months ended September 30, 2002, the Company sold fixed maturity securities with a fair value of $2,096 million at a loss of $145 million. During the nine months ended September 30, 2002, the Company sold fixed maturity securities with a fair value of $9,341 million at a loss of $627 million. The gross unrealized loss related to the Company's fixed maturities at September 30, 2002 was $2,170 million. These fixed maturities mature as follows: 4% due in one year or less; 29% due in greater than one year to five years; 20% due in greater than five years to ten years; and 47% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities 55 are concentrated by security type in US corporates (64%) and foreign corporates (13%); and are concentrated by industry in communications (23%) and finance (16%) (calculated as a percentage of gross unrealized loss). Noninvestment grade securities represent 30% of the $17,070 million of the fair value and 50% of the gross unrealized loss on fixed maturities. The following table presents the amortized cost, gross unrealized losses and number of securities for fixed maturities where the estimated fair value had declined and remained below amortized cost by less than 20%, or 20% or more for:
AT SEPTEMBER 30, 2002 ---------------------------------------------------------------------------- AMORTIZED COST GROSS UNREALIZED LOSSES NUMBER OF SECURITIES -------------------- ------------------------ -------------------- LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE -------------------- ------------------------ -------------------- (DOLLARS IN MILLIONS) Less than six months $ 7,312 $ 2,949 $ 405 $ 1,046 524 215 Six months or greater but less than nine months 6,082 156 379 61 367 23 Nine months or greater but less than twelve months 556 130 26 46 49 19 Twelve months or greater 1,850 205 115 92 145 27 -------------------- ------------------------ -------------------- Total $15,800 $ 3,440 $ 925 $ 1,245 1,085 284 ==================== ========================= ====================
The Company's review of its fixed maturities for impairments includes an analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below amortized cost by 20% or more for less than six months; and (iii) securities where the estimated value had declined and remained below amortized cost by 20% or more for six months or greater. The first two categories have generally been adversely impacted by the downturn in the financial markets, overall economic conditions and continuing effects of the September 11, 2001 tragedies. While all of these securities are monitored for potential impairment, the Company's experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve. The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by:
AT SEPTEMBER 30, 2002 ------------------------------ GROSS UNREALIZED % OF LOSSES TOTAL ------ ----- (DOLLARS IN MILLIONS) Less than 20% $ 925 42.6% 20% or more for less than six months 1,046 48.2 20% or more for six months or greater 199 9.2 ------ ---- Total $2,170 100.0% ====== ====
The category of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by less than 20% is comprised of 1,085 securities with an amortized cost of $15,800 million and a gross unrealized loss of $925 million. These fixed maturities mature as follows: 4% due in one year or less; 31% due in greater than one year to five years; 17% due in greater than five years to ten years; and 48% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in US corporates (58%) and foreign corporates (12%); and are concentrated by industry in finance (22%) and transportation (17%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 28% of the $14,875 million fair value and 30% of the $925 million gross unrealized loss. The category of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by 20% or more for less than six months is 215 securities with an amortized cost of $2,949 million and a gross unrealized loss of $1,046 million. These fixed maturities mature as follows: 1% due in one year or less; 21% due in greater than one year to five years; 41% due in greater than five years to ten years; and 37% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in US corporates (71%) and foreign corporates (13%); and are concentrated by industry in communications (30%) and transportation (19%) (calculated as a percentage of gross unrealized loss). 56 Non-investment grade securities represent 55% of the $1,903 million fair value and 62% of the $1,046 million gross unrealized loss. The category of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by 20% or more for six months or greater is comprised of 69 securities with an amortized cost of $491 million and a gross unrealized loss of $199 million. These fixed maturities mature as follows: 24% due in greater than one year to five years; 18% due in greater than five years to ten years; and 58% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in US corporates (58%) and foreign corporates (22%); and are concentrated by industry in communications (27%) and transportation (23%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 67% of the $292 million fair value and 77% of the $199 million gross unrealized loss. The Company held 35 fixed maturity securities each with a gross unrealized loss at September 30, 2002 greater than $10 million. Four of these securities represent 36% of the gross unrealized loss on fixed maturities where the estimated fair value had declined and remained below amortized cost by 20% or more for six months or greater. The estimated fair value and gross unrealized loss at September 30, 2002 for these securities were $53 million and $72 million, respectively. These securities were concentrated in the US corporate sector. The Company analyzed, on a case-by-case basis, each of the four fixed maturity securities as of September 30, 2002 to determine if the securities were other-than-temporarily impaired. The Company believes that the estimated fair value of these securities, which were concentrated in the communications and transportation industries, were artificially depressed as a result of unusually strong negative market reaction in this sector and generally poor economic and market conditions. The Company believes that the analysis of each such security indicated that the financial strength, liquidity, leverage, future outlook and/or recent management actions support the view that the security was not other-than-temporarily impaired as of September 30, 2002. Corporate Fixed Maturities. The table below shows the major industry types that comprise the corporate bond holdings at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------------- -------------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ------- ---------- ------- (DOLLARS IN MILLIONS) Industrial $28,533 41.9% $27,346 43.7% Utility 7,532 11.0 7,030 11.2 Finance 15,280 22.4 12,997 20.7 Yankee/Foreign (1) 16,499 24.2 14,767 23.6 Other 359 0.5 516 0.8 ------- ------- ------- ------- Total $68,203 100.0% $62,656 100.0% ======= ======= ======= =======
- ---------- (1) Includes publicly traded, dollar-denominated debt obligations of foreign obligors, known as Yankee bonds, and other foreign investments. The Company diversifies its corporate bond holdings by industry and issuer. The portfolio has no exposure to any single issuer in excess of 1% of its total invested assets. At September 30, 2002, the Company's combined holdings in the ten issuers to which it had the greatest exposure totaled $3,981 million, which was less than 3% of the Company's total invested assets at such date. The exposure to the largest single issuer of corporate bonds the Company held at September 30, 2002 was $508 million. At September 30, 2002 and December 31, 2001, investments of $12,207 million and $7,120 million, respectively, or 74.0% and 48.2%, respectively, of the Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The balance of this exposure was primarily dollar-denominated, foreign private placements and project finance loans. The Company diversifies the Yankee/Foreign portfolio by country and issuer. The Company does not have material exposure to foreign currency risk in its invested assets. In the Company's international insurance operations, both its assets and liabilities are generally denominated in local currencies. Foreign currency denominated securities supporting U.S. dollar liabilities are generally swapped back into U.S. dollars. 57 The Company's exposure to future deterioration in the economic and political environment in Brazil and Argentina, with respect to its Brazilian and Argentine related investments (including local insurance operations), is limited to the net carrying value of those assets, which totaled approximately $360 million and $160 million, respectively, as of September 30, 2002. The net carrying value of the Company's Brazilian and Argentine related investments is net of writedowns for other-than-temporary impairments. Mortgage-Backed Securities. The following table shows the types of mortgage-backed securities the Company held at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ----------------------- ----------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ------- ---------- ------- (DOLLARS IN MILLIONS) Pass-through securities $13,894 41.0% $10,542 40.0% Collateralized mortgage obligations 14,037 41.3 10,432 39.7 Commercial mortgage-backed securities 6,023 17.7 5,354 20.3 ------- ------- ------- ------- Total $33,954 100.0% $26,328 100.0% ======= ======= ======= =======
At September 30, 2002, pass-through and collateralized mortgage obligations totaled $27,931 million, or 82.3% of total mortgage-backed securities, and a majority of this amount represented agency-issued pass-through and collateralized mortgage obligations guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. At September 30, 2002, approximately $3,158 million, or 52.4% of the commercial mortgage-backed securities, and $27,326 million, or 97.8% of the pass-through securities and collateralized mortgage obligations, were rated Aaa/AAA by Moody's or S&P. The principal risks inherent in holding mortgage-backed securities are prepayment, extension and collateral risks, which will affect the timing of when cash will be received. The Company's active monitoring of its mortgage-backed securities mitigates exposure to losses from cash flow risk associated with interest rate fluctuations. Asset-Backed Securities. Asset-backed securities, which include home equity loans, credit card receivables, collateralized debt obligations and automobile receivables, are purchased both to diversify the overall risks of the Company's fixed maturity assets and to provide attractive returns. The Company's asset-backed securities are diversified both by type of asset and by issuer. Home equity loans constitute the largest exposure in the Company's asset-backed securities investments. Except for asset-backed securities backed by home equity loans, the asset-backed security investments generally have little sensitivity to changes in interest rates. Approximately $4,760 million and $3,427 million or 48.4% and 42.1%, of total asset-backed securities were rated Aaa/AAA by Moody's or S&P at September 30, 2002 and December 31, 2001, respectively. The principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the security's priority in the issuer's capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include consumer or corporate credits such as credit card holders, equipment lessees, and corporate obligors. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace. Structured investment transactions. The Company participates in structured investment transactions as part of its risk management strategy, including asset/liability management, and to enhance the Company's total return on its investment portfolio. These investments are predominately made through bankruptcy-remote SPEs, which generally acquire financial assets, including corporate equities, debt securities and purchased options. These investments are referred to as "beneficial interests." The Company's exposure to losses related to these SPEs is limited to its carrying value since the Company has not guaranteed the performance, liquidity or obligations of the SPEs. As prescribed by GAAP, the Company does not consolidate such SPEs since unrelated third parties hold controlling interests through ownership of the SPEs' equity, representing at least three percent of the total assets of the SPE throughout the life of the SPE, and such equity class has the substantive risks and rewards of the residual interests in the SPE. The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and is also the collateral manager and a beneficial interest holder in such transactions. As the collateral manager, the 58 Company earns a management fee on the outstanding securitized asset balance. When the Company transfers assets to an SPE and surrenders control over the transferred assets, the transaction is accounted for as a sale. Gains or losses on securitizations are determined with reference to the cost or amortized cost of the financial assets transferred, which is allocated to the assets sold and the beneficial interests retained based on relative fair values at the date of transfer. The Company has sponsored four securitizations with a total of approximately $1.3 billion in financial assets as of September 30, 2002. These transactions were executed prior to 2002. The Company's beneficial interests in these SPEs and the related investment income were insignificant as of September 30, 2002 and December 31, 2001 and for the three months and nine months ended September 30, 2002 and 2001. The Company also invests in structured investment transactions, which are managed and controlled by unrelated third parties. In instances where the Company exercises significant influence over the operating and financial policies of an SPE, the beneficial interests are accounted for in accordance with the equity method of accounting. Where the Company does not exercise significant influence, the structure of the beneficial interests (i.e., debt or equity securities) determines the method of accounting for the investment. Such beneficial interests generally are structured notes, which are classified as fixed maturities, and the related income is recognized using the retrospective interest method. Beneficial interests other than structured notes are also classified as fixed maturities, and the related income is recognized using the level yield method. The market value of all such structured investments, including SPEs, was approximately $1.3 billion at September 30, 2002 and $1.6 billion at December 31, 2001. The related income recognized was $17 million and $61 million for the three months and nine months ended September 30, 2002, respectively. The related losses recognized were $23 million and $5 million for the three months and nine months ended September 30, 2001, respectively. MORTGAGE LOANS ON REAL ESTATE The Company's mortgage loans on real estate are collateralized by commercial, agricultural and residential properties. Mortgage loans on real estate comprised 13.0% and 13.9% of the Company's total cash and invested assets at September 30, 2002 and December 31, 2001, respectively. The carrying value of mortgage loans on real estate is stated at original cost net of repayments, amortization of premiums, accretion of discounts and valuation allowances. The following table shows the carrying value of the Company's mortgage loans on real estate by type at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ---------------------- ---------------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL ------- ------- ------- ------- (DOLLARS IN MILLIONS) Commercial $18,348 76.8 % $17,959 76.0 % Agricultural 5,155 21.6 5,268 22.3 Residential 382 1.6 394 1.7 ------- ----- ------- ----- Total $23,885 100.0 % $23,621 100.0 % ======= ===== ======= =====
59 Commercial Mortgage Loans. The Company diversifies its commercial mortgage loans by both geographic region and property type, and manages these investments through a network of regional offices overseen by its investment department. The following table presents the distribution across geographic regions and property types for commercial mortgage loans at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------- -------------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL ------- ----- ------- ----- (DOLLARS IN MILLIONS) REGION South Atlantic $ 4,832 26.3% $ 4,729 26.3% Pacific 3,860 21.0 3,593 20.0 Middle Atlantic 3,315 18.1 3,248 18.1 East North Central 1,962 10.7 2,003 11.2 New England 1,270 6.9 1,198 6.7 West South Central 975 5.3 1,021 5.7 Mountain 763 4.2 733 4.1 West North Central 647 3.5 727 4.0 International 546 3.0 526 2.9 East South Central 178 1.0 181 1.0 ------- ----- ------- ----- Total $18,348 100.0% $17,959 100.0% ======= ===== ======= ===== PROPERTY TYPE Office $ 8,431 45.9% $ 8,293 46.2% Retail 4,332 23.6 4,208 23.4 Apartments 2,602 14.2 2,553 14.2 Industrial 1,933 10.5 1,813 10.1 Hotel 818 4.5 864 4.8 Other 232 1.3 228 1.3 ------- ----- ------- ----- Total $18,348 100.0% $17,959 100.0% ======= ===== ======= =====
60 The following table presents the scheduled maturities for the Company's commercial mortgage loans at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------- -------------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL ------- ----- ------- ----- (DOLLARS IN MILLIONS) Due in one year or less $ 750 4.1% $ 840 4.7% Due after one year through two years 1,115 6.1 677 3.8 Due after two years through three years 1,595 8.7 1,532 8.5 Due after three years through four years 2,393 13.0 1,772 9.9 Due after four years through five years 1,724 9.4 2,078 11.6 Due after five years 10,771 58.7 11,060 61.5 ------- ----- ------- ----- Total $18,348 100.0% $17,959 100.0% ======= ===== ======= =====
Problem, Potential Problem and Restructured Mortgage Loans. The Company monitors its mortgage loan investments on a continual basis. Through this monitoring process, the Company reviews loans that are restructured, delinquent or under foreclosure and identifies those that management considers to be potentially delinquent. These loan classifications are generally consistent with those used in industry practice. The Company defines restructured mortgage loans, consistent with industry practice, as loans in which the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. This definition provides for loans to exit the restructured category under certain conditions. The Company defines delinquent mortgage loans, consistent with industry practice, as loans in which two or more interest or principal payments are past due. The Company defines mortgage loans under foreclosure, consistent with industry practice, as loans in which foreclosure proceedings have formally commenced. The Company defines potentially delinquent loans as loans that, in management's opinion, have a high probability of becoming delinquent. The Company reviews all mortgage loans at least annually. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis and tenant creditworthiness. The Company also reviews loan-to-value ratios and debt coverage ratios for restructured loans, delinquent loans, loans under foreclosure, potentially delinquent loans, loans with an existing valuation allowance, loans maturing within two years and loans with a loan-to-value ratio greater than 90% as determined in the prior year. The principal risks in holding commercial mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the geographic location of the property, the physical condition of the property, the diversity of tenants and the rollover of their leases and the ability of the property manager to attract tenants and manage expenses. Supply and demand risks include changes in the supply and/or demand for rental space which cause changes in vacancy rates and/or rental rates. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for loan refinancing. The Company has a $525 million mortgage loan on a high profile office complex that has been affected by the September 11, 2001 tragedies causing the obligor to impair its investment in the property. The Company did not classify this loan as a problem or potential problem as of September 30, 2002 as the obligor is performing as agreed and the estimated collateral value provides sufficient coverage for the loan. The Company establishes valuation allowances for loans that it deems impaired, as determined through its mortgage review process. The Company defines impaired loans consistent with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as loans which it probably will not collect all amounts due according to applicable contractual terms of the agreement. The Company bases valuation allowances upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the value of the loan's collateral. The Company records valuation allowances as investment losses. The Company records subsequent adjustments to allowances as investment gains or losses. 61 The following table presents the amortized cost and valuation allowance for commercial mortgage loans distributed by loan classification at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ---------------------------------------------- ---------------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing $18,055 97.7% $ 56 0.3% $17,495 96.6% $ 52 0.3% Restructured 261 1.4 52 19.9% 448 2.5 55 12.3% Delinquent or under foreclosure 32 0.2 7 21.9% 14 0.1 7 50.0% Potentially delinquent 133 0.7 18 13.5% 136 0.8 20 14.7% ------- ----- ---- ------- ----- ---- Total $18,481 100.0% $133 0.7% $18,093 100.0% $134 0.7% ======= ===== ==== ======= ===== ====
---------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for commercial mortgage loans for the:
NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------ (DOLLARS IN MILLIONS) Balance, beginning of period $ 134 Additions 27 Deductions for writedowns and dispositions (28) ----- Balance, end of period $ 133 =====
Agricultural Mortgage Loans. The Company diversifies its agricultural mortgage loans by both geographic region and product type. The Company manages these investments through a network of regional offices and field professionals overseen by its investment department. Approximately 63.5% of the $5,155 million of agricultural mortgage loans outstanding at September 30, 2002 were subject to rate resets prior to maturity. A substantial portion of these loans generally are successfully renegotiated and remain outstanding to maturity. The process and policies for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial loans. 62 The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ----------------------------------------------- ----------------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing $4,875 94.4% $ -- 0.0% $5,055 95.8% $ 3 0.1% Restructured 186 3.6 2 1.1% 188 3.6 3 1.6% Delinquent or under foreclosure 91 1.8 4 4.4% 29 0.5 2 6.9% Potentially delinquent 9 0.2 -- 0.0% 5 0.1 1 20.0% ------ ----- ----- ------ ----- ----- Total $5,161 100.0% $ 6 0.1% $5,277 100.0% $ 9 0.2% ====== ===== ===== ====== ===== =====
---------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for agricultural mortgage loans for the:
NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------ (DOLLARS IN MILLIONS) Balance, beginning of period $ 9 Additions 2 Deductions for writedowns and dispositions (5) --- Balance, end of period $ 6 ===
The principal risks in holding agricultural mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the geographic location of the property, soil types, weather conditions and the other factors that may impact the borrower's guaranty. Supply and demand risks include the supply and demand for the commodities produced on the specific property and the related price for those commodities. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for loan refinancing. 63 REAL ESTATE, REAL ESTATE JOINT VENTURES AND REAL ESTATE HELD-FOR-SALE The Company's real estate and real estate joint venture investments consist of commercial and agricultural properties located throughout the U.S. and Canada. The Company manages these investments through a network of regional offices overseen by its investment department. At September 30, 2002 and December 31, 2001, the carrying value of the Company's real estate, real estate joint ventures and real estate held-for-sale was $5,663 million and $5,730 million, respectively, or 3.1% and 3.4% of total cash and invested assets, respectively. The carrying value of real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at the Company's equity in the real estate joint ventures net of impairments and valuation allowances. These holdings consist of real estate, interests in real estate joint ventures and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's real estate, real estate joint ventures and real estate held-for-sale at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------- -------------------- CARRYING % OF CARRYING % OF TYPE VALUE TOTAL VALUE TOTAL -------- ----- -------- ----- (DOLLARS IN MILLIONS) Real estate held-for-investment $4,061 71.7% $3,705 64.7% Real estate joint ventures held-for-investment 316 5.6 356 6.2 ------ ----- ------ ----- Subtotal 4,377 77.3 4,061 70.9 ------ ----- ------ ----- Real estate held-for-sale 1,241 21.9 1,620 28.3 Foreclosed real estate held-for-sale 45 0.8 49 0.8 ------ ----- ------ ----- Subtotal 1,286 22.7 1,669 29.1 ------ ----- ------ ----- Total $5,663 100.0% $5,730 100.0% ====== ===== ====== =====
Office properties representing 61.2% and 63.5% of the Company's real estate, real estate joint ventures and real estate held-for-sale at September 30, 2002 and December 31, 2001, respectively, are well diversified geographically, principally within the United States. The average occupancy level of office properties was 89% and 91% at September 30, 2002 and December 31, 2001, respectively. Ongoing management of these investments includes quarterly valuations, as well as an annual market update and review of each property's budget, financial returns, lease rollover status and the Company's exit strategy. In addition to individual property reviews, the Company employs an overall strategy of selective dispositions and acquisitions as market opportunities arise. The Company adjusts the carrying value of real estate and real estate joint ventures held-for-investment for impairments whenever events or changes in circumstances indicate that the carrying value of the property may not be recoverable. The Company writes down impaired real estate to estimated fair value, when the carrying value of the real estate exceeds the sum of the undiscounted cash flow expected to result from the use and eventual disposition of the real estate. The Company records writedowns as investment losses and reduces the cost basis of the properties accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. The current real estate equity portfolio is mainly comprised of a core portfolio of multi-tenanted office buildings with high tenant credit quality, net leased properties and apartments. The objective is to maximize earnings by building upon and strengthening the core portfolio through selective acquisitions and dispositions. In light of this objective, the Company currently is seeking to take advantage of a significant demand for Class A, institutional grade properties and, as a result, is selling certain real estate holdings in its portfolio. This sales program does not represent any fundamental change in the Company's investment strategy. Once the Company identifies a property that is expected to be sold within one year and commences a firm plan for marketing the property, in accordance with SFAS 144, the Company classifies the property as held-for-sale and reports the related net investment income and any resulting investments gains and losses as discontinued operations. Further, the Company establishes and periodically revises, if necessary, a valuation allowance to adjust the carrying value of the property to its expected sales value, less associated selling costs, if it is lower than the property's carrying value. The Company records allowances as investment losses. The Company records subsequent adjustments to allowances as investment gains or losses. If circumstances arise that were previously 64 considered unlikely and, as a result, the property is expected to be on the market longer than anticipated, a held-for-sale property is reclassified to held-for-investment and measured as such. The Company's carrying value of real estate and real estate joint ventures held-for-sale, including real estate acquired upon foreclosure of commercial and agricultural mortgage loans, in the amounts of $1,286 million and $1,669 million at September 30, 2002 and December 31, 2001, respectively, are net of impairments of $180 million and $172 million, respectively, and net of valuation allowances of $51 million and $35 million, respectively. The Company records real estate acquired upon foreclosure of commercial and agricultural mortgage loans at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure. EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS The Company's carrying value of equity securities, which primarily consist of investments in common stocks, was $1,955 million and $3,063 million at September 30, 2002 and December 31, 2001, respectively. Substantially all of the common stock is publicly traded on major securities exchanges. The carrying value of the other limited partnership interests (which primarily represent ownership interests in pooled investment funds that make private equity investments in companies in the U.S. and overseas) was $1,747 million and $1,637 million at September 30, 2002 and December 31, 2001, respectively. The Company classifies its investments in common stocks as available-for-sale and marks them to market, except for non-marketable private equities which are generally carried at cost. The Company accounts for its investments in limited partnership interests in which it does not have a controlling interest in accordance with the equity method of accounting. The Company's investments in equity securities excluding partnerships represented 1.1% and 1.8% of cash and invested assets at September 30, 2002 and December 31, 2001, respectively. Equity securities include, at September 30, 2002 and December 31, 2001, $451 million and $329 million, respectively, of private equity securities. The Company may not freely trade its private equity securities because of restrictions imposed by federal and state securities laws and illiquid trading markets. During the year ended December 31, 2001, two exchangeable subordinated debt securities matured, resulting in a gross gain of $44 million on the equity exchanged in satisfaction of the note. In February 2002, the remaining exchangeable debt security issued by the Company matured. The debt security was satisfied for cash, and no equity was exchanged. The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $1,752 million and $1,898 million at September 30, 2002 and December 31, 2001, respectively. 65 The following tables set forth the cost, gross unrealized gain or loss and estimated fair value of the Company's equity securities, as well as the percentage of the total equity securities at:
SEPTEMBER 30, 2002 ---------------------------------------------------------- GROSS UNREALIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ----- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks $1,594 $ 99 $ 191 $1,502 76.8% Nonredeemable preferred stocks 452 13 12 453 23.2 ------ ---- ----- ------ ----- Total equity securities $2,046 $112 $ 203 $1,955 100.0% ====== ==== ===== ====== =====
DECEMBER 31, 2001 ---------------------------------------------------------- GROSS UNREALIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ----- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks $1,968 $657 $ 78 $2,547 83.2% Nonredeemable preferred stocks 491 28 3 516 16.8 ------ ---- ----- ------ ----- Total equity securities $2,459 $685 $ 81 $3,063 100.0% ====== ==== ===== ====== =====
Problem and Potential Problem Equity Securities and Other Limited Partnership Interests. The Company monitors its equity securities and other limited partnership interests on a continual basis. Through this monitoring process, the Company identifies investments that management considers to be problems or potential problems. Problem equity securities and other limited partnership interests are defined as securities (i) in which significant declines in revenues and/or margins threaten the ability of the issuer to continue operating, or (ii) where the issuer has subsequently entered bankruptcy. Potential problem equity securities and other limited partnership interests are defined as securities issued by a company that is experiencing significant operating problems or difficult industry conditions. Criteria generally indicative of these problems or conditions are (i) cash flows falling below varying thresholds established for the industry and other relevant factors, (ii) significant declines in revenues and/or margins, (iii) public securities trading at a substantial discount compared to original cost as a result of specific credit concerns, and (iv) other information that becomes available. Equity Security Impairment. The Company classifies all of its equity securities as available-for-sale and marks them to market through other comprehensive income. All securities with gross unrealized losses at the consolidated balance sheet date are subjected to the Company's process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be so impaired. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described below, about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following: - The length of time and the extent to which the market value has been below cost; - The potential for impairments of securities when the issuer is experiencing significant financial difficulties, including a review of all securities of the issuer, including its known subsidiaries and affiliates, regardless of the form of the Company's ownership; - The potential for impairments in an entire industry sector or sub-sector; 66 - The potential for impairments in certain economically depressed geographic locations; - The potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; and - Other subjective factors, including concentrations and information obtained from regulators and rating agencies. Equity securities or other limited partnership interests which are deemed to be other-than-temporarily impaired are written down to fair value. The Company records writedowns as investment losses and adjusts the cost basis of the equity securities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Writedowns of equity securities and other limited partnership interests were $51 million and $20 million for the three months ended September 30, 2002 and 2001, respectively and $111 million and $117 million for the nine months ended September 30, 2002 and 2001, respectively. During the three months ended September 30, 2002, the Company sold equity securities with an estimated fair value of $2 million at a loss of $2 million. During the nine months ended September 30, 2002, the Company sold equity securities with an estimated fair value of $77 million at a loss of $43 million. The gross unrealized loss related to the Company's equity securities at September 30, 2002 was $203 million. Such securities are concentrated by security type in common stock (50%) and mutual funds (46%); and are concentrated by industry in domestic broad market mutual funds (38%) and financial (33%) (calculated as a percentage of gross unrealized loss). The following table presents the amortized costs, gross unrealized losses and number of securities for equity securities where the estimated fair value had declined and remained below cost by less than 20%, or 20% or more for:
AT SEPTEMBER 30, 2002 ------------------------------------------------------------------- GROSS AMORTIZED COST UNREALIZED LOSSES NUMBER OF SECURITIES -------------------- ------------------- -------------------- LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE -------------------- ------------------- -------------------- (DOLLARS IN MILLIONS) Less than six months $607 $355 $24 $106 415 292 Six months or greater but less than nine months 205 7 32 4 3 8 Nine months or greater but less than twelve months 3 8 1 2 3 8 Twelve months or greater 5 81 -- 34 2 64 -------------------- ------------------- -------------------- Total $820 $451 $57 $146 423 372 ==================== =================== ====================
The Company's review of its equity security exposure includes the analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost by 20% or more for six months or greater. The first two categories have generally been adversely impacted by the downturn in the financial markets, overall economic conditions and continuing effects of the September 11, 2001 tragedies. While all of these securities are monitored for potential impairment, the Company's experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve. The following table presents the total gross unrealized losses for equity securities at September 30, 2002 where the estimated fair value had declined and remained below cost by:
AT SEPTEMBER 30, 2002 ------------------------ GROSS UNREALIZED % OF LOSSES TOTAL ----------- ---------- (DOLLARS IN MILLIONS) Less than 20% $ 57 28.1% 20% or more for less than six months 106 52.2 20% or more for six months or greater 40 19.7 ---- ----- Total $203 100.0% ==== =====
67 The category of equity securities where the estimated fair value has declined and remained below cost by less than 20% is comprised of 423 equity securities with a cost of $820 million and a gross unrealized loss of $57 million. These securities are concentrated by security type in mutual funds (80%); and concentrated by industry in domestic broad market mutual funds (80%) (calculated as a percentage of gross unrealized loss). The significant factors considered at September 30, 2002 in the review of equity securities for other-than-temporary impairment were the unusual and severely depressed market conditions, the instability of the global economy and the lagging effects of the September 11, 2001 tragedies. The category of equity securities where the estimated fair value has declined and remained below cost by 20% or more for less than six months is comprised of 292 equity securities with a cost of $355 million and a gross unrealized loss of $106 million. These securities are concentrated by security type in common stock (86%); and concentrated by industry in financial (62%) and domestic broad market mutual funds (13%) (calculated as a percentage of gross unrealized loss). The significant factors considered at September 30, 2002 in the review of equity securities for other-than-temporary impairment were the unusual and severely depressed market conditions, the instability of the global economy and the lagging effects of the September 11, 2001 tragedies. The category of equity securities where the estimated fair value has declined and remained below cost by 20% or more for six months or greater is comprised of 80 equity securities with a cost of $96 million and a gross unrealized loss of $40 million. These securities are concentrated by security type in mutual funds (87%); and concentrated by industry in domestic broad market mutual funds (46%) and global mutual funds (40%) (calculated as a percentage of gross unrealized loss). A portion of the 80 equity securities described above had estimated fair values below cost by 20% or more for twelve months or greater. The significant factors considered at September 30, 2002 in the review of equity securities for other-than-temporary impairment were the unusual and severely depressed market conditions, the instability of the global economy and the lagging effects of the September 11, 2001 tragedies. The Company held four equity securities with a gross unrealized loss at September 30, 2002 greater than $5 million. None of these securities represented losses where the estimated fair value had declined and remained below amortized cost by 20% or more for six months or greater. OTHER INVESTED ASSETS The Company's other invested assets consist principally of leveraged leases and funds withheld at interest of $2.5 billion and $2.7 billion at September 30, 2002 and December 31, 2001. The leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions which are diversified by geographic area. The Company regularly reviews residual values and writes down residuals to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies equal to the net statutory reserves are withheld and continue to be legally owned by the ceding company. Interest accrues to these funds withheld at rates defined by the treaty terms and may be contractually specified or directly related to the investment portfolio. The Company's other invested assets represented 1.7% and 1.9% of cash and invested assets at September 30, 2002 and December 31, 2001, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative instruments to manage risk through one of four principal risk management strategies: the hedging of liabilities, invested assets, portfolios of assets or liabilities and anticipated transactions. Additionally, Metropolitan Life enters into income generation and replication derivative transactions as permitted by its derivatives use plan that was approved by the Department. The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit and foreign currency swaps, foreign exchange contracts, and options, including caps and floors. 68 The table below provides a summary of the carrying value, notional amount and fair value of derivative financial instruments held at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 -------------------------------------------- -------------------------------------------- CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE CARRYING NOTIONAL ------------------- CARRYING NOTIONAL ------------------- VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES -------- -------- ------ ----------- -------- -------- ------ ----------- (DOLLARS IN MILLIONS) Financial futures $ (1) $ 31 $ -- $ 1 $ -- $ -- $ -- $-- Interest rate swaps 84 3,681 202 118 70 1,849 79 9 Floors 7 325 7 -- 11 325 11 -- Caps -- 7,590 -- -- 5 7,890 5 -- Financial forwards (19) 250 -- 19 -- -- -- -- Foreign currency swaps 38 2,099 135 97 162 1,925 188 26 Options 3 55 3 -- (12) 1,857 -- 12 Foreign exchange contracts (3) 47 -- 3 4 67 4 -- Written covered calls -- 315 -- -- -- 40 -- -- Credit default swaps -- 376 1 1 -- 270 -- -- ----- ------- ---- ---- ----- ------- ---- --- Total contractual commitments $ 109 $14,769 $348 $239 $ 240 $14,223 $287 $47 ===== ======= ==== ==== ===== ======= ==== ===
SECURITIES LENDING The Company operates a securities lending program whereby blocks of securities are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $14,641 million and $13,471 million and an estimated fair value of $15,991 and $12,195 million were on loan under the program at September 30, 2002 and December 31, 2001, respectively. The Company was liable for cash collateral under its control of $16,251 million and $12,661 million at September 30, 2002 and December 31, 2001, respectively. Security collateral on deposit from customers may not be sold or repledged and is not reflected in the unaudited interim condensed consolidated financial statements. SEPARATE ACCOUNT ASSETS The Company manages each separate account's assets in accordance with the prescribed investment policy that applies to that specific separate account. The Company establishes separate accounts on a single client and multi-client commingled basis in conformity with insurance laws. Generally, separate accounts are not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to the Company's general account claims only to the extent that the value of such assets exceeds the separate account liabilities, as defined by the account's contract. If the Company uses a separate account to support a contract providing guaranteed benefits, the Company must comply with the asset maintenance requirements stipulated under Regulation 128 of the Department. The Company monitors these requirements at least monthly and, in addition, performs cash flow analyses, similar to that conducted for the general account, on an annual basis. The Company reports separately as assets and liabilities investments held in separate accounts and liabilities of the separate accounts. The Company reports substantially all separate account assets at their fair market value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders, and, accordingly, the Company does not reflect them in its unaudited interim condensed consolidated statements of income and cash flows. The Company reflects in its revenues fees charged to the separate accounts by the Company, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has material exposure to interest rate, equity market and foreign exchange risk. The Company analyzes 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 derivative instruments. The Company's market risk exposure at September 30, 2002 is relatively unchanged in amount from that reported on December 31, 2001, a description of which may be found in the 2001 Annual Report on Form 10-K. 69 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"), the Holding Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) were effective. (b) Change in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 9 to unaudited interim condensed consolidated financial statements in Part I of this Report. SALES PRACTICES CLAIMS As previously disclosed, over the past several years Metropolitan Life, New England Mutual Life Insurance Company ("New England Mutual") and General American Life Insurance Company ("General American") have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." Settlements have been reached in the sales practices class actions against Metropolitan Life, New England Mutual and General American. An appellate court has affirmed the order approving the General American settlement and the implementation is proceeding. Certain class members have opted out of these class action settlements and have brought or continued non-class action sales practices lawsuits. As of September 30, 2002, there are approximately 425 sales practices lawsuits pending against Metropolitan Life, approximately 60 lawsuits pending against New England Mutual and approximately 45 of such lawsuits pending against General American. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all reasonably probable and estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. ASBESTOS-RELATED CLAIMS As previously reported, Metropolitan Life received approximately 59,500 asbestos-related claims in 2001. During the first nine months of 2002 and 2001, Metropolitan Life received approximately 45,200 and 49,500 asbestos-related claims, respectively. DEMUTUALIZATION ACTIONS The Company has previously reported that a purported class action was filed in the Supreme Court of the State of New York for New York County on behalf of a purported class of beneficiaries of Metropolitan Life annuities purchased to fund structured settlements. The class members claimed that they should have received common stock or cash in connection with the demutualization. Metropolitan Life's motion to dismiss this case was granted in a decision filed on October 31, 2002. RACE-CONSCIOUS UNDERWRITING CLAIMS As previously disclosed, Insurance Departments in a number of states initiated inquiries in 2000 about possible race-conscious underwriting of life insurance. These inquiries generally have been directed to all life insurers licensed in their respective states, including Metropolitan Life and certain of its subsidiaries. The Department has commenced examinations of certain domestic life insurance companies, including Metropolitan Life, concerning possible past race-conscious underwriting practices. Metropolitan Life has cooperated fully with that inquiry. Four purported class action lawsuits filed against Metropolitan Life in 2000 and 2001 alleging 70 racial discrimination in the marketing, sale, and administration of life insurance policies have been consolidated in the United States District Court for the Southern District of New York. Metropolitan Life has entered into settlement agreements to resolve the regulatory examination and the actions pending in the United States District Court for the Southern District of New York. The class action settlement, which has received preliminary approval from the court, must receive final approval before it can be implemented. A fairness hearing has been set for February 7, 2003. The regulatory settlement agreement is conditioned upon final approval of the class action settlement. OTHER Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. SUMMARY It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted above in connection with specific matters. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's operating results or cash flows in particular quarterly or annual periods. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Regulatory Settlement Agreement dated as of August 29, 2002, by and between Metropolitan Life Insurance Company and the State of New York Insurance Department, along with the insurance regulators of each of the states of the United States and of the District of Columbia that adopt, approve and agree to the Regulatory Settlement Agreement. 10.2 Stipulation of Settlement dated August 29, 2002, by and between Thompson et al. as Plaintiffs in their individual and representative capacities, and Metropolitan Life Insurance Company, as Defendant. 10.3 Separation Agreement, Waiver and General Release dated July 16, 2002 by and between Metropolitan Life Insurance Company and James M. Benson. 10.4 MetLife Deferred Compensation Plan for Officers as amended and restated effective October 22, 2002. (b) Reports on Form 8-K During the three months ended September 30, 2002, the following current reports were filed on Form 8-K: 1. Current Report on Form 8-K filed July 18, 2002 attaching press release dated July 17, 2002 announcing combination of Individual and Institutional Businesses. 2. Current Report on Form 8-K filed August 6, 2002 attaching press release dated August 5, 2002 announcing second quarter 2002 results. 3. Current Report on Form 8-K filed August 12, 2002 attaching press release dated August 12, 2002 announcing adoption of fair-value recognition provisions of accounting for employee stock options effective January, 2003. 71 4. Current Report on Form 8-K filed August 14, 2002 attaching press release dated August 14, 2002 announcing submission of sworn statements to the Securities and Exchange Commission ("SEC") pursuant to SEC Order No. 4-460 and submission of certifications to SEC pursuant to 18 U.S.C. Section 1350. 5. Current Report on Form 8-K filed August 16, 2002 regarding correction of typographical error. 6. Current Report on Form 8-K filed August 29, 2002 attaching press release dated August 29, 2002 announcing proposed class-action litigation settlement. 7. Current Report on Form 8-K filed September 6, 2002 regarding ratings action by Moody's Investors Services. 8. Current Report on Form 8-K filed September 20, 2002 regarding ratings action by Fitch Ratings. 72 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. METLIFE, INC. By: /s/ Virginia M. Wilson ---------------------------------------- Virginia M. Wilson Senior Vice-President and Controller (Authorized signatory and principal accounting officer) Date: November 14, 2002 73 CERTIFICATIONS I, Robert H. Benmosche, Chief Executive Officer of MetLife, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert H. Benmosche ----------------- ----------------------- Name: Robert H. Benmosche Title: Chairman, President and Chief Executive Officer 74 I, Stewart G. Nagler, Chief Financial Officer of MetLife, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Stewart G. Nagler ----------------- --------------------- Name: Stewart G. Nagler Title: Vice Chairman and Chief Financial Officer 75 EXHIBIT INDEX
EXHIBIT PAGE NUMBER EXHIBIT NAME NUMBER 10.1 Regulatory Settlement Agreement dated as of August 29, 2002, by and between Metropolitan Life Insurance Company and the State of New York Insurance Department, along with the insurance regulators of each of the states of the United States and of the District of Columbia that adopt, approve and agree to the Regulatory Settlement Agreement. 10.2 Stipulation of Settlement dated August 29, 2002, by and between Thompson et al. as Plaintiffs in their individual and representative capacities, and Metropolitan Life Insurance Company, as Defendant. 10.3 Separation Agreement, Waiver and General Release dated July 16, 2002 by and between Metropolitan Life Insurance Company and James M. Benson. 10.4 MetLife Deferred Compensation Plan for Officers as amended and restated effective October 22, 2002.
76 EX-10.1 3 y65151exv10w1.txt REGULATORY SETTLEMENT AGREEMENT Exhibit 10.1 IN THE MATTER OF METROPOLITAN LIFE INSURANCE COMPANY ___________________________________/ REGULATORY SETTLEMENT AGREEMENT TABLE OF CONTENTS
Page ---- I. BACKGROUND AND RECITALS.......................................... 1 II. GENERAL TERMS.................................................... 3 A. Definitions................................................. 3 III. REGULATORY SETTLEMENT AGREEMENT TERMS............................ 24 IV. BENEFITS FOR IN-FORCE POLICIES................................... 30 A. The Enhanced Future Death/Maturity Benefit.................. 30 B. The Enhanced Future Termination/Non-Forfeiture Benefit...... 33 C. The Enhanced Additional Insurance Benefit................... 35 D. The Cash Payment Option..................................... 36 E. The Prospective Commitment.................................. 37 V. RELIEF FOR DEATH/MATURITY POLICIES: THE ENHANCED PAST DEATH/MATURITY BENEFIT...................................... 38 A. Standard Enhancements....................................... 39 B. Additional Enhancements..................................... 40 VI. BENEFITS FOR TERMINATED POLICIES................................. 41 A. The Enhanced Past Termination Benefit....................... 41 B. The Settlement Death Benefit................................ 42 VII. MET SERIES ENHANCEMENT........................................... 45 VIII. UNCLAIMED BENEFITS RELIEF........................................ 45 IX. COMPANY CERTIFICATION OF RELIEF.................................. 49 X. RELIEF QUALIFICATIONS............................................ 50 XI. MINIMUM/MAXIMUM COST OF BENEFITS................................. 56
i TABLE OF CONTENTS (Continued)
Page ---- XII. NOTICE TO CLASS MEMBERS AND COMMUNICATIONS WITH CLASS MEMBERS AND POLICYOWNERS................................... 59 A. Class Notice Package........................................ 59 B. Publication Notice and Other Media Notice................... 63 C. Remailing and Additional Notice............................. 64 D. Post-Settlement Mailing..................................... 65 E. Retention of Administrator.................................. 65 F. Communication with Class Members, Policyowners and Producers 70 XIII. ORDER OF DISMISSAL............................................... 71 XIV. ORDER OF NOTICE, FAIRNESS HEARING AND ADMINISTRATION............. 71 XV. FINAL APPROVAL, AND FINAL JUDGMENT AND ORDER APPROVING SETTLEMENT 72 XVI. NEW ENGLAND MUTUAL............................................... 72 XVII. REGULATORY RESOLUTION............................................ 74 XVIII. MODIFICATION OR TERMINATION OF THIS AGREEMENT.................... 76 XIX. GENERAL MATTERS AND RESERVATIONS................................. 78
ii IN THE MATTER OF METROPOLITAN LIFE INSURANCE COMPANY ____________________________________/ REGULATORY SETTLEMENT AGREEMENT THIS REGULATORY SETTLEMENT AGREEMENT (the "Regulatory Settlement Agreement") is entered into as of this 29th day of August 2002, by and between Metropolitan Life Insurance Company ("Metropolitan Life" or "MetLife") as party of the first part, and the State of New York Insurance Department (the "Department" or "Lead Regulatory Negotiator"), along with the insurance regulators of each of the states of the United States and of the District of Columbia that adopt, approve and agree to this Regulatory Settlement Agreement (the "Participating Regulators"), as parties of the second part. I. BACKGROUND AND RECITALS A. On June 22, 2000, the Department issued Supplement No. 1 to Circular Letter No. 19 (2000) notifying all life insurers and fraternal benefit societies that the Department was investigating allegations of race-based underwriting of life insurance by its licensees. B. The Department thereafter conducted an examination with respect to race-based underwriting practices and policies of MetLife, New England Mutual Life Insurance Company ("New England Mutual Life"), and United Mutual Life Insurance Company. New England Mutual Life merged with and into MetLife in 1996, and United Mutual Life Insurance Company merged with and into MetLife in 1992. The examination included a review of more than 750,000 pages of documents, thousands of policy application files, extensive data analysis and interviews of current and former employees and agents. C. Details regarding the scope of, and findings from, the Department's examination are set forth in a report entitled State of New York Insurance Department Report on Examination of Metropolitan Life Insurance Company Regarding Response to Supplement No. 1 to Circular Letter No. 19 (2000) dated March 1, 2002 (the "Report on Examination"). D. Members of the National Association of Insurance Commissioners ("NAIC"), including the Participating Regulators, as the chief regulatory officials of their respective jurisdictions, agreed that the Department would be principally responsible as Lead Regulatory Negotiator for negotiating this Regulatory Settlement Agreement on behalf of and for the benefit of the Participating Regulators and the NAIC. E. After extensive negotiations, MetLife and the Department have agreed to enter into this Regulatory Settlement Agreement. This Regulatory Settlement Agreement provides benefits to current and former policyholders and others who may have been affected by certain race-based underwriting practices. F. MetLife is a defendant in various lawsuits (collectively, the "Action"), which are more specifically identified at Section II.A.1.a of this Agreement and assert, 2 among other things, racial discrimination claims relating to the pricing, underwriting, sale, issuance, characteristics, and/or administration of MetLife's Industrial Policies and Ordinary Policies. G. By the execution of a Stipulation of Settlement (the "Stipulation of Settlement" or "Settlement Agreement") MetLife has agreed to settle the Action without admitting the allegations made or any wrongdoing. A copy of the Stipulation of Settlement accompanies this Regulatory Settlement Agreement. H. The Department, the Participating Regulators and the Company desire to resolve all regulatory issues arising from or in any way relating to race-based underwriting practices, including the subject matter described in the Report on Examination, on the terms and conditions set forth herein. IT IS HEREBY STIPULATED AND AGREED: II. GENERAL TERMS A. DEFINITIONS 1. As used in this Regulatory Settlement Agreement and the annexed exhibits (which are an integral part of this Regulatory Settlement Agreement and are incorporated in their entirety by reference), the following terms have the following meanings, unless a Section or Subsection of this Regulatory Settlement Agreement or its exhibits expressly provides otherwise: a. "Action" shall mean the lawsuit captioned Thompson, et al. v. Metropolitan Life Insurance Company, No. 00 Civ. 5071 (HB), and all cases consolidated with it, including, but not limited to, Justin, et al. v. Metropolitan Life 3 Insurance Company, No. 00 Civ. 9068 (HB), McCallop v. Metropolitan Life Insurance Company, No. 01 Civ. 2090 (HB) and Billups v. Metropolitan Life Insurance Company, No. 01 Civ. 5579 (HB). b. "Additional Enhancement" shall mean the enhancements or payments, in addition to the enhancements or payments provided as Standard Enhancements (defined in Section II.A.1.jjjj, below), that shall be provided to Holders of certain In-Force Policies and Death/Maturity Policies pursuant to this Regulatory Settlement Agreement. c. "Additional Insurance" shall mean paid-up insurance additional to the Face Amount of a Policy, having its own contractual cash values. d. "Additional Premium" shall mean the annualized amount by which the premiums paid for a New England Mutual Affected Policy exceeded the premiums that were charged for an otherwise identical life insurance policy insuring a person of the same age and issued with a standard risk classification. e. "Adjustment Amount" shall mean the sum of (i) all Additional Premiums on a New England Mutual Affected Policy and (ii) interest on each Additional Premium accumulated at 4% per annum from the premium due date to the date that the benefit under Section XVI is provided. f. "Administrator" shall mean any third-party agents or administrators whom the Company shall retain to help implement the terms of this Regulatory Settlement Agreement. 4 g. "Affinity Group" shall mean (i) the Class Member or his or her spouse, sibling, parent or child (including a stepchild residing with the Class Member), and/or (ii) any person in whom the Class Member has an insurable interest; provided however, that no member of the Affinity Group shall be over age 72 as of January 1, 2004. h. "Agent Script" shall mean the script that the Company shall disseminate to its current Producers, as further described in Section XII.F.3 below. i. "Agreement" or "Regulatory Settlement Agreement" shall mean this Regulatory Settlement Agreement and the attached exhibits, including any subsequent amendments thereto and any exhibits to such amendments. j. "Alternate Covered Person" shall mean, for purposes of any Settlement Death Benefit provided pursuant to Section VI.B, a person who is a member of the Class Member's Affinity Group who is designated pursuant to the terms of Section VI.B.7 as the person upon whose qualifying death the Settlement Death Benefit provided under this Agreement shall be paid. k. "Alternate Recipient" shall mean such person as the Class Member may choose to receive the SDB payment pursuant to the terms and conditions set forth in Section VI.B below. l. "Amended Complaint" shall mean the Amended Consolidated Class Action Complaint in the Action filed by Plaintiffs on July 19, 2002. m. "Application File" shall mean the application submitted for the Policy; any statement of the agent or other sales representative submitted in 5 connection with the application for the Policy; any report of medical or paramedical examination obtained in connection with the underwriting of the application; any mercantile report obtained in connection with the underwriting of the application; and any other documents in the application file for the Policy. n. "Automatic Adjustment Date" shall mean a date selected by the Company that is no more than 40 days following the Final Settlement Date. o. "Cash Payment Option" shall mean the option of Eligible Holders of In-Force Policies to receive a cash payment from the Company instead of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit, as described in Section IV.D below. p. "Cash Payment Option Election Letter" shall mean the letter sent to the Holders of In-Force Policies, substantially in the form attached hereto as Exhibit J, by which such Class Members may exercise their right to receive a cash payment from the Company instead of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit, as described in Section IV.D below. q. "Cash Value" shall mean the cash value associated with a Policy's Face Amount. For each Policy other than any Policy that went onto an extended term-insurance non-forfeiture status and then expired prior to January 1, 1968, the cash value associated with the Policy's Face Amount shall not be reduced by any policy loan. 6 r. "Claim Form" shall mean the form included with the Class Notice Package that Holders of certain Policies shall be required to complete and submit in order to become Eligible Holders, pursuant to Sections X.B and X.E below. The Claim Form shall be in substantially the form appended hereto as Exhibit A, and shall be contained in a wrapper that clearly indicates that (i) a Claim Form is enclosed, (ii) the Claim Form must be submitted to obtain settlement benefits unless a Statement of Benefits included in the Class Notice Package states that submission of the Claim Form for the Policy is unnecessary, and (iii) Claim Forms must be postmarked by the Claim-In Date. s. "Claim-In Date" shall mean the date 75 days after the Fairness Hearing. t. "Claim-Resolution Date" shall mean the date by which all disputes concerning the eligibility for settlement benefits of any person or entity who submits a Claim Form shall be finally resolved pursuant to Section X.G below, which date shall be no later than 195 days after the Claim-In Date. u. "Class" or "Class Members" shall mean all Holders (including their estates) of Policies, but shall not include (unless and to the extent such persons or entities are Class Members by virtue of their status as Holder of another Policy) the following: (i) any Excluded Entity; (ii) any persons or entities who are Holders (or their estates) of a Policy (a) for which a timely request for exclusion from the proposed class has been received from any Holder or Estate Holder; (b) that was issued by the Company, but not accepted and paid for, or was returned to the Company as part 7 of the exercise of a free look provision in the Policy; or (c) that is the subject of a release signed by any person or entity while represented by counsel settling a claim or dispute and releasing Metropolitan Life from any further liability concerning such Policy; and (iii) any insurance company that owns or owned a Policy pursuant to an absolute assignment effected as part of an exchange under section 1035 of the Internal Revenue Code. v. "Class Counsel" shall mean Milberg Weiss Bershad Hynes & Lerach LLP; Bonnett, Fairbourn, Friedman & Balint, P.C.; James, Hoyer, Newcomer & Smiljanich, P.A.; Watson Jimmerson Givhan & Martin, P.C.; Whatley Drake, LLC; Arnzen, Parry & Wentz, P.S.C.; Herman Herman Katz & Cotlar, LLP; Carter & Cates; The Nygaard Law Firm; Barrett, Towmey, Broom, Hughes & Wesley; Campbell, Waller & Loper, LLC; Foote, Meyers, Miekle, Flowers & Solano, LLC; and Specter Specter Evans & Manogue, P.C. w. "Class Notice" shall mean the notice of the terms of the proposed settlement included in the Class Notice Package. x. "Class Notice Package" shall mean the notice package, as approved in form and content by the Department, Lead Counsel and the Company, and the Court, and substantially in the form attached hereto as Exhibit A, to be provided to Class Members pursuant to Section XII.A of this Regulatory Settlement Agreement. The Class Notice Package shall include (i) the Class Notice, (ii) a Claim Form, and (iii) in the case of Database Policies, a Statement of Benefits. 8 y. "Company" or "Metropolitan" or "Metropolitan Life" shall mean Metropolitan Life Insurance Company. z. "Company's Counsel" shall mean the law firm of Debevoise & Plimpton. aa. "Confirmatory Letter" shall mean the letter, in the form attached hereto as Exhibit K, to be sent to the last-known address on the Company's electronic records of payees of certain Death/Maturity Policies as updated hereunder, seeking to confirm the address of such payee or to obtain an updated address for such payee postmarked within 30 days of the date of the letter, as described in Section X.C.3 below. bb. "Court" shall mean the United States District Court for the Southern District of New York, where the Action is pending. cc. "Covered Met Series Policy" shall mean any life insurance policy described in Exhibit N hereto. dd. "Covered Person" shall mean the person upon whose qualifying death the Settlement Death Benefit provided under this Agreement will be paid, which person shall be the insured under the Policy making the Class Member eligible for relief, unless the Class Member designates an Alternate Covered Person pursuant to Section VI.B.7 below. ee. "Database Policies" shall mean (a) any Policy for which the insured is reflected on the Company's electronic records as non-Caucasian; (b) any 1920-1929 Intermediate Policy and any Other Industrial Monthly Substandard 9 Policy on the Company's electronic records for which the race of the insured is identified in the Application File as other than Caucasian; and (c) any 1930-1935 Ordinary Substandard Policy, 1927-1929 Industrial Monthly Substandard Policy or Industrial Weekly Substandard Policy on the Company's electronic records for which the race of the insured is not identified in the Company's electronic records as Caucasian. ff. "Death/Maturity Policies" shall mean any Policy on which, prior to the Eligibility Date, a death, maturity or endowment benefit has been paid or has become payable pursuant to its terms. gg. "Domestic Partner" shall mean an individual who, prior to the death of a Holder: (i) Lived with the Holder in an intimate and committed relationship of mutual caring at a time where both individuals were at least 18 years of age and neither individual was married or in another domestic partnership; (ii) Shared the same residence with the Holder at the time of the Holder's death; and (iii) Agreed with the Holder to be jointly responsible for basic living expenses incurred during the domestic partnership. hh. "Early Termination Adjustment" shall equal X/Y, where: (i) X equals the number of years that a Policy was premium-paying; and 10 (ii) Y equals the lesser of (a) the number of years that the Company required premiums to be paid for the Policy absent the death of the insured and (b) 2002 minus the year in which the Policy was issued. ii. "Eligibility Date" shall mean August 19, 2002. jj. "Eligible Holder" shall mean a Holder who has satisfied the requirements, if any, set forth in Section X below. Only those Holders who are Eligible Holders shall be entitled to receive benefits under this Agreement. kk. "Enhanced Additional Insurance Benefit" shall mean the Additional Insurance to be provided to Eligible Holders of certain In-Force Policies under this Regulatory Settlement Agreement, as described in Section IV.C below. ll. "Enhanced Future Death/Maturity Benefit" shall mean the terminal dividend (composed of a Standard Enhancement and, where applicable, an Additional Enhancement) to be provided to Eligible Holders of certain In-Force Policies under this Regulatory Settlement Agreement, as described in Section IV.A below. mm. "Enhanced Future Termination/Non-Forfeiture Benefit" shall mean the surrender dividend (composed of a Standard Enhancement and, where applicable, an Additional Enhancement) to be provided to Eligible Holders of certain In-Force Policies under this Regulatory Settlement Agreement, as described in Section IV.B below. nn. "Enhanced Past Death/Maturity Benefit" shall mean the cash payment to be provided to Eligible Holders of Death/Maturity Policies under this Regulatory Settlement Agreement, as described in Section V below. 11 oo. "Enhanced Past Termination Benefit" shall mean the cash payment to be provided to Eligible Holders of certain Terminated Policies under this Regulatory Settlement Agreement, as described in Section VI.A below. pp. "Estate Holder" shall mean, with respect to any Policy for which all Eligible Holders are deceased, any estate of a Holder of the Policy that satisfies the requirements of Section III.C below. qq. "Excluded Entity" shall mean any entity that is not a natural person (such as a funeral home, creditor, institutional assignee or state government, or any branch, department or entity thereof) and that is an assignee of the benefits of, or is not an owner of, a Policy. Excluded Entities shall not be Class Members and shall not be eligible to receive any benefit provided under this Agreement, whether directly, indirectly, or on behalf of, or on account of benefits made available to, a Class Member. rr. "Execution Date" shall mean the first date on which the Settlement Agreement in the Action has been executed. ss. "Face Amount" shall mean the amount of insurance specified on the face of the Policy, including any additions to such amount of insurance by Company liberalizations, equalizations or other enhancements. (i) The Face Amount of a Policy shall be exclusive of any Additional Insurance, ancillary benefit or rider coverage; provided however, that if a Policy has paid or pays in the future an accidental death benefit in addition to the amount of insurance specified on the face of the Policy (including any additions thereto by 12 Company liberalizations, equalizations or other enhancement), then the accidental death benefit shall be included as part of the Face Amount. (ii) Except as provided in Section II.A.1.ss(iii) below, the Face Amount of a Policy that is providing reduced paid-up insurance coverage under a contractual non-forfeiture option shall be the amount of reduced paid-up insurance coverage provided under that option. (iii) For purposes of the calculation of any Settlement Death Benefit pursuant to Section VI.B below, (a) the Face Amount of any Policy on a reduced paid-up non-forfeiture status shall equal the face amount of the Policy at the time that it was issued; and (b) for any Industrial Weekly Policy that was issued in a substandard policy plan, and that was placed on a reduced paid-up non-forfeiture status at any time, the Face Amount of the Policy shall equal the face amount of the Policy at the time that it was issued, multiplied by 1.32. tt. "Fairness Hearing" shall mean the hearing at or after which the Court will make a final decision whether to approve the Settlement Agreement in the Action. uu. "Final Judgment" shall mean the judgment entered pursuant to the Order Approving Settlement in the Action. vv. "Final Settlement Date" shall mean the date on which the Final Judgment and Order Approving Settlement in the Action become final. For purposes of this definition, the Final Judgment and Order Approving Settlement in the Action shall become final: 13 (i) if no appeal is taken therefrom, on the date on which the time to appeal has expired; (ii) if any appeal is taken therefrom, on the date on which all appeals therefrom, including petitions for rehearing or reargument, petitions for rehearing en banc and petitions for certiorari or any other form of review, have been finally disposed of in a manner resulting in an affirmance of the Final Judgment and Order Approving Settlement; or (iii) on a date after entry of the Final Judgment and Order Approving Settlement, which date counsel for the Plaintiffs, the Company and the Department agree to in writing. ww. "Hearing Order" shall mean the order to be entered by the Court concerning notice, administration and the Fairness Hearing, as contemplated in Section XVI of the Settlement Agreement in the Action, and substantially in the form attached hereto as Exhibit D. xx. "Holders" shall mean, with respect to any Policy, the following persons and entities: (i) All past and present owners of Ordinary Policies; (ii) All past and present insureds under Industrial Policies; (iii) All individual assignees of Industrial Policies that have been assigned by the Policy's named Insured; and (iv) All payees of the contractual death benefits of Policies, where such death benefits became payable prior to the Eligibility Date based upon the death of the insured under the Policy. 14 yy. "Identifying Information" shall mean either (i) the policy number for a Policy or (ii) the alternative identifying information requested by Exhibit E hereto. Persons or entities who have completed and submitted Claim Forms postmarked on or before the Claim-In Date shall be given a reasonable opportunity to provide additional Identifying Information if such information is required to locate a Policy; provided however, that all such additional Identifying Information must be postmarked within 60 days of the Claim-In Date. zz. "Implementation Period" shall mean a period of time that (i) commences on a date selected by the Company, is communicated in writing to the Department, and is on or before the later of (a) 30 days after the Final Settlement Date and (b) 130 days after the Claim-Resolution Date; and (ii) ends on a date 150 days after it commences. aaa. "Industrial Monthly Policies" shall mean (i) any 1927-1929 Industrial Monthly Substandard Policy, (ii) any Other Industrial Monthly Substandard Policy and (iii) any Industrial Monthly Standard Policy. bbb. "Industrial Monthly Standard Policy" shall mean any life insurance policy issued by the Company from its Industrial Department insuring the life of a non-Caucasian, issued in a standard policy plan or with a standard risk classification, and on which the policy's terms required payment of monthly premiums. ccc. "Industrial Policies" shall mean Industrial Monthly Policies and Industrial Weekly Policies. 15 ddd. "Industrial Weekly Policies" shall mean (i) any Pre-1948 Industrial Weekly Substandard Death/Maturity Policy, (ii) any Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policy, (iii) any Pre-1963 Industrial Weekly Substandard Terminated Policy and (iv) any other life insurance policy issued by the Company from its Industrial Department insuring the life of a non-Caucasian, and on which the policy's terms required payment of weekly premiums. eee. "Industrial Weekly Substandard Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, on which the policy's terms required payment of weekly premiums, and for which the Company's records do not indicate the race of the insured as Caucasian. fff. "In-Force Policies" or "In Force" shall mean, for purposes of this Regulatory Settlement Agreement only, any Policy that is providing insurance coverage as of the Eligibility Date, including Policies that as of the Eligibility Date are (a) fully paid-up; (b) providing coverage as reduced paid-up or extended term insurance under a contractual non-forfeiture provision; or (c) in the process of escheatment to any state but for which a returned Claim Form discloses information sufficient to identify the appropriate payee of the Policy's benefits. ggg. "Interest" shall mean simple interest at 4.0 percent per annum calculated to the first day of the Implementation Period, and commencing on the later of (i) the date of the Policy's termination, maturity, or payment of death benefit, as applicable, or (ii) January 1, 1975. 16 hhh. "Issue Date" shall mean the "issue date" set forth in the Policy contract. iii. "Lead Counsel" shall mean the law firms of Milberg Weiss Bershad Hynes & Lerach LLP; Bonnett, Fairbourn, Friedman & Balint, P.C.; and Herman Herman Katz & Cotlar, LLP. jjj. "Neutral" shall mean a third-party to whom the Department, the Company and Lead Counsel shall agree, which third-party shall resolve disputes as to whether a person or entity who has submitted a Claim Form and, when requested, other Identifying Information is entitled to benefits under this Settlement Agreement, as described in Section X.G below. kkk. "New England Mutual Affected Policy" shall mean one of the seven life insurance policies issued by New England Mutual, and identified by the Department in its Report on Examination of Metropolitan Life Insurance Company Regarding Response to Supplement No. 1 to Circular Letter No. 19 (2000), as having been issued with a substandard "Special Class B" risk rating and for which the examiners' review identified no race-neutral basis for the rating. lll. "1930-1935 Ordinary Substandard Policies" shall mean any life insurance policy issued by the Company from its Ordinary Department in the Endowment at 80, 25-Year Endowment or 25-Pay Life policy plan, from January 1, 1930 through December 31, 1935, for which the Company's records do not indicate the race of the insured as Caucasian. 17 mmm. "1920-1929 Intermediate Policies" shall mean any life insurance policy insuring the life of a non-Caucasian issued by the Company from January 1, 1920 through December 31, 1929 in an intermediate policy plan. nnn. "1927-1929 Industrial Monthly Substandard Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan from January 1, 1927 through December 31, 1929, for which the Company's records do not indicate the race of the insured as Caucasian, where such policy's terms required payment of a stated amount of premiums per month. ooo. "Notice Card" shall mean the card, substantially in the form attached hereto as Exhibit F, that the Company shall make available to its Producers, and that the Administrator shall make available to certain others (by hand, mail, or via the Internet, including the Administrator's Web site), to give to Class Members who inquire about this Regulatory Settlement Agreement or Stipulation of Settlement, as further described in Section XII.F.3 below. ppp. "Order Approving Settlement" shall mean the order entered by the Court approving the Settlement Agreement in the Action. qqq. "Ordinary Policies" shall mean all Ordinary Substandard Policies and Covered Met Series Policies. rrr. "Ordinary Substandard Policies" shall mean (i) any 1930-1935 Ordinary Substandard Policy and (ii) any other life insurance policy, other than a 1920-1929 Intermediate Policy, issued by the Company from its Ordinary Department 18 with an intermediate, special-class or other substandard risk classification, and insuring the life of a non-Caucasian. sss. "Other Industrial Monthly Substandard Policy" shall mean any life insurance policy, other than a 1927-1929 Industrial Monthly Substandard Policy, issued by the Company from its Industrial Department insuring the life of a non-Caucasian, in an other-than-standard policy plan or with an other-than-standard risk classification, and on which the policy's terms required payment of monthly premiums. ttt. "Other Ordinary Substandard Policies" shall mean any Ordinary Substandard Policy other than a 1930-1935 Ordinary Substandard Policy. uuu. "Parties" or "Party" shall mean the Department and the Company collectively and, where applicable, their respective counsel. vvv. "Plaintiffs" shall mean Karl M. Thompson, Lucile Ellis, Charlene McCallop, Marguerite Guillmette Justin, Adrienne Delpit Blazio, Myron Billups (as the administrator of the Estate of Nellie Gillespie) and any other Class Members added to the Amended Complaint or any subsequent pleading as named plaintiffs, in their individual and representative capacities. www. "Policy" or "Policies" shall mean any and all Industrial Policies, Ordinary Substandard Policies, 1920-1929 Intermediate Policies and Covered Met Series Policies with an Issue Date during the period from January 1, 1901 through December 31, 1972, inclusive; provided however, that any Metropolitan Life insurance policy for which the claims asserted in the Action have been previously litigated and resolved or dismissed with prejudice, and are barred by the doctrine of res judicata, shall 19 not be a Policy; and provided however, that any Metropolitan Life insurance policy for which any Holder or Estate Holder has timely requested exclusion from the proposed class shall not be a Policy. xxx. "Postal Service" shall mean the United States Postal Service. yyy. "Post-Settlement Mailing" shall mean the mailing that the Company shall make starting at the commencement of the Implementation Period, as described in Section XII.D below. The Post-Settlement Mailing shall be completed within 60 days of the commencement of the Implementation Period. zzz. "Preliminary Approval Hearing" shall mean the hearing at or after which the Court will make a decision whether notice of the Action and the proposed Settlement Agreement in the Action may be given. aaaa. "Pre-1948 Industrial Weekly Substandard Death/Maturity Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not indicate the race of the insured as Caucasian, on which the policy's terms required payment of a stated amount of premiums per week, and where the policy terminated prior to January 1, 1948 by reason of the death of the insured or the maturity of the Policy. bbbb. "Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not indicate the race of the insured as Caucasian, on which the policy's terms required 20 payment of a stated amount of premiums per week, and where the policy went onto a reduced paid-up or extended term non-forfeiture status prior to January 1, 1963. cccc. "Pre-1963 Industrial Weekly Substandard Terminated Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not indicate the race of the insured as Caucasian, on which the policy's terms required payment of a stated amount of premiums per week, and where the policy lapsed, surrendered, or was terminated (other than by reason of Policy maturity or the death of the insured) prior to January 1, 1963. dddd. "Primary Eligible Holder" shall mean, with respect to any Terminated Policy eligible for the SDB hereunder, the following Eligible Holder of the Policy: (i) For an Industrial Policy, the insured under the Policy. (ii) For an Ordinary Policy, the owner of the Policy at the time it terminated, or if such person is not an Eligible Holder, the first Eligible Holder of the Policy to become an Eligible Holder under Section X below. eeee. "Producer" shall mean any of the Company's current account representatives, managers or managing directors. ffff. "Publication Notice" shall mean the published notice and other media notice of the proposed settlement, as approved in form and content by the 21 Department, counsel for Plaintiffs and the Defendant, and the Court, as described in Section XII.B. gggg. "Recipient" shall mean the person or persons to whom the Settlement Death Benefit under this Agreement shall be paid. Subject to Section III.F below, the Eligible Holder(s) of the Policy under Section X below shall be entitled to payments under the SDB, unless the Class Member designates an Alternate Recipient; provided however, that if the Recipient is deceased at the time the payment is to be made, the Company may pay the applicable death benefit to any person named as the beneficiary of the Policy making the Class Member eligible for the SDB, or if that person is deceased or cannot be paid for any reason, to any other person who appears to the Company to be equitably entitled to such payment under Section III.D below. hhhh. "SDB Certificate" shall mean the certificate, substantially in the form included at Exhibit H and including a tear-off sheet for Class Members to designate an Alternate Covered Person and/or Alternate Recipient, that shall be provided to Eligible Holders of certain Terminated Policies starting at the commencement of the Implementation Period as evidence of the benefits provided by the SDB. iiii. "Settlement Death Benefit" or "SDB" shall mean a form of relief to be provided to Eligible Holders of certain Terminated Policies, as described in Section VI.B below. jjjj. "Standard Enhancement" shall mean the enhancements or payments that shall be provided to Holders of certain In-Force and Death/Maturity Policies pursuant to this Regulatory Settlement Agreement. Wherever a Holder is 22 eligible for an Additional Enhancement (defined in Section II.A.1.b, above), the Standard Enhancement calculation shall utilize the Policy's Face Amount, Cash Value or death or maturity benefit as enhanced by the Additional Enhancement, exclusive of Interest. kkkk. "Statement of Benefits" shall mean the summary of benefits that is included in the Class Notice Package for Database Policies, and provided upon request to Eligible Holders whose policies have been confirmed to be Policies or whose Claim Forms identify the number of a Policy for which information is available on the Company's electronic records, as described in Section XII.A.4 below. llll. "Terminated Policies" shall mean any Policy that, as of the Eligibility Date, has lapsed, surrendered or otherwise terminated without insurance coverage, and has not been reinstated. For purposes of this Regulatory Settlement Agreement, the term "terminated" shall not include policies that, as of the Eligibility Date, are fully paid-up or are providing coverage as reduced paid-up or extended term insurance under a contractual non-forfeiture provision. 2. Defined terms used in combination in this Regulatory Settlement Agreement shall have the combined definitions ascribed to them in the Regulatory Settlement Agreement. For example, an In-Force Industrial Weekly Policy shall mean an Industrial Policy that is both an Industrial Weekly Policy and In Force. 3. Capitalized terms used in this Regulatory Settlement Agreement but not defined above shall have the meaning ascribed to them in this Regulatory Settlement Agreement and the attached exhibits. 23 III. REGULATORY SETTLEMENT AGREEMENT TERMS A. Pursuant to this Regulatory Settlement Agreement, Class Members will, depending on their eligibility hereunder, receive one or more forms of the benefits described in Sections IV through VIII below. B. With respect to each Policy making a Class Member eligible for benefits, the Policy's Eligible Holder(s) will receive the benefits for which that Policy is eligible hereunder, subject to the terms of Sections III.C, III.D, III.E and III.F below; provided however, that for any settlement benefit payable under this Agreement based upon a Policy for which a death claim is made following the commencement of the Implementation Period, the settlement benefit shall be paid to the payee of the Policy's contractual benefits (or, if there is more than one payee, to each payee in proportion to the relative amounts of benefits to which each is entitled under the Policy); and provided however, that in the event of any conflict between this Section III and Section X below, the provisions of Section X shall govern. No duplicate relief shall be provided to multiple Holders of the same Policy, or to their estates or descendants. C. If all Eligible Holders associated with a Policy are deceased, then the Estate Holder(s) may exercise the rights of, and receive all settlement benefits payable to, the Holders of such Policy, subject to the terms of Sections III.D, III.E and III.F below. Settlement benefits shall be payable to the Estate Holder only if, prior to the commencement of the Implementation Period, either (a) the Holder's estate's administrator submits evidence of his or her court-appointment as administrator of the 24 estate or (b) an heir of the Holder submits a declaration, in the form attached hereto as Exhibit I, establishing the authority of the heir to act for the Holder's estate. D. For all benefits under this Regulatory Settlement Agreement other than the SDB: 1. Where more than one person or entity is an Eligible Holder of a Policy, settlement benefits shall be distributed among such Eligible Holders in the manner and using the procedures specified in Section III.E below. 2. If all Eligible Holders of a Policy are deceased as of the Eligibility Date, and more than one person or entity is an Estate Holder of a Policy, settlement benefits shall be distributed among such Estate Holders in the manner and using the procedures specified in Section III.E below. 3. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.2 above, then any spouse or Domestic Partner of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 4. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.3 above, then any child (including stepchildren) of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such 25 person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 5. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.4 above, then any parent of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 6. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.5 above, then any sibling of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 7. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.6 above, then any grandchild of any Holder, or any offspring of such a grandchild, may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the 26 settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 8. If no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.7 above, then any other descendant or other relative of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section III.E below. 9. If, by the Claim-In Date, no person or entity is eligible for settlement benefits under the provisions of Sections III.C through III.D.8 above, then the Company may provide the settlement benefits to any other person appearing to the Company to be equitably entitled to receive the benefits. E. If more than one person or entity is eligible for benefits under Section III.D above, then the settlement benefits for the Policy shall be divided equally among all such persons and entities. In the event both an owner and a payee of contractual death benefits are Eligible Holders of a Death/Maturity Ordinary Policy, each shall be eligible at least to the benefits described in Section XI.D below. F. For the SDB provided under this Regulatory Settlement Agreement and described in Section VI.B below: 1. If more than one person or entity is an Eligible Holder, then: 27 a. Unless an Alternate Recipient is designated, all Eligible Holders shall be the Recipients under the SDB. Payments under the SDB shall be made jointly to all Eligible Holders and mailed to the first person or entity to become an Eligible Holder. b. The Primary Eligible Holder shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 2. If all Eligible Holders under a Policy are deceased as of the Eligibility Date, and more than one person or entity is an Estate Holder, then: a. Unless an Alternate Recipient is designated, all Estate Holders shall be the Recipients under the SDB. Payments under the SDB shall be made jointly to all Estate Holders and mailed to the first person or entity to become an Estate Holder. b. The first Estate Holder satisfying the requirements of Section III.C above shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 3. If no person or entity is eligible for the SDB pursuant to Sections III.C, III.F.1 or III.F.2 above, then the first relative of any Holder to timely submit a Claim Form for the Policy shall be the Recipient under the SDB and shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 4. If no person or entity is eligible for the SDB pursuant to Sections III.C, III.F.1, III.F.2 or III.F.3 above, then the Company may provide the settlement 28 benefits to any other person appearing to the Company to be equitably entitled to receive the benefits. G. Notwithstanding any other provision of this Agreement, where no address is available for an Eligible Holder or other person eligible for settlement benefits, or where there is an available address but it is known by the Company to be invalid, no settlement benefits shall be mailed to the Eligible Holder or other person. H. If any Holder or Estate Holder excludes himself or herself from the Class with respect to a Policy, all Holders (and their estates) of that Policy will be deemed to be excluded with respect to that Policy. I. In the event that provision of a particular form of relief hereunder could cause adverse tax and/or other regulatory consequences to the Class Member, or to his or her Policy, the Company shall not be obligated to provide such relief but may, in its sole discretion and as an alternative, make an economically comparable form of relief available to the Class Member. The Department shall be notified in advance of any such substitution of relief. J. In the event that the Parties determine that any provision of this Regulatory Settlement Agreement regarding its implementation has become administratively impracticable, the Parties may agree to amend or eliminate such provision as they mutually deem appropriate. K. If a death claim is made under an In-Force Policy, or if an In-Force Policy matures, after the Eligibility Date but before the commencement of the Implementation 29 Period, then the Inforce Policy shall be treated as if it were a Death/Maturity Policy on the Eligibility Date. L. If an In-Force Policy is terminated after the Eligibility Date but before the commencement of the Implementation Period, then the In-Force Policy shall be treated as if it were a Terminated Policy on the Eligibility Date. M. Pursuant to the terms of Section 8.2(a)(iii) of Metropolitan Life Insurance Company's Plan of Reorganization under Section 7312 of the New York Insurance Law as adopted on September 28, 1999 (and subsequently amended and restated by the Company's Board of Directors), the Company shall neither add assets to nor deduct assets from the "closed block" (as that term is defined in the Plan) in connection with this Settlement Agreement without the prior approval of the Department. IV. BENEFITS FOR IN-FORCE POLICIES A. THE ENHANCED FUTURE DEATH/MATURITY BENEFIT 1. Starting at the commencement of the Implementation Period, Eligible Holders of In-Force Industrial Weekly Policies, In-Force Industrial Monthly Policies, and In-Force Other Ordinary Substandard Policies that mature or pay a death benefit in the future shall receive, in addition to the contractual death or maturity benefit, a terminal dividend in the amount of the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections IV.A.2 and IV.A.3 below). Eligible Holders of all such In-Force Policies shall receive the Standard Enhancement. Eligible Holders of In-Force Pre-1963 Industrial Weekly 30 Substandard Non-Forfeiture Policies shall receive both the Standard Enhancement and the Additional Enhancement. 2. Standard Enhancements. The percentage of the Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement) constituting the Standard Enhancement shall be as follows:
Policy Type Percentage Enhancement - ----------- ---------------------- Industrial Weekly 12.5% Other Industrial Monthly Substandard 12.5% Industrial Monthly Standard 5% Other Ordinary Substandard 15%
3. Additional Enhancements. For In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement to the Policy's Face Amount at the time of the insured's death or the Policy's maturity shall be calculated, on a Policy-by-Policy basis, based upon the ratios in Exhibit L hereto. Such Additional Enhancement is designed to provide In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies with the benefit of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 4. In-Force 1920-1929 Intermediate Policies. Eligible Holders of In-Force 1920-1929 Intermediate Policies shall be provided the Enhanced Future Death/Maturity Benefit in the form of an increase, at the commencement of the Implementation Date, of 9% to the Policy's Face Amount and associated Cash Value. 5. Death Certificate Review Obligation. Starting on the Final Settlement Date, the Company shall review all future death certificates submitted in 31 connection with claims for benefits under life insurance policies that may be Policies eligible for the Enhanced Future Death/Maturity Benefit depending on the race of the insured. a. If, for any such policy, the Company's review discloses that the insured's race was listed on the death certificate as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Death/Maturity Benefit for the Policy shall be provided, unless all documents in the Application File that describe the insured's race indicate that the insured's race is Caucasian. b. If the death certificate does not provide the race of the insured, then the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) for the life insurance policy. If the Company's review discloses that the insured's race was identified in any part of the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Death/Maturity Benefit for the Policy shall be provided. 6. Policy Application File Review Obligation. Starting on the Final Settlement Date, the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) of any life insurance policy that becomes eligible for payment of maturity or endowment benefits and that may be a Policy eligible for the Enhanced Future Death/Maturity Benefit depending on the race of the insured. If, for any such policy, the Company's review 32 discloses that the insured's race was listed in any part of the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Death/Maturity Benefit for the Policy shall be provided. B. The Enhanced Future Termination/Non-Forfeiture Benefit 1. Starting at the commencement of the Implementation Period, Eligible Holders of In-Force Industrial Weekly Policies, In-Force Industrial Monthly Policies, and In-Force Other Ordinary Substandard Policies that lapse, surrender, or otherwise terminate (other than by death or maturity) in the future, or that are placed on a reduced paid-up or extended term non-forfeiture status in the future, shall receive a surrender dividend in the amount of the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections IV.B.2 and IV.B.3 below). Eligible Holders of all such Policies shall receive the Standard Enhancement. Eligible Holders of In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies shall receive both the Standard Enhancement and the Additional Enhancement. 2. Standard Enhancements. The percentage of the Policy's Cash Value at the time of termination or placement on non-forfeiture status (as enhanced by any Additional Enhancement) constituting the Standard Enhancement shall be as follows: 33
Policy Type Percentage Enhancement - ----------- ---------------------- Industrial Weekly 12.5% Other Industrial Monthly Substandard 12.5% Industrial Monthly Standard 5% Other Ordinary Substandard 15%
3. Additional Enhancements. For In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement to the Policy's Cash Value at the time of termination or placement on non-forfeiture status shall be calculated, on a Policy-by-Policy basis, based upon the ratios in Exhibit L hereto. Such Additional Enhancement is designed to provide In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies with the benefit of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 4. Application of Surrender Dividends to Non-Forfeiture Policies. For those Policies that are placed on non-forfeiture status after the commencement of the Implementation Period, the surrender dividend (composed of the Standard Enhancement plus, where applicable, the Additional Enhancement) shall be provided in the following form: a. For Policies placed on an extended term insurance non-forfeiture status, the surrender dividend shall be added to the Policy's total cash value for the purpose of calculating the duration of non-forfeiture benefits provided by the Policy and the amount of cash value available in the event the Policy is later surrendered for its cash value. 34 b. For Policies placed on a reduced paid-up non-forfeiture status, the surrender dividend shall be provided for the Policy at the time the Policy pays a death benefit or is surrendered for its cash value. 5. In-Force 1920-1929 Intermediate Policies. Eligible Holders of In-Force 1920-1929 Intermediate Policies shall be provided the Enhanced Future Termination/Non-Forfeiture Benefit in the form of an increase, at the commencement of the Implementation Date, of 9% to the Policy's Face Amount and associated Cash Value. 6. Policy Application File Review Obligation. Starting on the Final Settlement Date, the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) of any life insurance policy that terminates and is presented for payment of cash surrender benefits, and that may be a Policy eligible for the Enhanced Future Termination/Non-Forfeiture Benefit depending on the race of the insured. If, for any such policy, the Company's review discloses that the insured's race was listed in the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Termination/Non-Forfeiture Benefit for the Policy shall be provided. C. THE ENHANCED ADDITIONAL INSURANCE BENEFIT 1. Eligible Holders of In-Force 1920-1929 Intermediate Policies and In-Force 1930-1935 Ordinary Substandard Policies shall receive at the commencement of the Implementation Period an increase in the Policy's amount of insurance coverage in the form of Additional Insurance. 35 2. For Eligible Holders of In-Force 1920-1929 Intermediate Policies, the amount of Additional Insurance comprising the Enhanced Additional Insurance Benefit shall equal 35 percent of the Face Amount of the Policy as of the Eligibility Date; provided however, that for any such Policy on a non-forfeiture status as of the Eligibility Date, the Face Amount of the Policy shall be increased by 35 percent. The Enhanced Additional Insurance Benefit shall be provided in addition to the Enhanced Future Death/Maturity Benefit and the Enhanced Future Termination/Non-Forfeiture Benefit for which the Policy is eligible. 3. For Eligible Holders of In-Force 1930-1935 Ordinary Substandard Policies, the amount of Additional Insurance comprising the Enhanced Additional Insurance Benefit shall equal 15 percent of the Face Amount of the Policy as of the Eligibility Date; provided however, that for any such Policy on a non-forfeiture status as of the Eligibility Date, the Face Amount of the Policy shall be increased by 15 percent. D. THE CASH PAYMENT OPTION 1. Eligible Holders of any In-Force Policy may, instead of receiving the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit or the Enhanced Additional Insurance Benefit, elect to receive a cash payment from the Company in an amount equal to the cost for the Policy's settlement benefits pursuant to column 4 of the table in Section I of Exhibit M hereto. 2. Starting at the commencement of the Implementation Period and ending no later than 30 days thereafter, the Company shall mail the Cash Payment Option Election Letter, substantially in the form attached hereto as Exhibit J, to each Eligible 36 Holder associated with an In-Force Policy at the address indicated on a Claim Form for the Policy, or at the last-known address for the Eligible Holder if no Claim Form is submitted for the Policy. The Cash Payment Option Election Letter shall indicate both (i) the dollar amounts of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit (if any) for the Policy, together with a general description of those forms of benefits and (ii) the dollar amount that is payable in the alternative under the Cash Payment Option. The Cash Payment Option Election Letter shall contain a tear-off form that allows the Eligible Holder to request the Cash Payment Option. 3. To exercise the Cash Payment Option described in this Section IV.D, the Eligible Holder(s) of the Policy must elect the cash payment by either (i) contacting the Administrator at the Toll-Free Number within 30 days after the date of the Cash Payment Option Election Letter for the Policy or (ii) completing and returning the form included with the Cash Payment Option Election Letter (which form must be postmarked no later than 30 days after the date of the Cash Payment Option Election Letter). 4. Eligible Holders who timely elect the Cash Payment Option shall be provided their cash payments within 60 days of the date of the Cash Payment Option Election Letter. E. THE PROSPECTIVE COMMITMENT 1. The Company commits under this Agreement that, starting at the commencement of the Implementation Period, any future non-guaranteed policy elements 37 that may be provided to Holders of 1930-1935 Ordinary Substandard Policies shall utilize the mortality assumptions and factors utilized for the corresponding standard policy plan or form issued in the same year to insure persons of the same issue age in the same risk classification, and with the same Face Amount as the Policy (as enhanced by the Enhanced Additional Insurance Benefit). 2. The Company commits under this Agreement that, starting at the commencement of the Implementation Period, any future non-guaranteed policy elements that may be provided to Holders of 1920-1929 Intermediate Policies shall utilize the mortality assumptions and factors utilized for the standard risk classification in the corresponding policy plan or form issued in the same year to insure persons of the same issue age, and with the same Face Amount as the Policy (as enhanced by the Enhanced Future Death/Maturity Benefit and the Enhanced Additional Insurance Benefit). V. RELIEF FOR DEATH/MATURITY POLICIES: THE ENHANCED PAST DEATH/MATURITY BENEFIT Eligible Holders of Death/Maturity Industrial Weekly Policies, Death/Maturity Industrial Monthly Policies, Death/Maturity Ordinary Substandard Policies and Death/Maturity 1920-1929 Intermediate Policies shall receive a cash payment equal to the amount that is the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections V.A and V.B below). Eligible Holders of all such Policies shall receive the Standard Enhancement. Eligible Holders of Pre-1948 Industrial Weekly Substandard Death/Maturity Policies, Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies and 1927-1929 Industrial Monthly 38 Substandard Policies shall receive both the Standard Enhancement and the Additional Enhancement. Such cash payment shall be provided via the Post-Settlement Mailing, as further described in Section XII.D below. A. STANDARD ENHANCEMENTS 1. For Death/Maturity Industrial Weekly Policies and Death/Maturity Other Industrial Monthly Substandard Policies, the Standard Enhancement (if any) shall equal 12.5 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement). 2. For Death/Maturity Industrial Monthly Standard Policies and 1927-1929 Industrial Monthly Substandard Policies, the Standard Enhancement shall equal 5 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement). 3. For Death/Maturity Other Ordinary Substandard Policies, the Standard Enhancement shall equal 15 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity. 4. For Death/Maturity 1930-1935 Ordinary Substandard Policies, the Standard Enhancement shall equal 15 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, multiplied by the Early Termination Adjustment, accumulated with Interest; provided however, that the Early Termination Adjustment shall not apply to any such Policy that paid a death or maturity benefit while providing reduced paid-up insurance coverage under a contractual non-forfeiture provision. 39 5. For Death/Maturity 1920-1929 Intermediate Policies, the Standard Enhancement shall equal the sum of (i) 35 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, multiplied by the Early Termination Adjustment, accumulated with Interest; and (ii) 9 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, accumulated with Interest; provided however, that the Early Termination Adjustment shall not apply to any such Policy that paid a death or maturity benefit while providing reduced paid-up insurance coverage under a contractual non-forfeiture provision. B. ADDITIONAL ENHANCEMENTS 1. For Pre-1948 Industrial Weekly Substandard Death/Maturity Policies and Death/Maturity Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement shall equal the enhancement calculated for the particular Policy using the ratios set forth in Exhibit L hereto, accumulated with Interest. Such Additional Enhancement shall be designed to provide these Policies with the benefit of the Company's 1948 and 1963 equalizations of Industrial Weekly Substandard policy amounts of insurance and non-forfeiture values. 2. For Death/Maturity 1927-1929 Industrial Monthly Substandard Policies, the Additional Enhancement shall equal 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, accumulated with Interest. 40 VI. BENEFITS FOR TERMINATED POLICIES A. THE ENHANCED PAST TERMINATION BENEFIT 1. Eligible Holders of Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies, Terminated 1927-1929 Industrial Monthly Substandard Policies, Terminated 1930-1935 Ordinary Substandard Policies and Terminated 1920-1929 Intermediate Policies shall receive a cash payment equal to the amount calculated for the Policy pursuant to Sections VI.A.2 through VI.A.5 below. Such cash payment shall be provided via the Post-Settlement Mailing, as further described in Section XII.D below. 2. For Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies, the cash payment shall equal the enhancement calculated for the particular Policy calculated using the ratios in Exhibit L hereto, accumulated with Interest. Such payment shall be designed to provide Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies with the benefit of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 3. For Terminated 1930-1935 Ordinary Substandard Policies, the cash payment shall equal 15 percent of the Cash Value of the Policy at the time of termination, accumulated with Interest. 4. For Terminated 1920-1929 Intermediate Policies, the cash payment shall equal the 44 percent of the Cash Value of the Policy at the time of termination, accumulated with Interest. 41 5. For Terminated 1927-1929 Industrial Monthly Substandard Policies, the cash payment shall equal 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) of the Cash Value of the Policy at the time of termination, accumulated with Interest. B. THE SETTLEMENT DEATH BENEFIT 1. Eligible Holders of Terminated Industrial Weekly Policies, Terminated Industrial Monthly Policies and Terminated Other Ordinary Substandard Policies shall be entitled to the Settlement Death Benefit ("SDB"). Subject to Section VI.B.7 below, the SDB shall commence on the Final Settlement Date. 2. For each such Policy making the Class Member eligible for relief, the SDB shall provide a payment to the Recipient, upon the Company's receipt of due proof of death of the Covered Person within the 5 years following the Final Settlement Date, of an amount that is a percentage of the Face Amount of the Policy at the time of termination (as enhanced by any Additional Enhancement). 3. For Terminated Industrial Weekly Policies and Terminated Other Industrial Monthly Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 15.5 percent; provided however, that for Terminated Industrial Weekly Policies that are eligible for the Enhanced Past Termination Benefit, and for the sole purpose of calculating the percentage of the Face Amount at termination payable under the SDB, the Face Amount shall be increased by the ratio for the Policy provided in Exhibit L. 42 4. For Terminated Industrial Monthly Standard Policies and Terminated 1927-1929 Industrial Monthly Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 8 percent; provided however, that for Terminated 1927-1929 Industrial Monthly Substandard Policies, and for the sole purpose of calculating the percentage of the Face Amount at termination payable under the SDB, the Face Amount shall be increased by 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) to reflect the Enhanced Past Termination Benefit provided for the Policy. 5. For Terminated Other Ordinary Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 18 percent. 6. At any time prior to the expiration of the SDB or the death of the Covered Person, the Class Member may designate an Alternate Recipient by completing and returning the portion of the SDB Certificate that is designated for that purpose, as shown in Exhibit H hereto, or by submitting such designation to the Administrator's Internet Web site while it is operational. 7. If the insured under the Policy creating eligibility for the SDB is deceased as of the Final Settlement Date, then the Class Member or his or her estate must designate a member of the Class Member's Affinity Group as an Alternate Covered Person for purposes of the SDB, either (a) by completing and returning the portion of the SDB Certificate that is designated for that purpose, as shown in Exhibit H hereto, postmarked within 30 days after the commencement of the Implementation Period; or 43 (b) by submitting such designation to the Administrator's Internet Web site (while it is operational) within 30 days after the commencement of the Implementation Period. SDB coverage for the Alternate Covered Person shall commence five days after the date of the postmark of, or submission to the Administrator's Internet Web site of, the Class Member's designation of the Alternate Covered Person. 8. Starting at the commencement of the Implementation Period, the Company shall mail an SDB Certificate, substantially in the form attached hereto as Exhibit H, to each Eligible Holder entitled to the SDB. The SDB Certificate shall include a form for designation of an Alternate Covered Person and an Alternate Recipient. 9. Research Initiative Regarding Terminated Policies Eligible for the SDB. One year following the end of the Implementation Period, and annually thereafter until all SDBs provided by this Agreement are no longer in force, Metropolitan Life shall retain the services of a national information service bureau (such as TRW, Equifax, or COMSERV, Inc.), subject to the approval of the Department, for the purpose of determining, based on the social security numbers of the Covered Persons for all remaining in-force SDBs that are available to the Company on its electronic records or obtained through Claim Forms submitted by Class Members, whether any Covered Person covered by an SDB has died within the coverage period. If (a) the foregoing research reveals that any such Covered Person has died, and (b) the Company, using its best efforts, is able to contact the Recipient, and (c) the Recipient qualifies for payment of the SDB, then the Recipient shall be eligible to receive the payment under the SDB. 44 VII. MET SERIES ENHANCEMENT A. Covered Met Series Policies that are eligible to receive other benefits pursuant to this Regulatory Settlement Agreement shall receive an enhancement of an additional three percent to the percentages used to calculate the benefits to be provided by Sections IV through VI above. B. Covered Met Series Policies that are eligible for no other benefits under this Regulatory Settlement Agreement shall receive the following at the commencement of the Implementation Period: 1. For In-Force Policies, either (a) an Enhanced Future Death/Maturity Benefit of three percent of the Face Amount of the Policy at the time of death or maturity; or (b) an Enhanced Future Termination/Non-Forfeiture Benefit of three percent of the Cash Value of the Policy at the time of termination or placement on non-forfeiture status. Such Policies shall also be eligible for the Cash Payment Option described in Section IV.D above. 2. For Death/Maturity Policies, a cash payment equal to three percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity. 3. For Terminated Policies, an SDB (as described in Section VI.B above) with an amount of coverage of three percent of the Policy's Face Amount at the time of termination. VIII. UNCLAIMED BENEFITS RELIEF A. For all Database Policies and Policies for which a Claim Form has been timely submitted, and for which a death claim was paid in the period from August 19, 45 1995 through the Claim-In Date, the Company shall conduct a search for other Metropolitan Life insurance policies that also insured the person insured under the Policy in an effort to provide any death or maturity benefits due under any other such policies, as follows: 1. Within 30 days of the Claim-In Date, the Company shall perform a comprehensive search, using the Company's electronic policy databases and the protocols attached hereto as Exhibit C, to determine whether any other Metropolitan Life insurance policy or policies on those databases insured the life of the deceased insured under the Policy. 2. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time of the death of the insured, was providing life insurance coverage (including without limitation pursuant to a contractual non-forfeiture option), and with respect to which a death benefit was not paid, the Company shall use its best efforts to notify the beneficiary or beneficiaries of the life insurance policy and pay any death benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 3. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time it reached maturity, was premium-paying, fully paid-up or providing insurance coverage pursuant to a contractual non-forfeiture provision, and with respect to which maturity benefits became payable but have not been paid, the Company shall use its best efforts to notify 46 the person or entity to whom the policy's maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the maturity benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 4. In addition, if the Company's search reveals that the deceased insured was covered under any other Metropolitan Life insurance policy that was also a Policy, then the Policy shall be eligible for the settlement benefits provided for the Policy under this Regulatory Settlement Agreement. B. For all Policies for which a death claim is paid after the Claim-In Date, the Company shall conduct a search for other Metropolitan Life insurance policies that also insured the life of the person insured under the Policy in an effort to provide any death or maturity benefits due under any other such policies, as follows: 1. At the time the death claim is made under the Policy, the Company shall perform a comprehensive search, using its electronic policy databases and the protocols attached hereto as Exhibit C, to determine whether any other Metropolitan Life insurance policy or policies on those databases insured the life of the deceased insured under the Policy. 2. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time of the death of the insured, was providing life insurance coverage (including without limitation pursuant to a contractual non-forfeiture option), the Company shall use its best efforts to pay the 47 death benefits due under the life insurance policy, regardless of whether such benefits have already escheated to a state governmental authority. 3. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time it reached maturity, was premium-paying, fully paid-up or providing insurance coverage pursuant to a contractual non-forfeiture provision, and with respect to which maturity benefits became payable but have not been paid, the Company shall use its best efforts to notify the person or entity to whom the policy's maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the maturity benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 4. In addition, if the Company's search reveals that the deceased insured was covered under any other Metropolitan Life insurance policy that was also a Policy, then the Policy shall be eligible for the settlement benefits provided for the Policy under this Regulatory Settlement Agreement. C. Starting at the commencement of the Implementation Period, the Company shall search its electronic records that reflect prior escheatments of life insurance policy benefits to state governmental authorities, using the protocols attached hereto as Exhibit C, in an effort to identify other life insurance policies insuring the lives of the persons insured under the Policies. If this search identifies any such other life insurance policies for which death or maturity benefits have previously become payable, but which benefits have been escheated to a state governmental authority, the Company 48 shall use its best efforts to notify the person or entity to whom the policy's death or maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the death or maturity benefits due, plus any statutorily required interest. IX. COMPANY CERTIFICATION OF RELIEF A. On a date that is not later than six months following the first anniversary of the end of the Implementation Period, the Company, through one of its officers who is a member in good standing of the American Academy of Actuaries, shall provide to the Department a written certification specifying the actual cost to the Company, determined in accordance with Exhibit M hereto, of the benefits that have been provided to Class Members pursuant to this Agreement in the first year following the commencement of the Implementation Period. B. Such summary shall detail the costs of benefits provided to Class Members by each type of benefit provided under this Agreement and shall describe the relevant supporting information on which the summary is based. In addition, the certification shall contain a signed statement of the actuary affirming that the actuary has reviewed the relevant supporting information for the summary, that the actuary has authority to make the certification on behalf of the Company, and that the summary is accurate to the best of the actuary's knowledge and belief. Upon request of the Department, the Company shall provide the Department with the supporting information on which the cost summary is based. 49 X. RELIEF QUALIFICATIONS A. Holders of In-Force Database Policies shall automatically be Eligible Holders. B. Holders of In-Force Policies that are not Database Policies shall become Eligible Holders if: 1. All documents in the Policy's Application File that state the insured's race do not unanimously indicate the race of the insured as Caucasian, and 2. One of the following conditions applies: a. A Claim Form identifying the insured, identifying the race of the insured under the Policy as non-Caucasian and providing Identifying Information for the Policy has been submitted postmarked by the Claim-In Date or b. The Company's review under Section IV.A.5, Section IV.A.6 or Section IV.B.6 above discloses that the race of the insured under the Policy is identified as non-Caucasian in the certificate of death for the insured or in any part of the Policy's Application File. C. Holders of Death/Maturity and Terminated Database Policies for which the Company paid a death benefit within the seven years preceding the Eligibility Date, or for which the Company paid a maturity, endowment or cash surrender benefit on or after January 1, 1989, shall automatically be Eligible Holders, subject to the following terms and conditions: 1. The Company shall conduct research (using the National Change of Address database and ChoicePoint) to update the address of the payee of the Policy's 50 contractual benefits listed in the Company's records or in a Claim Form submitted for the Policy. 2. For those Policies for which the payee's address is updated or confirmed through the research in Section X.C.1 above, starting at the commencement of the Implementation Period, the Company shall mail any benefit payments due under this Agreement to the payee (or, if there are multiple payees, to each payee in proportion to the relative amounts of benefits to which each is entitled under the Policy); provided however, that if the Company's records indicate that the payee of the Policy is an Excluded Entity, then the provisions of Section X.D below shall apply. 3. For those Policies for which the payee's address cannot be updated or confirmed through the research in Section X.C.1 above, 30 days after the Claim-In Date, the Company shall mail the Confirmatory Letter, substantially in the form attached hereto as Exhibit K, to the payee of the Policy's contractual benefits at the payee's last-known address on the Company's records. a. If the Company receives an updated address or confirmation of the address from the payee, either in a writing postmarked within 30 days of the mailing of such Confirmatory Letter, or by telephone or e-mail within such period, then starting at the commencement of the Implementation Period, the Company shall mail any benefit payments due under this Agreement to the payee at the updated or confirmed address. b. If the Company does not receive an updated address or confirmation of the address from the payee in the manner and within the times specified 51 in Section X.C.3.a above, then the settlement benefits otherwise payable to the payee shall increase the benefits that otherwise would be provided to Eligible Holders, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto). 4. If the Company's records indicate that the payee of the Policy is an Excluded Entity, then this Section X.C shall not apply and the provisions of Section X.D below shall apply. D. If the Company's records indicate that the payee of the Policy is an Excluded Entity, then the Company shall provide the Policy's benefits under this Agreement to the Policy's contractual beneficiary at his or her last-known address on the Company's records. If there is no available contractual beneficiary for the Policy, then the Company shall provide the Policy's benefits under this Agreement as specified in Sections III.B through III.F above. E. Holders of all Death/Maturity Policies and Terminated Policies except those described in Sections X.C through X.D above shall become Eligible Holders only by submitting a Claim Form postmarked no later than the Claim-In Date that (i) identifies the insured under the Policy, (ii) identifies the race of the insured under the Policy as non-Caucasian and (iii) provides Identifying Information for the Policy; provided however, that no Holder of a Policy shall be an Eligible Holder if all documents in the Policy's Application File that state the race of the person insured under the Policy indicate unanimously that the insured's race is Caucasian. 52 F. The Administrator shall assist with the completion of Claim Forms as follows: 1. The toll-free telephone number established by the Administrator shall permit persons seeking to obtain a Class Notice Package to provide their names, telephone numbers, addresses and policy numbers. 2. The Administrator shall establish an Internet Web site that, in addition to providing notice of the proposed settlement, facilitates the electronic submission of Claim Form information. If any person or entity supplies Claim Form information electronically over the Administrator's Web site, then to the extent practicable, the Administrator shall provide such person or entity with a Claim Form that includes the information that has been electronically submitted, together with a pre-addressed and postage pre-paid envelope for return of the Claim Form to the Administrator; provided however, that no Claim Form shall be valid unless it is completed, signed and returned postmarked by the Claim-In Date. G. Wherever a Claim Form is required by this Regulatory Settlement Agreement, the Company shall not be obligated to provide settlement benefits to any person or entity who does not submit a Claim Form and other Identifying Information sufficient to permit the Company to confirm that the person or entity is entitled to settlement benefits, subject to the following conditions: 1. The Company shall use each substantially completed Claim Form that is submitted by any person or entity on or before the Claim-In Date to search its electronic databases and paper records in an effort to identify each life insurance policy 53 referenced in the Claim Form and determine (a) whether such policy is a Policy and (b) the person or entity who submitted the Claim Form is an Eligible Holder or is otherwise eligible for settlement benefits under this Agreement. 2. If the Company's search locates any life insurance policy referenced in the Claim Form but confirms that such policy is not a Policy, then as soon as is practicable, but in no event later than 60 days after the Claim-In Date, the Company shall notify in writing the person or entity who submitted the Claim Form, via first-class mail to the person's or entity's address on the Claim Form, (a) of each life insurance policy referenced in the Claim Form that is not a Policy, (b) of the reasons why each such policy is not a Policy, (c) that no settlement benefits will be provided for each such policy, and (d) that the person or entity may raise any questions within 30 days of the Company's notification. Absent such a written notification by the Company within 60 days of the Claim-In Date, any life insurance policy identified in the Claim Form shall be deemed a Policy and shall receive the settlement benefits to which it is entitled under this Agreement. 3. If the Company's search does not locate a life insurance policy referenced in the Claim Form, then: a. As soon as is practicable, but in no event later than 30 days after the Claim-In Date, the Company shall request additional Identifying Information from the person or entity who submitted the Claim Form. b. For any such person or entity who supplies additional Identifying Information postmarked within 30 days of the Company's request, the 54 Company shall use the additional Identifying Information to search its electronic databases and paper records in an effort to identify the life insurance policy referenced in the Claim Form and determine whether such policy is a Policy. c. As soon as is practicable, but in no event later than 120 days after the Claim-In Date, the Company shall notify in writing, via first-class mail to the person's or entity's address in the Claim Form, each person or entity that has submitted a Claim Form and other Identifying Information to whom the Company determines not to provide settlement benefits, either (i) because the Company's searches have not located each life insurance policy referenced in the Claim Form or (ii) because the Company has located any life insurance policy referenced in the Claim Form but has confirmed that such policy is not a Policy (in which case the Company's written notification shall include the matters set forth in Section X.G.2 above). 4. If any notified person or entity objects in writing to the Company's determination in a writing postmarked within 30 days of the date of a Company notification under Section X.G.2 or Section X.G.3 above, then: a. The Company and Lead Counsel shall confer in good faith to resolve any disagreement concerning the person's or entity's eligibility for settlement benefits. b. If the Company and Lead Counsel are unable to resolve any such disagreement within 15 days of receipt of the person or entity's written objection, then the Company and Lead Counsel shall submit their disagreement to the Neutral, who shall determine whether the person or entity is entitled to settlement benefits, provided 55 however, that prior to submitting any disagreement to the Neutral, the Company shall bring that disagreement to the attention of the Department. c. The Neutral's determinations under this Section X.G.4 shall be made within 30 days of the submission of the dispute by the Company and Lead Counsel, but in no event later than the Claim-Resolution Date. d. The determinations of the Neutral shall be final and binding on the Company and Lead Counsel and the person or entity in question. H. If, in the course of searching for any life insurance policy identified in a Claim Form or by other Identifying Information, the Company determines that the life insurance policy is a Policy and that the Company's records for the Policy list the numbers of other life insurance policies covering the life of the insured under the Policy, then the Company shall attempt to determine whether the other policies referenced are also Policies and provide any settlement benefits for which the Policies are eligible under this Agreement. XI. MINIMUM/MAXIMUM COST OF BENEFITS A. After the deadline under this Agreement for submission of all Claim Forms has expired, and no later than the commencement of the Implementation Period, the Company shall compute the total anticipated cost to the Company of all settlement benefits to be provided to the Class, using the factors and assumptions set forth in Exhibit M hereto. 1. If the computation in this Section XI.A results in a total cost to the Company of all anticipated settlement benefits that is less than $52 million, then all 56 benefits that otherwise would be provided to Eligible Holders and other eligible persons and entities shall be increased, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto), so that the total cost of all anticipated settlement benefits pursuant to the factors and assumptions set forth in Exhibit M hereto equals $52 million. 2. If the computation in this Section XI.A results in a total cost to the Company of all anticipated settlement benefits in excess of $90 million, then all benefits that otherwise would be provided to Eligible Holders and other eligible persons and entities shall be reduced, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto), so that the total cost of all anticipated settlement benefits pursuant to the factors and assumptions set forth in Exhibit M hereto equals $90 million. B. Within 30 days after the commencement of the Implementation Period, the Company shall make a charitable contribution to the United Negro College Fund, Inc. for scholarship purposes in the amount of $5 million; provided however, that such amount shall be reduced by the excess, if any, of the total cost to the Company of all anticipated settlement benefits (calculated in accordance with Section XI.A above) over $85 million. C. No later than 85 days prior to the commencement of the Implementation Period, the Company may propose to the Department increases in one or more of the percentages listed in column 3 of the table in Section II of Exhibit M hereto that, for aggregate cost-calculation purposes, are to be applied to certain types of In-Force life insurance policies for which no Claim Form has been submitted and for which the 57 insured's race is not reflected on the Company's electronic records (referred to in Exhibit M as policies "Subject to Race Adjustment"). Each such proposed increase by the Company shall be subject to review by the Department, as follows: 1. With its proposal, the Company shall provide the Department and Lead Counsel with the statistical analysis and all data, assumptions and calculations supporting its proposed increase. 2. The Department and Lead Counsel shall have 30 days from their receipt of any proposed percentage increase from the Company to request additional information and express any objection thereto. 3. The Department, Lead Counsel, and the Company shall attempt to resolve any objections raised by the Department or Lead Counsel through good-faith negotiations. 4. Any differences among the Department, Lead Counsel, and the Company that are not resolved by good-faith negotiation within 10 days of the Department's or Lead Counsel's objection shall be submitted to a third-party actuary chosen jointly by the Department, Lead Counsel, and the Company, who shall determine whether the Company's proposed increase is necessary to accurately estimate the percentage of non-Caucasian insureds under life insurance policies that are Subject to Race Adjustment, consistent with generally accepted statistical principles. The third-party actuary shall render his or her decision within 15 days of submission of the dispute. The third-party actuary's decision shall be final and binding on the Parties. 58 D. Notwithstanding any other provision of this Regulatory Settlement Agreement, if any settlement payment or benefit that would otherwise be provided in the aggregate for a Policy under this Agreement (other than any Enhanced Future Termination Benefit that may be payable based upon the expiry of a Policy's term insurance coverage) is less than $10, then such payment or benefit shall be increased to $10; provided however, that in the event a Policy is eligible for benefits under both Section VI.A and VI.B above, then both the payment under Section VI.A and the payment to the Recipient under Section VI.B shall equal at least $10; and provided however, that the $10 amount shall be reduced as necessary pursuant to Sections XI.A.2 and XI.C above; and provided however, that in making the calculations set forth in Section XI.A.1 above, the total cost of the payment or benefit that otherwise would have been made shall be calculated as the cost of providing a payment or benefit of $10. XII. NOTICE TO CLASS MEMBERS AND COMMUNICATIONS WITH CLASS MEMBERS AND POLICYOWNERS A. CLASS NOTICE PACKAGE 1. Subject to the requirements of the Hearing Order and no later than 85 days before the Fairness Hearing, the Company shall send a Class Notice Package by first-class mail, postage prepaid, to the last known address available on the Company's electronic records of each Class Member who is a Holder of a Database Policy (as updated pursuant to Section XII.A.5 below), and in cases where the Company is aware of pending litigation by the Class Member against the Defendant relating to any matter proposed to be released by this Agreement, also to all legal counsel known to represent 59 the Class Member. The Company will pay for the costs associated with producing and mailing the Class Notice Package. 2. The form and content of the Class Notice Package shall be agreed to by the Parties and shall be substantially in the form attached hereto as Exhibit A. Each Class Notice Package shall contain a Class Notice and, in the case of Database Policies, a Statement of Benefits. In addition, the Class Notice Package shall contain a Claim Form and a pre-addressed and postage pre-paid envelope for return of the Claim Form to the Administrator. 3. The Class Notice a. The Class Notice shall, at a minimum, (i) describe who is in the Class; (ii) contain a short, plain description of the background of the Action, the Class and the proposed settlement; (iii) generally describe the proposed benefits outlined above in Sections IV through VIII above; (iv) explain how to secure settlement benefits, including how to submit a Claim Form if one is required to become an Eligible Holder; (v) explain that to be excluded from the Class, a written exclusion request must be submitted no later than 40 days before the date of the Fairness Hearing; (vi) state that any one Policy Holder's request for exclusion will exclude all Holders of the Policy; (vii) inform Class Members that, if they do not exclude themselves from the Class with respect to a particular Policy, they will be eligible to receive one 60 or more forms of relief under the proposed settlement; (viii) state that any Class Member who has not submitted a written request for exclusion may, if he or she desires, object to the proposed settlement by filing and serving a written statement of objection no later than 40 days before the Fairness Hearing; (ix) state that any Class Member who has filed and served written objections to the proposed settlement may, if he or she so requests, enter an appearance at the Fairness Hearing either personally or through counsel by providing the Court and counsel for the Parties with a notice of intention to appear; (x) explain the impact of accepting or rejecting the benefits available to them under the Settlement Agreement on any existing litigation, claim, arbitration or other proceeding; (xi) state that any judgment entered with respect to the Settlement Agreement shall include, and be binding on, all Class Members who have not been excluded from the Class, even if they have objected to the proposed Settlement Agreement and even if they have any other claim, lawsuit or proceeding pending against the Defendant; (xii) provide the terms of the Release; (xiii) explain the disposition of unknown claims; and (xiv) state that any relief to Class Members is contingent on the Court's final approval of the proposed settlement. b. The Class Notice shall be reviewed and approved by the Department, in form and substance, prior to issuance. 61 4. The Statement of Benefits a. The Statement of Benefits will be included only in the Class Notice Packages of Holders of Database Policies. A Statement of Benefits shall also be provided upon request to any Eligible Holder who submits a Claim Form identifying the number of a Policy for which information is available on the Company's electronic records, or whose policy has been confirmed to be a Policy. b. The Statement of Benefits shall provide the Holder of the Policy with a simplified summary of certain information in the Class Notice and also shall inform him or her, to the extent feasible and reflected in the Company's electronic records, of (i) the Class Member's name; (ii) the policy number of the Policy making the Class Member eligible for relief; (iii) the status of the Policy as of the Eligibility Date; (iv) the form(s) and, to the extent practicable, percentages of relief for which the Class Member may be eligible; and (v) the need, if any, of the Class Member to submit a Claim Form to become an Eligible Holder. 5. Address Updating for Holders of Database Policies a. Prior to the mailing of the Class Notice Package to Holders of Database Policies described in Section XII.A.1 above, the Company shall conduct research to confirm or update the addresses of Holders of Database Policies that are 62 currently available on the Company's electronic databases, as described in this Section XII.A.5. b. Using its Trilium software, the Company shall reformat as necessary its address information for Holders of Database Policies that is currently available on the Company's electronic databases so that it is in a form conducive to searching for updated addresses through the National Change of Address Register. c. Once the Company has taken steps to reformat its current address information, the Company shall utilize the National Change of Address Register to confirm or update its current electronic addresses for Holders of Database Policies. d. Once it has taken the above steps, the Company shall provide its updated electronic address information for Holders of Database Policies to the Administrator, which shall use ChoicePoint to further update such address information to the extent practicable prior to the mailings contemplated by Section XII.A.1 above. B. PUBLICATION NOTICE AND OTHER MEDIA NOTICE 1. As soon as is practicable after the Court's entry of the Hearing Order, but no later than 55 days before the Fairness Hearing, the Company will publish on at least one occasion the Publication Notice, in a form substantially similar to that attached as Exhibit B and in the newspapers agreed to by the Department and the Company. The Company shall pay all of the costs associated with the Publication Notice. 2. Lead Counsel and the Company shall retain a media consultant to provide advice concerning the methods for providing the best notice practicable to the 63 Class. Based on the media consultant's recommendations, the Company shall arrange to provide notice to the Class through such media, and in such form and frequency, as to which the Department and the Company shall agree. Such media may include, without limitation, print media, television, radio, community outreach, and use of the Internet. All such media notification shall be completed as soon as is practicable following the Court's entry of the Hearing Order, but no later than 55 days prior to the Fairness Hearing. The Company shall pay all of the costs associated with the media notification described in this Section XII.B.2. C. REMAILING AND ADDITIONAL NOTICE The Company, through the Administrator, shall at its cost remail any notice returned by the Postal Service with a forwarding address that is received by the Administrator at least 50 days before the Fairness Hearing. With respect to Class Notices that are returned without a forwarding address, the Administrator shall immediately provide a copy of any returned notice to an address research firm retained for the purpose of researching updated addresses of Class Members, or conduct such research itself; provided however, that the Company shall not be obligated to duplicate the efforts of an address research firm that undertook a search for the Class Member's address prior to the initial mailing. In addition, the Hearing Order shall provide that any retained address research firm(s) shall provide to the Administrator in connection with each returned notice, as soon as is possible, either an updated address or a statement that, following due research (including, but not limited to, using the National Change of Address Register and Social Security Numbers) it has been unable to obtain an updated address. The 64 Administrator shall remail the notice to any Class Member for whom it obtains or the address research firm provides an updated address, so long as the updated address is obtained by or provided to the Administrator at least 50 days before the Fairness Hearing. D. POST-SETTLEMENT MAILING Starting at the commencement of the Implementation Period, the Company shall send a mailing to each person or entity eligible under Sections III.B through III.E above to receive a cash payment under this Regulatory Settlement Agreement by virtue of the Enhanced Past Death/Maturity Benefit (Section V above) or the Enhanced Past Termination Benefit (Section VI.A above). The mailing shall include a check in the amount of the cash payment for which the Policy is eligible. E. RETENTION OF ADMINISTRATOR 1. The Company shall at its cost retain one or more Administrators (including subcontractors) to help implement the terms of the proposed Regulatory Settlement Agreement. a. The Administrator(s) may assist with various administrative tasks, including, without limitation, (i) mailing or arranging for the mailing of the Class Notice to Class Members, (ii) arranging for publication of the Publication Notice, (iii) arranging for or assisting in dissemination of the Publication Notice; (iv) handling returned mail not delivered to Class Members, (v) attempting to obtain updated address information for any Class Notices returned without a forwarding address or an expired forwarding address, (vi) making any additional mailings required under the terms of this Regulatory Settlement Agreement, (vii) arranging for and staffing 65 a toll-free telephone number to assist the Parties in responding to inquiries from Class Members and others, (viii) assisting Class Members with the completion of Claim Forms under the terms and conditions set forth above in Section X.F above; (ix) answering written inquiries from Class Members, (x) receiving and maintaining on behalf of the Court any Class Member correspondence regarding requests for exclusion and objections to the settlement, (xi) establishing and administering a Web site with information on the settlement and the ability to submit Claim Form data; and (xii) otherwise assisting the Company with the administration of the Regulatory Settlement Agreement. The Company will pay the reasonable fees and expenses of the Administrator(s), as well as any other fees and expenses incurred in performing all of the tasks described in this Section XII.E.1.a. b. The Department shall be entitled to observe and monitor the performance of the Administrator to assure compliance with this Regulatory Settlement Agreement. c. The contract between the Company and the Administrator shall obligate the Administrator to abide by the following performance standards: (i) The Administrator shall accurately and neutrally describe, and shall train and instruct its employees and agents to accurately and objectively describe, the provisions of this Regulatory Settlement Agreement in communications with Class Members; 66 (ii) The Administrator shall provide prompt, accurate and neutral responses to inquiries from the Department or its designee, or the Company and/or the Company's Counsel. 2. Lead Counsel and the Company, in consultation with the Department, will establish a settlement administration center for the purpose of facilitating and providing information to Class Members regarding the settlement and their rights under it. The settlement administration center shall include, among other things, a telephone bank with a toll-free telephone number for responding to inquiries from Class Members and others about the proposed settlement and any issues related thereto. The Administrator shall direct all callers with general product questions, product status requests, or complaints unrelated to the settlement of the Action to call the Company's toll-free customer service number. a. The settlement administration center shall commence operations beginning no later than the day after the first Class Notice Package is mailed and ending on a date to be agreed to by the Parties. b. The Administrator will be responsible for (i) staffing the telephone bank with telephone representatives, (ii) educating the telephone representatives about the general background of the Action, the product concepts relevant to the proposed settlement, the notice, terms and chronology of the proposed settlement, (iii) training the telephone representatives to explain to Class Members the benefits available to them under the Settlement Agreement and Regulatory Settlement Agreement, including that the telephone representatives shall be instructed to advise all eligible Class 67 Members who call the telephone bank of their need, if any, to complete and return a Claim Form to become Eligible Holders, (iv) training the telephone representatives to answer inquiries from Class Members and others, (v) providing scripts and model questions and answers for the telephone representatives to use in answering inquiries from Class Members and other policyowners, (vi) training the telephone representatives to refer Class Member inquiries to appropriate sources, including, but not limited to Lead Counsel or its designee if the Class Member so requests or where otherwise appropriate, (vii) training telephone representatives to refer callers with general product questions, product status requests, or complaints unrelated to the settlement of this Action to call the Company's toll-free customer service number, (viii) training telephone representatives to advise policyowners how to inquire if they own Policies within the Class, (ix) providing for a translation service for non-English speaking Class Members who call the toll-free number, (x) providing callers access to a terminal for the hearing-impaired, (xi) maintaining records reflecting communications with Class Members; (xii) providing on-site facilities for the Department, the Company's Counsel and Company representatives; and (xiii) taking any other steps, in consultation with the Department and the Company, to promote accurate and efficient communications with Class Members and others. c. The Department and the Company and/or its counsel may monitor and participate in the education and training of telephone representatives. (i) The Department and the Company and/or its counsel may participate in all training sessions, speak with telephone representatives and 68 supervisors, and provide additional comment and/or instruction to telephone representatives and/or supervisors as they deem necessary. The Department or the Company or its designee may request and obtain a pause or cessation in any training session or other communication with a telephone representative or supervisor to confer regarding the content of the communication or training. All training and other written communications between the Parties and telephone representatives and/or supervisors must be agreed upon by the Parties. (ii) The Department may observe any communications between the Company or its designee and the telephone representatives and supervisors of telephone representatives regarding training issues. (iii) The Company and the Department shall consult in advance and agree on the form and content of all telephone scripts to be used by the telephone representatives, and all training materials and presentations, whether written or oral, provided to telephone representatives. The Department shall be provided with complete drafts of all telephone scripts, written materials or written presentations as soon as possible but no later than 10 days prior to their use in training. Any proposed changes, modifications or additions to the telephone scripts or written training materials by either Party must be provided to the other Party with sufficient time to permit meaningful comment prior to use. The Parties shall negotiate in good faith concerning any such changes, modifications or additions to facilitate providing clear, understandable and accurate information to Class Members. 69 (iv) The Department or its designee may be present on-site at the telephone bank to monitor telephone representatives' handling of Class Members' telephone inquiries. The Company and its designees may also be present on-site at the telephone bank to monitor telephone representatives' handling of Class Members' telephone inquiries. F. COMMUNICATION WITH CLASS MEMBERS, POLICYOWNERS AND PRODUCERS 1. The Company expressly reserves the right to communicate with and respond to inquiries from policyowners and Class Members orally and/or in writing, consistent with the provisions of the Regulatory Settlement Agreement. The Company shall make and maintain a note in its administrative systems reflecting any telephone call between representatives at the Company's toll-free customer service number and any potential Class Member relating to the settlement. 2. Any communications between the Company and Class Members concerning the terms of the settlement shall be consistent with scripted information that is provided to the Department for its comments prior to use. The Parties shall confer in good faith to resolve any differences concerning such scripts. In addition, upon request, the Department shall be provided with copies of all correspondence from the Company to Class Members concerning the terms of the settlement. 3. The Company's Producers may respond to inquiries from, and/or communicate with, present or former Company policyowners about the proposed settlement. However, the Company shall (a) instruct its Producers to encourage Class Members with inquiries regarding the proposed settlement to call the toll-free number 70 established to respond to such inquiries; (b) make available to its Producers copies of the Notice Card attached as Exhibit F hereto to give to such inquiring Class Members; and (c) provide its Producers with copies of an Agent Script and instruct them that any answers to Class Member questions regarding the settlement shall be consistent with such Agent Script. The Company may also respond to Producer questions regarding the proposed settlement. 4. Mass and/or generalized communications with Class Members regarding the proposed settlement, whether by the Company or its current Producers, and whether by mail, the establishment or encouragement of Internet websites or other Internet communications, telephone scripts, or any other means, shall be made only after approval by the Department. XIII. ORDER OF DISMISSAL The Plaintiffs and the Company will seek and obtain from the Court a Final Judgment and Order Approving Settlement (for which, as a condition of settlement, the time for appeal has expired without any modifications in the Final Judgment or Order Approving Settlement) as further described below in Section XV. The Final Judgment and Order Approving Settlement shall, among other things, (i) approve the Settlement Agreement in the Action as fair, reasonable and adequate, and (ii) dismiss the Action with prejudice and on the merits. XIV. ORDER OF NOTICE, FAIRNESS HEARING AND ADMINISTRATION A. The Company, Plaintiffs, and the Department have agreed to the form of the following documents: the Class Notice Package (Exhibit A), the Publication Notice 71 (Exhibit B), the Unclaimed Benefits Protocols (Exhibit C), the Hearing Order (Exhibit D), the Identifying Information (Exhibit E), the Notice Card (Exhibit F), the Stipulation of Confidentiality (Exhibit G), the SDB Certificate (Exhibit H), the Small Estate Declaration (Exhibit I), the Cash Payment Option Election Letter (Exhibit J), the Confirmatory Letter (Exhibit K), the Industrial Weekly Substandard Enhancement Factors (Exhibit L), the Cost Factors and Assumptions (Exhibit M) and the Covered Met Series Policies (Exhibit N). These documents are incorporated into, are an integral part of, and are material terms of this Regulatory Settlement Agreement. B. Plaintiffs and the Company will submit the Settlement Agreement in the Action, including all attached exhibits, to the Court and seek and obtain preliminary approval thereof. If the Court preliminarily approves the Settlement Agreement, the Plaintiffs and the Company shall move the Court to set a Fairness Hearing, and shall seek and obtain a proposed Hearing Order. XV. FINAL APPROVAL, AND FINAL JUDGMENT AND ORDER APPROVING SETTLEMENT After the Fairness Hearing, and upon the Court's approval of the Settlement Agreement in the Action, the Plaintiffs and the Company shall seek and obtain from the Court a Final Judgment and Order Approving Settlement in the Action. XVI. NEW ENGLAND MUTUAL A. Each New England Mutual Affected Policy shall be provided with the Adjustment Amount, in the form, and on the terms and conditions, described in this Section XVI. 72 B. On the Automatic Adjustment Date, the Adjustment Amount shall automatically be applied to purchase paid-up additional insurance coverage on the policy, unless the owner of a New England Mutual Affected Policy has previously notified the Company of an election to receive the cash payment option described in Section XVI.C.2 below. C. No later than 30 days preceding the Automatic Adjustment Date, the Company shall mail a letter to the owner of each New England Mutual Affected Policy, the form and content of which shall be approved by the Department prior to mailing. 1. The letter shall describe both the Adjustment Amount and the amount of additional paid-up insurance coverage purchasable for the policy using the Additional Amount. 2. The letter shall advise the owner of the New England Mutual Affected Policy that he or she may elect to receive the Adjustment Amount in the form of a cash payment, instead of in the form of additional paid-up insurance coverage. 3. The letter shall advise that unless the Company receives notification of the owner's election to receive the Adjustment Amount in the form of a cash payment on or before the Automatic Adjustment Date, the Adjustment Amount will automatically be applied to purchase paid-up additional insurance coverage. 4. If the owner of a New England Mutual Affected Policy timely elects to receive the Adjustment Amount in the form of a cash payment, the Company shall mail such cash payment no later than 10 days following the Automatic Adjustment Date. 73 D. If the person insured under any New England Mutual Affected Policy dies before the benefit described in this Section XVI is provided by the Company, then the Company shall provide the policy's contractual beneficiary with a cash payment equal to the amount of additional paid-up insurance coverage that would have been purchasable using the policy's Adjustment Amount. E. If any New England Mutual Affected Policy is surrendered or otherwise lapses or terminates before the benefit described in this Section XVI is provided by the Company, then the Company shall increase the cash value of the policy at the time of surrender or termination by the Adjustment Amount. F. No later than 20 days following the Automatic Adjustment Date, the Company, through one of its officers who is a member in good standing of the American Academy of Actuaries, shall deliver a written certification to the Department describing in detail the benefits provided by the Company for each New England Mutual Affected Policy under this Section XVI. G. The costs to the Company of providing the benefits described in this Section XVI shall not be considered in calculating the minimum/maximum cost of benefits pursuant to Section XI hereof. XVII. REGULATORY RESOLUTION A. Each person signing on behalf of a Participating Regulator gives his/her express assurance that under applicable state laws, regulations and judicial rulings, he/she has the authority to enter into this Regulatory Settlement Agreement on behalf of the Participating Regulator. 74 B. Each Participating Regulator shall execute and deliver this Regulatory Settlement Agreement to the Lead Regulatory Negotiator within sixty (60) days following the receipt of this Regulatory Settlement Agreement from the Lead Regulatory Negotiator. If a Participating Regulator finds that, under applicable state law, regulation or procedure, the preparation and execution of a consent order is necessary to carry out the terms of this Regulatory Settlement Agreement, such a consent order (the "Applicable Consent Order") shall be prepared by such Participating Regulator within sixty (60) days following the receipt of this Regulatory Settlement Agreement from the Lead Regulatory Negotiator. C. For purposes of this Regulatory Settlement Agreement, an "Applicable Consent Order" shall be satisfactory to the Company if it: (1) incorporates by reference and attaches via exhibit a copy of this Regulatory Settlement Agreement; (2) expressly adopts and agrees to the provisions of this Regulatory Settlement Agreement; and (3) includes only those other terms that may be legally required in the state of the applicable Participating Regulator. However, nothing in this Regulatory Settlement Agreement shall be construed to require any state to execute and deliver an Applicable Consent Order if such State elects instead to sign this Regulatory Settlement Agreement. D. Upon execution of this Regulatory Settlement Agreement, the Department and the Participating Regulators release and forever discharge the Company from all liability for, and from all civil or administrative causes, actions, claims, damages, losses and demands of any nature whatsoever, that arise from acts or omissions related to the subject matter of the Report on Examination, the Stipulation of Settlement and this 75 Regulatory Settlement Agreement, and relate to the marketing, solicitation, application, underwriting, risk classification, issuance, change issuance, re-issuance, reinstatement, design, type, structure, terminology, pricing, premiums, charges, rates, premium mode, acceptance, purchase, sale, operation, retention, administration, debit or home service, collection, servicing, performance, dividends, cash values, benefits (including non-forfeiture benefits), or provision of demutualization shares, relating to any Policy. E. Any material violation of this Regulatory Settlement Agreement may be deemed to constitute a violation of an Order issued by the Department or the Participating Regulators to the Company. XVIII. MODIFICATION OR TERMINATION OF THIS AGREEMENT A. The terms and provisions of this Regulatory Settlement Agreement may be amended, modified or expanded by agreement of the Department and the Company. B. The Company, in consultation with the Department and Lead Counsel and without approval of the Court, may implement the terms of this Regulatory Settlement Agreement after entry of the Final Judgment and Order Approving Settlement but before the Final Settlement Date, in which case all provisions in this Regulatory Settlement Agreement that specify actions to be taken on or after the Final Settlement Date shall, to the extent necessary, be deemed to provide that those actions shall be taken on or after the date on which the Company elects to implement the Regulatory Settlement Agreement. C. This Regulatory Settlement Agreement will terminate at the sole option and discretion of the Department or the Company if (i) the Court, or any appellate 76 court(s), rejects, modifies or denies approval of any portion of the Settlement Agreement in the Action or the proposed settlement that the terminating Party in its (or their) sole judgment and discretion reasonably determine(s) is material, including, without limitation, the terms of relief, the findings of the Court, the provisions relating to notice, the definition of the Class and/or the terms of the Release set forth in the Settlement Agreement, or (ii) the Court, or any appellate court(s), does not enter or completely affirm, or alters or expands, any portion of the Final Judgment or Order Approving Settlement, or any of the Court's findings of fact or conclusions of law as proposed by the Company's Counsel and Lead Counsel, that the terminating Party in its (or their) sole judgment and discretion believe(s) is material. The terminating Party must exercise the option to withdraw from and terminate this Regulatory Settlement Agreement, as provided in this Section no later than 20 days after receiving notice of the event prompting the termination. 1. The Company may unilaterally withdraw from and terminate this Regulatory Settlement Agreement if the Company properly withdraws from and terminates the Settlement Agreement. D. If an option to withdraw from and terminate this Regulatory Settlement Agreement arises under Section XVIII.C, (i) neither the Department nor the Company will be required for any reason or under any circumstance to exercise that option, and (ii) any exercise of that option shall be made in good faith. E. If this Regulatory Settlement Agreement is terminated pursuant to Section XVIII.C then: 77 1. this Regulatory Settlement Agreement shall be null and void and shall have no force or effect, and no Party to this Regulatory Settlement Agreement nor the Participating Regulators shall be bound by any of its terms, except for the terms of this Section XVIII.E; 2. this Regulatory Settlement Agreement, all of its provisions, and all negotiations, statements and proceedings relating to it shall be without prejudice to the rights of the Department, the Participating Regulators or the Company, all of which shall be restored to their respective positions existing immediately before the execution of this Regulatory Settlement Agreement; 3. the Company and its current and former directors, officers, Producers, employees, agents, attorneys and representatives expressly and affirmatively reserve all defenses, arguments and motions as to all claims that have been or might later be asserted with respect to the subject matter of this Regulatory Settlement Agreement; and 4. neither this Regulatory Settlement Agreement, nor the fact of its having been made, shall be offered into evidence for any purpose. XIX. GENERAL MATTERS AND RESERVATIONS A. The obligation, although not the ability, of the Parties to conclude this proposed settlement is and will be contingent upon each of the following: 1. authorization by the Board of Directors of Metropolitan Life Insurance Company to enter into this Regulatory Settlement Agreement; 78 2. entry by the Court of the Final Judgment and Order Approving Settlement in the Action, from which order the time to appeal has expired or which has remained unmodified after any appeal(s); and 3. any other conditions stated in this Regulatory Settlement Agreement. B. The Company and its counsel agree to keep the existence and contents of this Regulatory Settlement Agreement and the Stipulation of Settlement and all related negotiations confidential until the earlier of the date of the first public announcement by the Department or the signing of the order granting preliminary approval of the Settlement Agreement pursuant to Section XIV.B; provided however, that this Section shall not prevent earlier disclosure of such information to regulators, rating agencies, insurers or reinsurers, financial analysts, Producers, or any other person or entity (such as experts, courts, and/or Administrators) to whom the Parties agree disclosure must be made to effectuate the terms and conditions of this Regulatory Settlement Agreement or the Stipulation of Settlement. C. The Company shall not issue any written statements, written press releases or other written media notices in connection with the proposed settlement which has not first been provided to the Department sufficiently in advance of public release to provide the Department with adequate time to review and comment on the proposed statement, press release or notice, and to prepare its own statement. 79 D. The Company shall ensure that any comments about or descriptions of the proposed settlement or its value or cost in the media or in any other public forum are balanced, fair, accurate, and consistent with the terms and intent of the settlement. E. Lawrence A. Vranka represents that he is authorized to enter into this Regulatory Settlement Agreement on behalf of the Company. F. This Regulatory Settlement Agreement sets forth the entire agreement among the Parties and the Participating Regulators with respect to its subject matter, and it may not be altered or modified except by written instrument executed by the Department and the Company. This Regulatory Settlement Agreement supercedes any prior agreement, understanding, or undertaking (written or oral) by or among the Parties and the Participating Regulators regarding the subject matter of this Regulatory Settlement Agreement. G. This Regulatory Settlement Agreement and any ancillary agreements shall be governed by and interpreted according to the law of the State of New York, excluding its conflict-of-laws provisions. H. All time periods set forth herein shall be computed in calendar days unless otherwise expressly provided. In computing any period of time prescribed or allowed by this Regulatory Settlement Agreement or by order of court, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday or a legal holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the office of the clerk of the court inaccessible, in 80 which event the period shall run until the end of the next day that is not one of the aforementioned days. As used in this Section, "legal holiday" includes New Year's Day, Birthday of Martin Luther King, Jr., Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, Christmas Day and any other day appointed as a holiday by the President or the Congress of the United States, or by the State of New York, where the Court is located. I. The Department and the Company reserve the right, subject to the Court's approval, to make any reasonable extensions of time that might be necessary to carry out any of the provisions of this Regulatory Settlement Agreement. J. All Parties agree that this Regulatory Settlement Agreement was drafted during extensive arm's-length negotiations, and that no parol or other evidence may be offered to explain, construe, contradict or clarify its terms, the intent of the Parties or their counsel, or the circumstances under which the Regulatory Settlement Agreement was made or executed. K. In no event shall the Regulatory Settlement Agreement, any of its provisions or any negotiations, statements or court proceedings relating to its provisions in any way be offered by the Parties or Participating Regulators as evidence in any action or any judicial, administrative, regulatory or other proceeding, except a proceeding to enforce this Regulatory Settlement Agreement. Without limiting the foregoing, neither this Regulatory Settlement Agreement nor any related negotiations, statements or court proceedings shall be offered by the Parties or Participating Regulators as evidence of or an admission or concession of any liability or wrongdoing whatsoever on the part of any 81 person or entity, including but not limited to the Company, or as a waiver by the Company of any applicable defense, including without limitation any applicable statute of limitations or statute of frauds. L. The Company does not admit or concede any actual or potential fault, wrongdoing or liability in connection with any facts or claims that have been or could have been alleged against it, but considers it desirable for this matter to be resolved because this Agreement will provide substantial benefits to the Company's present and former policyowners, insureds and beneficiaries. M. Neither this Regulatory Settlement Agreement nor any of the relief to be offered under the proposed settlement shall be interpreted to alter in any way the contractual terms of any Policy, or to constitute a novation of any Policy. N. No opinion concerning the tax consequences of the proposed settlement to individual Class Members is being given or will be given by the Company, the Company's Counsel, the Department or the Participating Regulators nor is any representation or warranty in this regard made by virtue of this Regulatory Settlement Agreement. The Class Notice will direct Class Members to consult their own tax advisors regarding the tax consequences of the proposed settlement, including any payments, contributions or credits provided hereunder, and any tax reporting obligations they may have with respect thereto. Each Class Member's tax obligations, and the determination thereof, are the sole responsibility of the Class Member, and it is understood that the tax consequences may vary depending on the particular circumstances of each individual Class Member. 82 O. The Parties, their successors and assigns, and their attorneys undertake to oversee and implement the terms of this Regulatory Settlement Agreement in good faith, and to use good faith in resolving any disputes that may arise in the implementation of the terms of this Regulatory Settlement Agreement. P. This Settlement Agreement may be signed in counterparts, each of which shall constitute a duplicate original. 83 Agreed to this 29th day of August, 2002. APPROVED AND AGREED TO BY AND ON BEHALF OF THE STATE OF NEW YORK INSURANCE DEPARTMENT By: /s/ Gregory Serio -------------------------------------------------- GREGORY SERIO SUPERINTENDENT OF INSURANCE APPROVED AND AGREED TO BY AND ON BEHALF OF METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Lawrence A. Vranka -------------------------------------------------- LAWRENCE A. VRANKA VICE PRESIDENT METROPOLITAN LIFE INSURANCE COMPANY 84 EX-10.2 4 y65151exv10w2.txt STIPULATION OF SETTLEMENT Exhibit 10.2 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK __________________________________________ ) KARL M. THOMPSON and LUCILE ELLIS, ) ) On Behalf of Themselves and All Others ) No. 00 Civ. 5071 (HB) Similarly Situated, ) ) Also applies to: Plaintiffs, ) ) No. 00 Civ. 9068 (HB) v. ) No. 01 Civ. 2090 (HB) ) No. 01 Civ. 5579 (HB) METROPOLITAN LIFE INSURANCE ) COMPANY, ) ) Defendant. ) __________________________________________) STIPULATION OF SETTLEMENT TABLE OF CONTENTS
Page ---- I. INTRODUCTION AND DEFINITIONS............................................................ 2 A. Allegations and Response.......................................................... 2 B. Discovery......................................................................... 4 C. Settlement Considerations......................................................... 5 D. Definitions....................................................................... 5 II. SETTLEMENT AGREEMENT TERMS.............................................................. 25 III. BENEFITS FOR IN-FORCE POLICIES.......................................................... 32 A. The Enhanced Future Death/Maturity Benefit........................................ 32 B. The Enhanced Future Termination/Non-Forfeiture Benefit............................ 34 C. The Enhanced Additional Insurance Benefit......................................... 37 D. The Cash Payment Option........................................................... 38 E. The Prospective Commitment........................................................ 39 IV. RELIEF FOR DEATH/MATURITY POLICIES: THE ENHANCED PAST DEATH/MATURITY BENEFIT.......... 40 A. Standard Enhancements............................................................. 40 B. Additional Enhancements........................................................... 41 V. BENEFITS FOR TERMINATED POLICIES........................................................ 42 A. The Enhanced Past Termination Benefit............................................. 42 B. The Settlement Death Benefit...................................................... 43 VI. MET SERIES ENHANCEMENT.................................................................. 46 VII. UNCLAIMED BENEFITS RELIEF............................................................... 47 VIII. COMPANY CERTIFICATION OF RELIEF......................................................... 50 IX. RELIEF QUALIFICATIONS................................................................... 51 X. MINIMUM/MAXIMUM COST OF BENEFITS........................................................ 57
i TABLE OF CONTENTS (Continued)
Page ---- XI. NOTICE TO CLASS MEMBERS AND COMMUNICATIONS WITH CLASS MEMBERS AND POLICYOWNERS.......... 60 A. Class Notice Package.............................................................. 60 B. Publication Notice and Other Media Notice......................................... 64 C. Remailing and Additional Notice................................................... 65 D. Post-Settlement Mailing........................................................... 66 E. Retention of Administrator........................................................ 66 F. Communication with Class Members, Policyowners and Producers...................... 72 G. Media Communications.............................................................. 74 XII. REQUESTS FOR EXCLUSION.................................................................. 75 XIII. OBJECTIONS TO THE SETTLEMENT............................................................ 76 XIV. RELEASE AND WAIVER, AND ORDER OF DISMISSAL.............................................. 78 A. Release and Waiver................................................................ 78 B. Order of Dismissal................................................................ 83 XV. ATTORNEYS' FEES AND EXPENSES............................................................ 84 XVI. ORDER OF NOTICE, FAIRNESS HEARING AND ADMINISTRATION.................................... 85 XVII. FINAL APPROVAL, AND FINAL JUDGMENT AND ORDER APPROVING SETTLEMENT....................... 92 XVIII. MODIFICATION OR TERMINATION OF THIS AGREEMENT........................................... 96 XIX. GENERAL MATTERS AND RESERVATIONS........................................................ 100
ii UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK __________________________________________ ) KARL M. THOMPSON and LUCILE ELLIS, ) ) On Behalf of Themselves and All Others ) No. 00 Civ. 5071 (HB) Similarly Situated, ) ) Also applies to: Plaintiffs, ) ) No. 00 Civ. 9068 (HB) v. ) No. 01 Civ. 2090 (HB) ) No. 01 Civ. 5579 (HB) METROPOLITAN LIFE INSURANCE ) COMPANY, ) ) Defendant. ) __________________________________________) STIPULATION OF SETTLEMENT IT IS HEREBY STIPULATED AND AGREED, by, between and among Karl M. Thompson, Lucile Ellis, Charlene McCallop, Marguerite Guillmette Justin, Adrienne Delpit Blazio, and Myron Billups (as administrator of the Estate of Nellie Gillespie) ("Plaintiffs"), in their individual and representative capacities, and Metropolitan Life Insurance Company (hereinafter referred to as "Metropolitan Life," "Defendant" or the "Company"), through their duly authorized counsel, that the lawsuit captioned Karl M. Thompson, et al. v. Metropolitan Life Insurance Company, Case No. 00 Civ. 5071 (HB), and all other cases currently consolidated with it (the "Action"), and the matters raised by the Action, are settled and compromised on the terms and conditions set forth in this Stipulation of Settlement with attached exhibits (the "Settlement Agreement"), and the Release set forth in this Stipulation of Settlement, subject to the approval of the Court. I. INTRODUCTION AND DEFINITIONS A. ALLEGATIONS AND RESPONSE 1. The Action asserts racial discrimination claims relating to the pricing, underwriting, sale, issuance, characteristics, administration, and the providing of information (or failure to provide information) regarding the Policies. The Action alleges, among other things, that the Company discriminated against Class Members by engaging in the following practices: a. charging Class Members more in premiums for their insurance policies than similarly situated Caucasians; b. designing and offering products to Class Members that were inferior to products available to Caucasians; c. manipulating commissions paid to sales agents in furtherance of a policy and practice of racial discrimination; d. requiring mercantile reports and medical reports on Class Members in furtherance of a policy and practice of racial discrimination; e. underwriting Class Members on the basis of purportedly neutral social and economic factors (such as occupation, moral hazard, income or place of residence) as a pretext for a policy and practice of racial discrimination; f. selling and marketing Policies as "burial" protection; 2 g. selling a Policy or multiple Policies to Class Members regardless of the suitability or appropriateness of such Policies for an applicant or insured, when compared to other life insurance policies made available to Caucasians; h. limiting the amount of insurance available to Class Members; i. improperly training agents to sell inferior and multiple life insurance policies to Class Members; j. selling Policies to Class Members for which premiums were excessive and unconscionable based on their race or national origin; k. allocating Class Members fewer shares in the Company's demutualization in 2000 than the shares allocated to similarly situated Caucasian policyholders; l. training and permitting agents to decrease the frequency with which Policy premiums were to be collected; m. using discriminatory methods or actuarial principles for the apportionment and payment of, determination of, or amount of dividends on any Policy; n. failing to pay, delaying payment, or failing to inform any person of death or maturity benefits under a Policy; o. failing to notify persons or entities to whom Policy benefits have become payable, leading to improper escheatment of Policy benefits; p. failing to discontinue, correct or remedy effects of discrimination on the basis of race or national origin; 3 q. concealing material information from Class Members about the discriminatory nature of their Policies; and r. training or directing Company agents to conceal or not disclose MetLife's discriminatory practices in the sale and servicing of the Policies. 2. Plaintiffs continue to believe that there was and is a good faith basis for these allegations. 3. The Company expressly denies any allegations of wrongdoing against it and does not admit or concede any actual or potential fault, wrongdoing or liability in connection with any facts or claims that have been or could have been alleged against it in the Action and does not waive any defenses or positions in any other dispute concerning the Policies. The Company denies that any of the claims in the Action are meritorious. B. DISCOVERY 1. In the course of their examination and discovery in the litigation, counsel for Plaintiffs reviewed, among other things, approximately 450,000 pages of documents produced by the Company, deposed 21 current or former Company officials and employees and conducted other discovery of the Company, its agents and its policyowners relating to the issues raised in the Action. 2. In the course of its examination and discovery in the litigation, the Company (together with its counsel) reviewed the documents it produced to Plaintiffs and documents produced to it by Plaintiffs. Defendant's Counsel also conducted eight depositions of the Plaintiffs and other individuals. 4 C. SETTLEMENT CONSIDERATIONS 1. Based upon their discovery, investigation and evaluation of the facts and law relating to the matters alleged in the pleadings, Plaintiffs and counsel for Plaintiffs and the Class have agreed to settle the Action pursuant to the provisions of this Settlement Agreement after considering, among other things, (i) the substantial benefits available to Plaintiffs and the Class under the terms of this Settlement Agreement, (ii) the attendant risks and uncertainty of litigation, especially in complex actions such as this, as well as the difficulties and delays inherent in such litigation, and (iii) the desirability of consummating this settlement promptly to provide effective relief to Plaintiffs and the Class. 2. The Company, while expressly denying any wrongdoing and the allegations made in the Action, considers it desirable for the Action to be settled and dismissed because this Settlement Agreement will (i) provide significant benefits to the Company's present and former policyowners and insureds, (ii) avoid the substantial expense, burdens and uncertainties associated with continued litigation of the claims asserted in the Action and (iii) provide for a certain and prompt resolution of the claims asserted in the Action. D. DEFINITIONS 1. As used in this Settlement Agreement and the annexed exhibits (which are an integral part of this Settlement Agreement and are incorporated in their entirety by reference), the following terms have the following meanings, unless a Section or Subsection of this Settlement Agreement or its exhibits expressly provides otherwise: 5 a. "Action" shall mean the lawsuit captioned Thompson, et al. v. Metropolitan Life Insurance Company, No. 00 Civ. 5071 (HB), and all cases consolidated with it, including, but not limited to, Justin, et al. v. Metropolitan Life Insurance Company, No. 00 Civ. 9068 (HB), McCallop v. Metropolitan Life Insurance Company, No. 01 Civ. 2090 (HB) and Billups v. Metropolitan Life Insurance Company, No. 01 Civ. 5579 (HB). b. "Additional Enhancement" shall mean the enhancements or payments, in addition to the enhancements or payments provided as Standard Enhancements (defined in Section I.D.1.jjjj, below), that shall be provided to Holders of certain In-Force Policies and Death/Maturity Policies pursuant to this Settlement Agreement. c. "Additional Insurance" shall mean paid-up insurance additional to the Face Amount of a Policy, having its own contractual cash values. d. "Administrator" shall mean any third-party agents or administrators whom the Company shall retain, upon approval of Lead Counsel, to help implement the terms of this Settlement Agreement. e. "Affinity Group" shall mean (i) the Class Member or his or her spouse, sibling, parent or child (including a stepchild residing with the Class Member), and/or (ii) any person in whom the Class Member has an insurable interest; provided however, that no member of the Affinity Group shall be over age 72 as of January 1, 2004. 6 f. "Agent Script" shall mean the script that the Company shall disseminate to its current Producers, as further described in Section XI.F.3 below. g. "Agreement" or "Settlement Agreement" shall mean this Stipulation of Settlement and the attached exhibits, including any subsequent amendments thereto and any exhibits to such amendments. h. "Alternate Covered Person" shall mean, for purposes of any Settlement Death Benefit provided pursuant to Section V.B, a person who is a member of the Class Member's Affinity Group who is designated pursuant to the terms of Section V.B.7 as the person upon whose qualifying death the Settlement Death Benefit provided under this Agreement will be paid. i. "Alternate Recipient" shall mean such person as the Class Member may choose to receive the SDB payment pursuant to the terms and conditions set forth in Section V.B below. j. "Amended Complaint" shall mean the Amended Consolidated Class Action Complaint in this Action filed by Plaintiffs on July 19, 2002. k. "Application File" shall mean the application submitted for the Policy; any statement of the agent or other sales representative submitted in connection with the application for the Policy; any report of medical or paramedical examination obtained in connection with the underwriting of the application; any mercantile report obtained in connection with the underwriting of the application; and any other documents in the application file for the Policy. 7 l. "Attorneys' Fees and Expenses" shall mean such funds as may be agreed to by the Parties and/or awarded to Lead Counsel by the Court to compensate them (and all other attorneys of record for Plaintiffs in this Action as of the Execution Date) for their fees and expenses in connection with the Action, as provided for in Section XV below. m. "Cash Payment Option" shall mean the option of Eligible Holders of In-Force Policies to receive a cash payment from the Company instead of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit, as described in Section III.D below. n. "Cash Payment Option Election Letter" shall mean the letter sent to the Holders of In-Force Policies, substantially in the form attached hereto as Exhibit J, by which such Class Members may exercise their right to receive a cash payment from the Company instead of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit, as described in Section III.D below. o. "Cash Value" shall mean the cash value associated with a Policy's Face Amount. For each Policy other than any Policy that went onto an extended term-insurance non-forfeiture status and then expired prior to January 1, 1968, the cash value associated with the Policy's Face Amount shall not be reduced by any policy loan. p. "Claim Form" shall mean the form included with the Class Notice Package that Holders of certain Policies shall be required to complete and submit 8 in order to become Eligible Holders, pursuant to Sections IX.B and IX.E below. The Claim Form shall be in substantially the form appended hereto as Exhibit A, and shall be contained in a wrapper that clearly indicates that (i) a Claim Form is enclosed, (ii) the Claim Form must be submitted to obtain settlement benefits unless a Statement of Benefits included in the Class Notice Package states that submission of the Claim Form for the Policy is unnecessary, and (iii) Claim Forms must be postmarked by the Claim-In Date. q. "Claim-In Date" shall mean the date 75 days after the Fairness Hearing. r. "Claim-Resolution Date" shall mean the date by which all disputes concerning the eligibility for settlement benefits of any person or entity who submits a Claim Form shall be finally resolved pursuant to Section IX.G below, which date shall be no later than 195 days after the Claim-In Date. s. "Class" or "Class Members" shall mean all Holders (including their estates) of Policies, but shall not include (unless and to the extent such persons or entities are Class Members by virtue of their status as Holder of another Policy) the following: (i) any Excluded Entity; (ii) any persons or entities who are Holders (or their estates) of a Policy (a) for which a timely request for exclusion from the proposed class has been received from any Holder or Estate Holder; (b) that was issued by the Company, but not accepted and paid for, or was returned to the Company as part of the exercise of a free look provision in the Policy; or (c) that is the subject of a release signed by any person or entity while represented by counsel settling a claim or dispute and releasing 9 Metropolitan Life from any further liability concerning such Policy; and (iii) any insurance company that owns or owned a Policy pursuant to an absolute assignment effected as part of an exchange under section 1035 of the Internal Revenue Code. t. "Class Counsel" shall mean Milberg Weiss Bershad Hynes & Lerach LLP; Bonnett, Fairbourn, Friedman & Balint, P.C.; James, Hoyer, Newcomer & Smiljanich, P.A.; Watson Jimmerson Givhan & Martin, P.C.; Whatley Drake, LLC; Arnzen, Parry & Wentz, P.S.C.; Herman Herman Katz & Cotlar, LLP; Carter & Cates; The Nygaard Law Firm; Barrett, Towmey, Broom, Hughes & Wesley; Campbell, Waller & Loper, LLC; Foote, Meyers, Miekle, Flowers & Solano, LLC; and Specter Specter Evans & Manogue, P.C. u. "Class Notice" shall mean the notice of the terms of the proposed settlement included in the Class Notice Package. v. "Class Notice Package" shall mean the notice package, as approved in form and content by counsel to Plaintiffs and Defendant and the Court, and substantially in the form attached hereto as Exhibit A, to be provided to Class Members pursuant to Section XI.A of this Settlement Agreement. The Class Notice Package shall include (i) the Class Notice, (ii) a Claim Form, and (iii) in the case of Database Policies, a Statement of Benefits. w. "Company" or "Metropolitan" or "Metropolitan Life" shall mean Metropolitan Life Insurance Company. x. "Confirmatory Letter" shall mean the letter, in the form attached hereto as Exhibit K, to be sent to the last-known address on the Company's 10 electronic records of payees of certain Death/Maturity Policies as updated hereunder, seeking to confirm the address of such payee or to obtain an updated address for such payee postmarked within 30 days of the date of the letter, as described in Section IX.C.3 below. y. "Court" shall mean the United States District Court for the Southern District of New York, where the Action is pending. z. "Covered Met Series Policy" shall mean any life insurance policy described in Exhibit N hereto. aa. "Covered Person" shall mean the person upon whose qualifying death the Settlement Death Benefit provided under this Agreement will be paid, which person shall be the insured under the Policy making the Class Member eligible for relief, unless the Class Member designates an Alternate Covered Person pursuant to Section V.B.7 below. bb. "Database Policies" shall mean (a) any Policy for which the insured is reflected on the Company's electronic records as non-Caucasian; (b) any 1920-1929 Intermediate Policy and any Other Industrial Monthly Substandard Policy on the Company's electronic records for which the race of the insured is identified in the Application File as other than Caucasian; and (c) any 1930-1935 Ordinary Substandard Policy, 1927-1929 Industrial Monthly Substandard Policy or Industrial Weekly Substandard Policy on the Company's electronic records for which the race of the insured is not identified in the Company's electronic records as Caucasian. 11 cc. "Death/Maturity Policies" shall mean any Policy on which, prior to the Eligibility Date, a death, maturity or endowment benefit has been paid or has become payable pursuant to its terms. dd. "Defendant" shall mean Metropolitan Life Insurance Company. ee. "Defendant's Counsel" shall mean the law firm of Debevoise & Plimpton. ff. "Domestic Partner" shall mean an individual who, prior to the death of a Holder: (i) Lived with the Holder in an intimate and committed relationship of mutual caring at a time where both individuals were at least 18 years of age and neither individual was married or in another domestic partnership; (ii) Shared the same residence with the Holder at the time of the Holder's death; and (iii) Agreed with the Holder to be jointly responsible for basic living expenses incurred during the domestic partnership. gg. "Early Termination Adjustment" shall equal X/Y, where: (i) X equals the number of years that a Policy was premium-paying; and (ii) Y equals the lesser of (a) the number of years that the Company required premiums to be paid for the Policy absent the death of the insured and (b) 2002 minus the year in which the Policy was issued. 12 hh. "Eligibility Date" shall mean August 19, 2002. ii. "Eligible Holder" shall mean a Holder who has satisfied the requirements, if any, set forth in Section IX below. Only those Holders who are Eligible Holders shall be entitled to receive benefits under this Agreement. jj. "Enhanced Additional Insurance Benefit" shall mean the Additional Insurance to be provided to Eligible Holders of certain In-Force Policies under this Settlement Agreement, as described in Section III.C below. kk. "Enhanced Future Death/Maturity Benefit" shall mean the terminal dividend (composed of a Standard Enhancement and, where applicable, an Additional Enhancement) to be provided to Eligible Holders of certain In-Force Policies under this Settlement Agreement, as described in Section III.A below. ll. "Enhanced Future Termination/Non-Forfeiture Benefit" shall mean the surrender dividend (composed of a Standard Enhancement and, where applicable, an Additional Enhancement) to be provided to Eligible Holders of certain In-Force Policies under this Settlement Agreement, as described in Section III.B below. mm. "Enhanced Past Death/Maturity Benefit" shall mean the cash payment to be provided to Eligible Holders of Death/Maturity Policies under this Settlement Agreement, as described in Section IV below. nn. "Enhanced Past Termination Benefit" shall mean the cash payment to be provided to Eligible Holders of certain Terminated Policies under this Settlement Agreement, as described in Section V.A below. 13 oo. "Estate Holder" shall mean, with respect to any Policy for which all Eligible Holders are deceased, any estate of a Holder of the Policy that satisfies the requirements of Section II.C below. pp. "Excluded Entity" shall mean any entity that is not a natural person (such as a funeral home, creditor, institutional assignee or state government, or any branch, department or entity thereof) and that is an assignee of the benefits of, or is not an owner of, a Policy. Excluded Entities shall not be Class Members and shall not be eligible to receive any benefit provided under this Agreement, whether directly, indirectly, or on behalf of, or on account of benefits made available to, a Class Member. qq. "Execution Date" shall mean the first date on which the Settlement Agreement has been executed by all of the undersigned. rr. "Face Amount" shall mean the amount of insurance specified on the face of the Policy, including any additions to such amount of insurance by Company liberalizations, equalizations or other enhancements. (i) The Face Amount of a Policy shall be exclusive of any Additional Insurance, ancillary benefit or rider coverage; provided however, that if a Policy has paid or pays in the future an accidental death benefit in addition to the amount of insurance specified on the face of the Policy (including any additions thereto by Company liberalizations, equalizations or other enhancement), then the accidental death benefit shall be included as part of the Face Amount. (ii) Except as provided in Section I.D.1.rr(iii) below, the Face Amount of a Policy that is providing reduced paid-up insurance coverage under 14 a contractual nonforfeiture option shall be the amount of reduced paid-up insurance coverage provided under that option. (iii) For purposes of the calculation of any Settlement Death Benefit pursuant to Section V.B below, (a) the Face Amount of any Policy on a reduced paid-up non-forfeiture status shall equal the face amount of the Policy at the time that it was issued; and (b) for any Industrial Weekly Policy that was issued in a substandard policy plan, and that was placed on a reduced paid-up non-forfeiture status at any time, the Face Amount of the Policy shall equal the face amount of the Policy at the time that it was issued, multiplied by the appropriate ratio in Exhibit L hereto. ss. "Fairness Hearing" shall mean the hearing at or after which the Court will make a final decision whether to approve this Settlement Agreement. tt. "Final Judgment" shall mean the judgment entered pursuant to the Order Approving Settlement, as contemplated in Section XVII of this Settlement Agreement. uu. "Final Settlement Date" shall mean the date on which the Final Judgment and Order Approving Settlement become final. For purposes of this definition, the Final Judgment and Order Approving Settlement shall become final: (i) if no appeal is taken therefrom, on the date on which the time to appeal has expired; (ii) if any appeal is taken therefrom, on the date on which all appeals therefrom, including petitions for rehearing or reargument, petitions for rehearing en banc and petitions for certiorari or any other form of review, have been 15 finally disposed of in a manner resulting in an affirmance of the Final Judgment and Order Approving Settlement; or (iii) on a date after entry of the Final Judgment and Order Approving Settlement, which date counsel for the Parties agree to in writing. vv. "Hearing Order" shall mean the order to be entered by the Court concerning notice, administration and the Fairness Hearing, as contemplated in Section XVI of this Settlement Agreement, and substantially in the form attached hereto as Exhibit D. ww. "Holders" shall mean, with respect to any Policy, the following persons and entities: (i) All past and present owners of Ordinary Policies; (ii) All past and present insureds under Industrial Policies (iii) All individual assignees of Industrial Policies that have been assigned by the Policy's named Insured; and (iv) All payees of the contractual death benefits of Policies, where such death benefits became payable prior to the Eligibility Date based upon the death of the insured under the Policy. xx. "Identifying Information" shall mean either (i) the policy number for a Policy or (ii) the alternative identifying information requested by Exhibit E hereto. Persons or entities who have completed and submitted Claim Forms postmarked on or before the Claim-In Date shall be given a reasonable opportunity to provide additional Identifying Information if such information is required to locate a Policy; 16 provided however, that all such additional Identifying Information must be postmarked within 60 days of the Claim-In Date. yy. "Implementation Period" shall mean a period of time that (i) commences on a date selected by the Company, is communicated in writing to Lead Counsel, and is on or before the later of (a) 30 days after the Final Settlement Date and (b) 130 days after the Claim-Resolution Date; and (ii) ends on a date 150 days after it commences. zz. "Industrial Monthly Policies" shall mean (i) any 1927-1929 Industrial Monthly Substandard Policy, (ii) any Other Industrial Monthly Substandard Policy and (iii) any Industrial Monthly Standard Policy. aaa. "Industrial Monthly Standard Policy" shall mean any life insurance policy issued by the Company from its Industrial Department insuring the life of a non-Caucasian, issued in a standard policy plan or with a standard risk classification, and on which the policy's terms required payment of monthly premiums. bbb. "Industrial Policies" shall mean Industrial Monthly Policies and Industrial Weekly Policies. ccc. "Industrial Weekly Policies" shall mean (i) any Pre-1948 Industrial Weekly Substandard Death/Maturity Policy, (ii) any Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policy, (iii) any Pre-1963 Industrial Weekly Substandard Terminated Policy and (iv) any other life insurance policy issued by the Company from its Industrial Department insuring the life of a non-Caucasian, and on which the policy's terms required payment of weekly premiums. 17 ddd. "Industrial Weekly Substandard Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, on which the policy's terms required payment of weekly premiums, and for which the Company's records do not indicate the race of the insured as Caucasian. eee. "In-Force Policies" or "In Force" shall mean, for purposes of this Settlement Agreement only, any Policy that is providing insurance coverage as of the Eligibility Date, including Policies that as of the Eligibility Date are (a) fully paid-up; (b) providing coverage as reduced paid-up or extended term insurance under a contractual non-forfeiture provision; or (c) in the process of escheatment to any state but for which a returned Claim Form discloses information sufficient to identify the appropriate payee of the Policy's benefits. fff. "Interest" shall mean simple interest at 4.0 percent per annum calculated to the first day of the Implementation Period, and commencing on the later of (i) the date of the Policy's termination, maturity, or payment of death benefit, as applicable, or (ii) January 1, 1975. ggg. "Issue Date" shall mean the "issue date" set forth in the Policy contract. hhh. "Lead Counsel" shall mean the law firms of Milberg Weiss Bershad Hynes & Lerach LLP; Bonnett, Fairbourn, Friedman & Balint, P.C.; and Herman Herman Katz & Cotlar, LLP. iii. "Neutral" shall mean a third-party to whom the Company and Lead Counsel shall agree, which third party shall resolve disputes between the Parties as 18 to whether a person or entity who has submitted a Claim Form and, when requested, other Identifying Information is entitled to benefits under this Settlement Agreement, as described in Section IX.G below. jjj. "1930-1935 Ordinary Substandard Policies" shall mean any life insurance policy issued by the Company from its Ordinary Department in the Endowment at 80, 25-Year Endowment or 25-Pay Life policy plan, from January 1, 1930 through December 31, 1935, for which the Company's records do not indicate the race of the insured as Caucasian. kkk. "1920-1929 Intermediate Policies" shall mean any life insurance policy insuring the life of a non-Caucasian issued by the Company from January 1, 1920 through December 31, 1929 in an intermediate policy plan. lll. "1927-1929 Industrial Monthly Substandard Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan from January 1, 1927 through December 31, 1929, for which the Company's records do not indicate the race of the insured as Caucasian, where such policy's terms required payment of a stated amount of premiums per month. mmm. "Notice Card" shall mean the card, substantially in the form attached hereto as Exhibit F, that the Company shall make available to its Producers, and that the Administrator shall make available to certain others (by hand, mail, or via the Internet, including the Administrator's Web site), to give to Class Members who inquire about this Settlement Agreement, as further described in Section XI.F.3 below. 19 nnn. "Order Approving Settlement" shall mean the order entered by the Court approving the settlement and this Settlement Agreement. ooo. "Ordinary Policies" shall mean all Ordinary Substandard Policies and Covered Met Series Policies. ppp. "Ordinary Substandard Policies" shall mean (i) any 1930-1935 Ordinary Substandard Policy and (ii) any other life insurance policy, other than a 1920-1929 Intermediate Policy, issued by the Company from its Ordinary Department with an intermediate, special-class or other substandard risk classification, and insuring the life of a non-Caucasian. qqq. "Other Industrial Monthly Substandard Policy" shall mean any life insurance policy, other than a 1927-1929 Industrial Monthly Substandard Policy, issued by the Company from its Industrial Department insuring the life of a non-Caucasian, in an other-than-standard policy plan or with an other-than-standard risk classification, and on which the policy's terms required payment of monthly premiums. rrr. "Other Ordinary Substandard Policies" shall mean any Ordinary Substandard Policy other than a 1930-1935 Ordinary Substandard Policy. sss. "Parties" or "Party" shall mean Plaintiffs (in their individual and representative capacities) and/or Defendant collectively and, where applicable, their respective counsel. ttt. "Plaintiffs" shall mean Karl M. Thompson, Lucile Ellis, Charlene McCallop, Marguerite Guillmette Justin, Adrienne Delpit Blazio, Myron Billups (as the administrator of the Estate of Nellie Gillespie) and any other Class 20 Members added to the Amended Complaint or any subsequent pleading as named plaintiffs, in their individual and representative capacities. uuu. "Policy" or "Policies" shall mean any and all Industrial Policies, Ordinary Substandard Policies, 1920-1929 Intermediate Policies and Covered Met Series Policies with an Issue Date during the period from January 1, 1901 through December 31, 1972, inclusive; provided however, that any Metropolitan Life insurance policy for which the claims asserted in the Action have been previously litigated and resolved or dismissed with prejudice, and are barred by the doctrine of res judicata, shall not be a Policy; and provided however, that any Metropolitan Life insurance policy for which any Holder or Estate Holder has timely requested exclusion from the proposed class shall not be a Policy. vvv. "Postal Service" shall mean the United States Postal Service. www. "Post-Settlement Mailing" shall mean the mailing that the Company shall make starting at the commencement of the Implementation Period, as described in Section XI.D below. The Post-Settlement Mailing shall be completed within 60 days of the commencement of the Implementation Period. xxx. "Preliminary Approval Hearing" shall mean the hearing at or after which the Court will make a decision whether notice of the Action and the proposed Settlement Agreement may be given. yyy. "Pre-1948 Industrial Weekly Substandard Death/Maturity Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not 21 indicate the race of the insured as Caucasian, on which the policy's terms required payment of a stated amount of premiums per week, and where the policy terminated prior to January 1, 1948 by reason of the death of the insured or the maturity of the Policy. zzz. "Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not indicate the race of the insured as Caucasian, on which the policy's terms required payment of a stated amount of premiums per week, and where the policy went onto a reduced paid-up or extended term non-forfeiture status prior to January 1, 1963. aaaa. "Pre-1963 Industrial Weekly Substandard Terminated Policies" shall mean any life insurance policy issued by the Company from its Industrial Department in a substandard policy plan, for which the Company's records do not indicate the race of the insured as Caucasian, on which the policy's terms required payment of a stated amount of premiums per week, and where the policy lapsed, surrendered, or was terminated (other than by reason of Policy maturity or the death of the insured) prior to January 1, 1963. bbbb. "Primary Eligible Holder" shall mean, with respect to any Terminated Policy eligible for the SDB hereunder, the following Eligible Holder of the Policy: (i) For an Industrial Policy, the insured under the Policy. 22 (ii) For an Ordinary Policy, the owner of the Policy at the time it terminated, or if such person is not an Eligible Holder, the first Eligible Holder of the Policy to become an Eligible Holder under Section IX below. cccc. "Producer" shall mean any of the Company's current account representatives, managers or managing directors. dddd. "Publication Notice" shall mean the published notice and other media notice of the proposed settlement, as approved in form and content by counsel for Plaintiffs and the Defendant and the Court, as described in Section XI.B. eeee. "Recipient" shall mean the person or persons to whom the Settlement Death Benefit under this Agreement shall be paid. Subject to Section II.F below, the Eligible Holder(s) of the Policy under Section IX below shall be entitled to payments under the SDB, unless the Class Member designates an Alternate Recipient; provided however, that if the Recipient is deceased at the time the payment is to be made, the Company may pay the applicable death benefit to any person named as the beneficiary of the Policy making the Class Member eligible for the SDB, or if that person is deceased or cannot be paid for any reason, to any other person who appears to the Company to be equitably entitled to such payment under Section II.D below. ffff. "Release" shall mean the release and waiver set forth in Section XIV of this Settlement Agreement. gggg. "Releasees" shall mean the Company and each of its past, present and future parents (including intermediate and ultimate parents), subsidiaries, affiliates, predecessors, successors and assigns, and each of its respective past, present 23 and future officers, directors, employees, district office clerks, general agents, agents, managers, managing directors, producers, sales representatives, account representatives, brokers, solicitors, attorneys, insurers, successors and assigns, or any of them, including any person or entity acting on behalf or at the direction of any of them. hhhh. "SDB Certificate" shall mean the certificate, substantially in the form included at Exhibit H and including a tear-off sheet for Class Members to designate an Alternate Covered Person and/or Alternate Recipient, that shall be provided to Eligible Holders of certain Terminated Policies starting at the commencement of the Implementation Period as evidence of the benefits provided by the SDB. iiii. "Settlement Death Benefit" or "SDB" shall mean a form of relief to be provided to Eligible Holders of certain Terminated Policies, as described in Section V.B below. jjjj. "Standard Enhancement" shall mean the enhancements or payments that shall be provided to Holders of certain In-Force and Death/Maturity Policies pursuant to this Settlement Agreement. Wherever a Holder is eligible for an Additional Enhancement (defined in Section I.D.1.b, above), the Standard Enhancement calculation shall utilize the Policy's Face Amount, Cash Value or death or maturity benefit as enhanced by the Additional Enhancement, exclusive of Interest. kkkk. "Statement of Benefits" shall mean the summary of benefits that is included in the Class Notice Package for Database Policies, and provided upon request to Eligible Holders whose policies have been confirmed to be Policies or whose 24 Claim Forms identify the number of a Policy for which information is available on the Company's electronic records, as described in Section XI.A.4 below. llll. "Terminated Policies" shall mean any Policy that, as of the Eligibility Date, has lapsed, surrendered or otherwise terminated without insurance coverage, and has not been reinstated. For purposes of this Settlement Agreement, the term "terminated" shall not include policies that, as of the Eligibility Date, are fully paid-up or are providing coverage as reduced paid-up or extended term insurance under a contractual non-forfeiture provision. 2. Defined terms used in combination in this Settlement Agreement shall have the combined definitions ascribed to them in the Settlement Agreement. For example, an In-Force Industrial Weekly Policy shall mean an Industrial Policy that is both an Industrial Weekly Policy and In Force. 3. Capitalized terms used in this Settlement Agreement but not defined above shall have the meaning ascribed to them in this Settlement Agreement and the attached exhibits. II. SETTLEMENT AGREEMENT TERMS A. Pursuant to this Settlement Agreement, Class Members will, depending on their eligibility hereunder, receive one or more forms of the benefits described in Sections III through VII below. B. With respect to each Policy making a Class Member eligible for benefits, the Policy's Eligible Holder(s) will receive the benefits for which that Policy is eligible hereunder, subject to the terms of Sections II.C, II.D, II.E and II.F below; provided 25 however, that for any settlement benefit payable under this Agreement based upon a Policy for which a death claim is made following the commencement of the Implementation Period, the settlement benefit shall be paid to the payee of the Policy's contractual benefits (or, if there is more than one payee, to each payee in proportion to the relative amounts of benefits to which each is entitled under the Policy); and provided however, that in the event of any conflict between this Section II and Section IX below, the provisions of Section IX shall govern. No duplicate relief shall be provided to multiple Holders of the same Policy, or to their estates or descendants. C. If all Eligible Holders associated with a Policy are deceased, then the Estate Holder(s) may exercise the rights of, and receive all settlement benefits payable to, the Holders of such Policy, subject to the terms of Sections II.D, II.E and II.F below. Settlement benefits shall be payable to the Estate Holder only if, prior to the commencement of the Implementation Period, either (a) the Holder's estate's administrator submits evidence of his or her court-appointment as administrator of the estate or (b) an heir of the Holder submits a declaration, in the form attached hereto as Exhibit I, establishing the authority of the heir to act for the Holder's estate. D. For all benefits under this Settlement Agreement other than the SDB: 1. Where more than one person or entity is an Eligible Holder of a Policy, settlement benefits shall be distributed among such Eligible Holders in the manner and using the procedures specified in Section II.E below. 2. If all Eligible Holders of a Policy are deceased as of the Eligibility Date, and more than one person or entity is an Estate Holder of a Policy, settlement 26 benefits shall be distributed among such Estate Holders in the manner and using the procedures specified in Section II.E below. 3. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.2 above, then any spouse or Domestic Partner of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section II.E below. 4. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.3 above, then any child (including stepchildren) of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section II.E below. 5. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.4 above, then any parent of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed 27 among such persons in the manner and using the procedures specified in Section II.E below. 6. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.5 above, then any sibling of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section II.E below. 7. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.6 above, then any grandchild of any Holder, or any offspring of such a grandchild, may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section II.E below. 8. If no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.7 above, then any other descendant or other relative of any Holder may come forward to claim the benefits for the Policy by submitting a Claim Form received by the Claim-In Date. Where more than one such person timely claims to be entitled to receive benefits associated with a Policy, the 28 settlement benefits shall be distributed among such persons in the manner and using the procedures specified in Section II.E below. 9. If, by the Claim-In Date, no person or entity is eligible for settlement benefits under the provisions of Sections II.C through II.D.8 above, then the Company may provide the settlement benefits to any other person appearing to the Company to be equitably entitled to receive the benefits. E. If more than one person or entity is eligible for benefits under Section II.D above, then the settlement benefits for the Policy shall be divided equally among all such persons and entities. In the event both an owner and a payee of contractual death benefits are Eligible Holders of a Death/Maturity Ordinary Policy, each shall be eligible at least to the benefits described in Section X.D below. F. For the SDB provided under this Settlement Agreement and described in Section V.B below: 1. If more than one person or entity is an Eligible Holder, then: a. Unless an Alternate Recipient is designated, all Eligible Holders shall be the Recipients under the SDB. Payments under the SDB shall be made jointly to all Eligible Holders and mailed to the first person or entity to become an Eligible Holder. b. The Primary Eligible Holder shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 2. If all Eligible Holders under a Policy are deceased as of the Eligibility Date, and more than one person or entity is an Estate Holder, then: 29 a. Unless an Alternate Recipient is designated, all Estate Holders shall be the Recipients under the SDB. Payments under the SDB shall be made jointly to all Estate Holders and mailed to the first person or entity to become an Estate Holder. b. The first Estate Holder satisfying the requirements of Section II.C above shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 3. If no person or entity is eligible for the SDB pursuant to Sections II.C, II.F.1 or II.F.2 above, then the first relative of any Holder to timely submit a Claim Form for the Policy shall be the Recipient under the SDB and shall have the authority to designate an Alternate Covered Person or Alternate Recipient for the SDB. 4. If no person or entity is eligible for the SDB pursuant to Sections II.C, II.F.1, II.F.2 or II.F.3 above, then the Company may provide the settlement benefits to any other person appearing to the Company to be equitably entitled to receive the benefits. G. No person or entity who is not a Class Member shall receive any benefit under this settlement, unless such person or entity first agrees to be bound by the terms of the Release in Section XIV below with respect to the Policy for which settlement benefits are received. This requirement shall appear in the Class Notice. The Company reserves the right to include this requirement in the endorsement section of each instrument used to provide settlement payments. H. Notwithstanding any other provision of this Agreement, where no address is available for an Eligible Holder or other person eligible for settlement benefits, or where 30 there is an available address but it is known by the Company to be invalid, no settlement benefits shall be mailed to the Eligible Holder or other person. I. If any Holder or Estate Holder excludes himself or herself from the Class with respect to a Policy, all Holders (and their estates) of that Policy will be deemed to be excluded with respect to that Policy. J. In the event that provision of a particular form of relief hereunder could cause adverse tax and/or other regulatory consequences to the Class Member, or to his or her Policy, the Company shall not be obligated to provide such relief but may, in its sole discretion and as an alternative, make an economically comparable form of relief available to the Class Member. Lead Counsel shall be notified in advance of any such substitution of relief. K. In the event that the Parties determine that any provision of this Settlement Agreement regarding its implementation has become administratively impracticable, the Parties may agree to amend or eliminate such provision as they mutually deem appropriate, without obtaining approval from the Court. L. If a death claim is made under an In-Force Policy, or if an In-Force Policy matures, after the Eligibility Date but before the commencement of the Implementation Period, then the Inforce Policy shall be treated as if it were a Death/Maturity Policy on the Eligibility Date. M. If an In-Force Policy is terminated after the Eligibility Date but before the commencement of the Implementation Period, then the In-Force Policy shall be treated as if it were a Terminated Policy on the Eligibility Date. 31 N. The Company agrees and warrants that it will not utilize any extraordinary or exceptional accounting or actuarial principles to recapture from Class Members the costs of the settlement or otherwise to deprive Class Members of the benefits provided for in this Settlement Agreement. Nothing in this provision shall be construed to interfere with the Company's conduct of its business in the normal course. III. BENEFITS FOR IN-FORCE POLICIES A. THE ENHANCED FUTURE DEATH/MATURITY BENEFIT 1. Starting at the commencement of the Implementation Period, Eligible Holders of In-Force Industrial Weekly Policies, In-Force Industrial Monthly Policies, and In-Force Other Ordinary Substandard Policies that mature or pay a death benefit in the future shall receive, in addition to the contractual death or maturity benefit, a terminal dividend in the amount of the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections III.A.2 and III.A.3 below). Eligible Holders of all such In-Force Policies shall receive the Standard Enhancement. Eligible Holders of In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies shall receive both the Standard Enhancement and the Additional Enhancement. 2. Standard Enhancements. The percentage of the Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement) constituting the Standard Enhancement shall be as follows: 32
Policy Type Percentage Enhancement - ----------- ---------------------- Industrial Weekly 12.5% Other Industrial Monthly Substandard 12.5% Industrial Monthly Standard 5% Other Ordinary Substandard 15%
3. Additional Enhancements. For In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement to the Policy's Face Amount at the time of the insured's death or the Policy's maturity shall be calculated, on a Policy-by-Policy basis, based upon the ratios in Exhibit L hereto. Such Additional Enhancement is designed to provide In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies with the benefit of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 4. In-Force 1920-1929 Intermediate Policies. Eligible Holders of In-Force 1920-1929 Intermediate Policies shall be provided the Enhanced Future Death/Maturity Benefit in the form of an increase, at the commencement of the Implementation Date, of 9% to the Policy's Face Amount and associated Cash Value. 5. Death Certificate Review Obligation. Starting on the Final Settlement Date, the Company shall review all future death certificates submitted in connection with claims for benefits under life insurance policies that may be Policies eligible for the Enhanced Future Death/Maturity Benefit depending on the race of the insured. a. If, for any such policy, the Company's review discloses that the insured's race was listed on the death certificate as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future 33 Death/Maturity Benefit for the Policy shall be provided, unless all documents in the Application File that describe the insured's race indicate that the insured's race is Caucasian. b. If the death certificate does not provide the race of the insured, then the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) for the life insurance policy. If the Company's review discloses that the insured's race was identified in any part of the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Death/Maturity Benefit for the Policy shall be provided. 6. Policy Application File Review Obligation. Starting on the Final Settlement Date, the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) of any life insurance policy that becomes eligible for payment of maturity or endowment benefits and that may be a Policy eligible for the Enhanced Future Death/Maturity Benefit depending on the race of the insured. If, for any such policy, the Company's review discloses that the insured's race was listed in any part of the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Death/Maturity Benefit for the Policy shall be provided. B. THE ENHANCED FUTURE TERMINATION/NON-FORFEITURE BENEFIT 1. Starting at the commencement of the Implementation Period, Eligible Holders of In-Force Industrial Weekly Policies, In-Force Industrial Monthly Policies, and 34 In-Force Other Ordinary Substandard Policies that lapse, surrender, or otherwise terminate (other than by death or maturity) in the future, or that are placed on a reduced paid-up or extended term non-forfeiture status in the future, shall receive a surrender dividend in the amount of the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections III.B.2 and III.B.3 below). Eligible Holders of all such Policies shall receive the Standard Enhancement. Eligible Holders of In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies shall receive both the Standard Enhancement and the Additional Enhancement. 2. Standard Enhancements. The percentage of the Policy's Cash Value at the time of termination or placement on non-forfeiture status (as enhanced by any Additional Enhancement) constituting the Standard Enhancement shall be as follows:
Policy Type Percentage Enhancement - ----------- ---------------------- Industrial Weekly 12.5% Other Industrial Monthly Substandard 12.5% Industrial Monthly Standard 5% Other Ordinary Substandard 15%
3. Additional Enhancements. For In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement to the Policy's Cash Value at the time of termination or placement on non-forfeiture status shall be calculated, on a Policy-by-Policy basis, based upon the ratios in Exhibit L hereto. Such Additional Enhancement is designed to provide In-Force Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies with the benefit of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 35 4. Application of Surrender Dividends to Non-Forfeiture Policies. For those Policies that are placed on non-forfeiture status after the commencement of the Implementation Period, the surrender dividend (composed of the Standard Enhancement plus, where applicable, the Additional Enhancement) shall be provided in the following form: a. For Policies placed on an extended term insurance non-forfeiture status, the surrender dividend shall be added to the Policy's total cash value for the purpose of calculating the duration of non-forfeiture benefits provided by the Policy and the amount of cash value available in the event the Policy is later surrendered for its cash value. b. For Policies placed on a reduced paid-up non-forfeiture status, the surrender dividend shall be provided for the Policy at the time the Policy pays a death benefit or is surrendered for its cash value. 5. In-Force 1920-1929 Intermediate Policies. Eligible Holders of In-Force 1920-1929 Intermediate Policies shall be provided the Enhanced Future Termination/Non-Forfeiture Benefit in the form of an increase, at the commencement of the Implementation Date, of 9% to the Policy's Face Amount and associated Cash Value. 6. Policy Application File Review Obligation. Starting on the Final Settlement Date, the Company shall review the Application File (to the extent it has not already reviewed the Application File in connection with this Agreement) of any life insurance policy that terminates and is presented for payment of cash surrender benefits, and that may be a Policy eligible for the Enhanced Future Termination/Non-Forfeiture 36 Benefit depending on the race of the insured. If, for any such policy, the Company's review discloses that the insured's race was listed in the Application File as other than Caucasian, then the Holders of such Policy shall be deemed Eligible Holders and the Enhanced Future Termination/Non-Forfeiture Benefit for the Policy shall be provided. C. THE ENHANCED ADDITIONAL INSURANCE BENEFIT 1. Eligible Holders of In-Force 1920-1929 Intermediate Policies and In-Force 1930-1935 Ordinary Substandard Policies shall receive at the commencement of the Implementation Period an increase in the Policy's amount of insurance coverage in the form of Additional Insurance. 2. For Eligible Holders of In-Force 1920-1929 Intermediate Policies, the amount of Additional Insurance comprising the Enhanced Additional Insurance Benefit shall equal 35 percent of the Face Amount of the Policy as of the Eligibility Date; provided however, that for any such Policy on a non-forfeiture status as of the Eligibility Date, the Face Amount of the Policy shall be increased by 35 percent. The Enhanced Additional Insurance Benefit shall be provided in addition to the Enhanced Future Death/Maturity Benefit and the Enhanced Future Termination/Non-Forfeiture Benefit for which the Policy is eligible. 3. For Eligible Holders of In-Force 1930-1935 Ordinary Substandard Policies, the amount of Additional Insurance comprising the Enhanced Additional Insurance Benefit shall equal 15 percent of the Face Amount of the Policy as of the Eligibility Date; provided however, that for any such Policy on a non-forfeiture status as of the Eligibility Date, the Face Amount of the Policy shall be increased by 15 percent. 37 D. THE CASH PAYMENT OPTION 1. Eligible Holders of any In-Force Policy may, instead of receiving the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit or the Enhanced Additional Insurance Benefit, elect to receive a cash payment from the Company in an amount equal to the cost for the Policy's settlement benefits pursuant to column 4 of the table in Section I of Exhibit M hereto. 2. Starting at the commencement of the Implementation Period and ending no later than 30 days thereafter, the Company shall mail the Cash Payment Option Election Letter, substantially in the form attached hereto as Exhibit J, to each Eligible Holder associated with an In-Force Policy at the address indicated on a Claim Form for the Policy, or at the last-known address for the Eligible Holder if no Claim Form is submitted for the Policy. The Cash Payment Option Election Letter shall indicate both (i) the dollar amounts of the Enhanced Future Death/Maturity Benefit, the Enhanced Future Termination/Non-Forfeiture Benefit and the Enhanced Additional Insurance Benefit (if any) for the Policy, together with a general description of those forms of benefits and (ii) the dollar amount that is payable in the alternative under the Cash Payment Option. The Cash Payment Option Election Letter shall contain a tear-off form that allows the Eligible Holder to request the Cash Payment Option. 3. To exercise the Cash Payment Option described in this Section III.D, the Eligible Holder(s) of the Policy must elect the cash payment by either (i) contacting the Administrator at the Toll-Free Number within 30 days after the date of the Cash Payment Option Election Letter for the Policy or (ii) completing and returning the form 38 included with the Cash Payment Option Election Letter (which form must be postmarked no later than 30 days after the date of the Cash Payment Option Election Letter). 4. Eligible Holders who timely elect the Cash Payment Option shall be provided their cash payments within 60 days of the date of the Cash Payment Option Election Letter. E. THE PROSPECTIVE COMMITMENT 1. The Company commits under this Agreement that, starting at the commencement of the Implementation Period, any future non-guaranteed policy elements that may be provided to Holders of 1930-1935 Ordinary Substandard Policies shall utilize the mortality assumptions and factors utilized for the corresponding standard policy plan or form issued in the same year to insure persons of the same issue age in the same risk classification, and with the same Face Amount as the Policy (as enhanced by the Enhanced Additional Insurance Benefit). 2. The Company commits under this Agreement that, starting at the commencement of the Implementation Period, any future non-guaranteed policy elements that may be provided to Holders of 1920-1929 Intermediate Policies shall utilize the mortality assumptions and factors utilized for the standard risk classification in the corresponding policy plan or form issued in the same year to insure persons of the same issue age, and with the same Face Amount as the Policy (as enhanced by the Enhanced Future Death/Maturity Benefit and the Enhanced Additional Insurance Benefit). 39 IV. RELIEF FOR DEATH/MATURITY POLICIES: THE ENHANCED PAST DEATH/MATURITY BENEFIT Eligible Holders of Death/Maturity Industrial Weekly Policies, Death/Maturity Industrial Monthly Policies, Death/Maturity Ordinary Substandard Policies and Death/Maturity 1920-1929 Intermediate Policies shall receive a cash payment equal to the amount that is the sum of the Standard Enhancement and the Additional Enhancement (if any) for the Policy (calculated pursuant to Sections IV.A and IV.B below). Eligible Holders of all such Policies shall receive the Standard Enhancement. Eligible Holders of Pre-1948 Industrial Weekly Substandard Death/Maturity Policies, Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies and 1927-1929 Industrial Monthly Substandard Policies shall receive both the Standard Enhancement and the Additional Enhancement. Such cash payment shall be provided via the Post-Settlement Mailing, as further described in Section XI.D below. A. STANDARD ENHANCEMENTS 1. For Death/Maturity Industrial Weekly Policies and Death/Maturity Other Industrial Monthly Substandard Policies, the Standard Enhancement (if any) shall equal 12.5 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement). 2. For Death/Maturity Industrial Monthly Standard Policies and 1927-1929 Industrial Monthly Substandard Policies, the Standard Enhancement shall equal 5 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity (as enhanced by any Additional Enhancement). 40 3. For Death/Maturity Other Ordinary Substandard Policies, the Standard Enhancement shall equal 15 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity. 4. For Death/Maturity 1930-1935 Ordinary Substandard Policies, the Standard Enhancement shall equal 15 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, multiplied by the Early Termination Adjustment, accumulated with Interest; provided however, that the Early Termination Adjustment shall not apply to any such Policy that paid a death or maturity benefit while providing reduced paid-up insurance coverage under a contractual non-forfeiture provision. 5. For Death/Maturity 1920-1929 Intermediate Policies, the Standard Enhancement shall equal the sum of (i) 35 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, multiplied by the Early Termination Adjustment, accumulated with Interest; and (ii) 9 percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, accumulated with Interest; provided however, that the Early Termination Adjustment shall not apply to any such Policy that paid a death or maturity benefit while providing reduced paid-up insurance coverage under a contractual non-forfeiture provision. B. ADDITIONAL ENHANCEMENTS 1. For Pre-1948 Industrial Weekly Substandard Death/Maturity Policies and Death/Maturity Pre-1963 Industrial Weekly Substandard Non-Forfeiture Policies, the Additional Enhancement shall equal the enhancement calculated for the particular Policy 41 using the ratios set forth in Exhibit L hereto, accumulated with Interest. Such Additional Enhancement shall be designed to provide these Policies with the benefit of the Company's 1948 and 1963 equalizations of Industrial Weekly Substandard policy amounts of insurance and non-forfeiture values. 2. For Death/Maturity 1927-1929 Industrial Monthly Substandard Policies, the Additional Enhancement shall equal 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) of the Policy's Face Amount at the time of the insured's death or the Policy's maturity, accumulated with Interest. V. BENEFITS FOR TERMINATED POLICIES A. THE ENHANCED PAST TERMINATION BENEFIT 1. Eligible Holders of Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies, Terminated 1927-1929 Industrial Monthly Substandard Policies, Terminated 1930-1935 Ordinary Substandard Policies and Terminated 1920-1929 Intermediate Policies shall receive a cash payment equal to the amount calculated for the Policy pursuant to Sections V.A.2 through V.A.5 below. Such cash payment shall be provided via the Post-Settlement Mailing, as further described in Section XI.D below. 2. For Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies, the cash payment shall equal the enhancement calculated for the particular Policy calculated using the ratios in Exhibit L hereto, accumulated with Interest. Such payment shall be designed to provide Terminated Pre-1963 Industrial Weekly Substandard Terminated/Non-Forfeiture Policies with the benefit 42 of the Company's 1963 equalization of Industrial Weekly Substandard policy non-forfeiture values. 3. For Terminated 1930-1935 Ordinary Substandard Policies, the cash payment shall equal 15 percent of the Cash Value of the Policy at the time of termination, accumulated with Interest. 4. For Terminated 1920-1929 Intermediate Policies, the cash payment shall equal the 44 percent of the Cash Value of the Policy at the time of termination, accumulated with Interest. 5. For Terminated 1927-1929 Industrial Monthly Substandard Policies, the cash payment shall equal 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) of the Cash Value of the Policy at the time of termination, accumulated with Interest. B. THE SETTLEMENT DEATH BENEFIT 1. Eligible Holders of Terminated Industrial Weekly Policies, Terminated Industrial Monthly Policies and Terminated Other Ordinary Substandard Policies shall be entitled to the Settlement Death Benefit ("SDB"). Subject to Section V.B.7 below, the SDB shall commence on the Final Settlement Date. 2. For each such Policy making the Class Member eligible for relief, the SDB shall provide a payment to the Recipient, upon the Company's receipt of due proof of death of the Covered Person within the 5 years following the Final Settlement Date, of an amount that is a percentage of the Face Amount of the Policy at the time of termination (as enhanced by any Additional Enhancement). 43 3. For Terminated Industrial Weekly Policies and Terminated Other Industrial Monthly Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 15.5 percent; provided however, that for Terminated Industrial Weekly Policies that are eligible for the Enhanced Past Termination Benefit, and for the sole purpose of calculating the percentage of the Face Amount at termination payable under the SDB, the Face Amount shall be increased by the ratio for the Policy provided in Exhibit L. 4. For Terminated Industrial Monthly Standard Policies and Terminated 1927-1929 Industrial Monthly Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 8 percent; provided however, that for Terminated 1927-1929 Industrial Monthly Substandard Policies, and for the sole purpose of calculating the percentage of the Face Amount at termination payable under the SDB, the Face Amount shall be increased by 13 percent (for 25-Year Endowment Policies) or 36 percent (for Endowment at 75 Policies) to reflect the Enhanced Past Termination Benefit provided for the Policy. 5. For Terminated Other Ordinary Substandard Policies, the percentage of the Face Amount of the Policy at the time of termination that is payable under the SDB shall be 18 percent. 6. At any time prior to the expiration of the SDB or the death of the Covered Person, the Class Member may designate an Alternate Recipient by completing and returning the portion of the SDB Certificate that is designated for that purpose, as 44 shown in Exhibit H hereto, or by submitting such designation to the Administrator's Internet Web site while it is operational. 7. If the insured under the Policy creating eligibility for the SDB is deceased as of the Final Settlement Date, then the Class Member or his or her estate must designate a member of the Class Member's Affinity Group as an Alternate Covered Person for purposes of the SDB, either (a) by completing and returning the portion of the SDB Certificate that is designated for that purpose, as shown in Exhibit H hereto, postmarked within 30 days after the commencement of the Implementation Period; or (b) by submitting such designation to the Administrator's Internet Web site (while it is operational) within 30 days after the commencement of the Implementation Period. SDB coverage for the Alternate Covered Person shall commence five days after the date of the postmark of, or submission to the Administrator's Internet Web site of, the Class Member's designation of the Alternate Covered Person. 8. Starting at the commencement of the Implementation Period, the Company shall mail an SDB Certificate, substantially in the form attached hereto as Exhibit H, to each Eligible Holder entitled to the SDB. The SDB Certificate shall include a form for designation of an Alternate Covered Person and an Alternate Recipient. 9. Research Initiative Regarding Terminated Policies Eligible for the SDB. One year following the end of the Implementation Period, and annually thereafter until all SDBs provided by this Agreement are no longer in force, Metropolitan Life shall retain the services of a national information service bureau (such as TRW, Equifax, or COMSERV, Inc.), subject to the approval of Lead Counsel, for the purpose of 45 determining, based on the social security numbers of the Covered Persons for all remaining in-force SDBs that are available to the Company on its electronic records or obtained through Claim Forms submitted by Class Members, whether any Covered Person covered by an SDB has died within the coverage period. If (a) the foregoing research reveals that any such Covered Person has died, and (b) the Company, using its best efforts, is able to contact the Recipient, and (c) the Recipient qualifies for payment of the SDB, then the Recipient shall be eligible to receive the payment under the SDB. VI. MET SERIES ENHANCEMENT A. Covered Met Series Policies that are eligible to receive other benefits pursuant to this Settlement Agreement shall receive an enhancement of an additional three percent to the percentages used to calculate the benefits to be provided by Sections III through V above. B. Covered Met Series Policies that are eligible for no other benefits under this Settlement Agreement shall receive the following at the commencement of the Implementation Period: 1. For In-Force Policies, either (a) an Enhanced Future Death/Maturity Benefit of three percent of the Face Amount of the Policy at the time of death or maturity; or (b) an Enhanced Future Termination/Non-Forfeiture Benefit of three percent of the Cash Value of the Policy at the time of termination or placement on non-forfeiture status. Such Policies shall also be eligible for the Cash Payment Option described in Section III.D above. 46 2. For Death/Maturity Policies, a cash payment equal to three percent of the Policy's Face Amount at the time of the insured's death or the Policy's maturity. 3. For Terminated Policies, an SDB (as described in Section V.B. above) with an amount of coverage of three percent of the Policy's Face Amount at the time of termination. VII. UNCLAIMED BENEFITS RELIEF A. For all Database Policies and Policies for which a Claim Form has been timely submitted, and for which a death claim was paid in the period from August 19, 1995 through the Claim-In Date, the Company shall conduct a search for other Metropolitan life insurance policies that also insured the person insured under the Policy in an effort to provide any death or maturity benefits due under any other such policies, as follows: 1. Within 30 days of the Claim-In Date, the Company shall perform a comprehensive search, using the Company's electronic policy databases and the protocols attached hereto as Exhibit C, to determine whether any other Metropolitan life insurance policy or policies on those databases insured the life of the deceased insured under the Policy. 2. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time of the death of the insured, was providing life insurance coverage (including without limitation pursuant to a contractual non-forfeiture option), and with respect to which a death benefit was not paid, the Company shall use its best efforts to notify the beneficiary or beneficiaries of the life 47 insurance policy and pay any death benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 3. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time it reached maturity, was premium-paying, fully paid-up or providing insurance coverage pursuant to a contractual non-forfeiture provision, and with respect to which maturity benefits became payable but have not been paid, the Company shall use its best efforts to notify the person or entity to whom the policy's maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the maturity benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 4. In addition, if the Company's search reveals that the deceased insured was covered under any other Metropolitan Life insurance policy that was also a Policy, then the Policy shall be eligible for the settlement benefits provided for the Policy under this Settlement Agreement. B. For all Policies for which a death claim is paid after the Claim-In Date, the Company shall conduct a search for other Metropolitan Life insurance policies that also insured the life of the person insured under the Policy in an effort to provide any death or maturity benefits due under any other such policies, as follows: 1. At the time the death claim is made under the Policy, the Company shall perform a comprehensive search, using its electronic policy databases and the 48 protocols attached hereto as Exhibit C, to determine whether any other Metropolitan Life insurance policy or policies on those databases insured the life of the deceased insured under the Policy. 2. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time of the death of the insured, was providing life insurance coverage (including without limitation pursuant to a contractual non-forfeiture option), the Company shall use its best efforts to pay the death benefits due under the life insurance policy, regardless of whether such benefits have already escheated to a state governmental authority. 3. If the Company's search reveals that the deceased insured was covered by any other Metropolitan Life insurance policy that, at the time it reached maturity, was premium-paying, fully paid-up or providing insurance coverage pursuant to a contractual non-forfeiture provision, and with respect to which maturity benefits became payable but have not been paid, the Company shall use its best efforts to notify the person or entity to whom the policy's maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the maturity benefits due, plus any statutorily required interest, regardless of whether such benefits have already escheated to a state governmental authority. 4. In addition, if the Company's search reveals that the deceased insured was covered under any other Metropolitan Life insurance policy that was also a Policy, then the Policy shall be eligible for the settlement benefits provided for the Policy under this Settlement Agreement. 49 C. Starting at the commencement of the Implementation Period, the Company shall search its electronic records that reflect prior escheatments of life insurance policy benefits to state governmental authorities, using the protocols attached hereto as Exhibit C, in an effort to identify other life insurance policies insuring the lives of the persons insured under the Policies. If this search identifies any such other life insurance policies for which death or maturity benefits have previously become payable, but which benefits have been escheated to a state governmental authority, the Company shall use its best efforts to notify the person or entity to whom the policy's death or maturity benefits were payable (or, if such a person is deceased, his or her estate) and pay the death or maturity benefits due, plus any statutorily required interest. VIII. COMPANY CERTIFICATION OF RELIEF A. On a date that is not later than six months following the first anniversary of the end of the Implementation Period, the Company, through one of its officers who is a member in good standing of the American Academy of Actuaries, shall provide to Lead Counsel a written certification specifying the actual cost to the Company, determined in accordance with Exhibit M hereto, of the benefits that have been provided to Class Members pursuant to this Agreement in the first year following the commencement of the Implementation Period. B. Such summary shall detail the costs of benefits provided to Class Members by each type of benefit provided under this Agreement and shall describe the relevant supporting information on which the summary is based. In addition, the certification shall contain a signed statement of the actuary affirming that the actuary has reviewed the 50 relevant supporting information for the summary, that the actuary has authority to make the certification on behalf of the Company, and that the summary is accurate to the best of the actuary's knowledge and belief. Upon request of Lead Counsel, the Company shall provide with the supporting information on which the cost summary is based. IX. RELIEF QUALIFICATIONS A. Holders of In-Force Database Policies shall automatically be Eligible Holders. B. Holders of In-Force Policies that are not Database Policies shall become Eligible Holders if: 1. All documents in the Policy's Application File that state the insured's race do not unanimously indicate the race of the insured as Caucasian, and 2. One of the following conditions applies: a. A Claim Form identifying the insured, identifying the race of the insured under the Policy as non-Caucasian and providing Identifying Information for the Policy has been submitted postmarked by the Claim-In Date or b. The Company's review under Section III.A.5, Section III.A.6 or Section III.B.6 above discloses that the race of the insured under the Policy is identified as non-Caucasian in the certificate of death for the insured or in any part of the Policy's Application File. C. Holders of Death/Maturity and Terminated Database Policies for which the Company paid a death benefit within the seven years preceding the Eligibility Date, or for which the Company paid a maturity, endowment or cash surrender benefit on or after 51 January 1, 1989, shall automatically be Eligible Holders, subject to the following terms and conditions: 1. The Company shall conduct research (using the National Change of Address database and ChoicePoint) to update the address of the payee of the Policy's contractual benefits listed in the Company's records or in a Claim Form submitted for the Policy. 2. For those Policies for which the payee's address is updated or confirmed through the research in Section X.C.1 above, starting at the commencement of the Implementation Period, the Company shall mail any benefit payments due under this Agreement to the payee (or, if there are multiple payees, to each payee in proportion to the relative amounts of benefits to which each is entitled under the Policy); provided however, that if the Company's records indicate that the payee of the Policy is an Excluded Entity, then the provisions of Section IX.D below shall apply. 3. For those Policies for which the payee's address cannot be updated or confirmed through the research in Section IX.C.1 above, 30 days after the Claim-In Date, the Company shall mail the Confirmatory Letter, substantially in the form attached hereto as Exhibit K, to the payee of the Policy's contractual benefits at the payee's last-known address on the Company's records. a. If the Company receives an updated address or confirmation of the address from the payee, either in a writing postmarked within 30 days of the mailing of such Confirmatory Letter, or by telephone or e-mail within such period, then starting at 52 the commencement of the Implementation Period, the Company shall mail any benefit payments due under this Agreement to the payee at the updated or confirmed address. b. If the Company does not receive an updated address or confirmation of the address from the payee in the manner and within the times specified in Section IX.C.3.a above, then the settlement benefits otherwise payable to the payee shall increase the benefits that otherwise would be provided to Eligible Holders, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto). 4. If the Company's records indicate that the payee of the Policy is an Excluded Entity, then this Section IX.C shall not apply and the provisions of Section IX.D below shall apply. D. If the Company's records indicate that the payee of the Policy is an Excluded Entity, then the Company shall provide the Policy's benefits under this Agreement to the Policy's contractual beneficiary at his or her last-known address on the Company's records. If there is no available contractual beneficiary for the Policy, then the Company shall provide the Policy's benefits under this Agreement as specified in Sections II.B through II.F above. E. Holders of all Death/Maturity Policies and Terminated Policies except those described in Sections X.C through X.D above shall become Eligible Holders only by submitting a Claim Form postmarked no later than the Claim-In Date that (i) identifies the insured under the Policy, (ii) identifies the race of the insured under the Policy as non-Caucasian and (iii) provides Identifying Information for the Policy; provided 53 however, that no Holder of a Policy shall be an Eligible Holder if all documents in the Policy's Application File that state the race of the person insured under the Policy indicate unanimously that the insured's race is Caucasian. F. The Administrator shall assist with the completion of Claim Forms as follows: 1. The toll-free telephone number established by the Administrator shall permit persons seeking to obtain a Class Notice Package to provide their names, telephone numbers, addresses and policy numbers. 2. The Administrator shall establish an Internet Web site that, in addition to providing notice of the proposed settlement, facilitates the electronic submission of Claim Form information. If any person or entity supplies Claim Form information electronically over the Administrator's Web site, then to the extent practicable, the Administrator shall provide such person or entity with a Claim Form that includes the information that has been electronically submitted, together with a pre-addressed and postage pre-paid envelope for return of the Claim Form to the Administrator; provided however, that no Claim Form shall be valid unless it is completed, signed and returned postmarked by the Claim-In Date. G. Wherever a Claim Form is required by this Settlement Agreement, the Company shall not be obligated to provide settlement benefits to any person or entity who does not submit a Claim Form and other Identifying Information sufficient to permit the Company to confirm that the person or entity is entitled to settlement benefits, subject to the following conditions: 54 1. The Company shall use each substantially completed Claim Form that is submitted by any person or entity on or before the Claim-In Date to search its electronic databases and paper records in an effort to identify each life insurance policy referenced in the Claim Form and determine whether (a) such policy is a Policy and (b) the person or entity who submitted the Claim Form is an Eligible Holder or is otherwise eligible for settlement benefits under this Agreement. 2. If the Company's search locates any life insurance policy referenced in the Claim Form but confirms that such policy is not a Policy, then as soon as is practicable, but in no event later than 60 days after the Claim-In Date, the Company shall notify in writing the person or entity who submitted the Claim Form, via first-class mail to the person's or entity's address on the Claim Form, (a) of each life insurance policy referenced in the Claim Form that is not a Policy, (b) of the reasons why each such policy is not a Policy, (c) that no settlement benefits will be provided for each such policy, and (d) that the person or entity may raise any questions within 30 days of the Company's notification. Absent such a written notification by the Company within 60 days of the Claim-In Date, any life insurance policy identified in the Claim Form shall be deemed a Policy and shall receive the settlement benefits to which it is entitled under this Agreement. 3. If the Company's search does not locate a life insurance policy referenced in the Claim Form, then: 55 a. As soon as is practicable, but in no event later than 30 days after the Claim-In Date, the Company shall request additional Identifying Information from the person or entity who submitted the Claim Form. b. For any such person or entity who supplies additional Identifying Information postmarked within 30 days of the Company's request, the Company shall use the additional Identifying Information to search its electronic databases and paper records in an effort to identify the life insurance policy referenced in the Claim Form and determine whether such policy is a Policy. c. As soon as is practicable, but in no event later than 120 days after the Claim-In Date, the Company shall notify in writing, via first-class mail to the person's or entity's address in the Claim Form, each person or entity that has submitted a Claim Form and other Identifying Information to whom the Company determines not to provide settlement benefits, either (i) because the Company's searches have not located each life insurance policy referenced in the Claim Form or (ii) because the Company has located any life insurance policy referenced in the Claim Form but has confirmed that such policy is not a Policy (in which case the Company's written notification shall include the matters set forth in Section IX.G.2 above). 4. If any notified person or entity objects in writing to the Company's determination in a writing postmarked within 30 days of the date of a Company notification under Section IX.G.2 or Section IX.G.3 above, then: 56 a. The Company and Lead Counsel shall confer in good faith to resolve any disagreement concerning the person's or entity's eligibility for settlement benefits. b. If the Company and Lead Counsel are unable to resolve any such disagreement within 15 days of receipt of the person or entity's written objection, then the Company and Lead Counsel shall submit their disagreement to the Neutral, who shall determine whether the person or entity is entitled to settlement benefits. c. The Neutral's determinations under this Section X.G.4 shall be made within 30 days of the submission of the dispute by the Company and Lead Counsel, but in no event later than the Claim-Resolution Date. d. The determinations of the Neutral shall be final and binding on the Company, Lead Counsel and the person or entity in question. H. If, in the course of searching for any life insurance policy identified in a Claim Form or by other Identifying Information, the Company determines that the life insurance policy is a Policy and that the Company's records for the Policy list the numbers of other life insurance policies covering the life of the insured under the Policy, then the Company shall attempt to determine whether the other policies referenced are also Policies and provide any settlement benefits for which the Policies are eligible under this Agreement. X. MINIMUM/MAXIMUM COST OF BENEFITS A. After the deadline under this Agreement for submission of all Claim Forms has expired, and no later than the commencement of the Implementation Period, the Company shall compute the total anticipated cost to the Company of all settlement 57 benefits to be provided to the Class, using the factors and assumptions set forth in Exhibit M hereto. 1. If the computation in this Section X.A results in a total cost to the Company of all anticipated settlement benefits that is less than $52 million, then all benefits that otherwise would be provided to Eligible Holders and other eligible persons and entities shall be increased, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto), so that the total cost of all anticipated settlement benefits pursuant to the factors and assumptions set forth in Exhibit M hereto equals $52 million. 2. If the computation in this Section X.A results in a total cost to the Company of all anticipated settlement benefits in excess of $90 million, then all benefits that otherwise would be provided to Eligible Holders and other eligible persons and entities shall be reduced, on a proportionate basis based on the cost of each Policy's benefits (calculated in accordance with Exhibit M hereto), so that the total cost of all anticipated settlement benefits pursuant to the factors and assumptions set forth in Exhibit M hereto equals $90 million. B. Within 30 days after the commencement of the Implementation Period, the Company shall make a charitable contribution to the United Negro College Fund, Inc. for scholarship purposes in the amount of $5 million; provided however, that such amount shall be reduced by the excess, if any, of the total cost to the Company of all anticipated settlement benefits (calculated in accordance with Section X.A above) over $85 million. 58 C. No later than 85 days prior to the commencement of the Implementation Period, the Company may propose to Lead Counsel increases in one or more of the percentages listed in column 3 of the table in Section II of Exhibit M hereto that, for aggregate cost-calculation purposes, are to be applied to certain types of In-Force life insurance policies for which no Claim Form has been submitted and for which the insured's race is not reflected on the Company's electronic records (referred to in Exhibit M as policies "Subject to Race Adjustment"). Each such proposed increase by the Company shall be subject to review by Lead Counsel, as follows: 1. With its proposal, the Company shall provide Lead Counsel with the statistical analysis and all data, assumptions and calculations supporting its proposed increase. 2. Lead Counsel shall have 30 days from their receipt of any proposed percentage increase from the Company to request additional information and express any objection thereto. 3. The Parties shall attempt to resolve any objections raised by Lead Counsel through good-faith negotiations. 4. Any differences between the Parties that are not resolved by good-faith negotiation within 10 days of Lead Counsel's objection shall be submitted to a third-party actuary chosen jointly by the Parties, who shall determine whether the Company's proposed increase is necessary to accurately estimate the percentage of non-Caucasian insureds under life insurance policies that are Subject to Race Adjustment, consistent with generally accepted statistical principles. The third-party actuary shall render his or 59 her decision within 15 days of submission of the dispute. The third-party actuary's decision shall be final and binding on the Parties. D. Notwithstanding any other provision of this Settlement Agreement, if any settlement payment or benefit that would otherwise be provided in the aggregate for a Policy under this Settlement Agreement (other than any Enhanced Future Termination Benefit that may be payable based upon the expiry of a Policy's term insurance coverage) is less than $10, then such payment or benefit shall be increased to $10; provided however, that in the event a Policy is eligible for benefits under both Section V.A. and V.B above, then the payment under Section V.A and the payment to the Recipient under V.B each shall equal at least $10; and provided however, that the $10 amount shall be reduced as necessary pursuant to Sections X.A.2 above; and provided however, that in making the calculations set forth in Section X.A.1 above, the total cost of the payment or benefit that otherwise would have been made shall be calculated as the cost of providing a payment or benefit of $10. XI. NOTICE TO CLASS MEMBERS AND COMMUNICATIONS WITH CLASS MEMBERS AND POLICYOWNERS A. Class Notice Package 1. Subject to the requirements of the Hearing Order and no later than 85 days before the Fairness Hearing, the Company shall send a Class Notice Package by first-class mail, postage prepaid, to the last known address available on the Company's electronic records of each Class Member who is a Holder of a Database Policy (as updated pursuant to Section XI.A.5 below), and in cases where the Company is aware of 60 pending litigation by the Class Member against the Defendant relating to any matter proposed to be released by this Agreement, also to all legal counsel known to represent the Class Member. The Company will pay for the costs associated with producing and mailing the Class Notice Package. 2. The form and content of the Class Notice Package shall be agreed to by the parties and shall be substantially in the form attached hereto as Exhibit A. Each Class Notice Package shall contain a Class Notice and, in the case of Database Policies, a Statement of Benefits. In addition, the Class Notice Package shall contain a Claim Form and a pre-addressed and postage pre-paid envelope for return of the Claim Form to the Administrator. 3. The Class Notice a. The Class Notice shall, at a minimum, (i) describe who is in the Class; (ii) contain a short, plain description of the background of the Action, the Class and the proposed settlement; (iii) generally describe the proposed benefits outlined above in Sections III through VII above; (iv) explain how to secure settlement benefits, including how to submit a Claim Form if one is required to become an Eligible Holder; (v) explain that to be excluded from the Class, a written exclusion request must be submitted no later than 40 days before the date of the Fairness Hearing; (vi) state that any one Policy Holder's request for exclusion will exclude all Holders of the Policy; 61 (vii) inform Class Members that, if they do not exclude themselves from the Class with respect to a particular Policy, they will be eligible to receive one or more forms of relief under the proposed settlement; (viii) state that any Class Member who has not submitted a written request for exclusion may, if he or she desires, object to the proposed settlement by filing and serving a written statement of objection no later than 40 days before the Fairness Hearing; (ix) state that any Class Member who has filed and served written objections to the proposed settlement may, if he or she so requests, enter an appearance at the Fairness Hearing either personally or through counsel by providing the Court and counsel for the Parties with a notice of intention to appear; (x) explain the impact of accepting or rejecting the benefits available to them under the Settlement Agreement on any existing litigation, claim, arbitration or other proceeding; (xi) state that any judgment entered with respect to the Settlement Agreement shall include, and be binding on, all Class Members who have not been excluded from the Class, even if they have objected to the proposed Settlement Agreement and even if they have any other claim, lawsuit or proceeding pending against the Defendant; (xii) provide the terms of the Release; (xiii) explain the disposition of unknown claims; and (xiv) state that any relief to Class Members is contingent on the Court's final approval of the proposed settlement. b. The Class Notice shall conform to all applicable requirements of the Federal Rules of Civil Procedure, the United States Constitution (including the Due 62 Process Clause), the Rules of the Court and any other applicable law, and shall otherwise be in the manner and form agreed upon by the Parties and approved by the Court. 4. The Statement of Benefits a. The Statement of Benefits will be included only in the Class Notice Packages of Holders of Database Policies. A Statement of Benefits shall also be provided upon request to any Eligible Holder who submits a Claim Form identifying the number of a Policy for which information is available on the Company's electronic records, or whose policy has been confirmed to be a Policy. b. The Statement of Benefits shall provide the Holder of the Policy with a simplified summary of certain information in the Class Notice and also shall inform him or her, to the extent feasible and reflected in the Company's electronic records, of (i) the Class Member's name; (ii) the policy number of the Policy making the Class Member eligible for relief; (iii) the status of the Policy as of the Eligibility Date; (iv) the form(s) and, to the extent practicable, percentages of relief for which the Class Member may be eligible; and (v) the need, if any, of the Class Member to submit a Claim Form to become an Eligible Holder. 5. Address Updating for Holders of Database Policies a. Prior to the mailing of the Class Notice Package to Holders of Database Policies described in Section XI.A.1 above, the Company shall conduct 63 research to confirm or update the addresses of Holders of Database Policies that are currently available on the Company's electronic databases, as described in this Section XI.A.5. b. Using its Trilium software, the Company shall reformat as necessary its address information for Holders of Database Policies that is currently available on the Company's electronic databases so that it is in a form conducive to searching for updated addresses through the National Change of Address Register. c. Once the Company has taken steps to reformat its current address information, the Company shall utilize the National Change of Address Register to confirm or update its current electronic addresses for Holders of Database Policies. d. Once it has taken the above steps, the Company shall provide its updated electronic address information for Holders of Database Policies to the Administrator, which shall use ChoicePoint to further update such address information to the extent practicable prior to the mailings contemplated by Section XI.A.1 above. B. PUBLICATION NOTICE AND OTHER MEDIA NOTICE 1. As soon as is practicable after the Court's entry of the Hearing Order, but no later than 55 days before the Fairness Hearing, the Company will publish on at least one occasion the Publication Notice, in a form substantially similar to that attached as Exhibit B and in the newspapers agreed to by Lead Counsel and the Company. The Company shall pay all of the costs associated with the Publication Notice. 2. The Parties shall retain a media consultant to advise the Parties concerning the methods for providing the best notice practicable to the Class. Based on 64 the media consultant's recommendations, the Company shall arrange to provide notice to the Class through such media, and in such form and frequency, as to which the Parties shall agree. Such media may include, without limitation, print media, television, radio, community outreach, and use of the Internet. All such media notification shall be completed as soon as is practicable following the Court's entry of the Hearing Order, but no later than 55 days prior to the Fairness Hearing. The Company shall pay all of the costs associated with the media notification described in this Section XI.B.2. C. REMAILING AND ADDITIONAL NOTICE The Company, through the Administrator, shall at its cost remail any notice returned by the Postal Service with a forwarding address that is received by the Administrator at least 50 days before the Fairness Hearing. With respect to Class Notices that are returned without a forwarding address, the Administrator shall immediately provide a copy of any returned notice to an address research firm retained for the purpose of researching updated addresses of Class Members, or conduct such research itself; provided however, that the Company shall not be obligated to duplicate the efforts of an address research firm that undertook a search for the Class Member's address prior to the initial mailing. In addition, the Hearing Order shall provide that any retained address research firm(s) shall provide to the Administrator in connection with each returned notice, as soon as is possible, either an updated address or a statement that, following due research (including, but not limited to, using the National Change of Address Register and Social Security Numbers) it has been unable to obtain an updated address. The Administrator shall remail the notice to any Class Member for whom it obtains or the 65 address research firm provides an updated address, so long as the updated address is obtained by or provided to the Administrator at least 50 days before the Fairness Hearing. D. POST-SETTLEMENT MAILING Starting at the commencement of the Implementation Period, the Company shall send a mailing to each person or entity eligible under Sections II.B through II.E above to receive a cash payment under this Settlement Agreement by virtue of the Enhanced Past Death/Maturity Benefit (Section IV above) or the Enhanced Past Termination Benefit (Section V.A above). The mailing shall include a check in the amount of the cash payment for which the Policy is eligible. E. RETENTION OF ADMINISTRATOR 1. Upon consultation and approval of Lead Counsel, the Company shall at its cost retain one or more Administrators (including subcontractors) to help implement the terms of the proposed Settlement Agreement. a. The Administrator(s) may assist with various administrative tasks, including, without limitation, (i) mailing or arranging for the mailing of the Class Notice to Class Members, (ii) arranging for publication of the Publication Notice, (iii) arranging for or assisting in dissemination of the Publication Notice; (iv) handling returned mail not delivered to Class Members, (v) attempting to obtain updated address information for any Class Notices returned without a forwarding address or an expired forwarding address, (vi) making any additional mailings required under the terms of this Settlement Agreement, (vii) arranging for and staffing a toll-free telephone number to assist the Parties in responding to inquiries from Class Members and others, (viii) assisting Class 66 Members with the completion of Claim Forms under the terms and conditions set forth above in Section IX.F above; (ix) answering written inquiries from Class Members and/or forwarding such inquiries to Lead Counsel or its designee and (subject to Lead Counsel's prior opportunity to make a good-faith determination that the communication is privileged and may not be so forwarded) to the Company or its designee, (x) receiving and maintaining on behalf of the Court any Class Member correspondence regarding requests for exclusion and objections to the settlement, (xi) establishing and administering a Web site with information on the settlement and the ability to submit Claim Form data; and (xii) otherwise assisting the Company with administration of the Settlement Agreement. The Company will pay the reasonable fees and expenses of the Administrator(s), as well as any other fees and expenses incurred in performing all of the tasks described in this Section XI.E.1.a. b. Lead Counsel and/or its designee, and the Company and/or its designee, shall be entitled to observe and monitor the performance of the Administrator to assure compliance with the Settlement Agreement. c. The contract between the Company and the Administrator shall obligate the Administrator to abide by the following performance standards: (i) The Administrator shall accurately and neutrally describe, and shall train and instruct its employees and agents to accurately and objectively describe, the provisions of this Settlement Agreement in communications with Class Members; 67 (ii) The Administrator shall provide prompt, accurate and neutral responses to inquiries from Lead Counsel or its designee, Defendant and/or Defendant's Counsel. (iii) If, in the course of any communication with a Class Member, the Class Member requests that the Administrator and/or its agent or employee refer the communication to Plaintiffs' Counsel or the Company (for non-settlement and policy administration questions only) or it appears that such a referral will assist the Class Member, then the Administrator and/or its agent or employee shall promptly fulfill such request. (iv) If, in the course of any communication with a Class Member, an agent or employee of the Administrator reasonably concludes that the Class Member is not satisfied with the information and/or assistance provided, then the agent or employee shall promptly refer the Class Member's communication to a supervisor on duty, a representative of the Company, and Lead Counsel or its designee. d. If the Administrator makes a material or fraudulent misrepresentation to, or fraudulently conceals requested material information from a Class Member, Lead Counsel, Defendant or Defendant's Counsel, then the Party to whom the misrepresentation is made (or, in the case of a concealment, the requestor of the information) shall have the right to demand that the Administrator immediately be replaced; provided however, that in the case of a misrepresentation or concealment involving a Class Member, Lead Counsel shall have the right to make such demand. If the Administrator fails to perform adequately on behalf of the Company and the Class, 68 the Parties can agree to remove the Administrator. All disputes regarding the retention or dismissal of the Administrator shall be resolved by the Court. 2. The Company and Lead Counsel will establish a settlement administration center for the purpose of facilitating and providing information to Class Members regarding the settlement and their rights under it. The settlement administration center shall include, among other things, a telephone bank with a toll-free telephone number for responding to inquiries from Class Members and others about the proposed settlement and any issues related to the Settlement Agreement or the Action. The Administrator shall direct all callers with general product questions, product status requests, or complaints unrelated to the settlement of the Action to call the Company's toll-free customer service number. a. The settlement administration center shall commence operations beginning no later than the day after the first Class Notice Package is mailed and ending on a date to be agreed to by the Parties. b. The Administrator, with the participation of Lead Counsel and the Company and its counsel, will be responsible for (i) staffing the telephone bank with telephone representatives, (ii) educating the telephone representatives about the general background of the Action, the product concepts relevant to the proposed settlement, the notice, terms and chronology of the proposed Settlement Agreement, (iii) training the telephone representatives to explain to Class Members the benefits available to them under the Settlement Agreement, including that the telephone representatives shall be instructed to advise all eligible Class Members who call the telephone bank of their need, 69 if any, to complete and return a Claim Form to become Eligible Holders, (iv) training the telephone representatives to answer inquiries from Class Members and others, (v) providing scripts and model questions and answers for the telephone representatives to use in answering inquiries from Class Members and other policyowners, (vi) training the telephone representatives to refer Class Member inquiries to appropriate sources, including, but not limited to, Lead Counsel or its designee if the Class Member so requests or where otherwise appropriate, including under the circumstances described in Sections XI.E.1.c(iii) and XI.E.1.c(iv) above, (vii) training telephone representatives to refer callers with general product questions, product status requests, or complaints unrelated to the settlement of this Action to call the Company's toll-free customer service number, (viii) training telephone representatives to advise policyowners how to inquire if they own Policies within the Class, (ix) providing for a translation service for non-English speaking Class Members who call the toll-free number, (x) providing callers access to a terminal for the hearing-impaired, (xi) maintaining records reflecting communications with Class Members; (xii) providing on site facilities for Plaintiffs' Counsel, Defendant's Counsel and Company representatives; and (xiii) taking any other steps, in consultation with the Company and Lead Counsel, to promote accurate and efficient communications with Class Members and others. c. Lead Counsel or its designees, and the Company and/or its counsel, will monitor and participate in the education and training of telephone representatives. 70 (i) Lead Counsel or its designee and the Company and/or its counsel may participate in all training sessions, speak with telephone representatives and supervisors, and provide additional comment and/or instruction to telephone representatives and/or supervisors as they deem necessary. The Company, Lead Counsel or its designee may request and obtain a pause or cessation in any training session or other communication with a telephone representative or supervisor to confer regarding the content of the communication or training. All training and other written communications between the Parties and telephone representatives and/or supervisors must be agreed upon by the Parties. (ii) Lead Counsel or its designee may observe any communications between the Company or its designee and the telephone representatives and supervisors of telephone representatives regarding training issues. The Company or its designee may observe any communications between Lead Counsel or its designee and the telephone representatives and supervisors regarding training issues. (iii) The Company and Lead Counsel or its designees shall consult in advance and agree on the form and content of all telephone scripts to be used by the telephone representatives, and all training materials and presentations, whether written or oral, provided to telephone representatives. Lead Counsel shall be provided with complete drafts of all telephone scripts, written materials or written presentations as soon as possible but no later than 10 days prior to their use in training. Any proposed changes, modifications or additions to the telephone scripts or written training materials by either Party must be provided to the other Party with sufficient time 71 to permit meaningful comment prior to use. The Parties shall negotiate in good faith concerning any such changes, modifications or additions to facilitate providing clear, understandable and accurate information to Class Members. (iv) Lead Counsel and its designees may be present on-site at the telephone bank to monitor telephone representatives' handling of Class Members' telephone inquiries and also to speak directly with any Class Member who requests to speak to Plaintiffs' Counsel. The Company and its designees may also be present on-site at the telephone bank to monitor telephone representatives' handling of Class Members' telephone inquiries. 3. If during monitoring of a telephone call to the toll-free number Lead Counsel or its designee believes that an inaccurate statement has been made to a Class Member, or that the information provided to the Class Member was confusing, misleading or incomplete, Lead Counsel or its designee may contact the Class Member to address such statements or information. The Company or its designees may also raise concerns with the Administrator and/or Lead Counsel concerning the accuracy, clarity and completeness of statements made to Class Members during telephone calls to the toll-free number. F. COMMUNICATION WITH CLASS MEMBERS, POLICYOWNERS AND PRODUCERS 1. The Company expressly reserves the right to communicate with and respond to inquiries from policyowners and Class Members orally and/or in writing, consistent with the provisions of the Settlement Agreement. The Company shall make and maintain a note in its administrative systems reflecting any telephone call between 72 representatives at the Company's toll-free customer service number and any potential Class Member relating to the settlement. 2. Any communications between the Company and Class Members concerning the terms of the settlement shall be consistent with scripted information that is provided to Lead Counsel for its comments prior to use. The Parties shall confer in good faith to resolve any differences concerning such scripts. In addition, Lead Counsel shall be provided with copies of all correspondence from the Company to Class Members concerning the terms of the settlement. 3. The Company's Producers may respond to inquiries from, and/or communicate with, present or former Company policyowners about the proposed settlement. However, the Company shall (a) instruct its Producers to encourage Class Members with inquiries regarding the proposed settlement to call the toll-free number established to respond to such inquiries; (b) make available to its Producers copies of the Notice Card attached as Exhibit F hereto to give to such inquiring Class Members; and (c) provide its Producers with copies of an Agent Script and instruct them that any answers to Class Member questions regarding the settlement shall be consistent with such Agent Script. Lead Counsel may review and comment on advance copies of any written communications with Producers about the proposed settlement, including the Agent Script. The Parties shall confer in good faith to resolve any differences concerning the content of such written communications and the Agent Script. The Company may also respond to Producer questions regarding the proposed settlement. 73 4. Mass and/or generalized communications with Class Members regarding the proposed settlement, whether by Plaintiffs' Counsel, the Company or its current Producers, and whether by mail, the establishment or encouragement of Internet websites or other Internet communications, telephone scripts, or any other means, shall be made jointly with, or with the approval of, the other Party. 5. Lead Counsel shall have the express right to communicate directly with Class Members concerning any issue relating to the settlement. Lead Counsel shall maintain a log of all telephone calls or other communications with potential Class Members relating to the settlement. G. MEDIA COMMUNICATIONS 1. Concurrently with their first communication to the media or the general public concerning this Settlement Agreement, and in no event later than the date on which the Court enters the Hearing Order, the Parties shall issue press releases that have been agreed to in form and content by the Parties. 2. The form and content of any other initial joint written statement, press release or other media notice to be issued in connection with the proposed settlement on or after the Execution Date shall be mutually agreed upon by the Parties. 3. Any subsequent formal written statements, written press releases or other written media notices to be issued in connection with the proposed settlement shall not be inconsistent with the press releases described in Section XI.G.1 above and shall be exchanged by the Parties sufficiently in advance of public release to provide the other Party with adequate time to prepare its own statement. 74 4. Lead Counsel and the Company shall ensure that any comments about or descriptions of the proposed settlement or its value or cost in the media or in any other public forum are balanced, fair, accurate, and consistent with the terms and intent of the settlement. XII. REQUESTS FOR EXCLUSION A. Any potential Class Member (or Estate Holder) who wishes to be excluded from the Class must mail or deliver a written request for exclusion to the Clerk of the Court, care of the address provided in the Class Notice, so that it is received no later than 40 days before the Fairness Hearing, or as the Court otherwise may direct. 1. To the extent practicable, the written request for exclusion should identify the Policy or Policies for which the Class Member (or Estate Holder) is requesting exclusion, as well as the names of the persons insured under such Policy or Policies; provided however, that if a potential Class Member (or Estate Holder) requests exclusion but does not indicate the Policy or Policies for which he or she is requesting exclusion, then: a. all Policies with respect to which the potential Class Member (or Estate Holder) is a Holder (or Estate Holder) shall be deemed excluded from the Class; and b. the Company shall have the authority to cause the Administrator to contact the potential Class Member (or Estate Holder) to ask for Identifying Information for the Policy. 75 2. The written request for exclusion must also be signed by the Class Member (or Estate Holder) or a representative who has legal authority to sign on behalf of the Class Member. A list reflecting all requests for exclusion shall be filed with the Court by the Company at or before the Fairness Hearing. B. Any potential Class Member (or his or her estate) who does not file a timely written request for exclusion with respect to a Policy as provided in the preceding Section XII.A shall be bound with respect to that Policy by all subsequent proceedings, orders and judgments in this Action relating to the Settlement Agreement, even if he or she has pending, or subsequently initiates, litigation, arbitration or any other proceeding against the Company relating to that Policy and the claims released in this Action. XIII. OBJECTIONS TO THE SETTLEMENT A. Any Class Member (or Estate Holder) who has not filed a timely written request for exclusion for all of his or her Policies and who wishes to object to the fairness, reasonableness or adequacy of this Settlement Agreement or the proposed settlement, or to the award of Attorneys' Fees and Expenses, must deliver to Lead Counsel and Defendant's Counsel and file with the Court, no later than 40 days before the Fairness Hearing or as the Court otherwise may direct, a statement of his or her objection, as well as the specific reason(s), if any, for each objection, including any legal support the Class Member (or Estate Holder) wishes to bring to the Court's attention and any evidence the Class Member (or Estate Holder) wishes to introduce in support of the objection. Class Members (and Estate Holders) may so object either on their own or through an attorney hired at their own expense. 76 B. Class Members (and Estate Holders) and their personal attorneys may obtain access at their own expense to the documents produced during discovery to Plaintiffs' counsel by Defendant in this Action, and also to deposition transcripts and exhibits thereto generated in this Action, but must first agree in writing to be bound by the Stipulation of Confidentiality entered in this Action and attached as Exhibit G, as well as by all Protective Orders entered and to be entered in the Action. These discovery documents shall be made available by appointment during regular business hours at the offices of Lead Counsel at Milberg Weiss Bershad Hynes & Lerach, LLP, 401 B. Street, Suite 1700, San Diego, California 92101. Lead Counsel shall inform Defendant's Counsel promptly of any requests by Class Members (or Estate Holders) or their attorneys or other persons or entities for access to such documents. C. If a Class Member (or Estate Holder) hires an attorney to represent him or her, the attorney must (i) file a notice of appearance with the Clerk of Court no later than 40 days before the Fairness Hearing, or as the Court otherwise may direct, and (ii) deliver to Lead Counsel and Defendant's Counsel no later than 40 days before the Fairness Hearing a copy of the same. Fees for any such attorney will be paid by the Class Member (or Estate Holder) and not by the Company, Lead Counsel or from the settlement. D. Any Class Member (or Estate Holder) who files and serves a written objection, as described in Section XIII.A, may appear at the Fairness Hearing, either in person or through personal counsel hired at the Class Member's (or Estate Holder's) expense, to object to the fairness, reasonableness or adequacy of this Settlement Agreement or the proposed settlement. Class Members (or Estate Holders) or their 77 attorneys intending to make an appearance at the Fairness Hearing must deliver to Lead Counsel and Defendant's Counsel and file with the Court no later than 40 days before the Fairness Hearing, or as the Court otherwise may direct, a notice of intention to appear. E. Any Class Member (or his or her estate) who fails to comply with the provisions of this Section XIII shall waive and forfeit any and all rights he or she may have to appear separately, object and/or appeal, and shall be bound by all the terms of this Settlement Agreement and by all proceedings, orders and judgments in this Action. XIV. RELEASE AND WAIVER, AND ORDER OF DISMISSAL A. RELEASE AND WAIVER 1. Plaintiffs and the Class agree to the following release and waiver, which shall take effect upon entry of the Final Judgment and Order Approving Settlement: I. Plaintiffs and all Class Members hereby expressly agree that they shall release, acquit and forever discharge the Releasees from, and shall not now or hereafter institute, receive any individual benefits from, maintain, maintain a right to or assert against the Releasees, either directly or indirectly, on their own behalf, or on behalf of the Class or any other person or entity, any and all causes of action, claims (known or unknown), demands or rights, including, without limitation, claims for damages, interest, or equitable or legal relief, or individual administrative relief, including reformation, rescission, restitution, declaratory or injunctive relief, imposition of constructive trust, or damages of any kind, including punitive damages or other damages in excess of actual damages, claims for mental anguish, claims of civil rights violations and discrimination based on race and national origin, and claims for fraud, misrepresentation, unfair competition and unfair or deceptive trade practices related to race or national origin, whether based on federal, state or local law, statute, ordinance, regulation, contract, common law, or any other source, including, without limitation, the provisions of federal and state civil rights laws, respecting discrimination on the basis of race or national origin including, without limitation, 42 U.S.C.(Section). 1981; 42 U.S.C.(Section).1982; 41 U.S.C.(Section).1983; 42 U.S.C.(Section).1985; 42 U.S.C.(Section).1985(3); 42 U.S.C. 78 (Section). 1986; 42 U.S.C.(Section).1988; 42 U.S.C.(Section).2000a et seq.; and state constitutions, statutes and municipal ordinances modeled after provisions of the Civil Rights Act of 1964, that have been, could have been, may be or could be alleged or asserted now or in the future by Plaintiffs or any Class Member against the Releasees or any of them in this Action or in any other court action or before any administrative body (including any brought by or on behalf of any state attorney general or Department of Insurance or other regulatory entity or state prosecutorial or other organization), tribunal, arbitration panel, or other adjudicatory body on the basis of, connected with, arising out of, or related to, in whole or in part, any or all of the acts, omissions, nondisclosures, facts, matters, transactions, occurrences, or oral or written statements or representations that have been alleged or asserted in the Action, including without limitation relating to: A. Any discrimination based on race or national origin by any of the Releasees prior to the Execution Date in connection with, or related directly or indirectly to, the marketing, solicitation, application, underwriting, risk classification, issuance, change-issuance, re-issuance, reinstatement, design, type, structure, terminology, pricing, premiums, charges, rates, premium mode, acceptance, sale, purchase, operation, retention, administration, debit or home service collection, servicing, performance, dividends, cash values, benefits (including non-forfeiture benefits), or provision of demutualization shares, on the basis of or with respect to, any Policy; B. Any Company effort or failure to discontinue or correct, or to remedy the effects of, discrimination on the basis of race or national origin in connection with the matters described in Paragraph I.A of this Release above; C. Any consideration of an applicant's or insured's socio-economic status, occupational status, moral character or hazard, social status, economic level, income, or place of residence in connection with the pricing, purchase, sale, underwriting, issuance or administration of any Policy; D. Any use of a mercantile report or medical examination in connection with the pricing, purchase, sale, underwriting or issuance of any Policy; E. Any request for any information from an applicant or insured related to race or national origin in connection with the pricing, purchase, sale, underwriting, issuance or administration of any Policy; 79 F. Any limitation or restriction on the amount of insurance made available to Class Members, individually or in the aggregate, related to race or national origin, leading up to the purchase of, or in connection with, any Policy; G. Any Class Member was charged premiums for any Policy, based on race or national origin, that were excessive, unconscionable or unreasonable; H. The frequency with which premiums for a Policy were paid or collected, or the method or system by which premiums were paid or collected, including without limitation the Company's reflection of the costs of premium collection or administration in the premiums paid for, dividends provided to, or other benefits provided by any Policy; I. The suitability or appropriateness of the purchase or sale of a Policy or Policies to an applicant or insured based on race or national origin, instead of one or more other Policies or other life insurance policies; J. Any training, instructions, or encouragement by the Company to any of the Company's general agents, agents, account representatives, sales representatives, managers, district office clerks, managing directors, producers, and representatives relating directly or indirectly to race, concerning (i) the frequency with which Policy premiums were to be paid or collected, (ii) the type, size or number of life insurance policies to offer or sell to Class Members, or (iii) any disclosure or non-disclosure of the alleged discriminatory practices described in Paragraph I.A of this Release above; K. The sale or marketing of any Policy as "burial" protection; L. The Company's agent commission payment practices, methods or schedules with respect to any Policy, including without limitation the commission paid in connection with the sale of any Policy compared to the commissions payable in connection with the sale of any other life insurance policy; M. The application of the cash values of any Policy toward the provision of insurance coverage under a contractual non-forfeiture option, including any past or future expiration of any Industrial Policy's insurance coverage under the extended term non-forfeiture option; 80 N. The Company's apportionment, provision or distribution of shares of MetLife, Inc. stock as part of its 2000 demutualization to any Class Member, or amount of shares allocated to any Class Member, including, without limitation, the shares received by any Class Member in relation to the shares received by any other person or entity, related to race or national origin; provided however, that nothing in this Paragraph I.N shall be construed to bar, limit or restrict any putative or certified class action pending as of the Execution Date and alleging that the Company's 2000 demutualization was unlawful or to otherwise limit the participation of any Class Member in any such action; O. The Company's methods or actuarial principles for the apportionment and payment of, determination of, or amount of dividends on any Policy, including, without limitation, the dividends of any Policy in relation to the dividends of any other life insurance policy or the form of payment of dividends, based on race or national origin; P. With respect to any Policy on which a death, maturity or endowment benefit has been paid by the Company, any failure to pay, delay in paying, or failure to inform any person of, such benefits under a Policy, including without limitation any failure to disclose that a Policy has lapsed, become paid-up or been placed on non-forfeiture status; Q. The Company's methods or practices for notifying persons or entities to whom Policy benefits have become payable, including without limitation any escheatment of a Policy's benefits to a governmental authority or alleged non-compliance with any state unclaimed property laws; R. Any refusal or failure to disclose actuarial information or assumptions, mortality experience or assumptions, underwriting practices or policies, or rate information concerning any Policy, relating to race or national origin; S. Disclosures in any local or state regulatory filing by the Company relating to any matter described in this Paragraph I; T. Any or all acts, omissions, nondisclosures, facts, matters, transactions, occurrences or oral or written statements or representations in connection with or directly or indirectly relating to the Settlement Agreement or the settlement of the Action, and/or U. Any and all claims for attorneys' fees, costs or disbursements incurred by Lead Counsel or any other counsel representing 81 Plaintiffs or Class Members in this Action, or by Plaintiffs or the Class Members in this Action, or any of them, in connection with or related in any manner to the Action, the settlement of the Action, the administration of such settlement and/or the matters described in Paragraph I.A of this Release above, except to the extent otherwise specified in the Settlement Agreement. II. Nothing in this Release shall be deemed to alter, limit or affect (i) a Class Member's contractual rights to make a claim for benefits that will become payable in the future pursuant to the express terms of the policy form issued by the Company (except where such benefit has been or is paid, as described in Paragraph I.P of this Release) or (ii) a Class Member's right to assert any claim that independently arises from acts, facts or circumstances arising after the Execution Date; provided however, that this provision shall not entitle a Class Member to assert claims that relate directly or indirectly to any act, fact or circumstance arising prior to the Execution Date that is alleged in the Action or described in paragraphs I.A, I.B or I.C, above. III. Plaintiffs and all Class Members expressly agree that this Release will be, and may be raised as, a complete defense to and will preclude any action or proceeding encompassed by this Release. IV. Plaintiffs and Class Members expressly understand that principles of law such as Section 1542 of the Civil Code of the State of California provide that a general release does not extend to claims which a creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. To the extent that, as a result of or notwithstanding the choice of law provisions in the Settlement Agreement, California or other law may be applicable, Plaintiffs and the Class Members hereby agree that the provisions of Section 1542 and all similar federal or state laws, rights, rules, or legal principles of any other jurisdiction which may be applicable herein, are hereby knowingly and voluntarily waived and relinquished by Plaintiffs and the Class Members, and Plaintiffs and the Class Members hereby agree and acknowledge that this is an essential term of both the Settlement Agreement and this Release. V. In connection with this Release, Plaintiffs and the Class Members acknowledge that they are aware that they may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those that they now know or believe to be true, with respect to the matters released herein or with respect to their Policies for acts, facts, circumstances or transactions occurring or arising prior to the Execution Date. Nevertheless, it is the intention of Plaintiffs and the Class Members in executing this Release fully, finally and forever to settle and release all 82 such matters, and all claims relating thereto, which exist, hereafter may exist, or might have existed. VI. Nothing in this Release shall preclude any action to enforce the terms of the Settlement Agreement, provided that such action shall be brought in the United States District Court for the Southern District of New York. VII. Nothing in this Release shall be deemed to release, extinguish or otherwise compromise in any way a Class Member's claims for (a) physical personal injury, theft, forgery or embezzlement; or (b) misappropriation of an individual Policy's premiums or benefits by an individual agent or employee of the Company acting without the Company's knowledge, authorization or consent. The Company expressly waives any argument that any such claim is precluded by res judicata, collateral estoppel, or any other doctrine proscribing the splitting of claims. VIII. Upon the Final Settlement Date, each of the Releasees shall be deemed to have, and by operation of the Final Judgment shall have, fully, finally, and forever released, relinquished and discharged each and all of the Plaintiffs, Lead Counsel and Class Counsel from all claims (including unknown claims) arising out of, relating to, or in connection with the institution, prosecution, assertion, settlement or resolution of the Action or the claims included in this Release. IX. Plaintiffs, the Company and the Class Members hereby agree and acknowledge that the provisions of this Release together constitute an essential and material term of the Settlement Agreement. X. This Release is the result of a compromise of disputed claims and shall never at any time be used as evidence of any admission of liability by the Company. B. ORDER OF DISMISSAL 1. The Parties will seek and obtain from the Court a Final Judgment and Order Approving Settlement (for which, as a condition of settlement, the time for appeal has expired without any modifications in the Final Judgment or Order Approving Settlement) as further described below in Section XVII. The Final Judgment and Order Approving Settlement shall, among other things, (i) approve this Settlement Agreement 83 as fair, reasonable and adequate, (ii) dismiss the Action with prejudice and on the merits, and (iii) incorporate the terms of the Release. XV. ATTORNEYS' FEES AND EXPENSES A. The Company agrees to pay any Court award of Attorneys' Fees and Expenses in addition to the settlement benefits provided to Plaintiffs and Class Members by this Agreement. Lead Counsel will file an application with the Court seeking an award of Attorneys' Fees and Expenses. The Company reserves the right to oppose any aspect of the application. There is no other agreement between the Parties as to Attorneys' Fees and Expenses. All remaining issues relating to Attorneys' Fees and Expenses, including the methodology and amount, will be determined by the Court, subject to reversal or modification of any Court award of Attorneys' Fees and Expenses on appeal. B. Lead Counsel may petition the Court for incentive awards of up to $5,000 per person to be paid to some or all of the Plaintiffs. The Company agrees not to oppose Lead Counsel's petition for any incentive award to a Plaintiff up to that amount. The purpose of such awards, if any, shall be to compensate Plaintiffs (or any of them) for efforts and risks taken by them on behalf of the Class. Any incentive awards made by the Court shall be paid by the Company as settlement benefits under this Agreement. C. In addition to the Attorneys' Fees and Expenses, the Company shall bear the following settlement administration expenses under this Agreement: (1) publishing, printing and mailing the Class Notice Package to Class Members and others who request such a Package from the Administrator; (2) publishing the Publication Notice; 84 (3) providing the media and other outreach described in Section XI.B above; (4) post-office box rentals; (5) processing requests for exclusion, Claim Forms, and designations under the SDB; (6) fees and disbursements to the Administrator and any other third-party contractors or administrators retained by the Parties for the purpose of assisting in settlement implementation (except to the extent the Administrator is used by Lead Counsel by written agreement); (7) administrative costs associated with providing settlement benefits under this Agreement; and (8) the fees and expenses of the Neutral and any other arbitrators, including assistants. XVI. ORDER OF NOTICE, FAIRNESS HEARING AND ADMINISTRATION A. The Parties have negotiated, drafted and agreed to the form of the following documents: the Class Notice Package (Exhibit A), the Publication Notice (Exhibit B), the Unclaimed Benefits Protocols (Exhibit C), the Hearing Order (Exhibit D), the Identifying Information (Exhibit E), the Notice Card (Exhibit F), the Stipulation of Confidentiality (Exhibit G), the SDB Certificate (Exhibit H), the Small Estate Declaration (Exhibit I), the Cash Payment Option Election Letter (Exhibit J), the Confirmatory Letter (Exhibit K), the Industrial Weekly Substandard Enhancement Factors (Exhibit L), the Cost Methodologies and Assumptions (Exhibit M) and the Covered Met Series Policies (Exhibit N). These documents are incorporated into, are an integral part of, and are material terms of this Settlement Agreement. B. The Parties will submit this Settlement Agreement, including all attached exhibits, to the Court and seek and obtain preliminary approval thereof. If the Court preliminarily approves the settlement, the Parties shall move the Court to set a Fairness 85 Hearing, and shall seek and obtain a proposed Hearing Order, unless otherwise agreed to by the Parties: 1. providing for the certification of the Class for settlement purposes only; 2. finding that the proposed settlement is sufficient to warrant sending notice to the Class; 3. scheduling the Fairness Hearing to be held on such date as the Court may direct, to consider the fairness, reasonableness and adequacy of the proposed settlement and whether it should be approved by the Court; 4. approving the proposed Class Notice Package, Publication Notice and additional notice methodology described in this Settlement Agreement; 5. directing the Company or its designee(s) to cause the Class Notice Package to be mailed to each Class Member who is a Holder of a Database Policy (and, in cases of pending litigation against the Defendant, also to all legal counsel known to represent the Class Member) by first-class mail, postage prepaid, to his or her last known address (if available from the Company's electronic databases) no later than 85 days before the Fairness Hearing; 6. directing the Company or its designee(s) to publish the Publication Notice and conclude additional media as provided in this Settlement Agreement no later than 55 days before the Fairness Hearing; 7. determining that the Class Notice Package, together with the Publication Notice and other media notice, (i) is the best practicable notice, (ii) is 86 reasonably calculated, under the circumstances, to apprise Class Members of the pendency of the Action and of their right to object to or exclude themselves from the proposed settlement, (iii) is reasonable and constitutes due, adequate and sufficient notice to all persons entitled to receive notice, and (iv) meets all applicable requirements of the Federal Rules of Civil Procedure, the United States Constitution (including the Due Process Clause), the Rules of the Court and any other applicable law; 8. ordering that the Administrator(s) shall (i) remail any notices returned by the Postal Service with forwarding addresses that are received by the Administrator(s) at least 50 days before the Fairness Hearing and (ii) immediately provide copies of any such returned notices that do not include a forwarding address to any address research firm retained by the Administrator. In addition, the Hearing Order shall provide that (a) in connection with each returned notice provided to it, any address research firm(s) will return to the Administrator, as soon as is possible, either an updated address or a statement that, following due research (including, but not limited to, using the National Change of Address Register and Social Security Numbers) it has not been able to update that address, and (b) the Administrator will remail notice to any Class Member for whom it obtains or the address research firm provides an updated address, so long as the updated address is obtained by or provided to the Administrator at least 50 days before the Fairness Hearing; 9. authorizing the Parties to distribute the Class Notice Package and disseminate of the fact of the Settlement Agreement, and to communicate the ability to obtain the Notice Package by calling the toll-free telephone number; 87 10. requiring the Company to file proof of the mailing of the Class Notice Package to Database Policies and publication of the Publication Notice and other media notice at or before the Fairness Hearing; 11. authorizing the Company, including its current Producers or other representatives and any other retained personnel, to communicate with potential Class Members, Class Members and other present or former policyowners about the Action and the terms of the proposed settlement, subject to the terms of Section XI.F, and to engage in any other communications within the normal course of the Company's business; 12. requiring each Class Member who wishes to exclude himself or herself from the Class to submit an appropriate, timely written request for exclusion, received no later than 40 days before the date of the Fairness Hearing, to the Clerk of the Court, care of the address provided in the Class Notice; 13. preliminarily enjoining all Class Members who have not timely excluded themselves from the Class as to a Policy from filing, commencing, prosecuting, intervening in, participating in, whether individually, as class members or otherwise, or receiving any benefits or other relief from any other lawsuit or arbitration, or receiving any individual benefits from any administrative, regulatory or other proceeding or order, in any jurisdiction, based on or relating to the claims and causes of action, or the facts and circumstances relating thereto, in this Action and/or the Release as to that Policy; 14. preliminarily enjoining all persons from filing, commencing or prosecuting any other lawsuit as a class action (including by seeking to amend a pending complaint to include class allegations or by seeking class certification in a pending action 88 in any jurisdiction) or any other form of action on behalf of Class Members who have not timely excluded themselves from the Class, if such other lawsuit is based on or relates to the claims and causes of action, or the facts and circumstances relating thereto, in this Action and/or the Release; 15. preliminarily enjoining all persons from asserting or maintaining any claims, pursuing any discovery from Metropolitan Life or any third party, presenting evidence, or claiming any damages, whether compensatory or punitive, based on or encompassing, in whole or in part, the alleged Company practices and patterns that are the subject of the Action and/or the Release; provided however, that Class Members who have timely excluded themselves from the Class shall not be enjoined from (a) proceeding with their individual actions, insofar as they are amenable to proof by evidence relevant exclusively to policies that were the subject of timely requests for exclusion; or (b) seeking discovery in connection with their individual actions, insofar as it relates directly to policies that were the subject of timely requests for exclusion and does not seek broader evidence of the alleged Company practices or patterns that are the subject of the Action and/or the Release; 16. ruling that any Class Member who does not submit a timely, written request for exclusion from the Class will be bound by all proceedings, orders and judgments in this Action relating to this Settlement Agreement, even if such Class Member has previously initiated or subsequently initiates individual litigation against the Company or other proceedings encompassed by the Release; 89 17. requiring each Class Member who wishes to object to the fairness, reasonableness or adequacy of this Settlement Agreement or the proposed settlement, or to the award of Attorneys' Fees and Expenses, to deliver to Lead Counsel and Defendant's Counsel and to file with the Court, no later than 40 days before the Fairness Hearing, or at such other time as the Court may direct, a statement of his or her objection, as well as the specific reasons, if any, for each objection, including any legal support the Class Member wishes to bring to the Court's attention and any evidence the Class Member wishes to introduce in support of his or her objection, or be forever barred from separately objecting; 18. requiring any attorney hired by a Class Member at the Class Member's expense for the purpose of objecting to this Settlement Agreement, the proposed settlement, or the award of Attorneys' Fees and Expenses, to file with the Clerk of Court and deliver to Lead Counsel and Defendant's Counsel a notice of appearance no later than 40 days before the Fairness Hearing, or as the Court otherwise may direct; 19. requiring any Class Member who files and serves a written objection and who intends to make an appearance at the Fairness Hearing, either in person or through personal counsel hired at the Class Member's expense, to deliver to Lead Counsel and Defendant's Counsel and file with the Court no later than 40 days before the Fairness Hearing, or as the Court otherwise may direct, a notice of intention to appear; 20. directing the Company or its designated agents to rent one or more post-office boxes in the name of the Clerk of the Court, to be used for receiving requests for exclusion, objections and any other communications including Claim Forms, and 90 providing that, other than the Court or the Clerk of Court, only the Company, Lead Counsel and their designated agents shall have access to such post-office boxes; 21. directing Defendant's Counsel and Lead Counsel, and any other counsel for Plaintiffs or the Class, promptly to furnish each other with copies of any and all objections or written requests for exclusion that might come into their possession; 22. providing a means for those filing objections to obtain access at their own expense, at Lead Counsel's office, to the documents disclosed by Defendant through discovery to Plaintiffs' counsel in this Action, and also to deposition transcripts and exhibits thereto in this Action, provided that such individuals shall not be given access to these materials unless and until they enter into the Stipulation of Confidentiality and all Protective Orders entered and to be entered in the Action, as described above in Section XIII.B; and 23. containing any additional provisions that might be necessary to implement and administer the terms of this Settlement Agreement and the proposed settlement. C. Neither Karl M. Thompson, Lucile Ellis, Charlene McCallop, Marguerite Guillmette Justin, Adrienne Delpit Blazio, Myron Billups nor any other named Plaintiff will request exclusion from the Class, object to the proposed settlement, or file an appeal from or otherwise seek review of any order approving the proposed settlement. 91 XVII. FINAL APPROVAL, AND FINAL JUDGMENT AND ORDER APPROVING SETTLEMENT A. After the Fairness Hearing, and upon the Court's approval of this Settlement Agreement, the Parties shall seek and obtain from the Court a Final Judgment and Order Approving Settlement, which shall, among other things: 1. find that the Court has personal jurisdiction over all Class Members and that the Court has subject matter jurisdiction to approve this Settlement Agreement and all exhibits thereto; 2. approve this Settlement Agreement and the proposed settlement as fair, reasonable and adequate, consistent and in compliance with all applicable requirements of the Federal Rules of Civil Procedure, the United States Constitution (including the Due Process Clause), the Rules of the Court and any other applicable law, and in the best interests of each of the Parties and the Class Members; direct the Parties and their counsel to implement and consummate this Settlement Agreement according to its terms and provisions; and declare this Settlement Agreement to be binding on - and, as to all claims and issues that have or could have been raised in this Action, to have res judicata and other preclusive effect in all pending and future lawsuits or other proceedings encompassed by the Release maintained by or on behalf of - Plaintiffs and all other Class Members, as well as their heirs, executors and administrators, successors and assigns; 3. finally certify the Class for settlement purposes; 92 4. find that the Class Notice Package, Publication Notice and other media notice implemented pursuant to this Settlement Agreement (i) constituted the best practicable notice, (ii) constituted notice that was reasonably calculated, under the circumstances, to apprise Class Members of the pendency of the Action, their right to object to or exclude themselves from the proposed settlement and their right to appear at the Fairness Hearing, (iii) were reasonable and constituted due, adequate and sufficient notice to all persons entitled to receive notice, and (iv) met all applicable requirements of the Federal Rules of Civil Procedure, the United States Constitution (including the Due Process Clause), the Rules of the Court and any other applicable law; 5. find that Lead Counsel and the Class representatives adequately represented the Class for purposes of entering into and implementing the settlement; 6. dismiss the Action (including all individual claims and Class claims presented thereby) on the merits and with prejudice, without fees or costs to any Party except as provided in this Settlement Agreement; 7. incorporate the Release set forth above in Section XIV, make the Release effective as of the date of the Final Judgment and Order Approving Settlement, and forever discharge the Releasees from any claims or liabilities arising from or related to the matters in the Release; 8. permanently bar and enjoin all Class Members who have not been timely excluded from the Class with respect to a Policy from (i) filing, commencing, prosecuting, maintaining, intervening in, participating in (whether individually, as class members or otherwise), or receiving any benefits or other relief from any other lawsuit or 93 arbitration, or receiving any individual benefits from any administrative, regulatory or other proceeding or order, in any jurisdiction based on or relating to the claims and causes of action, or the facts and circumstances relating thereto, in this Action and/or the Release as to that Policy, and (ii) organizing such nonexcluded Class Members into a separate class for purposes of pursuing as a purported class action (including by seeking to amend a pending complaint to include class allegations, or by seeking class certification in a pending action) any lawsuit based on or relating to the claims and causes of action, and/or the facts and circumstances relating thereto, in this Action and/or the Release as to that Policy; 9. permanently bar and enjoin all persons from asserting or maintaining any claims, pursuing any discovery from Metropolitan Life or any third party, presenting evidence, or claiming any damages, whether compensatory or punitive, based on or encompassing, in whole or in part, the alleged Company practices and patterns that are the subject of the Action and/or the Release; provided however, that Class Members who have timely excluded themselves from the Class shall not be enjoined from (a) proceeding with their individual actions, insofar as they are amenable to proof by evidence relevant exclusively to policies that were the subject of timely requests for exclusion; or (b) seeking discovery in connection with their individual actions, insofar as it relates directly to policies that were the subject of timely requests for exclusion and does not seek broader evidence of the alleged Company practices or patterns that are the subject of the Action and/or the Release; 94 10. authorize the Parties, without further approval from the Court, to agree to and adopt such amendments, modifications and expansions of this Settlement Agreement and all exhibits attached to the Settlement Agreement as (i) are not materially inconsistent with the Final Judgment and Order Approving Settlement and (ii) do not limit the rights of Class Members under the Settlement Agreement; 11. authorize the Company, in consultation with Lead Counsel and without approval from the Court, to implement the settlement before the Final Settlement Date, in which case all provisions in this Settlement Agreement that specify actions to be taken on or after the Final Settlement Date shall, to the extent necessary, be deemed to provide that those actions shall be taken on or after the date on which the Company elects to implement the Settlement Agreement; 12. confirm that no person or entity who is not a Class Member shall receive any benefit under this settlement, unless such person or entity first agrees to be bound by the terms of the Release in Section XIV hereto as to the Policy for which relief is received; 13. require anyone seeking to appeal from the Court's rulings to post an appropriate bond; 14. require that, in the event that the Company determines to implement the settlement before the Final Settlement Date, anyone seeking to appeal from the Court's rulings must first (i) request to intervene upon a representation of inadequacy of counsel and (ii) request a stay of implementation of the settlement and, absent satisfaction of each of these requirements and the posting of an appropriate bond, authorize the 95 Company to proceed with implementation of the settlement, even if such implementation would moot the appeal; 15. without affecting the finality of the Final Judgment and Order Approving Settlement for purposes of appeal, retain jurisdiction as to all matters relating to the administration, consummation, enforcement and interpretation of this Settlement Agreement and the Final Judgment and Order Approving Settlement, and for any other necessary purpose; provided however, that nothing in this Section shall restrict the ability of the Parties to exercise their rights under Sections XVII.A.10 and XVII.A.11 above; and 16. incorporate any other provisions that the Court deems necessary and just. XVIII. MODIFICATION OR TERMINATION OF THIS AGREEMENT A. The terms and provisions of this Settlement Agreement may be amended, modified or expanded by agreement of the Parties and approval of the Court; provided however, that after entry of the Final Judgment and Order Approving Settlement the Parties may by agreement effect such amendments, modifications or expansions of this Settlement Agreement and its implementing documents (including all exhibits to the Settlement Agreement) without notice to or approval by the Court if such changes are not materially inconsistent with the Court's Final Judgment and Order Approving Settlement and do not limit the rights of Class Members under the Settlement Agreement. B. The Company, in consultation with Lead Counsel and without approval of the Court, may implement the terms of the settlement after entry of the Final Judgment and 96 Order Approving Settlement but before the Final Settlement Date, in which case all provisions in this Settlement Agreement that specify actions to be taken on or after the Final Settlement Date shall, to the extent necessary, be deemed to provide that those actions shall be taken on or after the date on which the Company elects to implement the Settlement Agreement. C. This Settlement Agreement will terminate at the sole option and discretion of Defendant or Plaintiffs if (i) the Court, or any appellate court(s), rejects, modifies or denies approval of any portion of this Settlement Agreement or the proposed settlement that the terminating Party in its (or their) sole judgment and discretion reasonably determine(s) is material, including, without limitation, the terms of relief, the findings of the Court, the provisions relating to notice, the definition of the Class and/or the terms of the Release, or (ii) the Court, or any appellate court(s), does not enter or completely affirm, or alters or expands, any portion of the Final Judgment or Order Approving Settlement, or any of the Court's findings of fact or conclusions of law as proposed by Defendant's Counsel and Lead Counsel, that the terminating Party in its (or their) sole judgment and discretion believe(s) is material. The terminating Party must exercise the option to withdraw from and terminate this Settlement Agreement, as provided in this Section no later than 20 days after receiving notice of the event prompting the termination. D. Notwithstanding the preceding Section XVIII.C, Plaintiffs may not terminate this Settlement Agreement solely because of the amount or distribution of Attorneys' Fees and Expenses awarded by the Court or any appellate court(s). Defendant, however, 97 may elect to terminate this Settlement Agreement if the amount of Attorneys' Fees and Expenses awarded exceeds any amount that, before the Fairness Hearing, it has agreed not to oppose. E. Defendant may unilaterally withdraw from and terminate this Settlement Agreement if those persons or entities who elect to exclude themselves from the Class with respect to any Policy or Policies together are Holders or Estate Holders of more than 20,000 Policies. 1. The Company's option to withdraw from and terminate this Settlement Agreement under this Section XVIII.E shall arise only if, in combination, requests for exclusion have been submitted for 20,000 Policies that are, in combination, (i) Database Policies and (ii) other life insurance policies for which the Application File confirms the policy's status as a Policy. 2. The Company's option to withdraw from and terminate this Settlement Agreement under this Section XVIII.E shall be exercised no later than 14 days preceding the Fairness Hearing. 3. If the Company exercises its termination option under this Section XVIII.E above, then Lead Counsel shall be given access to the numbers for all Policies for which exclusion requests have been received, and also to the Application Files for all excluded Policies (other than Database Policies). Based on its review of this information, Lead Counsel may argue to the Court that the Company is not entitled to exercise the termination rights under this Section XVIII.E above. The Court's Fairness Hearing shall 98 be continued to permit Lead Counsel to conduct the review contemplated by this Section XIII.E.3. F. If an option to withdraw from and terminate this Settlement Agreement arises under Sections XVIII.C through XVIII.E, (i) neither Defendant nor Plaintiffs will be required for any reason or under any circumstance to exercise that option, and (ii) any exercise of that option shall be made in good faith. G. If this Settlement Agreement is terminated pursuant to Sections XVIII.C, XVIII.D, and/or XVIII.E, then: 1. this Settlement Agreement shall be null and void and shall have no force or effect, and no Party to this Settlement Agreement shall be bound by any of its terms, except for the terms of this Section XVIII.G and Section XIX.C, below; 2. this Settlement Agreement, all of its provisions, and all negotiations, statements and proceedings relating to it shall be without prejudice to the rights of Defendant, Plaintiffs or any other Class Member, all of whom shall be restored to their respective positions existing immediately before the execution of this Settlement Agreement; 3. Defendant and its current and former directors, officers, Producers, employees, agents, attorneys and representatives expressly and affirmatively reserve all defenses, arguments and motions as to all claims that have been or might later be asserted in the Action, including (without limitation) any applicable statutes of limitation, statutes of repose, or other prescriptive periods and the argument that the Action may not be litigated as a class action; 99 4. Plaintiffs and their current and former predecessors, successors, heirs, agents, attorney, representatives or assigns expressly and affirmatively reserve all motions as to, and arguments in support of, all claims that have been or might later be asserted in the Action, including (without limitation) any argument concerning class certification and/or punitive damages; 5. neither this Settlement Agreement, nor the fact of its having been made, shall be admissible or entered into evidence for any purpose whatsoever; and 6. any order or judgment entered after the date of this Settlement Agreement will be deemed vacated and will be without any force or effect. XIX. GENERAL MATTERS AND RESERVATIONS A. The obligation, although not the ability, of the Parties to conclude the proposed settlement is and will be contingent upon each of the following: 1. authorization by the Board of Directors of Metropolitan Life Insurance Company of entry into this Settlement Agreement; 2. the resolution, acceptable to Defendant, of any regulatory investigation or inquiry by the New York State Insurance Department arising out of, or relating to the relief to be provided under, the proposed settlement (to this end, Defendant agrees to seek any necessary approval of the New York State Insurance Department relating to the relief not later than 20 days before the Fairness Hearing); 3. entry by the Court of the Final Judgment and Order Approving Settlement, from which order the time to appeal has expired or which has remained unmodified after any appeal(s); and 100 4. any other conditions stated in this Settlement Agreement. B. The Parties and their counsel agree to keep the existence and contents of this Settlement Agreement and all related negotiations confidential until the date of the first public announcement by the Company; provided however, that this Section shall not prevent earlier disclosure of such information to regulators, rating agencies, insurers or reinsurers, financial analysts, Producers, or any other person or entity (such as experts, courts, and/or Administrators) to whom the Parties agree disclosure must be made to effectuate the terms and conditions of this Settlement Agreement. C. One year after the Final Settlement Date or promptly after termination of this Settlement Agreement, whichever comes first (unless the time is extended by agreement of the Parties), Plaintiffs and their counsel will return to Defendant's Counsel all documents (and all copies of such documents in whatever form made or maintained) produced by Defendant in this Action, as well as all transcripts of and exhibits to any deposition testimony provided by Defendant or their current or former officers, employees or Producers (and all copies of such documents in whatever form made or maintained). D. The Company's execution of this Settlement Agreement shall not be construed to release - and the Company expressly does not intend to release - any claim the Company may make against any insurer for any cost or expense incurred in connection with this Settlement Agreement, including attorneys' fees and costs. E. Lead Counsel represents that (a) it is authorized to enter into this Settlement Agreement on behalf of Plaintiffs and any other attorneys who now represent Plaintiffs in 101 this Action with respect to the claims in this Action, and (b) it is seeking to protect the interests of the entire Class. F. Plaintiffs represent and certify that (i) they have agreed to serve as a representative of the Class proposed to be certified herein; (ii) they are willing, able and ready to perform all of the duties and obligations of representatives of the Class, including, but not limited to, being available for, and involved in, discovery and fact finding; (iii) they have read the pleadings in this Action, including the Amended Complaint, or have had the contents of such pleadings described to them; (iv) they are familiar with the results of the fact-finding undertaken by Lead Counsel; (v) they have been kept apprised of the progress of the Action and/or the settlement negotiations among the Parties, and have either read this Settlement Agreement, including the exhibits attached to the Settlement Agreement, or have received a detailed description of it from Plaintiffs' Counsel, and they have agreed to its terms; (vi) they have consulted with Lead Counsel - and/or other Plaintiffs' counsel of record - about the Action, this Settlement Agreement and the obligations imposed on a representative of the Class; (vii) they have authorized Lead Counsel to execute this Settlement Agreement on their behalf; and (viii) they will remain and serve as representatives of the Class until the terms of this Settlement Agreement are effectuated, this Settlement Agreement is terminated in accordance with its terms, or the Court at any time determines that said Plaintiffs cannot represent the Class. 102 G. Lawrence A. Vranka represents that he is authorized to enter into this Settlement Agreement on behalf of Defendant and any attorneys who have represented or who now represent Defendant in the Action. H. This Settlement Agreement sets forth the entire agreement among the Parties with respect to its subject matter, and it may not be altered or modified except by written instrument executed by Lead Counsel and Defendant's Counsel. This Settlement Agreement supercedes any prior agreement, understanding, or undertaking (written or oral) by and between the Parties regarding the subject matter of this Settlement Agreement. I. This Settlement Agreement and any ancillary agreements shall be governed by and interpreted according to the law of the State of New York, excluding its conflict-of-laws provisions. J. Any action to enforce this Settlement Agreement shall be commenced and maintained only in this Court. Without in any way compromising the finality of its Final Judgment or Order Approving Settlement, the Court shall retain jurisdiction over the implementation, administration, and conduct of this settlement and the interpretation, construction, and enforcement of this Settlement Agreement. K. Whenever this Settlement Agreement requires or contemplates that one Party shall or may give notice to the other, notice shall be provided by facsimile and/or next-day (excluding Sunday) express delivery service as follows: 103 1. If to Defendant, then to Kaiper Wilson, Esq. Metropolitan Life Insurance Company Law Department One Madison Avenue New York, New York 10010 Telephone: (212) 578-8743 Facsimile: (212) 251-1514 and Bruce E. Yannett, Esq. Debevoise & Plimpton 919 Third Avenue New York, New York 10022 Telephone: (212) 909-6000 Facsimile: (212) 909-6836 2. If to Plaintiffs, then to John J. Stoia, Jr., Esq. Milberg Weiss Bershad Hynes & Lerach LLP 401 B Street, Suite 1700 San Diego, California 92101 Telephone: (619) 231-1058 Facsimile: (619) 231-7423 and Andrew S. Friedman, Esq. Bonnett, Fairbourn, Friedman & Balint, P.C. 2901 North Central Avenue, Suite 1000 Phoenix, Arizona 85012-3311 Telephone: (602) 274-1100 Facsimile: (602) 274-1199 L. All time periods set forth herein shall be computed in calendar days unless otherwise expressly provided. In computing any period of time prescribed or allowed by this Settlement Agreement or by order of court, the day of the act, event, or default from 104 which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday or a legal holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the office of the clerk of the court inaccessible, in which event the period shall run until the end of the next day that is not one of the aforementioned days. As used in this Section, "legal holiday" includes New Year's Day, Birthday of Martin Luther King, Jr., Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, Christmas Day and any other day appointed as a holiday by the President or the Congress of the United States, or by the State of New York, where the Court is located. M. The Parties reserve the right, subject to the Court's approval, to make any reasonable extensions of time that might be necessary to carry out any of the provisions of this Settlement Agreement. N. All Parties agree that this Settlement Agreement was drafted by counsel for the Parties during extensive arm's-length negotiations, and that no parol or other evidence may be offered to explain, construe, contradict or clarify its terms, the intent of the Parties or their counsel, or the circumstances under which the Settlement Agreement was made or executed. O. In no event shall the Settlement Agreement, any of its provisions or any negotiations, statements or court proceedings relating to its provisions in any way be construed as, offered as, received as, used as or deemed to be evidence of any kind in this Action, any other action, or any judicial, administrative, regulatory or other proceeding, 105 except a proceeding to enforce this Settlement Agreement. Without limiting the foregoing, neither this Settlement Agreement nor any related negotiations, statements or court proceedings shall be construed as, offered as, received as, used as or deemed to be evidence or an admission or concession of any liability or wrongdoing whatsoever on the part of any person or entity, including but not limited to Defendant, or as a waiver by Defendant of any applicable defense, including without limitation any applicable statute of limitations or statute of frauds, or as a concession by Plaintiffs or the Class that any claims, causes of action or remedies, including punitive damages, lack merit. P. Defendant expressly denies any wrongdoing alleged in the pleadings and does not admit or concede any actual or potential fault, wrongdoing or liability in connection with any facts or claims that have been or could have been alleged against it in the Action, but considers it desirable for the Action to be settled and dismissed because this settlement will (i) provide substantial benefits to the Company's present and former policyowners, insureds and beneficiaries, (ii) avoid the substantial expense and the further disruption of the management and operation of the Company's business due to the pendency and defense of the Action and (iii) finally put Plaintiffs' claims and the underlying matters to rest. Q. Plaintiffs expressly affirm that the allegations contained in the Amended Complaint were made in good faith and have a basis in fact, but consider it desirable for the Action to be settled and dismissed because of the substantial benefits that the proposed settlement will provide to the Company's present and former policyowners. 106 R. Neither this Settlement Agreement nor any of the relief to be offered under the proposed settlement shall be interpreted to alter in any way the contractual terms of any Policy, or to constitute a novation of any Policy. S. No opinion concerning the tax consequences of the proposed settlement to individual Class Members is being given or will be given by the Company, Defendant's Counsel or Plaintiffs' Counsel; nor is any representation or warranty in this regard made by virtue of this Settlement Agreement. The Class Notice will direct Class Members to consult their own tax advisors regarding the tax consequences of the proposed settlement, including any payments, contributions or credits provided hereunder, and any tax reporting obligations they may have with respect thereto. Each Class Member's tax obligations, and the determination thereof, are the sole responsibility of the Class Member, and it is understood that the tax consequences may vary depending on the particular circumstances of each individual Class Member. T. The Parties, their successors and assigns, and their attorneys undertake to oversee and implement the terms of this Settlement Agreement in good faith, and to use good faith in resolving any disputes that may arise in the implementation of the terms of this Settlement Agreement. U. The Parties, their successors and assigns, and their attorneys agree to cooperate fully with one another in seeking court approval of this Settlement Agreement and to use their best efforts to effect the prompt consummation of this Settlement Agreement and the proposed settlement. 107 V. This Settlement Agreement may be signed in counterparts, each of which shall constitute a duplicate original. Agreed to this 29th day of August, 2002. APPROVED AND AGREED TO BY AND ON BEHALF OF KARL M. THOMPSON, LUCILE ELLIS, CHARLENE MCCALLOP, MARGUERITE GUILLMETTE JUSTIN, ADRIENNE DELPIT BLAZIO, MYRON BILLUPS (AS ADMINISTRATOR OF THE ESTATE OF NELLIE GILLESPIE), IN THEIR INDIVIDUAL AND REPRESENTATIVE CAPACITIES By: /s/ John J. Stoia, Jr. ___________________________________________ JOHN J. STOIA, JR, ESQ. MILBERG WEISS BERSHAD HYNES & LERACH LLP /s/ Andrew S. Friedman ____________________________________________ ANDREW S. FRIEDMAN, ESQ. BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. /s/ Steven J. Lane ____________________________________________ STEVEN J. LANE, ESQ. HERMAN HERMAN KATZ & COTLAR, LLP LEAD COUNSEL FOR PLAINTIFFS APPROVED AND AGREED TO BY AND ON BEHALF OF METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Lawrence A. Vranka ____________________________________________ LAWRENCE A. VRANKA VICE PRESIDENT METROPOLITAN LIFE INSURANCE COMPANY 108 EX-10.3 5 y65151exv10w3.txt SEPARATION AGREEMENT Exhibit 10.3 SEPARATION AGREEMENT, WAIVER AND GENERAL RELEASE This Separation Agreement, Waiver and General Release ("Agreement") is entered into this 16th day of July, 2002 by and between Metropolitan Life Insurance Company ("MetLife"), and James M. Benson ("Benson"). WHEREAS, Benson was employed by New England Life Insurance Company, a subsidiary of MetLife, pursuant to an Executive Employment Agreement dated June 16, 1997 ("Employment Agreement"); and WHEREAS, Benson's Employment Agreement expired by its terms on June 15, 2000 and Benson has thereafter continued in an employment relationship with MetLife on an employment-at-will basis; and WHEREAS, MetLife and Benson have determined to end the employment relationship and exchange valuable consideration on the basis of the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements set forth herein, it is hereby agreed as follows: 1. Benson's employment with MetLife will terminate effective July 31, 2002 ("Termination Date"). He agrees that he will act in a manner consistent with the provisions set forth in this Agreement from the date of its execution until the Termination Date. Effective July 31, 2002, Benson shall resign from any and all positions that he may hold as an officer, trustee or member of the Board of Directors of any Company entity, and shall execute whatever documentation is necessary to accomplish such resignations. MetLife shall document Benson's separation as a voluntary resignation from employment for purposes of Benson's personnel file, external communications and communications with any and all governmental and regulatory authorities, such as the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and the Association for Investment Management & Research. 2. As of the Termination Date, those provisions of the Employment Agreement that were to extend beyond the termination date of the Employment Agreement will become null and void. This Agreement will establish all the terms and conditions that shall continue to govern the relationship between Benson and MetLife, and except as otherwise provided in this Agreement or as required by law, Benson's compensation and benefits from the Company shall end on the Termination Date. 3. In exchange for the consideration recited in this Agreement, including the General Release set forth in Paragraph 11 of this Agreement, and in full satisfaction of any and all obligations to Benson under the Employment Agreement or any other obligations, MetLife will pay to Benson, subject to the terms and conditions of this Agreement, the sum of $3,100,000 (net of any withholding of taxes required by law) within five business days of July 31, 2002; and (ii) purchase an annuity that will provide Benson with the sum of $400,000 per year starting at his age 62, which annuity will feature a 20 year term certain and otherwise be payable for Benson's life. Benson acknowledges that the payments and other consideration provided for under this Agreement are in exchange for the waiver of any rights he may have under the Employment Agreement or any plan or program offered by MetLife and provide good and adequate consideration for the waiver provided in this Agreement. Benson further agrees that the payments provided to him in this Paragraph 3 are conditioned upon his compliance with his undertakings set forth herein, including those set forth in Paragraphs 4, 5, 6, 7, 8 and 9 below. 4. No later than the Termination Date, Benson shall deliver to the person designated by MetLife to receive same, all information, documents and other materials (including but not limited to manuals, correspondence, reports, records, memoranda, notes, videotapes, audio tapes, disks, cd-roms, and any copies or transcripts of the foregoing) concerning or in any way relating to Benson's employment with MetLife, or the Company's business or operations, that Benson is aware of that are in Benson's custody, possession or control, except that nothing in this Agreement shall preclude Benson from retaining documents and other materials that are purely personal in nature. Benson shall not be in violation of this Paragraph 4 unless his failure to return any such documents or materials is willful and he fails to do so within 48 hours after discovery of such documents or materials. Likewise, if MetLife is or becomes aware of any documents or materials covered by this Paragraph 4 that are not returned, it shall provide written notice to Benson and Benson shall return such documents or materials within 48 hours of such request. 5. No later than the Termination Date, Benson shall deliver to the person designated by MetLife to receive same, all property of the Company, including all keys, records and information belonging to the Company in tangible form (including any documents, memoranda and/or files, stored in whatever media) and/or equipment, identification cards, books, notes, recordings, and all copies or 2 transcripts thereof. Benson shall not be in violation of this Paragraph 5 unless his failure to return any such property is willful and he fails to do so within 48 hours after discovery of such property. Likewise, if MetLife is or becomes aware of any property covered by this Paragraph 5 that is not returned, it shall provide written notice to Benson and Benson shall return such property within 48 hours of such request. 6. The existence, terms and conditions of this Agreement are and shall be deemed to be fully confidential and shall not hereafter be disclosed by Benson or the Company to any other person or entity, except as may be required by law, as may be required by the Internal Revenue Service or any other governmental authority, and except that Benson may disclose the existence, terms and conditions of this Agreement to his attorneys, accountants, immediate family members, lenders and/or financial advisors and, with respect to prospective employers Paragraphs 7, 8, 9 and 10 of this Agreement, provided that he makes each such person to whom disclosure is made aware of the confidentiality of this Agreement and that person agrees to keep the terms of the Agreement confidential, and except that the Company may disclose the existence, terms and conditions of this Agreement within the Company and to its attorneys, accountants and auditors, and as otherwise appropriate in the conduct of the Company's business and affairs. Benson will give MetLife ten (10) days written notice in the event he is subpoenaed or otherwise required by law to disclose the existence or contents of this Agreement by mailing to MetLife's Law Department located at One Madison Avenue New York, New York a copy of any such legal demand for such information (or, if he is required to disclose this Agreement in less than ten (10) days, by overnight delivery to be delivered to the same address in advance of disclosing this Agreement). MetLife will give Benson ten (10) days written notice in the event it is subpoenaed or otherwise required by law to disclose the existence or contents of this Agreement by mailing to him at the address set forth in Paragraph 18 a copy of any such legal demand for such information (or, if it is required to disclose this Agreement in less than ten (10) days, by overnight delivery to be delivered to the same address in advance of disclosing this Agreement). 7. Benson agrees that he will not now and for a period of eighteen months after the Termination Date knowingly (i) directly or indirectly solicit any employee of the Company ("Employee") to become employed, associated or contracted by or with him or any entity in which he is an employee, owner, investor or otherwise associated ("Other Company"); (ii) directly or indirectly solicit any Employee to become employed, associated or contracted with an organization providing services to Benson or any Other Company; and (iii) interview an Employee for a job or engagement, or offer, authorize, approve or 3 agree to hire or engage an Employee for any job opportunity or similar engagement with him or any Other Company. 8. Benson agrees that he will not now and for a period of eighteen months after the Termination Date, to the extent permitted by law, intentionally interfere in the Company's business or try to disrupt the Company's business, whether by his own efforts, or indirectly through the efforts of others, and he will not use any MetLife information or property to assist him or others to do so. This prohibition includes but is not limited to wrongfully diverting business away from MetLife or seeking to have any MetLife customer reduce or terminate any insurance, annuity contract or program or any other product obtained from or through MetLife. 9. Benson and the Company each agree that neither will knowingly make statements that damage, disparage or otherwise diminish the reputation and business practices of the other. This includes statements made verbally, in writing or electronically. This provision shall not impair the ability of either Benson or the Company to introduce information that he or it believes is relevant to any lawsuit or other proceeding between or involving them both with respect to the subjects covered by this Agreement. If either Benson or the Company is required by process of law or otherwise required by regulatory or administrative process to provide information to any third party that it reasonably believes might be perceived by the other to represent a statement otherwise prohibited by this Paragraph, the party so required will give notice to the other on the same terms as provided in Paragraph 6. 10. Benson agrees to make himself available, at reasonable times and on reasonable notice from the Company and its counsel, for purposes of providing factual information and/or truthful testimony in connection with any investigation or any action, suit, complaint, claim, grievance, charge or proceeding of any kind, in any court, or with any self-regulatory organization, or before any administrative, governmental or investigative body or agency (whether public, quasi-public or private), in which the Company is a party or has an interest. The Company will reimburse Benson any reasonable expenses incurred related to his compliance with Paragraph 10. 11. Benson agrees, for himself and his relatives, heirs, executors, administrators, successors, and assigns that he hereby fully and forever releases and discharges MetLife, its parents, subsidiaries, affiliates, and agents and their respective past, present, and future directors, officers, employees, agents, representatives, employee benefits plans or funds (except as set forth below in this Paragraph 11) and the fiduciaries thereof, successors, and assigns (collectively, "the Company") from any and all claims, charges, demands, actions, liability, 4 damages, sums of money, back pay, front pay, attorneys' fees, or rights of any and every kind or nature, accrued or unaccrued, which Benson ever had, now has or may have, whether known or unknown, against the Company arising out of any act, omission, transaction, or occurrence up to and including the date Benson executes this Agreement including, but not limited to, (i) any claim arising out of or related to Benson's employment by the Company or the discontinuance thereof; (ii) any claims arising under or for breach of any provisions of the Employment Agreement, it being the intention of the parties to supersede all rights and obligations created or arising under all prior agreements, whether written or oral, including without limitation the Employment Agreement, with the terms and conditions set forth herein, (iii) any alleged violations of any federal, state, or local fair employment practice or benefits laws, or other employee relations statute, executive order, law, or ordinance, (iv) any alleged violations of any duty or other employment-related obligation or other obligations arising out of contract, tort, tortious course of conduct, libel or slander, defamation, public policy, law, or equity, (v) any claim on Benson's behalf in any action brought by any administrative agency or other party (including claims for back pay, front pay, damages, in whatever form, and for reinstatement), and (vi) any expectation, anticipation, right, or claim under the MetLife, Inc. 2000 Stock Incentive Plan or any other Company incentive compensation plan (including the Annual Variable Incentive Plan and the Long Term Performance Compensation Plan) or claim to any salary and bonuses. Benson acknowledges that, prior to his execution of this Agreement, he has been fully informed that his employment is being discontinued and that any and all claims arising from this discontinuance are included in this release. This Paragraph 11 is not intended to and does not release any claims to rights to indemnity that Benson may have for actions or inactions taken or not taken during his employment with MetLife or its affiliates. This Agreement does not affect any vested benefits or rights under employee benefit plans. Set forth in Attachment A is a list of the various plans offered by MetLife in which Benson participated or might have participated, including employee benefit plans under ERISA and other plans, and in those in which he participated, the amount of Benson's benefit or participation in such plan ("Benefit Amount.") This Agreement is not intended to, and does not, release any Benefit Amount. 12. Benson and MetLife acknowledge that each of them fully understands the terms of this Agreement and their significance, that each has signed it voluntarily and of his and its own free will, and that each intends to abide by its provisions without exception. 13. Benson acknowledges that this Agreement may not be changed except in a writing that specifically references this Agreement and that is signed by him and the Senior Executive Vice-President and Chief Administrative Officer of 5 MetLife. With the exception of the written stock option agreement into which Benson entered during his employment with MetLife granting him the option to purchase certain shares of MetLife, Inc. common stock, and the Agreement to Protect Corporate Property which he may have signed during his employment with MetLife, which remain in full force and effect, and the plans referenced in Attachment A, this Agreement constitutes the full understanding between Benson and MetLife regarding the subject matter hereof. Benson further acknowledges that no other promises or agreements of any kind have been made to him by any person or entity whatsoever to cause him to sign this Agreement, and that no other promises or agreements or any kind between him and the Company exist or survive the execution of this Agreement. 14. The making of this Agreement is not intended and shall not be construed as any admission that the Company has violated any federal, state or local law (statutory or decisional), ordinance or regulation, or has committed any wrong against Benson. 15. This Agreement may not be used as evidence in any proceeding, except in a proceeding in which one of the parties alleges a breach of the Agreement. 16. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and may be delivered to either party by facsimile, overnight carrier or United States mail, as follows: If to Benson: James M. Benson [redacted] [redacted] If to MetLife: 6 Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010 Attn: Lisa M. Weber Senior Executive Vice-President and Chief Administrative Officer Facsimile: 212-726-9069 18. This Agreement shall be governed by the laws of the state of New York, and shall be construed and enforced in all respects by the laws of the state of New York without regard to the conflict of laws principles thereof. 19. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect. However, the illegality or unenforceability of such provision shall have no effect upon, and shall not impair the enforceability of any other provision of this Agreement. 20. This Agreement is binding upon and shall inure to the benefit of the parties and each of their respective heirs, distributees, executors, administrators, personal representatives, successors and assigns. 21. In the event that any action, suit or other proceeding is instituted to enforce or interpret this Agreement, or to remedy, prevent or obtain relief from a breach of this Agreement, the prevailing party shall recover all of such party's costs and fees (including attorney's fees) incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom. James M. Benson /s/ James M. Benson July 16, 2002 - ------------------- ------------- Signature Date 7 Metropolitan Life Insurance Company By: /s/ Lisa M. Weber July 16, 2002 ----------------- ------------- Name: Lisa M. Weber Date ------------- Title: Senior Executive Vice-President ------------------------------- 8 EX-10.4 6 y65151exv10w4.txt METLIFE DEFERRED COMPENSATION PLAN Exhibit 10.4 MetLife Deferred Compensation Plan for Officers (as amended and restated effective October 22, 2002) 1. Purpose. The purpose of the Plan is to provide an opportunity for Participants to delay receipt of certain compensation until a later date, at which time payment of the compensation will be made after adjustment for the simulated investment experience of such compensation from date of deferral. 2. Plan Administration. ------------------- 2.1. The Plan Administrator shall administer the Plan. 2.2. The Plan Administrator may establish, amend, and rescind rules and regulations relating to the Plan, provide for conditions necessary or advisable to protect the interest of the MetLife Companies, construe all communications related to the Plan, and make all other determinations it deems necessary or advisable for the administration and interpretation of the Plan. 2.3. Determinations, interpretations, and other actions made by the Plan Administrator shall be final, binding, and conclusive for all purposes and upon all individuals. 2.4. The Plan Administrator may prescribe forms as the sole and exclusive means for Participants to take actions authorized or allowed under the Plan. The Plan Administrator may issue communications to Eligible Associates and Participants as it deems necessary or appropriate in connection with the Plan (including but not limited to communications explaining the risks and potential benefits of the Investment Tracking Funds). The Plan Administrator may, in its sole discretion, adjust the value of Deferred Compensation Accounts on a basis other than as prescribed in Deferral Elections or Reallocation Elections, including but not limited to the use of Investment Tracking Funds other than those selected by the Participant. 2.5. Except to the extent prohibited by law, Communication by the Plan Administrator (and by an Eligible Associate or Participant to the extent authorized by the Plan Administrator) of any document or writing, including any document or writing that must be executed by a party, may be in an electronic form of communication. 2.6. The Plan Administrator may appoint such agents, who may be officers or employees of a MetLife Company, as it deems necessary or appropriate to assist it in administering the Plan and may grant authority to such agents to execute documents and take action on its behalf. The Plan Administrator may consult such legal counsel, consultants, or other professional as it deems desirable and may rely on any opinion received from any such professional or from its agent. All expenses incurred in the administration of the Plan shall be paid by one or more of the MetLife Companies. 3. Eligibility to Participate. Each Officer shall be eligible to participate in this Plan; provided, however, that unless the Plan Administrator determines otherwise, no Officer who receives a payment pursuant to Section 13 of this Plan shall be eligible to participate in this Plan with regard to Compensation payable in any calendar year prior to the calendar year next beginning after the third anniversary of such payment pursuant to Section 13 is made. 4. Deferral Elections. ------------------ 4.1. Each calendar year at such time as is determined by the Plan Administrator, each Eligible Associate may complete a Deferral Election applicable to the Eligible Associate's Compensation payable in the following calendar year and submit such Deferral Election to the Plan Administrator. The Plan Administrator shall prescribe the form(s) of Deferral Election. 4.2. Each Deferral Election shall indicate (a) the percentage, in increments of 5%, or maximum dollar amount of base salary that would otherwise be paid the receipt of which the Eligible Associate wishes to defer into a Deferred Cash Compensation Account, which shall be no greater than 75% of base salary; (b) the percentage, in increments of 5%, or maximum dollar amount of Cash Incentive Compensation, by plan under which such Compensation may be payable, that would otherwise be paid the receipt of which the Eligible Associate wishes to defer into a Deferred Cash Compensation Account (provided, however, that if the Participant expresses a maximum dollar amount of Cash Incentive Compensation for deferral and the amount of Cash Incentive Compensation actually payable to the Participant is less than the maximum dollar amount specified, the Deferral Election shall be deemed to apply to the full amount of the Cash Incentive Compensation); (c) the percentage, in increments of 5%, of Stock Compensation that would otherwise be paid the receipt of which the Eligible Associate wishes to defer into a Deferred Stock Compensation Account; (d) the Investment Tracking Fund(s) which the Eligible Participant selects to adjust the value of the Deferred Cash Compensation Account and the value of the Matching Contribution Account, in increments of 5%; (e) the date on which the Eligible Participant wishes the payment of the Deferred Stock Compensation Account to begin; (f) the date on which the Eligible Participant wishes the payment of the Deferred Cash Compensation Account and Matching Contribution Account to begin; (g) whether the Deferred Compensation Accounts are to be paid in a single lump sum or annual installments; and (h) if the Deferred Compensation Accounts are to be paid in annual installments, the number (not to exceed fifteen (15)) of such installments. 4.3. Each Deferral Election that specifies any deferral of base salary in terms of a maximum dollar amount rather than in percentage terms must specify deferral of at least two hundred dollars ($200) of base salary per pay period. Each Deferral Election that specifies any deferral of Cash Incentive Compensation in terms of a maximum dollar amount rather than in percentage terms must specify deferral of at least five thousand dollars ($5,000) of Cash Incentive Compensation per year. 4.4. Each Deferral Election shall indicate the date(s) on which the Eligible Associate wishes the payment of a Deferred Compensation Account to begin by indicating either: (a) a single date certain that is no earlier than January 1 of the calendar year following the calendar year in which the third anniversary of the latest date any Compensation subject to the Deferral Election would have otherwise been paid; (b) the date of the Eligible Associate's Retirement Eligibility. 4.5. The Plan Administrator may, in its discretion, either reject or reform any Deferral Election not consistent with (a) this Section 4; (b) employer compliance with legal requirements (including those regarding sufficient tax withholding and those 2 regarding payroll taxation for FICA or otherwise); or (c) requirements for employee contributions or premium payments from compensation under the terms of any ERISA plan. 5. Investment Tracking. ------------------- 5.1. Except as provided in Section 2.4 of this Plan, the value of a Participant's Deferred Stock Compensation Account shall be adjusted using the MetLife Deferred Shares Fund as provided in Section 6.1 of this Plan, on the same basis as if the value of such Stock Compensation had been invested in MetLife Stock for such period(s) of time determined by the Deferral Election until it is payable. 5.2. Except as provided in Sections 2.4 and 5.1 of this Plan, the value of each Participant's Deferred Cash Compensation Account and Matching Contribution Account shall be adjusted to reflect the simulated investment performance using the Investment Tracking Funds selected by the Participant for purposes of such valuation in the Deferral Election, and those selected by the Participant in subsequent Reallocation Elections, on the same basis as if the value of such Deferred Compensation Accounts had been invested in such Investment Tracking Funds for such period(s) of time determined by the Deferral Election and any Reallocation Election until it is payable. 6. Investment Tracking Funds. The methods of Investment Tracking described in this Section 6 shall be available for Deferral Elections and Reallocation Elections. If this Section 6 is amended, the Plan Administrator may require the Participant to make an appropriate change in the Participant's Investment Tracking or make unilaterally impose a method of Investment Tracking with regard to such parts of a Participant's Deferred Compensation Accounts affected by that amendment. 6.1. MetLife Deferred Shares Fund. Subject to Section 14.5 of this Plan, value tracked in this Investment Tracking Fund shall be accounted in number of tracking shares equal to the number of shares of MetLife Stock deferred and adjusted to simulate the effect of each and any of the following on the Stock Compensation had it been paid in MetLife Stock: (a) dividend; (b) stock dividend; (c) stock split; (d) MetLife, Inc. recapitalization (including, but not limited, to the payment of an extraordinary dividend), (e) merger, consolidation, combination, or spin-off affecting MetLife, Inc. capitalization; (f) distribution of MetLife, Inc. assets to holders of MetLife Stock (other than ordinary cash dividends); (g) exchange of shares, or (h) other similar corporate change. Unless otherwise determined by the Plan Administrator, only the value of deferred Stock Compensation may be tracked in the MetLife Deferred Shares Fund. 6.2. Actively managed funds: Investment Tracking according to the changes in value of shares and simulated reinvested dividends and other distributions to share/accountholders in: 6.2.1. MetLife SIP Fixed Income Fund 6.2.2. Lord Abbett Bond Debenture Fund 6.2.3. Oakmark Fund(R) 3 6.2.4. MetLife SIP Fixed Income Fund 6.2.5. Oakmark International Portfolio 6.3. Market index funds: Investment Tracking according to the changes in value of shares in: 6.3.1. S&P 500 (R) Index 6.3.2. Russell 2000 (R) Index 6.3.3. Nasdaq Composite (R) Index 6.3.4. MSCI-EAFE (R) Index 6.3.5. Lehman Brothers (R) Aggregate Bond Index 6.3.6. Merrill Lynch US High Yield Master II Index 6.3.7. MSCI EMF Index sm 7. Reallocation Elections. ---------------------- 7.1. The Participant may change the Investment Tracking Funds used to adjust either (a) the value of new contributions to his/her Deferred Compensation Cash Account and credits to his/her Matching Contribution Account, from the date(s) Compensation is deferred rather than paid and any matching contributions are credited, as the case may be; and/or (b) the value of the Participant's existing Deferred Cash Compensation Account and Matching Contribution Account. 7.2. Unless otherwise determined by the Plan Administrator, a Reallocation Election shall be effective on the date it is received by the Plan Administrator, or on the following business day if it is received by the Plan Administrator at a time when the Plan Administrator determines it is not practicable or convenient to the operation of the Plan to apply such Reallocation on the date it is received. The number of Reallocation Elections by a Participant regarding each of items (a) and (b) of Section 7.1, respectively, shall not exceed six (6) in any calendar year. 8. Matching Contribution. A Participant's Matching Contribution Account shall be credited with the amount of matching contributions (if any) with which the Participant's SIP account would have been credited under the terms and provisions of SIP with relation to deferred Compensation had the Compensation not been deferred. 9. Beneficiary Designation. The Plan Administrator shall prescribe the form by which each Eligible Associate and Participant may designate a beneficiary or beneficiaries (who may be named contingently or successively, and among whom payments received under this Plan may be split as indicated by the individual) for purposes of receiving payment of Deferred Compensation Accounts under this Plan after the death of such individual. Each designation will be effective only upon its receipt by the Plan Administrator during the life of the individual making the designation and shall revoke all prior beneficiary designations by that individual related to this Plan. 4 10. Payment of Deferred Compensation Accounts. ----------------------------------------- 10.1. Amount. Except as provided in Section 2.4 of this Plan, the amount of payment(s) of each Deferred Compensation Account shall reflect the value of those Deferred Compensation Accounts through the date each payment of Deferred Compensation Accounts is payable, as adjusted for Investment Tracking. If payment of Deferred Compensation Accounts is to be made in installments, then the amount of each installment payment will be determined by dividing the value of each of the Deferred Compensation Accounts at the time each payment is due by the remaining number of installments in which the Deferred Compensation Accounts is to be paid. 10.2. Form. Except as provided in Section 14.5 of this Plan, payment of a Participant's Deferred Stock Compensation Account shall be made in the form of shares of MetLife Stock. The form of payment of all other Deferred Compensation Accounts shall be cash. 10.3. Timing and Number of Payments. ----------------------------- 10.3.1. If a Participant dies on any date prior to completion of all payments from a Participant's Deferred Compensation Accounts, the unpaid portions of the Participant's Deferred Compensation Accounts shall become immediately payable in a lump sum. 10.3.2. If the date on which payment of a Participant's Deferred Compensation Accounts is to begin, as specified in the Participant's Deferral Election, occurs prior to the Participant's Employment Discontinuance, then the Participant's Deferred Compensation Accounts shall be payable beginning on the date determined by the Participant's Deferral Election and in the number of payments determined by the Participant's Deferral Election; provided, however, that if the Participant's Employment Discontinuance occurs prior to the completion of all such payments, then all remaining Deferred Compensation Account shall be paid in a lump sum. 10.3.3. If the date on which payment of a Participant's Deferred Compensation Accounts is to begin, as specified in the Participant's Deferral Election, has not occurred prior to the Participant's Employment Discontinuance, and Participant is Retirement Eligible upon Employment Discontinuance (or upon the conclusion of the Participant's receipt of severance payments), then the Participant's Deferred Compensation Accounts shall be payable beginning on the date determined by the Participant's Deferral Election and in the number of payments determined by the Participant's Deferral Election. 10.3.4. If the date on which payment of a Participant's Deferred Compensation Accounts has not yet occurred, as specified in the Participant's Deferral Election, prior to the Participant's Employment Discontinuance, and the Participant (a) is not Retirement Eligible upon Employment Discontinuance; (b) is, at Employment Discontinuance, eligible to participate in a severance plan offered by a MetLife Company; and (c) will be deemed to be Retirement Eligible upon attaining age 55, then the Participant's Deferred Compensation Accounts shall be payable and in the number of payments determined by the Participant's Deferral Election beginning on the date determined by the Participant's Deferral Election; provided, 5 however, that if the Participant's Deferral Election specified payment upon Retirement Eligibility then the Participant's Deferred Compensation Accounts shall be payable upon the Participant's Employment Discontinuance. 10.3.5. If the date on which payment of a Participant's Deferred Compensation Accounts is to begin, as specified in the Participant's Deferral Election, has not occurred prior to the Participant's Employment Discontinuance, and neither Sections 10.3.3 nor 10.3.4 applies to the Participant, then the Participant's Deferred Compensation Accounts shall be payable in a lump sum upon the Participant's Employment Discontinuance, notwithstanding the Participant's Deferral Election. 10.3.6. Notwithstanding any of the other terms of this Section 10.3, distribution of amounts from a Participant's Matching Contribution Account shall not be made beginning on any date earlier than the date on which payments of Matching Contributions could have been payable under the terms of SIP. To the extent that the Participant's Matching Contribution Account is not payable on the earliest date(s) that the Participant's other Deferred Compensation Accounts become payable, in each case by virtue of this Section 10.3.6, the Matching Contribution Account shall be paid in a lump sum. 10.3.7. Notwithstanding any of the other terms of this Section 10.3, except Section 10.3.6, if a Participant's Deferred Compensation Accounts are payable pursuant to Section 12 or Section 13 of this Plan, payment shall be made in a single lump sum. 10.3.8. Notwithstanding any of the other terms of this Section 10.3, if a Participant's Deferred Compensation Accounts are otherwise payable upon Employment Discontinuance, but as of that date the Participant has been offered severance pay, then the Participant's Deferred Compensation Accounts shall be payable upon the later of (x) the Participant's date of Employment Discontinuance and (y) the date the final severance payment is made to the Participant by a MetLife Company or an Affiliate. Notwithstanding the foregoing, if this Section 10.3.8 applies, the Plan Administrator may, in its sole discretion, determine that the Deferred Compensation Accounts are payable on any date after the Participant's date of Employment Discontinuance. 10.3.9. Payment(s) of a Participant's Deferred Compensation Accounts shall be made as soon as practicable after they are payable, as determined by the Plan Administrator. 10.4. To Whom Paid. Except as otherwise provided in this Section 10.4 of this Plan, all payments of a Participant's Deferred Compensation Accounts will be made to the Participant. If a Participant dies on any date prior to the date of the completion of all such payments, all unpaid value in the Participant's Deferred Compensation Accounts shall be paid to the beneficiary designated for that purpose by the Participant. If the Participant's designated beneficiary has not survived the Participant, or the Participant has designated no beneficiary for purposes of this Plan, such payment will be made to the Participant's surviving spouse, if any, or if the Participant has no spouse to the Participant's estate. 6 10.5. Withholding. Withholding of taxes and other items required by law shall be made from each payment of a Participant's Deferred Compensation Account. 11. Loans and Assignments. The Plan shall make no loan, including any loan on account of any Deferred Compensation Account, to any Participant or any other person nor permit any Deferred Compensation Account to serve as the basis or security for any loan to any Participant or any other person. No Participant or any other person may sell, assign, transfer, pledge, commute, or encumber any Deferred Compensation Account or any other rights under this Plan. 12. Hardship Accommodations. Upon the written request of an Eligible Associate or Participant, the Plan Administrator may, in its sole discretion and in light of any facts or considerations it deems appropriate, suspend the deferral of receipt of Compensation by the Eligible Associate or Participant pursuant to a Deferral Election and/or accelerate the payment of all or a portion of the Participant's Deferred Compensation Accounts on the grounds of a hardship need of the Participant. The total amount of deferrals suspended or payment advanced cannot exceed the amount required to satisfy the financial consequences of the hardship. The Plan Administrator shall provide the Eligible Associate or Participant with written notice of its determinations in response to the Eligible Associate's or Participant's request. 13. Accelerated Payment. A Participant shall, upon written request, be paid ninety per cent (90%) of the value of the Participant's Deferred Compensation Accounts but shall forfeit ten per cent (10%) of the value of the Participant's Deferred Compensation Accounts. Each participant receiving such a payment under this Section 13 shall be ineligible to participate in this Plan for such time as provided in Section 3 of this Plan. 14. Change of Control. ----------------- 14.1. The Plan Administrator shall transmit to each Eligible Associate communications and documents necessary for each Participant to complete a Change of Control Election applicable to the Participant's Deferred Compensation Accounts. 14.2. Each Change of Control Election shall indicate whether the Participant wishes payment of Deferred Compensation Accounts to be made under the circumstances described in Section 14.4 of this Plan. 14.3. Upon the occurrence of a Change of Control, Section 2.3 of this Plan shall no longer be applicable to any rights, including accrued Deferred Compensation Accounts, existing in favor of any Participant as of the date before the Change of Control. 14.4. Upon the occurrence of both (a) a Change of Control and (b) a Participant's Employment Discontinuance on or after the Change of Control but before the second anniversary of the Change of Control, payment of all Deferred Compensation Accounts shall be made in a lump sum to the Participant if the Participant's Change of Control Election specifies that payment shall be made in such circumstances. 14.5. Upon a Change of Control, the value of a Participant's Deferred Stock Compensation Account shall immediately be determined using the Fair Market Value price of MetLife Stock on the date of the Change of Control. Thereafter, the value of the 7 Participant's Deferred Stock Compensation Account shall be adjusted, and the form of payment of the Deferred Stock Compensation Account shall be in a form, each as determined prior to the Change of Control by the Plan Administrator on a basis the Plan Administrator determines is reasonable in light of the Change of Control. If the Plan Administrator makes no determination pursuant to the foregoing prior to the Change of Control, after a Change of Control the value of the Participant's Deferred Stock Compensation Account shall be adjusted, and the form of payment of the Deferred Stock Compensation Account shall be in a form, each on a basis as is selected by the Participant from among the same alternatives available at the time to the Participant with regard to the Deferred Cash Compensation Account. 15. Nature of Liability. All Deferred Compensation Accounts accrued under this Plan on or after January 1, 2003 are unsecured obligations of MetLife, Inc. and any successor thereto, are neither obligations, debts, nor liabilities of any other entity or party. This Plan and the liabilities created hereunder are unfunded. Investment Tracking, any other means for adjusting the value of Deferred Compensation Accounts, and any communication or documentation regarding this Plan or any Participant's Deferred Compensation are for recordkeeping purposes only and do not create any right, property, security, or interest in any assets of MetLife, Inc. or any other party. All Deferred Compensation Accounts accrued under this Plan on or after January 1, 2003 are subject to the claims of general creditors of MetLife, Inc; all Deferred Compensation Accounts accrued under this Plan prior to January 1, 2003 are subject to the claims of general creditors of the company liable for such Deferred Compensation Accounts. Notwithstanding the foregoing, if any MetLife Company employing a Participant ceases to be an Affiliate, the Plan Administrator may determine on or before the date of the transaction in which the MetLife Company ceased to be an Affiliate (or afterward, with the consent of an officer of MetLife, Inc.), that the liabilities associated with some or all of the employees of that MetLife Company who are Participants shall transfer from MetLife, Inc. to that MetLife Company as of the date that MetLife Company ceases or ceased to be an Affiliate. 16. No Guarantee of Employment; No Limitation on Employer Action. Nothing in this Plan shall interfere with or limit in any way the right of any employer to establish the terms and conditions of employment of any individual, including but not limited to compensation and benefits, or to terminate the employment of any individual, nor confer on any individual the right to continue in the employ of any employer. Nothing in this Plan shall limit the right of any employer to establish any other compensation or benefit plan. No Deferred Compensation Account shall be treated as compensation for purposes of a Participant's right under any other plan, policy, or program, except as stated or provided in such plan, policy, or program. Nothing in this Plan shall be construed to limit, impair, or otherwise affect the right of any entity to make adjustments, reorganizations, or changes to its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part of its business or assets. 17. Term of Plan. This Plan shall be effective in this restated form upon its approval by the Board of Directors of Metropolitan Life Insurance Company, and shall continue in effect unless and until it is terminated pursuant to its terms. 8 18. Governing Law. The Plan shall be construed in accordance with and governed by New York law, without regard to principles of conflict of laws. 19. Entire Plan; Third Party Beneficiaries. This Plan document is the entire expression of the Plan, and no other oral or written communication, other than documents authorized under this Plan and fulfilling its express terms, shall determine the terms of the Plan or the terms of any agreement between an Eligible Associate or Participant and a MetLife Company with regard to the Plan or Deferred Compensation Accounts. There are no third party beneficiaries to this Plan, other than Participants' respective beneficiaries designated under the terms of this Plan. 20. Amendment and Termination. Except to the extent otherwise required by law, the Plan Administrator may amend, modify, suspend, or terminate this Plan at any time. Any such amendment or termination will not reduce the amount in Deferred Compensation Accounts accrued under this Plan prior to the execution of such amendment or termination. For further clarification, except as stated in the sentence above (or as provided in Section 14), amendments may otherwise be made to any and all provisions of the Plan, including but not limited to amendments affecting the time of distribution of Deferred Compensation Accounts, affecting forms of distribution of Deferred Compensation Accounts, or affecting any of the Investment Tracking Funds or any other means for adjusting the value of Deferred Compensation Accounts. 21. Definitions. Capitalized terms in this Plan, and their forms, shall have the following meanings: 21.1. "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, MetLife, Inc. 21.2. "Cash Incentive Compensation" shall mean compensation payable in the form of cash under the Annual Variable Incentive Compensation Plan, awards under the Corporate Investments Incentive Plan, awards under the Real Estate Investments Incentive Plan, awards under the Agricultural Investments Incentive Plan, awards under the Individual Regional Executive Plan, awards under the Institutional Regional Executive Plan, and the Long Term Performance Compensation Plan (and, in the case of each incentive compensation plan, any successor plan(s)). 21.3. "Change of Control" shall mean the occurrence of any of: 21.3.1. any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended ("Exchange Act")), directly or indirectly, of securities of MetLife, Inc. representing 25% or more of the combined Voting Power of MetLife, Inc.'s securities; 21.3.2. within any 24-month period, the persons who were directors of MetLife, Inc. at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of MetLife, Inc. (the "Board") or the board of directors of any successor to MetLife, Inc.; provided, however, that any director elected or nominated for election to the Board of Directors of MetLife, Inc. by a majority of the Incumbent Directors then still 9 in office shall be deemed to be an Incumbent Director for purposes of this subsection 21.3.2; 21.3.3. the stockholders of MetLife, Inc. approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of MetLife, Inc. which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of MetLife, Inc. immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (1) in the case of a merger or consolidation, the surviving or resulting corporation, (2) in the case of a share exchange, the acquiring corporation, or (3) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the MetLife, Inc. immediately prior to such Corporate Event; or 21.3.4. any other event occurs which the Board of Directors of MetLife, Inc. declares to be a Change of Control. 21.4. "Change of Control Election" shall mean a written document executed by the Eligible Associate specifying the Eligible Associate's instructions regarding the matters addressed by Section 14.4 of this Plan. 21.5. "Compensation" shall mean base salary, Cash Incentive Compensation, and Stock Compensation payable by MetLife, Inc. or an Affiliate. 21.6. "Deferral Election" shall mean a written document executed by the Eligible Associate specifying the Eligible Associate's instructions regarding the matters addressed by Section 4 of this Plan. 21.7. "Deferred Cash Compensation Account" shall mean a record-keeping account established for the benefit of a Participant in which is credited Compensation otherwise payable in cash to a Participant, but accounted for to the credit of the Participant under the terms of this Plan rather than paid to the Participant as and when originally earned. 21.8. "Deferred Compensation Account" shall mean a Deferred Cash Compensation Account, Deferred Stock Compensation Account, or a Matching Contribution Account (and, when used in the plural, all such Deferred Compensation Accounts to the credit of a Participant under the terms of this Plan). The value of each Deferred Compensation Account shall be adjusted as provided in this Plan. 21.9. "Deferred Stock Compensation Account" shall mean a shall mean a record-keeping account established for the benefit of a Participant in which is credited Compensation otherwise payable in MetLife Stock to a Participant, but accounted for to the credit of the Participant under the terms of this Plan rather than paid to the Participant as and when originally earned. 21.10. "Eligible Associate" shall mean an Officer at such times that Officer is eligible to participate in this Plan as provided in Section 3 of this Plan. 10 21.11. "Employment Discontinuance" shall mean the termination of employment with a MetLife Company or an Affiliate, other than in connection with the transfer of employment to another MetLife Company or any Affiliate. 21.12. "Fair Market Value" shall mean, for purposes of a Change of Control, the highest price per share of MetLife Stock offered in conjunction with any transaction resulting in a Change of Control (as determined in good faith by the Plan Administrator if any part of the offered price is payable other than in cash) or, in the case of a Change of Control occurring solely by reason of a change in the composition of the Board of Directors of MetLife, Inc., the highest Closing Value of the MetLife Stock on any of the 30 trading days immediately preceding the date on which a Change of Control occurs. For this purpose, the "Closing Value" shall mean, on any date, the closing prices of MetLife Stock as reported in the principal consolidated transaction reporting system for the New York Stock Exchange (or on such other recognized quotation system on which the trading prices of MetLife Stock are quoted at the relevant time) on such date, and in the event that there are no Common Stock transactions reported on such tape (or such other system) on such date, Closing Value shall mean the closing price on the immediately preceding date on which MetLife Stock transactions were so reported. 21.13. "Matching Contribution" shall mean the matching contributions (if any) with which the Participant's SIP account would have been credited under the terms and provisions of SIP with relation to deferred Compensation had the Compensation not been deferred. 21.14. "Matching Contribution Account" shall mean a record-keeping account established for the benefit of a Participant in which is credited Matching Contributions. 21.15. "MetLife Companies" shall mean MetLife Group, Inc.; Metropolitan Property and Casualty Insurance Company; MetLife Securities, Inc.; MetLife Trust Company and Association; MetLife Bank, National Association; and Edison Supply and Distribution, Inc. 21.16. "MetLife Stock" shall mean shares of common stock of MetLife, Inc. 21.17. "Officer" shall mean each individual who is employed by a MetLife Company paid from the United States in United States currency and is either (a) an officer of any one or more MetLife Companies; (b) an employee of any MetLife Company in the same or an equivalent compensation grade level as officers of that MetLife Company; or (c) an employee of any MetLife Company who was formerly a participant in the GenAmerica Executive Deferred Savings Plan. 21.18. "Participant" shall mean each Eligible Associate who has had compensation deferred by operation of a deferral election under this Plan. 21.19. "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (i) MetLife, Inc. or any Affiliate of MetLife, Inc., (ii) the MetLife Policyholder Trust (and any person(s) who would otherwise be described herein solely by reason of having the power to control the 11 voting of the shares held by that trust), or (iii) any employee benefit plan (including an employee stock ownership plan) sponsored by MetLife, Inc. or any Affiliate of MetLife, Inc. 21.20. "Plan" shall mean this MetLife Deferred Compensation Plan for Officers. 21.21. "Plan Administrator" shall mean the Plan Administrator of the Retirement Plan, including any person to whom such office has been delegated consistent with the Retirement Plan. 21.22. "Reallocation Election" shall mean a written document executed by the Participant specifying the Participant's instructions regarding the matters addressed by Section 7 of this Plan. 21.23. "Retirement Eligible" shall mean: (a) if the Participant participates in the Retirement Plan, the Participant has met the age and service criteria necessary to begin receiving pension payments under the "traditional formula" in the Retirement Plan immediately upon terminating service (regardless of whether the Participant is actually eligible to receive "traditional formula" pension payments), and (b) if the Participant participates in any other retirement plan offered by a MetLife Company or any Affiliate, the Participant has met the age and service criteria necessary to begin receiving pension payments immediately upon terminating service. 21.24. "Retirement Plan" shall mean the Metropolitan Life Retirement Plan for United States Employees. 21.25. "SIP" shall mean each and all of the Savings and Investment Plan for Employees of Metropolitan Life and Participating Affiliates, the Metropolitan Life Auxiliary Savings and Investment Plan, and the Auxiliary Savings and Investment Plan of Participating Metropolitan Affiliates (and/or any successor plan(s)). 21.26. "Stock Compensation" shall mean compensation payable in the form of shares of MetLife Stock, including awards in that form under the Long Term Performance Compensation Plan. 21.27. "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company. 21.28. "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. 12 -----END PRIVACY-ENHANCED MESSAGE-----