-----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, OaMt+5E5WL8GGdQO+ob7nSZlh87B1UVFEjiVrg49AKXnQGZBNmk9efNxXNVZZyXJ C8jWFAzE0TeDuTDEYnoA5g== 0000950123-03-009363.txt : 20030813 0000950123-03-009363.hdr.sgml : 20030813 20030813134824 ACCESSION NUMBER: 0000950123-03-009363 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03840301 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 y87663e10vq.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 JUNE 30, 2003 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 [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At August 6, 2003, 760,143,836 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............................. 3 Interim Condensed Consolidated Balance Sheets at June 30, 2003 (Unaudited) and December 31, 2002................. 3 Unaudited Interim Condensed Consolidated Statements of Income for the Three months and Six months ended June 30, 2003 and 2002...................................... 4 Unaudited Interim Condensed Consolidated Statement of Stockholders' Equity for the Six months ended June 30, 2003................................................... 5 Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2003 and 2002................................................... 6 Notes to Unaudited Interim Condensed Consolidated Financial Statements................................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 95 ITEM 4. CONTROLS AND PROCEDURES.......................... 95 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................ 95 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 98 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................. 99 Signatures................................................ 100
1 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 and 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 U.S. 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. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METLIFE, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, 2003 2002 ---------- -------------- ASSETS Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $147,056 and $132,899, respectively)... $158,822 $140,288 Equity securities, at fair value (cost: $1,418 and $1,556, respectively)........................................... 1,617 1,613 Mortgage loans on real estate............................. 25,289 25,086 Policy loans.............................................. 8,627 8,580 Real estate and real estate joint ventures held-for-investment..................................... 4,559 4,559 Real estate held-for-sale................................. 26 166 Other limited partnership interests....................... 2,406 2,395 Short-term investments.................................... 2,640 1,921 Other invested assets..................................... 4,261 3,727 -------- -------- Total investments....................................... 208,247 188,335 Cash and cash equivalents................................... 5,714 2,323 Accrued investment income................................... 2,241 2,088 Premiums and other receivables.............................. 7,512 6,472 Deferred policy acquisition costs........................... 11,899 11,727 Other assets................................................ 6,749 6,788 Separate account assets..................................... 67,460 59,693 -------- -------- Total assets............................................ $309,822 $277,426 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits.................................... $ 92,554 $ 89,815 Policyholder account balances............................. 72,207 66,830 Other policyholder funds.................................. 6,144 5,685 Policyholder dividends payable............................ 1,112 1,030 Policyholder dividend obligation.......................... 2,806 1,882 Short-term debt........................................... 3,443 1,161 Long-term debt............................................ 5,562 4,425 Current income taxes payable.............................. 726 769 Deferred income taxes payable............................. 2,514 1,625 Payables under securities loaned transactions............. 23,028 17,862 Other liabilities......................................... 11,366 7,999 Separate account liabilities.............................. 67,460 59,693 -------- -------- Total liabilities....................................... 288,922 258,776 -------- -------- Commitments, contingencies and guarantees (Note 8) Company-obligated mandatorily redeemable securities of subsidiary trusts......................................... 277 1,265 -------- -------- 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 June 30, 2003 and December 31, 2002; 760,143,836 shares outstanding at June 30, 2003 and 700,278,412 shares outstanding at December 31, 2002......................................... 8 8 Additional paid-in capital.................................. 14,956 14,968 Retained earnings........................................... 3,093 2,807 Treasury stock, at cost; 26,622,828 shares at June 30, 2003 and 86,488,252 shares at December 31, 2002................ (740) (2,405) Accumulated other comprehensive income...................... 3,306 2,007 -------- -------- Total stockholders' equity.............................. 20,623 17,385 -------- -------- Total liabilities and stockholders' equity.............. $309,822 $277,426 ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- REVENUES Premiums................................................... $5,092 $4,701 $9,930 $9,182 Universal life and investment-type product policy fees..... 594 514 1,160 971 Net investment income...................................... 2,892 2,828 5,789 5,590 Other revenues............................................. 355 343 653 710 Net investment losses (net of amounts allocated from other accounts of $0, ($73), ($38) and ($86), respectively).... (55) (185) (277) (277) ------ ------ ------ ------ Total revenues........................................ 8,878 8,201 17,255 16,176 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment losses of $5, ($64), ($23) and ($71), respectively)..................................... 4,965 4,882 9,918 9,500 Interest credited to policyholder account balances......... 761 727 1,508 1,441 Policyholder dividends..................................... 507 488 1,010 985 Other expenses (excludes amounts directly related to net investment losses of ($5), ($9), ($15) and ($15), respectively)............................................ 1,846 1,572 3,595 3,225 ------ ------ ------ ------ Total expenses........................................ 8,079 7,669 16,031 15,151 ------ ------ ------ ------ Income from continuing operations before provision for income taxes............................................. 799 532 1,224 1,025 Provision for income taxes................................. 218 161 339 347 ------ ------ ------ ------ Income from continuing operations.......................... 581 371 885 678 Income (Loss) from discontinued operations, net of income taxes.................................................... (1) 16 57 33 ------ ------ ------ ------ Income before cumulative effect of change in accounting.... 580 387 942 711 Cumulative effect of change in accounting.................. -- -- -- 5 ------ ------ ------ ------ Net income................................................. $ 580 $ 387 $ 942 $ 716 ====== ====== ====== ====== Income from continuing operations available to common shareholders per share Basic.................................................... $ 0.79 $ 0.53 $ 1.21 $ 0.96 ====== ====== ====== ====== Diluted.................................................. $ 0.79 $ 0.51 $ 1.21 $ 0.92 ====== ====== ====== ====== Net income available to common shareholders per share Basic.................................................... $ 0.79 $ 0.55 $ 1.29 $ 1.01 ====== ====== ====== ====== Diluted.................................................. $ 0.79 $ 0.53 $ 1.29 $ 0.97 ====== ====== ====== ======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2003 (DOLLARS IN MILLIONS)
ACCUMULATED OTHER COMPREHENSIVE INCOME ----------------------------------------- NET FOREIGN MINIMUM ADDITIONAL TREASURY UNREALIZED CURRENCY PENSION COMMON PAID-IN RETAINED STOCK AT INVESTMENT TRANSLATION LIABILITY STOCK CAPITAL EARNINGS COST GAINS (LOSSES) ADJUSTMENT ADJUSTMENT TOTAL ------ ---------- -------- -------- -------------- ----------- ---------- ------- Balance at December 31, 2002...................... $8 $14,968 $2,807 $(2,405) $2,282 $(229) $(46) $17,385 Stock grants and issuance of stock options............. 9 3 12 Settlement of common stock purchase contracts........ (656) 1,662 1,006 Premium on conversion of company-obligated mandatorily redeemable securities of a subsidiary trust..................... (21) (21) Comprehensive income: Net income................ 942 942 Other comprehensive income: Unrealized losses on derivative instruments, net of income taxes.......... (69) (69) Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes................. 1,234 1,234 Foreign currency translation adjustments........... 143 143 Minimum pension liability adjustment............ (9) (9) ------- Other comprehensive income................ 1,299 ------- Comprehensive income...... 2,241 --- ------- ------ ------- ------ ----- ---- ------- Balance at June 30, 2003.... $8 $14,956 $3,093 $ (740) $3,447 $ (86) $(55) $20,623 === ======= ====== ======= ====== ===== ==== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 METLIFE, INC. UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, --------------------- 2003 2002 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 3,460 $ 1,895 CASH FLOWS FROM INVESTING ACTIVITIES -------- -------- Sales, maturities and repayments of: Fixed maturities....................................... 33,578 29,231 Equity securities...................................... 147 1,387 Mortgage loans on real estate.......................... 1,611 1,085 Real estate and real estate joint ventures............. 263 119 Other limited partnership interests.................... 129 123 Purchases of: Fixed maturities....................................... (45,608) (36,376) Equity securities...................................... (22) (121) Mortgage loans on real estate.......................... (1,766) (1,223) Real estate and real estate joint ventures............. (158) (257) Other limited partnership interests.................... (187) (121) Net change in short-term investments...................... (722) (788) Purchase of businesses, net of cash received.............. -- (879) Net change in payable under securities loaned transactions........................................... 5,166 825 Other, net................................................ (715) (341) -------- -------- Net cash used in investing activities....................... (8,284) (7,336) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................... 17,821 12,786 Withdrawals............................................ (13,004) (10,329) Net change in short-term debt............................. 2,282 (303) Long-term debt issued..................................... 120 3 Long-term debt repaid..................................... (10) (195) Treasury stock acquired................................... -- (431) Settlement of common stock purchase contracts............. 1,006 -- -------- -------- Net cash provided by financing activities................... 8,215 1,531 -------- -------- Change in cash and cash equivalents......................... 3,391 (3,910) Cash and cash equivalents, beginning of period.............. 2,323 7,473 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,714 $ 3,563 ======== ======== Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest............................................... $ 266 $ 231 ======== ======== Income taxes........................................... $ 189 $ (20) ======== ======== Non-cash transactions during the period: Business acquisitions -- assets........................ $ -- $ 2,630 ======== ======== Business acquisitions -- liabilities................... $ -- $ 1,751 ======== ======== Purchase money mortgage on real estate sale............ $ 50 $ 11 ======== ======== MetLife Capital Trust I transactions................... $ 1,037 $ -- ======== ======== Real estate acquired in satisfaction of debt........... $ -- $ 20 ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 METLIFE, INC. NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF 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 other financial services to a broad spectrum of individual and institutional customers. The Company offers life insurance, annuities, automobile and property insurance and mutual funds to individuals, as well as group insurance, reinsurance and 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: (i) investment impairments; (ii) the fair value of investments in the absence of quoted market values; (iii) the fair value of derivatives; (iv) the amortization of deferred policy acquisition costs; (v) the liability for future policyholder benefits; (vi) the liability for litigation matters; and (vii) accounting for reinsurance transactions, derivatives and employee benefit plans. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. Actual results could differ from those estimates. The accompanying unaudited interim condensed consolidated financial statements include the accounts of (i) the Holding Company and its subsidiaries; (ii) partnerships and joint ventures in which the Company has a majority voting interest; and (iii) variable interest entities ("VIEs") entered into or modified after January 31, 2003 of which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line by line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 7. Intercompany accounts and transactions have been eliminated. The Company uses the equity method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has more than a minor interest, has influence over the partnership's operating and financial policies and does not have a controlling interest. The Company uses the cost method for minor interest investments and when it has virtually no influence over the partnership's operating and financial policies. Minority interest related to consolidated entities included in other liabilities was $597 million and $491 million at June 30, 2003 and December 31, 2002, respectively. Certain amounts in the prior period's unaudited interim condensed consolidated financial statements have been reclassified to conform with the 2003 presentation. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company at June 30, 2003, its consolidated results of operations for the three months and six months ended June 30, 2003 and 2002 and its consolidated cash flows for the six months ended June 30, 2003 and 2002 in accordance with GAAP. 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, 2002 included in MetLife, Inc.'s 2002 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC"). 7 FEDERAL INCOME TAXES Federal income taxes for interim periods have been computed using an estimated annual effective income 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 income tax rate. APPLICATION OF ACCOUNTING PRONOUNCEMENTS In July 2003, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1 provides guidance on separate account presentation and valuation, the accounting for sales inducements and the classification and valuation of long-duration contract liabilities. SOP 03-1 is effective for fiscal years beginning after December 15, 2003. The Company is in the process of quantifying the impact of SOP 03-1 on its unaudited interim condensed consolidated financial statements. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as a liability or, in certain circumstances, an asset. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150, as of July 1, 2003, requires the Company to reclassify $277 million of company-obligated mandatorily redeemable securities of subsidiary trusts from mezzanine equity to liabilities beginning with its unaudited interim condensed consolidated financial statements at and for the periods ending September 30, 2003. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 is effective October 1, 2003. The Company is in the process of quantifying the impact of the adoption of Issue B36 on its consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Except for certain implementation guidance that is incorporated in SFAS 149 and already effective, SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company's adoption of SFAS 149 on July 1, 2003 did not have a significant impact on its unaudited interim condensed consolidated financial statements. Effective February 1, 2003, the Company adopted FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46") for VIEs created or acquired on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning July 1, 2003. FIN 46 defines a VIE as (i) any entity in which the equity investors at risk in such entity do not have the characteristics of a controlling financial 8 METLIFE, INC. NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest, or (ii) any entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. FIN 46 also requires consolidation of the VIE by the primary beneficiary. See Note 6 for the disclosures relating to VIEs and the impact of such adoption on the Company's unaudited interim condensed consolidated financial statements as of July 1, 2003. Effective January 1, 2003, the Company adopted FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires entities to establish liabilities for certain types of guarantees and expands financial statement disclosures for others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a significant impact on the Company's unaudited interim condensed consolidated financial statements. See Note 8. Effective January 1, 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"), which provides guidance on how to apply the fair value method of accounting for stock options granted by the Company subsequent to December 31, 2002. As permitted under SFAS 148, options granted prior to January 1, 2003 will continue to be accounted for under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and the pro forma impact of accounting for these options at fair value will continue to be disclosed in the unaudited interim condensed consolidated financial statements until the last of those options vest in 2005. See Note 10. Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recorded 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") Issue No. 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"). The Company's activities subject to this guidance in 2003 were not significant. Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). 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 did not have a significant impact on the Company's unaudited interim condensed consolidated financial statements. In June 2001, the FASB issued 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. 2. SEPTEMBER 11, 2001 TRAGEDIES On September 11, 2001 terrorist attacks occurred in New York, Washington, D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life and property, which had an adverse impact on certain of the Company's businesses. The Company's original estimate of the total insurance losses related to the tragedies, which was recorded in the third quarter of 2001, was $208 million, net of income taxes of $117 million. As of 9 June 30, 2003, the Company's remaining liability for unpaid and future claims associated with the tragedies was $24 million, principally related to disability coverages. This estimate has been and will continue to be subject to revision in subsequent periods, as claims are received from insureds and processed. Any revision to the estimate of losses in subsequent periods will affect net income in such periods. The Company's general account investment portfolios include investments, primarily comprised of fixed maturities, in industries that were originally affected by the tragedies, including airline, other travel, lodging and insurance. Exposures to these industries also exist through mortgage loans and investments in real estate. The carrying value of the Company's investment portfolio exposed to these industries was approximately $3.4 billion at June 30, 2003. 3. NET INVESTMENT LOSSES Net investment gains (losses), including changes in valuation allowances, and related policyholder amounts were as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------ ------------- 2003 2002 2003 2002 ---- ----- ----- ----- (DOLLARS IN MILLIONS) Fixed maturities...................................... $(43) $(210) $(192) $(375) Equity securities..................................... (3) 68 (8) 260 Mortgage loans on real estate......................... (8) (3) (22) (22) Real estate and real estate joint ventures(1)......... (7) (6) (5) (8) Other limited partnership interests................... 4 13 (62) (18) Derivatives not qualifying for hedge accounting....... (3) (121) (37) (150) Other................................................. 5 1 11 (50) ---- ----- ----- ----- Total............................................... (55) (258) (315) (363) Amounts allocated from: Deferred policy acquisition costs................... 5 9 15 15 Policyholder dividend obligation.................... (5) 64 23 71 ---- ----- ----- ----- Total net investment losses...................... $(55) $(185) $(277) $(277) ==== ===== ===== =====
- --------------- (1) The amounts presented exclude amounts related to sales of real estate held-for-sale presented as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). Investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of deferred policy acquisition costs to the extent that such amortization results from investment gains and losses; and (ii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. This presentation may not be comparable to presentations made by other insurers. 4. DERIVATIVE INSTRUMENTS The Company uses derivative instruments to manage risk through one of four principal risk management strategies: (i) the hedging of liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; and (iv) firm commitments and forecasted transactions. Additionally, the Company enters into income generation and 10 replication derivative transactions as permitted by its insurance subsidiaries' derivatives use plans approved by the applicable state insurance departments. The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards and options, including caps and floors. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure (fair value, cash flow or foreign currency). If a derivative does not qualify as a hedge, according to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended, the changes in its fair value are generally 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 inception of the hedge 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 notional amount and fair value of derivatives by type of hedge designation at:
JUNE 30, 2003 DECEMBER 31, 2002 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLARS IN MILLIONS) BY TYPE OF HEDGE Fair value..................... $ 1,890 $ 6 $180 $ 420 $ -- $ 64 Cash flow...................... 7,485 110 220 3,520 69 73 Non qualifying................. 12,304 260 126 13,119 239 183 ------- ---- ---- ------- ---- ---- Total........................ $21,679 $376 $526 $17,059 $308 $320 ======= ==== ==== ======= ==== ====
During the three months and six months ended June 30, 2003, the Company recognized net investment income from the periodic settlement of interest rate, foreign currency and credit default swaps of $3 million and $6 million, respectively. During the three months and six months ended June 30, 2002, the Company recognized net investment income from the periodic settlement of interest rate, foreign currency and credit default swaps of $12 million and $17 million, respectively. During the three months and six months ended June 30, 2003, the Company recognized $83 million and $92 million, respectively, in net investment losses related to qualifying fair value hedges. In addition, $74 million and $86 million of unrealized gains on fair value hedged investments were recognized in net investment gains and losses during the three months and six months ended June 30, 2003, respectively. There were no derivatives designated as fair value hedges during the three months and six months ended June 30, 11 2002. There were no discontinued fair value hedges during the three months and six months ended June 30, 2003 or 2002. At June 30, 2003 and December 31, 2002, the net amounts accumulated in other comprehensive income relating to cash flow hedges were net losses of $131 million and $24 million, respectively. For the three months and six months ended June 30, 2003, the market value of cash flow hedges decreased by $109 million and $122 million, respectively. During the three months and six months ended June 30, 2003, the Company recognized other comprehensive net losses of $103 million and $116 million, respectively, relating to the effective portion of cash flow hedges. During both the three months and six months ended June 30, 2003, $1 million of other comprehensive losses was reclassified into net investment income, and during the three months and six months ended June 30, 2003, $8 million of other comprehensive gains and $12 million of other comprehensive losses were reclassified into net investment losses, respectively, relating to the discontinuation of cash flow hedges. For the three months and six months ended June 30, 2003, $2 million and $4 million of other comprehensive income were reclassified to net investment income, respectively, related to the SFAS 133 transition adjustment. During the three months and six months ended June 30, 2002, the Company recognized other comprehensive net losses of $39 million and $51 million, respectively, relating to the effective portion of cash flow hedges. For the three months and six months ended June 30, 2002, amounts related to ineffectiveness of qualifying cash flow hedges were insignificant. During the three months and six months ended June 30, 2002, there were no amounts reclassified to net investment income or gains and losses relating to the discontinuation of cash flow hedges. For the three months and six months ended June 30, 2002, $3 million and $6 million of other comprehensive income were reclassified to net investment income, respectively, related to the SFAS 133 transition adjustment. Approximately $3 million and $2 million of net losses reported in accumulated other comprehensive income at June 30, 2003 are expected to be reclassified during the year ending December 31, 2003 into net investment income and net investment gains and losses, respectively, as the underlying investments mature or expire according to their original terms. For the three months ended June 30, 2003 and 2002, the Company recognized net investment income of $13 million and $1 million, respectively, and net investment losses of $3 million and $121 million, respectively, from derivatives not qualifying as accounting hedges. For the six months ended June 30, 2003 and 2002, the Company recognized net investment income of $22 million and $3 million, respectively, and net investment losses of $37 million and $150 million, respectively, from derivatives not qualifying as accounting hedges. The use of these non-speculative derivatives is permitted by the applicable insurance departments. 5. STRUCTURED INVESTMENT TRANSACTIONS The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance the Company's total return on its investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes consisting of equity-linked notes and similar instruments. The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and also is the collateral manager and a beneficial interest holder in such transactions (commonly referred to as collateralized debt obligations). As the collateral manager, the Company earns management fees on the outstanding securitized asset balance, which are recorded in income as earned. When the Company transfers assets to a bankruptcy-remote special purpose entity ("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 carrying amount of the financial assets transferred. Such 12 gains or losses are allocated to the assets sold and the beneficial interests retained based on relative fair values at the date of transfer. Beneficial interests in securitizations are carried at fair value in fixed maturities. Income on the beneficial interests is recognized using the prospective method in accordance with EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Prior to the effective date of FIN 46, the SPEs used to securitize assets were not consolidated by the Company because unrelated third parties hold controlling interests through ownership of equity in the SPEs, representing at least three percent of the value 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 interest of the SPE. The Company purchases or receives beneficial interests in SPEs, which generally acquire financial assets, including corporate equities, debt securities and purchased options. The Company has not guaranteed the performance, liquidity or obligations of the SPEs and the Company's exposure to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company uses the beneficial interests as part of its risk management strategy, including asset-liability management. Prior to the effective date of FIN 46, these SPEs were not consolidated by the Company because unrelated third parties hold controlling interests through ownership of equity in the SPEs, representing at least three percent of the value 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 interest of the SPE. The beneficial interests in SPEs where the Company exercises significant influence over the operating and financial policies of the SPE are accounted for in accordance with the equity method of accounting. Impairments of these beneficial interests are included in net investment gains and losses. The beneficial interests in SPEs where the Company does not exercise significant influence are accounted for based on the substance of the beneficial interest's rights and obligations. Beneficial interests are included in fixed maturities. These beneficial interests are generally structured notes, as defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. 6. VARIABLE INTEREST ENTITIES Effective February 1, 2003, FIN 46 established new accounting guidance relating to the consolidation of VIEs. Certain of the Company's asset-backed securitizations, collateralized debt obligations, structured investment transactions, and investments in real estate joint ventures and other limited partnership interests meet the definition of a VIE under FIN 46. The Company consolidates VIEs created or acquired on or after February 1, 2003 for which it is the primary beneficiary and, effective July 1, 2003, consolidates VIEs created or acquired prior to February 1, 2003 for which it is the primary beneficiary. The following table presents the total assets and liabilities of VIEs for which the Company has concluded that it is the primary beneficiary and will be consolidated in the Company's financial statements for periods ending after June 30, 2003:
JUNE 30, 2003 ---------------------------- TOTAL TOTAL ASSETS(1) LIABILITIES(1) ---------- --------------- (DOLLARS IN MILLIONS) Real estate joint ventures(2)............................... $498 $143 Structured investment transactions(3)....................... 388 173 Other limited partnerships(4)............................... 27 -- ---- ---- Total..................................................... $913 $316 ==== ====
(1) The assets and liabilities of the real estate joint ventures and other limited partnerships are reflected at the carrying amounts at which such assets and liabilities would have been reflected on the 13 Company's balance sheet had the Company consolidated the VIE from the date of its initial involvement with the entity. The assets and liabilities of the structured investment transactions are reflected at fair value as of June 30, 2003. (2) Real estate joint ventures include partnerships and other ventures, which engage in the acquisition, development, management and disposal of real estate investments. (3) Structured investment transactions represent trusts, which hold municipal bond obligations and issue beneficial interests in such assets. (4) Other limited partnerships include partnerships established for the purpose of investing in public and private debt and equity securities, as well as limited partnerships established for the purpose of investing in low-income housing that qualifies for Federal tax credits. The Company's financial statements for the quarter ended September 30, 2003 will include a transition adjustment of $17 million, net of an income tax benefit of $4 million, associated with the consolidation of these entities as a cumulative effect of a change in accounting. Of the $913 million in total assets to be consolidated, $535 million is held as collateral for the various VIEs' obligations. General creditors and beneficial interest holders of the consolidated VIEs have no recourse to the Company. The following table presents the total assets of and the maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary:
JUNE 30, 2003 ----------------------------- TOTAL MAXIMUM EXPOSURE ASSETS(1) TO LOSS(2) ---------- ---------------- (DOLLARS IN MILLIONS) Asset-backed securitizations and collateralized debt obligations............................................ $ 619 $25 Other limited partnerships............................... 420 11 Real estate joint ventures............................... 57 55 ------ --- Total............................................... $1,096 $91 ====== ===
- --------------- (1) The assets and liabilities of the asset-backed securitizations and collateralized debt obligations are reflected at fair value as of June 30, 2003. (2) The maximum exposure to loss of the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. The maximum exposure to loss relating to the other limited partnerships and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments reduced by amounts guaranteed by other partners. Due to the complexity of the judgments and interpretations required in the application of FIN 46 to the Company's collateralized debt obligations, the Company is continuing to evaluate certain entities for consolidation and/or disclosure under FIN 46. At June 30, 2003, the fair value of both the assets and liabilities of the entities still under evaluation approximate $1.5 billion. The Company's maximum exposure to loss related to these entities at June 30, 2003 is approximately $5 million. 7. CLOSED BLOCK On April 7, 2000, (the "date of demutualization"), Metropolitan Life Insurance Company ("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 14 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. Closed block liabilities and assets designated to the closed block are as follows:
JUNE 30, DECEMBER 31, 2003 2002 -------- ------------ (DOLLARS IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits...................................... $41,507 $41,207 Other policyholder funds.................................... 284 279 Policyholder dividends payable.............................. 773 719 Policyholder dividend obligation............................ 2,806 1,882 Payables under securities loaned transactions............... 4,875 4,851 Other liabilities........................................... 737 433 ------- ------- Total closed block liabilities............................ 50,982 49,371 ------- ------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $29,104 and $28,339, respectively).... 31,761 29,981 Equity securities, at fair value (cost: $219 and $236, respectively).......................................... 223 218 Mortgage loans on real estate............................. 7,366 7,032 Policy loans.............................................. 4,012 3,988 Short-term investments.................................... 92 24 Other invested assets..................................... 627 604 ------- ------- Total investments......................................... 44,081 41,847 Cash and cash equivalents................................... 60 435 Accrued investment income................................... 528 540 Deferred income taxes....................................... 1,072 1,151 Premiums and other receivables.............................. 100 130 ------- ------- Total assets designated to the closed block............ 45,841 44,103 ------- ------- Excess of closed block liabilities over assets designated to the closed block.......................................... 5,141 5,268 ------- ------- Amounts included in accumulated other comprehensive loss: Net unrealized investment gains, net of deferred income tax of $936 and $577, respectively..................... 1,725 1,047 Unrealized derivative (losses) gains, net of deferred income tax of ($10) and $7, respectively............... (19) 13 Allocated from policyholder dividend obligation, net of deferred income tax of ($987) and ($668), respectively........................................... (1,819) (1,214) ------- ------- (113) (154) ------- ------- Maximum future earnings to be recognized from closed block assets and liabilities.................................... $ 5,028 $ 5,114 ======= =======
15 Information regarding the policyholder dividend obligation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2003 2002 ----------------- ------------ (DOLLARS IN MILLIONS) Balance at beginning of period.............................. $1,882 $ 708 Impact on net income before amounts allocated from policyholder dividend obligation.......................... 23 157 Net investment losses....................................... (23) (157) Change in unrealized investment and derivative gains........ 924 1,174 ------ ------ Balance at end of period.................................... $2,806 $1,882 ====== ======
Closed block revenues and expenses were as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------- --------------- 2003 2002 2003 2002 ------ ------ ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums................................................... $ 825 $ 870 $1,624 $1,712 Net investment income and other revenues................... 623 643 1,265 1,280 Net investment (losses) gains (net of amounts allocated from the policyholder dividend obligation of $5, ($64), ($23) and ($71), respectively)........................... (24) 38 (29) 43 ------ ------ ------ ------ Total revenues........................................ 1,424 1,551 2,860 3,035 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims........................... 911 895 1,764 1,807 Policyholder dividends..................................... 392 399 786 798 Change in policyholder dividend obligation (excludes amounts directly related to net investment (losses) gains of $5, ($64), ($23) and ($71), respectively)............. (5) 64 23 71 Other expenses............................................. 76 78 152 158 ------ ------ ------ ------ Total expenses........................................ 1,374 1,436 2,725 2,834 ------ ------ ------ ------ Revenues net of expenses before income taxes............... 50 115 135 201 Income taxes............................................... 18 42 49 73 ------ ------ ------ ------ Revenues net of expenses and income taxes.................. $ 32 $ 73 $ 86 $ 128 ====== ====== ====== ======
16 The change in maximum future earnings of the closed block was as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------- --------------- 2003 2002 2003 2002 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Balance at end of period........................... $5,028 $5,205 $5,028 $5,205 Balance at beginning of period..................... 5,060 5,278 5,114 5,333 ------ ------ ------ ------ Change during period............................... $ (32) $ (73) $ (86) $ (128) ====== ====== ====== ======
Metropolitan Life charges the closed block with federal income taxes, state and local premium taxes, other additive state or local taxes, investment management expenses and maintenance expenses relating to the closed block as provided in the plan of demutualization. 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 notional amount and fair value of derivatives by type of hedge designation at:
JUNE 30, 2003 DECEMBER 31, 2002 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLARS IN MILLIONS) BY TYPE OF HEDGE Fair value...................... $ 50 $ 1 $ 6 $ -- $-- $-- Cash flow....................... 371 4 35 128 2 11 Non qualifying.................. 124 -- 10 258 32 2 ---- ---- --- ---- --- --- Total......................... $545 $ 5 $51 $386 $34 $13 ==== ==== === ==== === ===
During each of the three months and six months ended June 30, 2003 and 2002, the closed block recognized net investment income from the periodic settlement of interest rate, foreign currency and credit default swaps of $1 million. During both the three months and six months ended June 30, 2003, the closed block recognized $1 million in net investment losses related to qualifying fair value hedges. In addition, $1 million of unrealized gains on fair value hedged investments were recognized in net investment gains and losses during both the three months and six months ended June 30, 2003. There were no derivatives designated as fair value hedges during the three months and six months ended June 30, 2002. There were no discontinued fair value hedges during the three months and six months ended June 30, 2003 or 2002. At June 30, 2003 and December 31, 2002, the net amounts accumulated in other comprehensive loss relating to cash flow hedges were net losses of $29 million and net gains of $20 million, respectively. During the three months ended June 30, 2003 and 2002, the closed block recognized other comprehensive net losses of $30 million and $2 million, respectively, relating to the effective portion of cash flow hedges. During the six months ended June 30, 2003 and 2002, the closed block recognized other comprehensive net losses of $48 million and other comprehensive net gains of $2 million, respectively, relating to the effective portion of cash flow hedges. For the three months and six months ended June 30, 2003, market value changes recognized as ineffectiveness of qualifying cash flow hedges were insignificant. During both the three months ended June 30, 2003 and 2002, $1 million of other comprehensive income was reclassified into net investment income. During both the six months ended June 30, 2003 and 2002, $2 million of other comprehensive income 17 was reclassified into net investment income. Approximately $2 million of gains reported in accumulated other comprehensive income at June 30, 2003 are expected to be reclassified during the year ending December 31, 2003 into net investment income, as the underlying investments mature or expire according to their original terms. For the three months ended June 30, 2003 and 2002, the closed block did not recognize any net investment income and recognized net investment losses of $16 million and $9 million, respectively, from derivatives not qualifying as accounting hedges. For the six months ended June 30, 2003 and 2002, the closed block did not recognize any net investment income and recognized net investment losses of $17 million and $7 million, respectively, from derivatives not qualifying as accounting hedges. The use of these non-speculative derivatives is permitted by the New York Insurance Department. 8. COMMITMENTS, CONTINGENCIES AND GUARANTEES 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 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. In addition, other sales practices lawsuits have been brought. As of June 30, 2003, there are approximately 375 sales practices lawsuits pending against Metropolitan Life, approximately 60 sales practices lawsuits pending against New England Mutual and approximately 35 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 2002, a purported class action complaint was filed in a federal court in Kansas by S-G Metals Industries, Inc. against 18 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. The action was transferred to a federal court in Massachusetts. New England Mutual moved to dismiss the case and in November 2002, the federal district court dismissed the case. S-G Metals has filed a notice of appeal. New England Mutual intends to continue 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 probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. 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 manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life issued liability or workers' compensation insurance to companies in the business of 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 have alleged 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. Metropolitan Life believes that it should not have legal liability in such cases. Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. Although Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse monetary judgments in respect of these claims, due to the risks and expenses of litigation, almost all past cases have been resolved by settlements. Metropolitan Life's defenses (beyond denial of certain factual allegations) to plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In defending asbestos cases, Metropolitan Life selects various strategies depending upon the jurisdictions in which such cases are brought and other factors which, in Metropolitan Life's judgment, best protect Metropolitan Life's interests. Strategies include seeking to settle or compromise claims, motions challenging the legal or factual basis for such claims or defending on the merits at trial. In 2002 and 2003, trial courts in California, Utah and Georgia granted motions dismissing claims against Metropolitan Life on some or all of the above grounds. Other courts have denied motions brought by Metropolitan Life to dismiss cases without the necessity of trial. There can be no assurance that Metropolitan Life will receive favorable decisions on motions in the future. 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. 19 See Note 11 of Notes to Consolidated Financial Statements for the year ended December 31, 2002 included in the MetLife, Inc. Annual Report on Form 10-K filed with the SEC for information regarding historical asbestos claims information and the increase of its recorded liability at December 31, 2002. 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. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to Metropolitan Life 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 Metropolitan Life 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. A claim has been made under the excess insurance policies in 2003 for the amounts paid in 2002 with respect to asbestos litigation in excess of the retention. As the performance of the indices impact the return in the reference fund, it is possible that loss reimbursements to the Company and the recoverable with respect to later periods may be less than the amount of the recorded losses. Such forgone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. If at some point in the future, the Company believes the liability for probable and reasonably estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. A portion of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts 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 adverse 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. In addition, publicity regarding legislative reform efforts may be resulting in an increase in the number of claims. As reported in MetLife, Inc.'s Annual Report on Form 10-K, Metropolitan Life received approximately 66,000 asbestos-related claims in 2002. During the first six months of 2003 and 2002, Metropolitan Life received approximately 48,000 and 28,000 asbestos-related claims, respectively. Of the approximately 48,000 claims received in the first six months of 2003, approximately 23,000 were received in April 2003. Except as to April, the number of asbestos-related claims received in 2003 are in line with the claims received in 2002 for the same period. However, we can provide no assurance with respect to the timing of receipt of new claims. 20 It is likely that a bill reforming asbestos litigation will be voted on by the Senate in 2003. While the Company strongly supports reform efforts, there can be no assurance that legislative reform will be enacted. Metropolitan Life will continue to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, 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 unaudited interim condensed 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. In 2003, Metropolitan Life also has been named as a defendant in a small number of silicosis, welding and mixed dust cases. The cases are pending in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana, Kentucky and Arkansas. The Company intends to vigorously defend itself against these cases. 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. In a lawsuit involving another insurer, the Tennessee Supreme Court held that diminished value is not covered under a Tennessee automobile policy. Based on that decision, plaintiffs in Tennessee have dismissed their alleged diminished value lawsuit against Metropolitan Property and Casualty Insurance Company. 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. Total loss valuation methods 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. The court has dismissed the action. An appeal has been filed. 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 New York state court in New York County were consolidated within the commercial part. In addition, there remained a separate purported class action in New York state court in New York County. On February 21, 2003, the defendants' motions to dismiss both the consolidated action and separate action were granted; leave to replead as a 21 proceeding under Article 78 of New York's Civil Practice Law and Rules has been granted in the separate action. Plaintiffs in the consolidated action and separate action have filed notices of appeal. 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. 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. On February 4, 2003, plaintiffs filed a consolidated amended complaint adding a fraud claim under the Securities Exchange Act of 1934. Metropolitan Life has filed a motion to dismiss the consolidated amended complaint and a motion for summary judgment in this action. 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. In January 2003, the United States Court of Appeals for the Second Circuit affirmed the dismissal. In June 2003, the United States Supreme Court denied plaintiffs' petition for certiorari in this action. 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 United States District Court for the Western District of Pennsylvania. The Holding Company, Metropolitan Life, the trustee of the policyholder trust, and certain present and former individual directors and officers of Metropolitan Life are named as defendants. After the defendants' motion to transfer the lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an amended complaint that dropped all claims against the trustee of the policyholder trust and the individual directors and officers. In the amended complaint, plaintiffs allege that the treatment of the cost of the sales practices settlement in connection with the demutualization of Metropolitan Life breached the terms of the settlement. Plaintiffs seek compensatory and punitive damages, as well as attorneys' fees and costs. The defendants have moved to dismiss the action. Plaintiffs' motion for class certification has been adjourned. The defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting 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 affiliates. The New York Insurance Department has concluded its examination of Metropolitan Life concerning possible past race-conscious 22 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. On April 28, 2003, the United States District Court approved a class-action settlement of the consolidated actions. Several persons who had objected to the settlement have filed notices of appeal from the order approving the settlement. Metropolitan Life also has entered into settlement agreements to resolve the regulatory examination. Metropolitan Life recorded a charge in the fourth quarter of 2001 in connection with the anticipated resolution of these matters. During the second quarter of 2003, the Company reduced this charge by $64 million, after-tax. The Company believes the remaining portion of the previously recorded charge is adequate to cover the costs associated with the resolution of these matters. Eighteen lawsuits involving approximately 130 plaintiffs have been filed in federal and state court in Alabama, Mississippi and Tennessee alleging federal and/or state law claims of racial discrimination in connection with the sale, formation, administration or servicing of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in these 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. Plaintiffs have filed a motion for class certification. Opposition papers were filed by Metropolitan Life. The parties have reached a settlement in principle and are seeking the Court's preliminary approval. 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. The parties are engaged in settlement discussions. A putative class action lawsuit is pending in the United States District Court for the District of Columbia, 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 these plaintiffs whose employment, or whose spouses' employment, had terminated before they became eligible for an immediate retirement benefit. 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 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 23 reinsurance premium rates. Metropolitan Life and these affiliates intend to vigorously defend themselves against the claims of the reinsurer, including the purported rate increase. The SEC has commenced a formal investigation of New England Securities Corporation, an indirect subsidiary of New England Life Insurance Company ("NES"), in response to NES informing the SEC that certain systems and controls relating to one NES advisory program were not operating effectively. NES is cooperating fully with the SEC and is continuing to research the effect, if any, of this issue upon approximately 6,000 active and closed accounts. The American Dental Association and two individual providers have sued MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought in a Florida federal district court. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. MetLife is vigorously defending the case. Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's unaudited interim condensed 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 consolidated net income or cash flows in particular quarterly or annual periods. COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $1,488 million and $1,667 million at June 30, 2003 and December 31, 2002, respectively. The Company anticipates that these amounts will be invested in the partnerships over the next three to five years. GUARANTEES In the course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition and investment transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company 24 provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from $1 million to $800 million, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount due under these guarantees in the future. In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies other of its agents for liabilities incurred as a result of their representation of the Company's interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under these indemnities in the future. The fair value of such indemnities, guarantees and commitments entered into subsequent to December 31, 2002 was insignificant. The Company's recorded liability at June 30, 2003 and December 31, 2002 for indemnities, guarantees and commitments provided to third parties prior to January 1, 2003 was insignificant. 9. 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 ongoing commitment to reduce expenses. The following tables represent the original expenses recorded in the fourth quarter of 2001 and the remaining liability as of June 30, 2003:
PRE-TAX CHARGES RECORDED IN THE FOURTH QUARTER OF 2001 ------------------------------------------------ INSTITUTIONAL INDIVIDUAL AUTO & HOME TOTAL ------------- ---------- ----------- ----- (DOLLARS IN MILLIONS) Severance and severance-related costs....... $ 9 $32 $ 3 $ 44 Facilities consolidation costs.............. 3 65 -- 68 Business exit costs......................... 387 -- -- 387 ---- --- ----- ---- Total..................................... $399 $97 $ 3 $499 ==== === ===== ====
REMAINING LIABILITY AS OF JUNE 30, 2003 ---------------------------------- INSTITUTIONAL INDIVIDUAL TOTAL ------------- ---------- ----- (DOLLARS IN MILLIONS) Facilities consolidation costs........................... $-- $11 $11 Business exit costs...................................... 34 -- 34 --- --- --- Total.................................................. $34 $11 $45 === === ===
Institutional. The charges to this segment in the fourth quarter of 2001 include costs associated with exiting a business, including the write-off of goodwill, severance and severance-related costs, and facilities consolidation costs. These expenses are the result of the discontinuance of certain 401(k) recordkeeping services and externally-managed guaranteed index separate accounts. These actions resulted in charges to policyholder benefits and claims and other expenses of $215 million and $184 million, respectively. The business realignment initiatives will ultimately result in the elimination of approximately 930 positions. As of June 30, 2003, there were approximately 235 terminations to be completed in connection with the Company's 25 business exit activities. Management expects these terminations to be completed by December 31, 2003. The Company continues to carry a liability as of June 30, 2003 since the exit plan could not be completed within one year due to circumstances outside the Company's control and since certain contractual obligations extended beyond one year. Individual. The charges to this segment in the fourth quarter of 2001 include facilities consolidation costs, severance and severance-related costs, which predominantly stem from the elimination of approximately 560 non-sales positions and 190 operations and technology positions supporting this segment. All terminations were completed as of June 30, 2003. These costs were recorded in other expenses. The remaining liability as of June 30, 2003 is due to certain contractual obligations that extended beyond one year. Auto & Home. The charges to this segment in the fourth quarter of 2001 include severance and severance-related costs associated with the elimination of approximately 200 positions. All terminations were completed as of December 31, 2002. The costs were recorded in other expenses. 10. STOCK COMPENSATION PLANS Effective January 1, 2003, the Company elected to apply the fair value method of accounting for stock options granted by the Company subsequent to December 31, 2002. As permitted under SFAS 148, options granted prior to January 1, 2003 will continue to be accounted for under APB 25. Had compensation expense for grants awarded prior to January 1, 2003 been determined based on fair value at the date of grant in accordance with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's earnings and earnings per share amounts would have been reduced to the following pro forma amounts:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- ------------- 2003 2002 2003 2002 ----- ----- ----- ----- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net Income............................................. $ 580 $ 387 $ 942 $ 716 Charge for conversion of company-obligated mandatorily redeemable securities of a subsidiary trust(1)....... -- -- (21) -- ----- ----- ----- ----- Actual net income available to common shareholders..... $ 580 $ 387 $ 921 $ 716 ===== ===== ===== ===== Pro forma net income available to common shareholders(2)(3)................................... $ 572 $ 380 $ 904 $ 702 ===== ===== ===== ===== BASIC EARNINGS PER SHARE As reported............................................ $0.79 $0.55 $1.29 $1.01 ===== ===== ===== ===== Pro forma(2)(3)........................................ $0.78 $0.54 $1.26 $0.99 ===== ===== ===== ===== DILUTED EARNINGS PER SHARE As reported............................................ $0.79 $0.53 $1.29 $0.97 ===== ===== ===== ===== Pro forma(2)(3)........................................ $0.78 $0.52 $1.26 $0.95 ===== ===== ===== =====
- --------------- (1) See Note 12 for a discussion of this charge included in the calculation of net income available to common shareholders. (2) The pro forma earnings disclosures are not necessarily representative of the effects on net income and earnings per share in future years. 26 (3) Includes the Company's ownership share of stock compensation costs related to the Reinsurance Group of America, Incorporated incentive stock plan and the stock compensation costs related to the incentive stock plans at SSRM Holdings, Inc. determined in accordance with SFAS 123. Stock-based compensation expense related to the Company's Stock Incentive Plan and Directors Stock Plan for the three months and six months ended June 30, 2003 was $4 million and $10 million, respectively, including stock-based compensation for non-employees of $300 thousand and $825 thousand, respectively. Stock-based compensation expense for non-employees for the three months and six months ended June 30, 2002 was $462 thousand and $923 thousand, respectively. 11. COMPREHENSIVE INCOME The components of comprehensive income are as follows:
FOR THE FOR THE THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- -------------- 2003 2002 2003 2002 ------ ------ ------ ----- (DOLLARS IN MILLIONS) Net income........................................ $ 580 $ 387 $ 942 $ 716 ------ ------ ------ ----- Other comprehensive income (loss): Unrealized losses on derivative instruments, net of income taxes.............................. (71) (27) (69) (37) Unrealized investment gains (losses), net of related offsets, reclassification adjustments and income taxes............................. 936 630 1,234 (191) Foreign currency translation adjustments........ 129 24 143 24 Minimum pension liability adjustment............ -- -- (9) -- ------ ------ ------ ----- Other comprehensive income (loss)................. 994 627 1,299 (204) ------ ------ ------ ----- Comprehensive income......................... $1,574 $1,014 $2,241 $ 512 ====== ====== ====== =====
12. METLIFE CAPITAL TRUST I In connection with MetLife, Inc.'s initial public offering in April 2000, the Holding Company and MetLife Capital Trust I (the "Trust") issued equity security units (the "units"). Each unit originally consisted of (i) a contract to purchase, for $50, shares of the Holding Company's common stock (the "purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust, with a stated liquidation amount of $50. In accordance with the terms of the units, the Trust was dissolved on February 5, 2003, and $1,006 million aggregate principal amount of 8.00% debentures of the Holding Company (the "MetLife debentures"), the sole assets of the Trust, were distributed to the owners of the Trust's capital securities in exchange for their capital securities. The MetLife debentures were remarketed on behalf of the debenture owners on February 12, 2003 and the interest rate on the MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a yield to maturity of 2.876%. As a result of the remarketing, the debenture owners received $21 million ($0.03 per diluted common share) in excess of the carrying value of the capital securities. This excess was recorded by the Company as a charge to additional paid-in capital and, for the purpose of calculating earnings per share, is subtracted from net income to arrive at net income available to common shareholders. 27 On May 15, 2003, the purchase contracts associated with the units were settled. In exchange for $1,006 million, the Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract, or approximately 59.8 million shares of treasury stock. Approximately $656 million, which represents the excess of the Company's cost of the treasury stock ($1,662 million) over the contract price of the stock issued to the purchase contract holders ($1,006 million), was recorded as a direct reduction to retained earnings. 13. EARNINGS PER SHARE The following table 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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) Weighted average common stock outstanding for basic earnings per share.............................. 731,242,226 704,674,529 715,866,466 708,349,444 Incremental shares from assumed: Conversion of equity security units........................... -- 28,269,468 -- 27,681,257 Exercise of stock options.......... 14,228 991,773 -- 642,948 ------------ ------------ ------------ ------------ Weighted average common stock outstanding for diluted earnings per share.......................... 731,256,454 733,935,770 715,866,466 736,673,649 ============ ============ ============ ============ INCOME FROM CONTINUING OPERATIONS.... $ 581 $ 371 $ 885 $ 678 CHARGE FOR CONVERSION OF COMPANY- OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST(1)........................... -- -- (21) -- ------------ ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS... $ 581 $ 371 $ 864 $ 678 ============ ============ ============ ============ Basic earnings per share........... $ 0.79 $ 0.53 $ 1.21 $ 0.96 ============ ============ ============ ============ Diluted earnings per share......... $ 0.79 $ 0.51 $ 1.21 $ 0.92 ============ ============ ============ ============ INCOME (LOSS) FROM DISCONTINUED OPERATIONS......................... $ (1) $ 16 $ 57 $ 33 ============ ============ ============ ============ Basic earnings per share........... $ -- $ 0.02 $ 0.08 $ 0.05 ============ ============ ============ ============ Diluted earnings per share......... $ -- $ 0.02 $ 0.08 $ 0.04 ============ ============ ============ ============ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING......................... $ -- $ -- $ -- $ 5 ============ ============ ============ ============ Basic earnings per share........... $ -- $ -- $ -- $ 0.01 ============ ============ ============ ============ Diluted earnings per share......... $ -- $ -- $ -- $ 0.01 ============ ============ ============ ============ NET INCOME........................... $ 580 $ 387 $ 942 $ 716 CHARGE FOR CONVERSION OF COMPANY- OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST(1)........................... -- -- (21) -- ------------ ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS....................... $ 580 $ 387 $ 921 $ 716 ============ ============ ============ ============ Basic earnings per share........... $ 0.79 $ 0.55 $ 1.29 $ 1.01 ============ ============ ============ ============ Diluted earnings per share......... $ 0.79 $ 0.53 $ 1.29 $ 0.97 ============ ============ ============ ============
- --------------- (1) See Note 12. 28 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. The Holding Company did not acquire any shares of common stock during the six months ended June 30, 2003. The Holding Company acquired 13,644,492 shares of common stock for $431 million during the six months ended June 30, 2002. During the six months ended June 30, 2003, 59,865,424 shares of common stock were issued from treasury stock, 59,771,221 of which were issued in connection with the settlement of common stock purchase contracts (see Note 12) for approximately $1,006 million. During the six months ended June 30, 2002, 16,379 shares of common stock were issued from treasury stock. 14. BUSINESS SEGMENT INFORMATION The Company provides insurance and financial services to customers in the United States, Canada, Central America, South America, Europe, South Africa, Asia and Australia. The Company's business is divided into six major segments: Institutional, Individual, Auto & Home, International, Reinsurance and Asset Management. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. Institutional offers a broad range of group insurance and retirement and savings products and services, including group life insurance, non-medical health insurance, such as short and long-term disability, long-term care, and dental insurance, and other insurance products and services. Individual offers a wide variety of individual insurance and investment products, including life insurance, annuities and mutual funds. Auto & Home provides insurance coverages, including private passenger automobile, homeowners and personal excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement and savings products to both individuals and groups, and auto and homeowners coverage to individuals. Reinsurance provides primarily reinsurance of life and annuity policies in North America and various international markets. Additionally, reinsurance of critical illness policies is provided in select international markets. Asset Management provides a broad variety of asset management products and services to individuals and institutions. Set forth in the tables below is certain financial information with respect to the Company's operating segments for the three months and six months ended June 30, 2003 and 2002 and at June 30, 2003 and December 31, 2002. The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains and losses from intercompany sales, which are 29 eliminated in consolidation. The Company allocates capital to each segment based upon an internal capital allocation system that allows the Company to more effectively manage its capital. The Company evaluates the performance of each operating segment based upon net income excluding net investment gains and losses, net of income taxes, and the impact from the cumulative effect of changes in accounting, net of income taxes. The Company allocates certain non-recurring items (e.g., expenses associated with the resolution of proceedings alleging race-conscious underwriting practices, sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products and demutualization costs) to Corporate & Other.
FOR THE THREE MONTHS AUTO & ASSET CORPORATE & ENDED JUNE 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL - -------------------- ------------- ---------- ------ ------------- ----------- ---------- ----------- ------ (DOLLARS IN MILLIONS) Premiums................ $2,343 $1,055 $721 $390 $588 $ -- $(5) $5,092 Universal life and investment-type product policy fees... 145 378 -- 71 -- -- -- 594 Net investment income... 1,010 1,530 41 131 121 16 43 2,892 Other revenues.......... 152 109 4 26 12 37 15 355 Net investment (losses) gains................. (8) (19) (2) (1) 5 -- (30) (55) Income from continuing operations before provision (benefit) for income taxes...... 398 216 51 92 33 9 -- 799
FOR THE THREE MONTHS AUTO & ASSET CORPORATE & ENDED JUNE 30, 2002 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL - -------------------- ------------- ---------- ------ ------------- ----------- ---------- ----------- ------ (DOLLARS IN MILLIONS) Premiums................ $2,162 $1,094 $702 $274 $472 $ -- $ (3) $4,701 Universal life and investment-type product policy fees... 168 339 -- 7 -- -- -- 514 Net investment income... 995 1,563 46 95 102 15 12 2,828 Other revenues.......... 156 102 9 3 11 50 12 343 Net investment (losses) gains................. (109) (89) (18) 8 -- -- 23 (185) Income (loss) from continuing operations before provision (benefit) for income taxes................. 271 200 29 12 33 8 (21) 532
FOR THE SIX MONTHS ENDED AUTO & ASSET CORPORATE & JUNE 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL - ------------------------ ------------- ---------- ------ ------------- ----------- ---------- ----------- ------ (DOLLARS IN MILLIONS) Premiums................ $4,485 $2,096 $1,433 $785 $1,140 $ -- $ (9) $9,930 Universal life and investment-type product policy fees... 300 738 -- 122 -- -- -- 1,160 Net investment income... 1,988 3,092 80 254 231 32 112 5,789 Other revenues.......... 294 195 13 34 24 66 27 653 Net investment (losses) gains................. (119) (87) (6) (1) 1 8 (73) (277) Income (loss) from continuing operations before provision (benefit) for income taxes................. 626 394 74 134 63 19 (86) 1,224
30
FOR THE SIX MONTHS ENDED AUTO & ASSET CORPORATE & JUNE 30, 2002 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL - ------------------------ ------------- ---------- ------ ------------- ----------- ---------- ----------- ------ (DOLLARS IN MILLIONS) Premiums................ $4,022 $2,178 $1,394 $649 $947 $ -- $ (8) $9,182 Universal life and investment-type product policy fees... 320 637 -- 14 -- -- -- 971 Net investment income... 1,972 3,083 91 170 201 29 44 5,590 Other revenues.......... 328 230 16 6 19 90 21 710 Net investment (losses) gains................. (191) (86) (32) (14) 2 (4) 48 (277) Income (loss) from continuing operations before provision (benefit) for income taxes................. 546 465 56 10 70 6 (128) 1,025
The following amounts are reported as discontinued operations in accordance with SFAS 144:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- ----------- 2003 2002 2003 2002 ----- ----- ---- ---- (DOLLARS IN MILLIONS) Net investment income (loss) Institutional............................................. $(2) $ 8 $(1) $16 Individual................................................ -- 17 1 28 Corporate & Other......................................... (1) 8 (1) 16 --- --- --- --- Total net investment income (loss)..................... $(3) $33 $(1) $60 === === === === Net investment gains (losses) Institutional............................................. $(1) $-- $40 $-- Individual................................................ 7 (1) 47 (1) Corporate & Other......................................... (5) (7) 4 (7) --- --- --- --- Total net investment gains (losses).................... $ 1 $(8) $91 $(8) === === === ===
31 The following table presents assets with respect to the Company's operating segments at:
JUNE 30, DECEMBER 31, 2003 2002(1) -------- ------------ (DOLLARS IN MILLIONS) Assets Institutional............................................. $110,308 $ 98,234 Individual................................................ 157,301 145,152 Auto & Home............................................... 4,569 4,540 International............................................. 8,991 8,301 Reinsurance............................................... 11,200 9,924 Asset Management.......................................... 285 190 Corporate & Other......................................... 17,168 11,085 -------- -------- Total.................................................. $309,822 $277,426 ======== ========
- --------------- (1) These balances reflect the allocation of capital using the Risk-Based Capital methodology, which differs from the original presentation of GAAP equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K. Economic Capital. Beginning in 2003, the Company changed its methodology of allocating capital from Risk-Based Capital to Economic Capital. Prior to 2003, the Company's business segments' allocated equity was primarily based on Risk-Based Capital, an internally developed formula based on applying a multiple to the National Association of Insurance Commissioners Statutory Risk-Based Capital and included certain GAAP accounting adjustments. Economic Capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The Economic Capital model accounts for the unique and specific nature of the risks inherent in MetLife's businesses. This is in contrast to the standardized regulatory Risk-Based Capital formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. The change in methodology is being applied prospectively. This change has and will continue to impact the level of net investment income and net income of each of the Company's business segments. A portion of net investment income is credited to the segments based on the level of allocated equity. This change in methodology of allocating equity does not impact the Company's consolidated net investment income or net income. The following table presents actual and pro forma net investment income with respect to the Company's operating segments for the three months and six months ended June 30, 2002. The amounts shown as pro 32 forma reflect net investment income that would have been reported in the prior year had the Company allocated capital based on Economic Capital rather than on the basis of Risk-Based Capital.
NET INVESTMENT INCOME --------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2002 JUNE 30, 2002 ------------------ ------------------ ACTUAL PRO FORMA ACTUAL PRO FORMA ------ --------- ------ --------- (DOLLARS IN MILLIONS) Institutional.................................. $ 995 $1,010 $1,972 $2,004 Individual..................................... 1,563 1,541 3,083 3,039 Auto & Home.................................... 46 42 91 83 International.................................. 95 85 170 151 Reinsurance.................................... 102 92 201 181 Asset Management............................... 15 18 29 35 Corporate & Other.............................. 12 40 44 97 ------ ------ ------ ------ Total........................................ $2,828 $2,828 $5,590 $5,590 ====== ====== ====== ======
The following table presents actual and pro forma assets with respect to the Company's operating segments at December 31, 2002. The amounts shown as pro forma reflect assets that would have been reported in the prior year had the Company allocated capital based on Economic Capital rather than on the basis of Risk-Based Capital.
ASSETS --------------------- ACTUAL(1) PRO FORMA --------- --------- (DOLLARS IN MILLIONS) Institutional............................................... $ 98,234 $ 98,810 Individual.................................................. 145,152 144,073 Auto & Home................................................. 4,540 4,360 International............................................... 8,301 7,990 Reinsurance................................................. 9,924 9,672 Asset Management............................................ 190 320 Corporate & Other........................................... 11,085 12,201 -------- -------- Total..................................................... $277,426 $277,426 ======== ========
- --------------- (1) These balances reflect the allocation of capital using the Risk-Based Capital methodology, which differs from the original presentation of GAAP equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K. The Individual segment's results of operations for the three months and six months ended June 30, 2003 include a charge resulting from the recognition of previously deferred expenses. The International segment's results of operations for the three months and six months ended June 30, 2003 include the results of operations of Aseguradora Hidalgo S.A., a Mexican life insurer that was acquired on June 20, 2002. During the second quarter of 2003, as part of its acquisition and integration strategy, International completed the legal merger of Aseguradora Hidalgo, S.A. into its original Mexican subsidiary, Seguros Genesis, S.A., forming MetLife Mexico, S.A. As a result of the merger of these companies, the Company recorded a tax benefit of $40 million for the reduction of deferred tax valuation allowances. 33 Additionally, a change in reserve methodology resulted in a $22 million after-tax reduction in policyholder liabilities. Corporate & Other includes various start-up and run-off entities, 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 related borrowings. Net investment income and net investment gains and losses are based upon the actual results of each segment's specifically identifiable asset portfolio adjusted for allocated capital. Other costs and operating costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company's product pricing. Revenues derived from any customer did not exceed 10% of consolidated revenues for the three months and six months ended June 30, 2003 and 2002. Revenues from U.S. operations were $8,034 million and $7,655 million for the three months ended June 30, 2003 and 2002, respectively, which represented 90% and 93%, respectively, of consolidated revenues. Revenues from U.S. operations were $15,636 million and $15,047 million for the six months ended June 30, 2003 and 2002, respectively, which represented 91% and 93%, respectively, of consolidated revenues. 15. DISCONTINUED OPERATIONS The Company actively manages its real estate portfolio with the objective to maximize earnings through selective acquisitions and dispositions. In accordance with SFAS 144, income related to real estate classified as held-for-sale 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2003 2002 2003 2002 ----- ----- ----- ------ (DOLLARS IN MILLIONS) Investment income................................ $ 6 $101 $ 15 $ 195 Investment expense............................... (9) (68) (16) (135) Net investment gains (losses).................... 1 (8) 91 (8) --- ---- ---- ----- Total revenues................................. (2) 25 90 52 Provision (Benefit) for income taxes............. (1) 9 33 19 --- ---- ---- ----- Income (Loss) from discontinued operations..... $(1) $ 16 $ 57 $ 33 === ==== ==== =====
The carrying value of real estate related to discontinued operations was $26 million and $166 million at June 30, 2003 and December 31, 2002, respectively. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this discussion, the terms "Company" or "MetLife" refer to MetLife, Inc., a Delaware corporation formed in 1999 (the "Holding Company"), 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 included elsewhere herein. 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 ongoing commitment to reduce expenses. The following tables represent the original expenses recorded in the fourth quarter of 2001 and the remaining liability as of June 30, 2003:
PRE-TAX CHARGES RECORDED IN THE FOURTH QUARTER OF 2001 ------------------------------------------------ INSTITUTIONAL INDIVIDUAL AUTO & HOME TOTAL ------------- ---------- ----------- ----- (DOLLARS IN MILLIONS) Severance and severance-related costs....... $ 9 $32 $ 3 $ 44 Facilities consolidation costs.............. 3 65 -- 68 Business exit costs......................... 387 -- -- 387 ---- --- --- ---- Total..................................... $399 $97 $ 3 $499 ==== === === ====
REMAINING LIABILITY AS OF JUNE 30, 2003 ---------------------------------- INSTITUTIONAL INDIVIDUAL TOTAL ------------- ---------- ----- (DOLLARS IN MILLIONS) Facilities consolidation costs........................... $-- $11 $11 Business exit costs...................................... 34 -- 34 --- --- --- Total.................................................. $34 $11 $45 === === ===
Institutional. The charges to this segment in the fourth quarter of 2001 include costs associated with exiting a business, including the write-off of goodwill, severance and severance-related costs, and facilities consolidation costs. These expenses are the result of the discontinuance of certain 401(k) recordkeeping services and externally-managed guaranteed index separate accounts. These actions resulted in charges to policyholder benefits and claims and other expenses of $215 million and $184 million, respectively. The business realignment initiatives will ultimately result in the elimination of approximately 930 positions. As of June 30, 2003, there were approximately 235 terminations to be completed in connection with the Company's business exit activities. Management expects these terminations to be completed by December 31, 2003. The Company continues to carry a liability as of June 30, 2003 since the exit plan could not be completed within one year due to circumstances outside the Company's control and since certain contractual obligations extended beyond one year. Individual. The charges to this segment in the fourth quarter of 2001 include facilities consolidation costs, severance and severance-related costs, which predominantly stem from the elimination of approximately 560 non-sales positions and 190 operations and technology positions supporting this segment. All terminations were completed as of June 30, 2003. These costs were recorded in other expenses. The remaining liability as of June 30, 2003 is due to certain contractual obligations that extended beyond one year. Auto & Home. The charges to this segment in the fourth quarter of 2001 include severance and severance-related costs associated with the elimination of approximately 200 positions. All terminations were completed as of December 31, 2002. The costs were recorded in other expenses. 35 SEPTEMBER 11, 2001 TRAGEDIES On September 11, 2001 terrorist attacks occurred in New York, Washington, D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life and property, which had an adverse impact on certain of the Company's businesses. The Company's original estimate of the total insurance losses related to the tragedies, which was recorded in the third quarter of 2001, was $208 million, net of income taxes of $117 million. As of June 30, 2003, the Company's remaining liability for unpaid and future claims associated with the tragedies was $24 million, principally related to disability coverages. This estimate has been and will continue to be subject to revision in subsequent periods, as claims are received from insureds and processed. Any revision to the estimate of losses in subsequent periods will affect net income in such periods. The Company's general account investment portfolios include investments, primarily comprised of fixed maturities, in industries that were originally affected by the tragedies, including airline, other travel, lodging and insurance. Exposures to these industries also exist through mortgage loans and investments in real estate. The carrying value of the Company's investment portfolio exposed to these industries was approximately $3.4 billion at June 30, 2003. METLIFE CAPITAL TRUST I In connection with MetLife, Inc.'s, initial public offering in April 2000, the Holding Company and MetLife Capital Trust I (the "Trust") issued equity security units (the "units"). Each unit originally consisted of (i) a contract to purchase, for $50, shares of the Holding Company's common stock (the "purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust, with a stated liquidation amount of $50. In accordance with the terms of the units, the Trust was dissolved on February 5, 2003, and $1,006 million aggregate principal amount of 8.00% debentures of the Holding Company (the "MetLife debentures"), the sole assets of the Trust, were distributed to the owners of the Trust's capital securities in exchange for their capital securities. The MetLife debentures were remarketed on behalf of the debenture owners on February 12, 2003 and the interest rate on the MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a yield to maturity of 2.876%. As a result of the remarketing, the debenture owners received $21 million ($0.03 per diluted common share) in excess of the carrying value of the capital securities. This excess was recorded by the Company as a charge to additional paid-in capital and, for the purpose of calculating earnings per share, is subtracted from net income to arrive at net income available to common shareholders. On May 15, 2003, the purchase contracts associated with the units were settled. In exchange for $1,006 million, the Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract, or approximately 59.8 million shares of treasury stock. Approximately $656 million, which represents the excess of the Company's cost of the treasury stock ($1,662 million) over the contract price of the stock issued to the purchase contract holders ($1,006 million), was recorded as a direct reduction to retained earnings. ECONOMIC CAPITAL Beginning in 2003, the Company changed its methodology of allocating capital from Risk-Based Capital to Economic Capital. Prior to 2003, the Company's business segments' allocated equity was primarily based on Risk-Based Capital, an internally developed formula based on applying a multiple to the National Association of Insurance Commissioners Statutory Risk-Based Capital and included certain adjustments in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Economic Capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The Economic Capital model accounts for the unique and specific nature of the risks inherent in MetLife's businesses. This is in contrast to the standardized regulatory Risk-Based Capital formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. 36 The change in methodology is being applied prospectively. This change has and will continue to impact the level of net investment income and net income of each of the Company's business segments. A portion of net investment income is credited to the segments based on the level of allocated equity. This change in methodology of allocating equity does not impact the Company's consolidated net investment income or net income. The following table presents actual and pro forma net investment income with respect to the Company's operating segments for the three months and six months ended June 30, 2002. The amounts shown as pro forma reflect net investment income that would have been reported in the prior year had the Company allocated capital based on Economic Capital rather than on the basis of Risk-Based Capital.
NET INVESTMENT INCOME --------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2002 JUNE 30, 2002 ------------------ ------------------ ACTUAL PRO FORMA ACTUAL PRO FORMA ------ --------- ------ --------- (DOLLARS IN MILLIONS) Institutional................................... $ 995 $1,010 $1,972 $2,004 Individual...................................... 1,563 1,541 3,083 3,039 Auto & Home..................................... 46 42 91 83 International................................... 95 85 170 151 Reinsurance..................................... 102 92 201 181 Asset Management................................ 15 18 29 35 Corporate & Other............................... 12 40 44 97 ------ ------ ------ ------ Total......................................... $2,828 $2,828 $5,590 $5,590 ====== ====== ====== ======
ACQUISITIONS AND DISPOSITIONS In June 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo"), an insurance company based in Mexico with approximately $2.5 billion in assets as of the date of acquisition. The purchase price of this acquisition was subject to adjustment under certain provisions of the purchase agreement. Post-acquisition analysis did not result in any significant adjustments of the purchase price, although certain changes were made that affected goodwill, the value of business acquired and reserve balances. The Company has completed the merger of Hidalgo into Seguros Genesis, S.A., MetLife's wholly-owned Mexican subsidiary headquartered in Mexico City. The combined entity operates under the name MetLife Mexico. In June 2003, the Company agreed to purchase John Hancock Life Insurance Company's group life insurance business. The transaction is expected to close later this year, subject to regulatory approval. While this transaction provides strategic benefits and extends the Company's customer reach, it will have no material impact on MetLife's 2003 consolidated net income. On June 30, 2003, the Company announced the sale of 20 percent of Santander Central Hispano Seguros y Reaseguros S.A. to Banco Santander Central Hispano S.A. ("Santander") and the purchase of a 20 percent stake in MetLife Iberia S.A. from Santander. In July 2003, the Company announced the sale of its Spanish operation, MetLife, Iberia, S.A. and its subsidiaries, Seguros Genesis, S.A. and Genesis Seguros Generales, S.A., to Liberty Insurance, a Spanish subsidiary of Liberty Mutual Group. The transaction is subject to certain regulatory approvals. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The critical accounting policies, estimates and related judgments underlying the Company's consolidated financial statements are summarized below. In applying these accounting policies, management makes subjective and complex judgments that frequently require estimates about matters that 37 are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. 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 impairments and income, as well as the determination of fair values. The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; and (vi) other subjective factors, including concentrations and information obtained from regulators and rating agencies. 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. The determination of fair values in the absence of quoted market values is based on valuation methodologies, securities the Company deems to be comparable and assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. DERIVATIVES The Company enters into freestanding derivative transactions primarily 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, issues certain insurance policies and engages in certain reinsurance contracts 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 authoritative 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. Such assumptions include estimated market volatility and interest rates used in the determination of fair value where quoted market values are not available. 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 upon 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, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns are most likely to impact the rate of amortization of such costs. The aforementioned factors enter into management's estimates of gross margins and profits, which generally are used to amortize 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 38 of the asset and a charge to income if estimated future gross margins and profits are less than amounts deferred. In addition, the Company utilizes the reversion to the mean assumption, a standard industry practice, in its determination of the amortization of deferred policy acquisition costs. This practice assumes that the expectation for long-term appreciation in equity markets is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. 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. The Company also 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, as well as 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. Differences between the actual experience and assumptions used in pricing these policies and in the establishment of liabilities result in variances in profit and could result in losses. 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 aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed above. 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 reinsurer is subject or features that delay the timely reimbursement of claims. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. See "-- Derivatives" above. 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, including the Company's asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables used to determine amounts recorded. The data and variables that impact the assumption used to estimate the Company's asbestos-related liability include the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. It is possible that an adverse outcome in certain of the Company's litigation, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company's consolidated net income or cash flows in particular quarterly or annual periods. 39 EMPLOYEE BENEFIT PLANS The Company sponsors pension and other retirement plans in various forms covering employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company. Management determines these assumptions based upon currently available market and industry data, historical performance of the plan and its assets, and consultation with an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. These differences may have a significant effect on the Company's consolidated financial statements and liquidity. The actuarial assumptions used in the calculation of the Company's aggregate projected benefit obligation may vary and include an expectation of long-term market appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. For the largest of the plans sponsored by the Company (the Metropolitan Life Retirement Plan for United States Employees, with a projected benefit obligation of $4.3 billion or 98.6% of all qualified plans at December 31, 2002), the discount rate, expected rate of return on plan assets, and the range of rates of future compensation increases used in that plan's valuation at December 31, 2002 were 6.75%, 9% and 4% to 8%, respectively. The expected rate of return on plan assets for use in that plan's valuation in 2003 is currently anticipated to be 8.5%. 40 RESULTS OF OPERATIONS The following table presents consolidated financial information for the Company for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- ----------------- 2003 2002 2003 2002 ------ ------ ------- ------- (DOLLARS IN MILLIONS) REVENUES Premiums................................................ $5,092 $4,701 $ 9,930 $ 9,182 Universal life and investment-type product policy fees.................................................. 594 514 1,160 971 Net investment income................................... 2,892 2,828 5,789 5,590 Other revenues.......................................... 355 343 653 710 Net investment losses (net of amounts allocated from other accounts of $0, ($73), ($38) and ($86), respectively)......................................... (55) (185) (277) (277) ------ ------ ------- ------- Total revenues........................................ 8,878 8,201 17,255 16,176 ------ ------ ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment losses of $5, ($64), ($23) and ($71), respectively)................. 4,965 4,882 9,918 9,500 Interest credited to policyholder account balances...... 761 727 1,508 1,441 Policyholder dividends.................................. 507 488 1,010 985 Other expenses (excludes amounts directly related to net investment losses of ($5), ($9), ($15) and ($15), respectively)......................................... 1,846 1,572 3,595 3,225 ------ ------ ------- ------- Total expenses........................................ 8,079 7,669 16,031 15,151 ------ ------ ------- ------- Income from continuing operations before provision for income taxes.......................................... 799 532 1,224 1,025 Provision for income taxes.............................. 218 161 339 347 ------ ------ ------- ------- Income from continuing operations....................... 581 371 885 678 Income from discontinued operations, net of income taxes................................................. (1) 16 57 33 ------ ------ ------- ------- Income before cumulative effect of change in accounting............................................ 580 387 942 711 Cumulative effect of change in accounting............... -- -- -- 5 ------ ------ ------- ------- Net income.............................................. $ 580 $ 387 $ 942 $ 716 ====== ====== ======= =======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- THE COMPANY Premiums increased by $391 million, or 8%, to $5,092 million for the three months ended June 30, 2003 from $4,701 million for the comparable 2002 period. This variance is primarily attributable to increases in the Institutional, Reinsurance, International and Auto & Home segments, partially offset by a decrease in the Individual segment. A $181 million increase in Institutional is primarily the result of growth in this segment's long-term care, disability, dental and group life businesses. The increase in these businesses is partially offset by a decrease in retirement and savings. This decrease is the result of the sale of a significant single premium contract in the second quarter of 2002, which is partially offset by higher sales in structured settlement products in 2003. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business contributed to a $116 million increase in the Reinsurance segment. An increase of $116 million in International is primarily due to the acquisition of Hidalgo in June 2002, which accounted for $113 million of the variance. A 41 $19 million increase in Auto & Home is primarily due to rate increases in both the auto and property lines. A $39 million decrease in the Individual segment is primarily the result of an amendment to a reinsurance agreement in the third quarter of 2002 and a decrease in dividends used to purchase additional insurance as a direct result of the dividend scale reduction adopted in the fourth quarter of 2002. Universal life and investment-type product policy fees increased by $80 million, or 16%, to $594 million for the three months ended June 30, 2003 from $514 million for the comparable 2002 period. This variance is largely attributable to increases in the International and Individual segments, partially offset by a decrease in the Institutional segment. A $64 million increase in the International segment is primarily due to the acquisition of Hidalgo in June 2002, which accounted for $60 million of the variance. A $39 million increase in Individual is primarily due to higher revenue from insurance fees, surrender charges and the recognition of previously deferred fees. The recognition of previously deferred fees is the result of lapse, mortality and investment experience. In addition, an increase in average separate account balances and favorable investment experience resulted in an increase in universal life and investment-type product policy fees from annuity and investment-type products. A $23 million decrease in the Institutional segment results from fees received in the second quarter of 2002 on two bank-owned life insurance contracts. Net investment income increased by $64 million, or 2%, to $2,892 million for the three months ended June 30, 2003 from $2,828 million for the comparable 2002 period. This variance is attributable to increases of (i) $75 million, or 4%, in income from fixed maturities; (ii) $13 million, or 23%, in income from other invested assets; (iii) $4 million, or 11%, in income from cash, cash equivalents and short-term investments; and (iv) $2 million, or 1%, in interest income from policy loans. These variances are partially offset by decreases of (i) $15 million, or 32%, in income from equity securities and other limited partnership interests; (ii) $13 million, or 9%, in income from real estate and real estate joint ventures held-for-investment, net of investment expenses and depreciation; and (iii) higher investment expenses of $2 million, or 3%. The increase in income from fixed maturities to $2,073 million in 2003 from $1,998 million in 2002 is mostly due to a higher asset base resulting from the reinvestment of cash flows, higher income from equity-linked notes due to increases in underlying indices, and the acquisition of Hidalgo in June 2002. These favorable variances are somewhat offset by a decline in reinvestment rates. The increase in income on other invested assets to $69 million in 2003 from $56 million in 2002 is primarily due to an increase in reinsurance contracts' funds withheld at interest. Income from cash, cash equivalents and short-term investments increased to $42 million in 2003 from $38 million in 2002 largely as a result of a higher asset base attributable to an increase in short-term financing-related liabilities, partially offset by a decline in short-term rates. The increase in interest income from policy loans to $139 million in 2003 from $137 million in 2002 is mostly due to increased loans outstanding. The decrease in income from equity securities and other limited partnership interests to $32 million in 2003 from $47 million in 2002 is primarily due to a decrease in sales of underlying assets held within corporate partnerships. The decrease in income from real estate and real estate joint ventures held-for-investment to $128 million in 2003 from $141 million in 2002 is primarily due to a decrease in sales of underlying assets held within the joint ventures. The increase in net investment income is primarily attributable to increases in the International segment, Corporate & Other and the Reinsurance and Institutional segments, somewhat offset by decreases in the Individual and Auto & Home segments. A $36 million increase in International is largely due to a higher asset base resulting from the acquisition of Hidalgo in June 2002, partially offset by reduced income from allocated capital. The increase in Corporate & Other of $31 million is mainly due to higher income from allocated capital and equity-linked notes, as well as an increase in income resulting from a higher asset base, partially offset by lower reinvestment rates. The Reinsurance segment increased $19 million largely resulting from an increase in reinsurance contracts' funds withheld at interest, partially offset by reduced income from allocated capital. The Institutional segment increased $15 million primarily due to a higher asset base, an increase in income from equity-linked notes and higher income from allocated capital, partially offset by a decline in reinvestment rates. These increases are partially offset by a decrease in the Individual segment of $33 million primarily resulting from lower reinvestment rates, fewer sales of underlying assets held in corporate partnerships and lower income from allocated capital, partially offset by a higher asset base. The decrease in Auto & Home of $5 million is due to lower reinvestment rates and reduced income from allocated capital. 42 Other revenues increased by $12 million, or 3%, to $355 million for the three months ended June 30, 2003 from $343 million for the comparable 2002 period. This variance is primarily attributable to an increase in the International segment, partially offset by a decrease in the Asset Management segment. A $23 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. This increase is partially offset by a $13 million decrease in Asset Management due to lower average assets under management on which management and advisory fees are earned. Net investment losses decreased by $130 million, or 70%, to $55 million for the three months ended June 30, 2003 from $185 million for the comparable 2002 period. This decrease reflects total investment losses, before offsets, of $55 million (including gross gains of $130 million, gross losses of $79 million, writedowns of $103 million, and a net loss from derivatives of $3 million), a decrease of $203 million, or 79%, from $258 million (including gross gains of $438 million, gross losses of $314 million, writedowns of $261 million, and a net loss from derivatives of $121 million) for the comparable 2002 period. Offsets include the amortization of deferred policy acquisition costs of $5 million and $9 million for the three months ended June 30, 2003 and 2002, respectively, and changes in the policyholder dividend obligation of ($5) million and $64 million for the three months ended June 30, 2003 and 2002, respectively. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of deferred policy acquisition costs, to the extent that such amortization results from investment gains and losses; and (ii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. 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 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 $83 million, or 2%, to $4,965 million for the three months ended June 30, 2003 from $4,882 million for the comparable 2002 period. This variance is primarily attributable to increases in the Reinsurance, Institutional, International, and Auto & Home segments, partially offset by a decrease in the Individual segment. An $81 million increase in Reinsurance is consistent with the growth in premiums as previously discussed above. A $46 million increase in Institutional is primarily a result of growth in premiums as previously discussed, partially offset by a decrease in retirement and savings as the second quarter of 2002 included a sale of a significant single premium contract. A $24 million net increase in International is largely due to the acquisition of Hidalgo in June 2002, partially offset by a reduction in policyholder liabilities related to a change in reserve methodology. A $10 million increase in Auto & Home is primarily due to more catastrophes and higher claims severities in the auto line and increased severities and a higher catastrophe level, partially offset by lower non-catastrophe claims frequency in the property line. These increases were partially offset by a $77 million decline in the Individual segment predominantly due to favorable mortality experience, partially offset by the impact of the aforementioned amendment to a reinsurance agreement and an increase in the claims associated with guaranteed minimum death benefits. Interest credited to policyholder account balances increased by $34 million, or 5%, to $761 million for the three months ended June 30, 2003 from $727 million for the comparable 2002 period. This variance is primarily due to increases in the International and Reinsurance segments, partially offset by a decrease in the Institutional segment. A $25 million increase in International is largely due to the acquisition of Hidalgo in June 2002. The majority of the $13 million increase in Reinsurance is the result of increasing deposits from several annuity treaties. A $4 million decrease in the Institutional segment is primarily attributable to declines in average crediting rates in 2003 as a result of the lower interest rate environment and is partially offset by an increase in policyholder account balances. 43 Policyholder dividends increased by $19 million, or 4%, to $507 million for the three months ended June 30, 2003 from $488 million for the comparable 2002 period. This variance is primarily attributable to the Institutional and Individual segments. A $39 million increase in Institutional is largely due to favorable mortality experience among several large group clients. Institutional policyholder dividends vary from period to period based on participating contract experience, which is generally recorded in policyholder benefits and claims. The increase in Institutional is partially offset by a $22 million decrease in Individual resulting primarily from the reduction of the dividend scale in the fourth quarter of 2002. Other expenses increased by $274 million, or 17%, to $1,846 million for the three months ended June 30, 2003 from $1,572 million for the comparable 2002 period. Excluding the capitalization and amortization of deferred policy acquisition costs, which are discussed below, other expenses increased by $295 million, or 17%, to $2,012 million for the three months ended June 30, 2003 from $1,717 million for the comparable 2002 period. This variance is primarily attributable to increases in the Individual, Reinsurance, Institutional, and International segments, partially offset by decreases in Corporate & Other and the Asset Management segment. A $119 million increase in Individual is primarily due to higher commissions resulting from sales growth in new annuity and investment-type products, increased pension and post-retirement benefit expenses and a $22 million charge principally related to office consolidations, partially offset by savings from ongoing expense management initiatives. A $107 million increase in Reinsurance is largely attributable to higher reinsurance allowances paid. A $65 million increase in Institutional is predominantly due to a rise in non-deferrable variable expenses associated with the aforementioned premium growth, additional post-retirement and other employee benefit-related costs and a $15 million charge principally related to office consolidations. These increases in Institutional are partially offset by expense savings resulting from the Company's exit from the large market 401(k) business in late 2001, as business was transferred to other carriers throughout 2002. A $63 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. These increases were partially offset by a $41 million decrease in Corporate & Other, which is mostly attributable to a $46 million reduction in litigation-related expenses. This decrease is largely attributable to a reduction of a previously established liability related to the Company's race-conscious underwriting settlement. A $13 million decrease in Asset Management is primarily due to staff reductions in the third and fourth quarters of 2002 and reduced expenses as a result of lower average assets under management. Deferred policy acquisition costs are principally amortized in proportion to gross margins and profits, including investment gains and 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 and profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisition costs increased by $125 million, or 25%, to $627 million for the three months ended June 30, 2003 from $502 million for the comparable 2002 period. This variance is primarily due to the Reinsurance, Individual, International, Institutional and Auto & Home segments. A $57 million increase in Reinsurance is largely attributable to higher reinsurance allowances paid. A $22 million increase in Individual is primarily the result of higher sales commissions and other deferrable expenses related to annuity and investment-type products, partially offset by the impact of the recognition of non-deferrable expenses that were previously deferred. A $19 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. A $15 million increase in Institutional is related to sales growth as previously discussed. A $12 million increase in Auto & Home is primarily due to higher premiums from rate increases. Total amortization of deferred policy acquisition costs increased by $108 million, or 31%, to $456 million for the three months ended June 30, 2003 from $348 million for the comparable 2002 period. Amortization of $461 million and $357 million are allocated to other expenses in 2003 and 2002, respectively, while the remainder of the amortization in each year is allocated to investment gains and losses. The increase in amortization allocated to other expenses is largely attributable to the International, Individual, Institutional and Auto & Home segments. A $55 million increase in International is primarily due to an increase in the amortization of the value of business acquired related to the change in reserve methodology discussed above and the acquisition of Hidalgo in June 2002. A $30 million increase in Individual is primarily due to a charge resulting from the recognition of previously deferred expenses, with the remaining variance attributable to the impact of lapse, 44 mortality and investment experience. A $12 million increase in Institutional is due to sales growth as previously discussed. A $10 million increase in Auto & Home is primarily related to higher premiums from rate increases. Income tax expense for the three months ended June 30, 2003 was $218 million, or 27% of income before provision for income taxes and cumulative effect of change in accounting, compared with $161 million, or 30%, for the comparable 2002 period. The 2003 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income, tax credits for investments in low income housing, and a reduction of the deferred tax valuation allowance to recognize the effect of certain foreign net operating loss carryforwards. The 2002 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 Statement of Financial Accounting Standards ("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 for the three months ended June 30, 2003 and 2002. The income from discontinued operations is comprised of net investment income and net investment gains related to 51 properties that the Company began marketing for sale on or after January 1, 2002. For the three months ended June 30, 2003, the Company recognized $1 million of net investment gains from discontinued operations related to two properties sold or held-for-sale. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- THE COMPANY Premiums increased by $748 million, or 8%, to $9,930 million for the six months ended June 30, 2003 from $9,182 million for the comparable 2002 period. This variance is primarily attributable to increases in the Institutional, Reinsurance, International and Auto & Home segments, partially offset by a decrease in the Individual segment. A $463 million increase in Institutional is predominantly the result of growth in this segment's long-term care, disability, dental and group life businesses. In addition, an increase in retirement and savings resulted from higher sales of structured settlement products, partially offset by a decrease due to the sale of a significant single premium contract in the second quarter of 2002. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business contributed to a $193 million increase in the Reinsurance segment. An increase of $136 million in International is primarily due to the acquisition of Hidalgo in June 2002, which accounted for $255 million of the variance, largely offset by a decrease of $108 million attributable to a non-recurring sale of an annuity contract in the first quarter of 2002 in Canada. A $39 million increase in Auto & Home is largely due to rate increases in both the auto and property lines. An $82 million decrease in the Individual segment is primarily the result of an amendment to a reinsurance agreement in the third quarter of 2002 and a decrease in dividends used to purchase additional insurance as a direct result of the dividend scale reduction adopted in the fourth quarter of 2002. Universal life and investment-type product policy fees increased by $189 million, or 19%, to $1,160 million for the six months ended June 30, 2003 from $971 million for the comparable 2002 period. This variance is primarily attributable to increases in the International and Individual segments, partially offset by a decrease in the Institutional segment. A $108 million increase in the International segment is predominantly due to the acquisition of Hidalgo in June 2002, which accounted for $102 million of the variance. A $101 million increase in Individual is largely attributable to higher revenue from insurance fees, surrender charges and the recognition of previously deferred fees. The recognition of previously deferred fees is the result of lapse, mortality and investment experience. In addition, favorable investment experience and an increase in average separate account balances resulted in an increase in universal life and investment-type product policy fees from annuity and investment-type products. These increases are partially offset by a $20 million decline in the Institutional segment resulting from fees received in the second quarter of 2002 on two bank-owned life insurance contracts. Net investment income increased by $199 million, or 4%, to $5,789 million for the six months ended June 30, 2003 from $5,590 million for the comparable 2002 period. This variance is primarily attributable to increases of (i) $165 million, or 4%, in income from fixed maturities; (ii) $30 million, or 29%, in income from 45 other invested assets; (iii) $27 million, or 46%, in income from equity securities and other limited partnership interests; (iv) $10 million, or 4%, in interest income from policy loans; and (v) $8 million, or 1%, in income from mortgage loans on real estate. These variances are partially offset by decreases of (i) $15 million, or 12%, in income from cash, cash equivalents and short-term investments; (ii) $11 million, or 4%, in income from real estate and real estate joint ventures held-for-investment, net of investment expenses and depreciation; and (iii) higher investment expenses of $15 million, or 14%. The increase in income from fixed maturities to $4,117 million in 2003 from $3,952 million in 2002 is due to a higher asset base resulting from the reinvestment of cash flows, higher income from equity-linked notes resulting from appreciation in underlying indices, the acquisition of Hidalgo in June 2002, and an increase in bond prepayment fees. These increases are partially offset by a decline in reinvestment rates. The increase in income on other invested assets to $132 million in 2003 from $102 million in 2002 is largely due to an increase in reinsurance contracts' funds withheld at interest. The increase in income from equity securities and other limited partnership interests to $86 million in 2003 from $59 million in 2002 is predominantly due to an increase in sales of underlying assets held in corporate partnerships. The increase in interest income from policy loans to $278 million in 2003 from $268 million in 2002 is largely due to increased loans outstanding. The increase in income from mortgage loans on real estate to $942 million in 2003 from $934 million in 2002 is largely attributable to a higher asset base coupled with an increase in prepayment fees, somewhat offset by lower reinvestment rates. The decrease in income from cash, cash equivalents and short-term investments to $106 million in 2003 from $121 million in 2002 is mainly due to a decline in short-term interest rates, partially offset by a higher asset base resulting from an increase in short-term financing-related liabilities. The decrease in income from real estate and real estate joint ventures held-for-investment to $253 million in 2003 from $264 million in 2002 is largely due to lower income from hotel properties as a result of lower occupancy rates, combined with a decrease in sales of underlying assets held within the joint ventures. These decreases were somewhat offset by increased income from space rented at the Company's One Madison Avenue, New York City location. The increase in investment expenses to $125 million in 2003 from $110 million in 2002 is primarily the result of higher corporate and overhead charges applicable to investment activity. The increase in net investment income is primarily attributable to increases in the International segment, Corporate & Other and the Reinsurance, Institutional and Individual segments, partially offset by a decrease in the Auto & Home segment. An $84 million increase in International is primarily due to a higher asset base resulting from the acquisition of Hidalgo in June 2002, partially offset by reduced income related to allocated capital. The increase in Corporate & Other of $68 million is mainly due to higher income from allocated capital, equity-linked notes and sales of underlying assets held in corporate partnerships, as well as an increase in income resulting from a higher asset base. These favorable variances are partially offset by a decline in reinvestment rates. The Reinsurance segment increased $30 million primarily as a result of an increase in reinsurance contracts' funds withheld at interest, somewhat offset by reduced income from allocated capital. The Institutional segment increased $16 million predominantly as a result of a higher asset base, increased sales of underlying assets held in corporate partnerships and higher income from allocated capital, partially offset by a decline in reinvestment rates. A $9 million increase in the Individual segment is largely attributable to a higher asset base, partially offset by lower reinvestment rates, fewer sales of underlying assets held in corporate partnerships and lower income from allocated capital. A decrease in the Auto & Home segment of $11 million is mainly due to lower reinvestment rates and reduced income from allocated capital. Other revenues decreased by $57 million, or 8%, to $653 million for the six months ended June 30, 2003 from $710 million for the comparable 2002 period. This variance is primarily attributable to decreases in the Individual, Institutional and Asset Management segments and an increase in the International segment. A $35 million decrease in Individual is primarily due to lower commission and fee income associated with the volume decline in the broker/dealer and other subsidiaries, principally due to the depressed equity markets. A decrease of $34 million in Institutional is primarily attributable to reduced administrative fees stemming from the Company's exit from the large market 401(k) business in late 2001. This action resulted in reduced revenue as business was transferred to other carriers throughout 2002. A $24 million decrease in Asset Management is due to lower average assets under management on which management and advisory fees are earned. A $28 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. 46 Net investment losses remained unchanged at $277 million for both the six months ended June 30, 2003 and 2002. This amount reflects total investment losses, before offsets, of $315 million (including gross gains of $262 million, gross losses of $173 million, writedowns of $367 million, and a net loss from derivatives of $37 million), a decrease of $48 million, or 13%, from $363 million (including gross gains of $983 million, gross losses of $597 million, writedowns of $599 million, and a net loss from derivatives of $150 million) from the comparable 2002 period. Offsets include the amortization of deferred policy acquisition costs of $15 million for both the six months ended June 30, 2003 and 2002, and changes in the policyholder dividend obligation of $23 million and $71 million for the six months ended June 30, 2003 and 2002, respectively. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of deferred policy acquisition costs, to the extent that such amortization results from investment gains and losses; and (ii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. 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 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 $418 million, or 4%, to $9,918 million for the six months ended June 30, 2003 from $9,500 million for the comparable 2002 period. This variance is primarily attributable to increases in the Institutional, Reinsurance, International, and Auto & Home segments, partially offset by a decrease in the Individual segment. A $256 million increase in Institutional is largely the result of growth in premiums as discussed above. A $114 million increase in Reinsurance is consistent with the growth in premiums as discussed above. A net increase of $55 million in International is largely attributable to the acquisition of Hidalgo in June 2002, partially offset by a reduction in policyholder liabilities related to a change in reserve methodology. A $49 million increase in Auto & Home is predominantly due to an increase in auto claims frequencies resulting largely from adverse road conditions in the first quarter of 2003 and higher auto losses due to adverse claims development related to prior accident years, resulting mostly from bodily injury and uninsured motorist claims also in the first quarter of 2003. The increase in the auto line is partially offset by a decrease in the property line resulting from improved claims frequencies, a reduction in the number of homeowners policies in-force and underwriting and agency management actions. A $57 million decline in the Individual segment is primarily due to favorable mortality experience, partially offset by the impact of the aforementioned amendment to a reinsurance agreement and an increase in the claims associated with guaranteed minimum death benefits. Interest credited to policyholder account balances increased by $67 million, or 5%, to $1,508 million for the six months ended June 30, 2003 from $1,441 million for the comparable 2002 period. This variance is primarily due to increases in the International and Reinsurance segments, partially offset by a decrease in the Institutional segment. A $53 million increase in International is largely due to the acquisition of Hidalgo in June 2002. The majority of the $22 million increase in Reinsurance is the result of increasing deposits from several annuity treaties. An $8 million decrease in the Institutional segment is primarily attributable to declines in average crediting rates in 2003 as a result of the low interest rate environment. Policyholder dividends increased by $25 million, or 3%, to $1,010 million for the six months ended June 30, 2003 from $985 million for the comparable 2002 period. This variance is attributable to the Institutional, International and Individual segments. A $56 million increase in Institutional is largely due to favorable mortality experience among several large group clients. Institutional policyholder dividends vary from period to period based on participating contract experience, which is generally recorded in policyholder benefits and claims. A $10 million increase in International is primarily attributable to the acquisition of 47 Hidalgo in June 2002. A $41 million decrease in the Individual segment is the result of the reduction of the dividend scale in the fourth quarter of 2002. Other expenses increased by $370 million, or 11%, to $3,595 million for the six months ended June 30, 2003 from $3,225 million for the comparable 2002 period. Excluding the capitalization and amortization of deferred policy acquisition costs, which are discussed below, other expenses increased by $389 million, or 11%, to $3,960 million for the six months ended June 30, 2003 from $3,571 million for the comparable 2002 period. This variance is primarily attributable to increases in the Reinsurance, Individual, Institutional, and International segments, partially offset by decreases in Corporate & Other and the Asset Management and Auto & Home segments. A $157 million increase in Reinsurance is largely attributable to higher reinsurance allowances paid. A $131 million increase in Individual is primarily due to higher commissions resulting from sales growth in new annuity and investment-type products, increased pension and post-retirement benefit expenses and a $22 million charge principally related to office consolidations, partially offset by savings from ongoing expense management initiatives. A $115 million increase in Institutional is predominantly due to a rise in non-deferrable variable expenses associated with the aforementioned premium growth, additional post-retirement costs and a $15 million charge principally related to office consolidations. The increases in Institutional are partially offset by expense savings resulting from the Company's exit from the large market 401(k) business in late 2001, as business was transferred to other carriers throughout 2002. A $110 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. These increases were partially offset by a $91 million decrease in Corporate & Other, which is mostly attributable to a $98 million reduction in litigation-related expenses. This decrease is largely attributable to a reduction of a previously established liability related to the Company's race-conscious underwriting settlement. A $22 million decrease in Asset Management is primarily due to staff reductions in the third and fourth quarters of 2002 and reduced expenses as a result of lower average assets under management. An $11 million decrease in Auto & Home is primarily due to a reduction in the cost of the New York assigned risk plan and a reduction in expenses resulting from the completion of the St. Paul integration. Deferred policy acquisition costs are principally amortized in proportion to gross margins and profits, including investment gains and 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 and profits originating from transactions other than investment gains and losses. Capitalization of deferred policy acquisition costs increased by $187 million, or 18%, to $1,213 million for the six months ended June 30, 2003 from $1,026 million for the comparable 2002 period. This variance is primarily due to the Reinsurance, Individual, International, Auto & Home and Institutional segments. A $60 million increase in Reinsurance is largely attributable to higher reinsurance allowances paid. A $38 million increase in Individual is primarily the result of higher sales commissions and other deferrable expenses related to annuity and investment-type products, partially offset by the impact of the recognition of non-deferrable expenses that were previously deferred. A $45 million increase in International is primarily due to the acquisition of Hidalgo in June 2002. A $26 million increase in Auto & Home is primarily due to higher premiums from rate increases. An $18 million increase in Institutional is primarily related to sales growth as previously discussed. Total amortization of deferred policy acquisition costs increased by $168 million, or 25%, to $833 million for the six months ended June 30, 2003 from $665 million for the comparable 2002 period. Amortization of $848 million and $680 million are allocated to other expenses in 2003 and 2002, respectively, while the remainder of the amortization in each year is allocated to investment gains and losses. The increase in amortization allocated to other expenses is largely attributable to the International, Individual, Auto & Home and Institutional segments. A $62 million increase in International is primarily due to an increase in the amortization of the value of business acquired related to the change in reserve methodology discussed above and the acquisition of Hidalgo in June 2002. A $68 million increase in Individual is primarily due to a charge resulting from the recognition of previously deferred expenses, with the remaining variance attributable to the impact of lapse, mortality and investment experience. A $21 million increase in Auto & Home is primarily due to higher premiums from rate increases. A $16 million increase in Institutional is primarily related to sales growth as previously discussed. 48 Income tax expense for the six months ended June 30, 2003 was $339 million, or 28% of income before provision for income taxes and cumulative effect of change in accounting, compared with $347 million, or 34%, for the comparable 2002 period. The 2003 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income, tax credits for investments in low income housing, a tax recovery of prior year tax overpayments on tax-exempt bonds and a reduction of the deferred tax valuation allowance to recognize the effect of certain foreign net operating loss carryforwards. The 2002 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 Statement of Financial Accounting Standards ("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 for the six months ended June 30, 2003 and 2002. The income from discontinued operations is comprised of net investment income and net investment gains related to 51 properties that the Company began marketing for sale on or after January 1, 2002. For the six months ended June 30, 2003, the Company recognized $91 million of net investment gains from discontinued operations related to 15 properties sold or held-for-sale. INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------- --------------- 2003 2002 2003 2002 ------ ------ ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums........................................... $2,343 $2,162 $4,485 $4,022 Universal life and investment-type product policy fees............................................. 145 168 300 320 Net investment income.............................. 1,010 995 1,988 1,972 Other revenues..................................... 152 156 294 328 Net investment losses.............................. (8) (109) (119) (191) ------ ------ ------ ------ Total revenues................................... 3,642 3,372 6,948 6,451 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims................... 2,506 2,460 4,885 4,629 Interest credited to policyholder account balances......................................... 228 232 452 460 Policyholder dividends............................. 54 15 93 37 Other expenses..................................... 456 394 892 779 ------ ------ ------ ------ Total expenses................................... 3,244 3,101 6,322 5,905 ------ ------ ------ ------ Income from continuing operations before provision for income taxes................................. 398 271 626 546 Provision for income taxes......................... 142 86 222 189 ------ ------ ------ ------ Income from continuing operations.................. 256 185 404 357 Income (Loss) from discontinued operations, net of income taxes..................................... (2) 5 25 10 ------ ------ ------ ------ Net income......................................... $ 254 $ 190 $ 429 $ 367 ====== ====== ====== ======
49 THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- INSTITUTIONAL Premiums increased by $181 million, or 8%, to $2,343 million for the three months ended June 30, 2003 from $2,162 million for the comparable 2002 period. Group insurance premiums increased by $218 million, primarily in the long-term care, disability, dental and group life products. The increase in long term-care is largely attributable to a significant contract for which the Company began receiving premiums in the second half of 2002. Favorable renewal actions and persistency generated the increase in disability. The dental increase is predominantly due to improved persistency and sales growth. The group life increase resulted from improved persistency, strong sales in 2002 and growth on the existing block of business. In addition, a significant premium was earned on an existing term life contract. Retirement and savings premiums decreased by $37 million due to a sale of a significant single premium contract in the second quarter of 2002, partially offset by higher sales in structured settlement products in 2003. Retirement and savings premium levels are significantly influenced by large transactions and, as a result, can fluctuate from period to period. Universal life and investment-type product policy fees decreased by $23 million, or 14%, to $145 million for the three months ended June 30, 2003 from $168 million for the comparable 2002 period. This decrease reflects fees received in the second quarter of 2002 on two bank-owned life insurance contracts. Other revenues decreased by $4 million, or 3%, to $152 million for the three months ended June 30, 2003 from $156 million for the comparable 2002 period. Retirement and savings other revenues decreased $10 million, primarily due to lower fees in the 401(k) business, as a result of exiting the large market 401(k) business in late 2001, which resulted in reduced revenue as business was transferred to other carriers throughout 2002. This is partially offset by an increase in group insurance other revenues of $6 million due to additional revenue received for separate account fees and fees relating to a settlement pertaining to the Company's former vision business. Policyholder benefits and claims increased by $46 million, or 2%, to $2,506 million for the three months ended June 30, 2003 from $2,460 million for the comparable 2002 period. Group insurance increased by $88 million, primarily as a result of the premium growth in this segment's long-term care, disability, dental and group life products. Retirement and savings decreased by $42 million, comparable with the aforementioned decrease in premiums, which is primarily due to the sale of a significant contract in the second quarter of 2002, partially offset by higher sales in structured settlement products in 2003. Both periods benefited from favorable underwriting-related experience. Interest credited to policyholders decreased by $4 million, or 2%, to $228 million for the three months ended June 30, 2003 from $232 million for the comparable 2002 period. This decrease is primarily attributable to declines in average crediting rates in 2003 as a result of the lower interest rate environment, partially offset by an increase in policyholder account balances. Policyholder dividends increased by $39 million, or 260%, to $54 million for the three months ended June 30, 2003 from $15 million for the comparable 2002 period. This increase is largely attributable to favorable mortality experience among several large group clients. Policyholder dividends vary from period to period based on participating contract experience, which is generally recorded in policyholder benefits and claims. Other expenses increased by $62 million, or 16%, to $456 million for the three months ended June 30, 2003 from $394 million in the comparable 2002 period. Group insurance and retirement and savings expenses increased by $43 million and $19 million, respectively, primarily due to a rise in non-deferrable variable expenses associated with the aforementioned premium growth, additional post-retirement and other employee benefit-related costs and a $15 million charge principally related to office consolidations. Non-deferrable variable expenses include a certain portion of premium taxes, commissions, claim approval and case administration expenses. The increase in retirement and savings is partially offset by the Company's exit from the large market 401(k) business in late 2001, which resulted in expense reductions as business was transferred to other carriers throughout 2002. 50 SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- INSTITUTIONAL Premiums increased by $463 million, or 12%, to $4,485 million for the six months ended June 30, 2003 from $4,022 million for the comparable 2002 period. Group insurance premiums increased by $424 million primarily in the long-term care, disability, dental and group life products. The increase in long term-care is largely attributable to a significant contract entered into for which the Company began receiving premiums in the second half of 2002. Favorable renewal actions and persistency generated the increase in disability. The dental increase is predominantly due to improved persistency and sales growth. The group life increase resulted from improved persistency, strong sales in 2002 and growth on the existing block of business. In addition, a significant premium was earned on an existing term life contract. Retirement and savings premiums increased by $39 million, primarily resulting from higher sales in structured settlement products, offset by a sale of a significant single premium contract in the second quarter of 2002. Retirement and savings premium levels are significantly influenced by large transactions and, as a result, can fluctuate from period to period. Universal life and investment-type product policy fees decreased by $20 million, or 6%, to $300 million for the six months ended June 30, 2003 from $320 million for the comparable 2002 period. This decrease reflects fees received in the second quarter of 2002 on two bank-owned life insurance contracts. Other revenues decreased by $34 million, or 10%, to $294 million for the six months ended June 30, 2003 from $328 million for the comparable 2002 period. Retirement and savings other revenues decreased $35 million primarily due to a decline in administrative fees as a result of the Company's exit from the large market 401(k) business in late 2001, which resulted in reduced revenue as business was transferred to other carriers throughout 2002. Policyholder benefits and claims increased by $256 million, or 6%, to $4,885 million for the six months ended June 30, 2003 from $4,629 million for the comparable 2002 period. Group insurance increased by $210 million, primarily as a result of the aforementioned premium growth in this segment's long-term care, disability, dental and group life products. The remaining increase in retirement and savings of $46 million is comparable with the premium growth. Interest credited to policyholders decreased by $8 million, or 2%, to $452 million for the six months ended June 30, 2003 from $460 million for the comparable 2002 period. This decrease is primarily attributable to a decline in average crediting rates in 2003 as a result of the lower interest rate environment. Policyholder dividends increased by $56 million, or 151%, to $93 million for the six months ended June 30, 2003 from $37 million for the comparable 2002 period. This increase is largely attributable to favorable mortality experience among several large group clients. Policyholder dividends vary from period to period based on participating contract experience, which is generally recorded in policyholder benefits and claims. Other expenses increased by $113 million, or 15%, to $892 million for the six months ended June 30, 2003 from $779 million in the comparable 2002 period. Group insurance and retirement and savings expenses increased by $89 million and $24 million, respectively, primarily due to a rise in non-deferrable variable expenses associated with the aforementioned premium growth, additional post-retirement and other employee benefit-related costs and a $15 million charge principally related to office consolidations. Non-deferrable variable expenses include a certain portion of premium taxes, commissions, claim approval and case administration expenses. The increase in retirement and savings is partially offset by the Company's exit from the large market 401(k) business in late 2001, which resulted in expense reductions as business was transferred to other carriers throughout 2002. 51 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------- --------------- 2003 2002 2003 2002 ------ ------ ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums........................................... $1,055 $1,094 $2,096 $2,178 Universal life and investment-type product policy fees............................................. 378 339 738 637 Net investment income.............................. 1,530 1,563 3,092 3,083 Other revenues..................................... 109 102 195 230 Net investment (losses) gains (net of amounts allocated from other accounts of $0, ($73), ($38) and ($86), respectively)......................... (19) (89) (87) (86) ------ ------ ------ ------ Total revenues................................... 3,053 3,009 6,034 6,042 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment losses of $5, ($64), ($23) and ($71), respectively)............ 1,186 1,263 2,438 2,495 Interest credited to policyholder account balances......................................... 452 452 895 895 Policyholder dividends............................. 439 461 879 920 Other expenses (excludes amounts directly related to net investment losses of ($5), ($9), ($15) and ($15), respectively)............................. 760 633 1,428 1,267 ------ ------ ------ ------ Total expenses................................... 2,837 2,809 5,640 5,577 ------ ------ ------ ------ Income from continuing operations before provision for income taxes................................. 216 200 394 465 Provision for income taxes......................... 76 72 139 167 ------ ------ ------ ------ Income from continuing operations.................. 140 128 255 298 Income from discontinued operations, net of income taxes............................................ 4 12 30 18 ------ ------ ------ ------ Net income......................................... $ 144 $ 140 $ 285 $ 316 ====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- INDIVIDUAL Premiums decreased by $39 million, or 4%, to $1,055 million for the three months ended June 30, 2003 from $1,094 million for the comparable 2002 period. Premiums from insurance products decreased by $34 million, as a result of a third quarter 2002 amendment to a reinsurance agreement which increased the amount of insurance ceded, as well as a decrease in dividends used to purchase additional insurance as a direct result of the dividend scale reduction adopted in the fourth quarter of 2002. Premiums from annuity and investment-type products decreased by $5 million in the single premium immediate annuities and supplemental contracts with life contingencies product lines. Fees from these products will fluctuate based on customer demand. Universal life and investment-type product policy fees increased by $39 million, or 12%, to $378 million for the three months ended June 30, 2003 from $339 million for the comparable 2002 period. Policy fees from insurance products increased by $23 million due to higher revenue from insurance fees, surrender charges, and the recognition of previously deferred fees. The insurance fees increased due to growth in the net amount of 52 insurance at risk. The recognition of previously deferred fees was the result of lapse, mortality and investment experience. Policy fees from annuity and investment-type products increased by $16 million resulting from favorable investment experience and an increase in average separate account balances. Other revenues increased by $7 million, or 7%, to $109 million for the three months ended June 30, 2003 from $102 million for the comparable 2002 period. Other revenues, which primarily consist of commission and fee income related to the broker/dealer and other subsidiaries, fluctuate from period to period in response to equity market changes. In addition, experience rated refunds from reinsurance arrangements are also included in other revenues. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of deferred policy acquisition costs, to the extent that such amortization results from investment gains and losses; and (ii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. 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 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 decreased by $77 million, or 6%, to $1,186 million for the three months ended June 30, 2003 from $1,263 million for the comparable 2002 period. Policyholder benefits and claims for insurance products decreased by $63 million primarily due to favorable mortality experience offset by the impact of the aforementioned amendment to a reinsurance agreement. Policyholder benefits and claims for annuity and investment-type products decreased by $14 million largely due to favorable mortality experience, slightly offset by an increase in the claims associated with guaranteed minimum death benefits, which fluctuate in response to equity market changes. Interest credited to policyholder account balances remained unchanged at $452 million for the comparable periods. Declines in the interest crediting rates were offset by growth in future policyholder benefits and policyholder account balances. Policyholder dividends decreased by $22 million, or 5%, to $439 million for the three months ended June 30, 2003 from $461 million for the comparable 2002 period due to the reduction of the dividend scale in the fourth quarter of 2002, reflecting the impact of the low interest rate environment on the asset portfolios supporting these policies. Other expenses increased by $127 million, or 20%, to $760 million for the three months ended June 30, 2003 from $633 million for the comparable 2002 period. Excluding the capitalization and amortization of deferred policy acquisition costs that are discussed below, other expenses increased by $119 million, or 17%, to $833 million in 2003 from $714 million in 2002. Other expenses related to insurance products increased by $33 million. Although there are savings from ongoing expense management initiatives, these savings are offset by increased pension and post-retirement benefit expenses and a $14 million charge principally related to office consolidations. Other expenses related to annuity and investment-type products increased by $86 million. An increase in commissions is due to the continued rise in sales of new annuity and investment-type products offered by the MetLife Investors Group distribution channel, as well as increased pension and post-retirement benefit expenses and an $8 million charge principally related to office consolidations. 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. 53 Capitalization of deferred policy acquisition costs increased by $22 million, or 9%, to $280 million for the three months ended June 30, 2003 from $258 million for the comparable 2002 period due to higher sales of annuity and investment-type products, resulting in higher commissions and other deferrable expenses, partially offset by the impact of the recognition of non-deferrable expenses that were previously deferred. Total amortization of deferred policy acquisition costs increased by $34 million, or 20%, to $202 million in 2003 from $168 million in 2002. Amortization of deferred policy acquisition costs of $207 million and $177 million is allocated to other expenses in 2003 and 2002, respectively, while the remainder of the amortization in each period is allocated to investment gains and losses. The $47 million increase in amortization of deferred policy acquisition costs allocated to other expenses for insurance products is primarily due to a charge resulting from the recognition of previously deferred expenses, with the remaining variance attributable to the impact of lapse, mortality and investment experience. The decrease in amortization of deferred policy acquisition costs allocated to other expenses for annuity and investment-type products of $17 million is due to the impact of favorable investment experience. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- INDIVIDUAL Premiums decreased by $82 million, or 4%, to $2,096 million for the six months ended June 30, 2003 from $2,178 million for the comparable 2002 period. Premiums from insurance products decreased by $81 million, primarily as a result of a third quarter 2002 amendment to a reinsurance agreement which increased the amount of insurance ceded, as well as a decrease in dividends used to purchase additional insurance as a direct result of the dividend scale reduction adopted in the fourth quarter of 2002. Premiums from annuity and investment-type products decreased by $1 million in the single premium immediate annuities and supplemental contracts with life contingencies product lines. Fees from these products will fluctuate based on customer demand. Universal life and investment-type product policy fees increased by $101 million, or 16%, to $738 million for the six months ended June 30, 2003 from $637 million for the comparable 2002 period. Policy fees from insurance products increased by $84 million due to higher revenue from insurance fees, surrender charges, and the recognition of previously deferred fees. The insurance fees increased due to growth in the net amount of insurance at risk. The recognition of previously deferred fees was the result of lapse, mortality and investment experience. Policy fees from annuity and investment-type products increased by $17 million resulting from favorable investment experience and an increase in average separate account balances. Other revenues decreased by $35 million, or 15%, to $195 million for the three months ended June 30, 2003 from $230 million for the comparable 2002 period, largely due to lower commission and fee income associated with the sales volume decline in the broker/dealer and other subsidiaries which is principally due to the depressed equity markets. Other revenues, which primarily consist of commission and fee income related to the broker/dealer and other subsidiaries, fluctuate from period to period in response to equity market changes. In addition, experience rated refunds from reinsurance arrangements are also included in other revenues. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of deferred policy acquisition costs, to the extent that such amortization results from investment gains and losses; and (ii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. 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 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. 54 Policyholder benefits and claims decreased by $57 million, or 2%, to $2,438 million for the six months ended June 30, 2003 from $2,495 million for the comparable 2002 period. Policyholder benefits and claims for insurance products decreased by $59 million primarily due to favorable mortality experience offset by the impact of the aforementioned amendment to a reinsurance agreement. Policyholder benefits and claims for annuity and investment-type products increased by $2 million, largely due to benefits related to single premium immediate annuities and an increase in the claims associated with guaranteed minimum death benefits, which fluctuate in response to equity market changes, partially offset by favorable mortality experience. Interest credited to policyholder account balances remained unchanged at $895 million. Declines in the interest crediting rates were offset by growth in future policyholder benefit and policyholder account balances. Policyholder dividends decreased by $41 million, or 4%, to $879 million for the six months ended June 30, 2003 from $920 million for the comparable 2002 period due to the reduction of the dividend scale in the fourth quarter of 2002, reflecting the impact of the low interest rate environment on the asset portfolios supporting these policies. Other expenses increased by $161 million, or 13%, to $1,428 million for the six months ended June 30, 2003 from $1,267 million for the comparable 2002 period. Excluding the capitalization and amortization of deferred policy acquisition costs that are discussed below, other expenses increased by $131 million, or 9%, to $1,586 million in 2003 from $1,455 million in 2002. Other expenses related to insurance products increased by $15 million. Although there are savings from ongoing expense management initiatives, these savings are offset by increased pension and post-retirement benefit expenses and a $14 million charge principally related to office consolidations. Other expenses related to annuity and investment-type products increased by $116 million. An increase in commissions is attributable to the continued rise in sales of new annuity and investment-type products offered by the MetLife Investors Group distribution channel, as well as increased pension and post-retirement benefit expenses and an $8 million charge principally related to office consolidations. 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 $38 million, or 8%, to $540 million for the six months ended June 30, 2003 from $502 million for the comparable 2002 period due to higher sales of annuity and investment-type products, resulting in higher commissions and other deferrable expenses, partially offset by the impact of the recognition of non-deferrable expenses that were previously deferred. Total amortization of deferred policy acquisition costs increased by $68 million, or 23%, to $367 million in 2003 from $299 million in 2002. Amortization of deferred policy acquisition costs of $382 million and $314 million is allocated to other expenses in 2003 and 2002, respectively, while the remainder of the amortization in each period is allocated to investment gains and losses. The $77 million increase in amortization of deferred policy acquisition costs allocated to other expenses for insurance products is primarily due to a charge resulting from the recognition of previously deferred expenses, with the remaining variance attributable to the impact of lapse, mortality and investment experience. The decrease in amortization of deferred policy acquisition costs allocated to other expenses for annuity and investment-type products of $9 million is due to the impact of favorable investment experience. 55 AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- --------------- 2003 2002 2003 2002 ----- ----- ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums.............................................. $721 $702 $1,433 $1,394 Net investment income................................. 41 46 80 91 Other revenues........................................ 4 9 13 16 Net investment losses................................. (2) (18) (6) (32) ---- ---- ------ ------ Total revenues...................................... 764 739 1,520 1,469 ---- ---- ------ ------ EXPENSES Policyholder benefits and claims...................... 527 517 1,061 1,012 Other expenses........................................ 186 193 385 401 ---- ---- ------ ------ Total expenses...................................... 713 710 1,446 1,413 ---- ---- ------ ------ Income before provision for income taxes.............. 51 29 74 56 Provision for income taxes............................ 10 5 6 11 ---- ---- ------ ------ Net income............................................ $ 41 $ 24 $ 68 $ 45 ==== ==== ====== ======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- AUTO & HOME Premiums increased by $19 million, or 3%, to $721 million for the three months ended June 30, 2003 from $702 million for the comparable 2002 period. Auto and property premiums increased by $10 million and $9 million, respectively, due to increases in average premium resulting from rate increases. Premiums from other personal lines remained unchanged at $13 million. Other revenues decreased by $5 million, or 56%, to $4 million for the three months ended June 30, 2003 from $9 million for the comparable 2002 period. The decrease is the result of a revision to an estimate of a reinsurance recoverable and related reinsurance balances on former reinsurance business. Policyholder benefits and claims increased by $10 million, or 2%, to $527 million for the three months ended June 30, 2003 from $517 million for the comparable 2002 period. Auto policyholder benefits and claims increased by $8 million due to more catastrophes and higher claims severities. Automobile non-catastrophe claims frequency was relatively flat versus the comparable 2002 period. Despite an increase in policyholder benefits and claims, the auto loss ratio was unchanged at 77.5% due to higher average earned premium. Property policyholder benefits and claims increased by $6 million due to increased severities and a higher catastrophe level, offset by lower non-catastrophe claims frequency. The property loss ratio, however, was level with the prior year period due to an increase of 18% in the average earned premium due to rate increases. Despite heavy adverse weather, especially in the Midwest, catastrophes represented 3.2% of this segment's loss ratio in 2003 compared to 2.8% in 2002. The impact of the adverse weather was mitigated by ongoing volatility management programs, including underwriting activity, agency management, product changes and reinsurance. These actions offset catastrophe losses in the second quarter of 2003 by $7 million. Catastrophe losses were also mitigated by a $7 million recovery from the Federal Emergency Management Agency related to the Cerro Grande (Los Alamos) fires in 2000. Other policyholder benefits and claims decreased by $4 million due to fewer personal umbrella claims. 56 Other expenses decreased $7 million, or 4%, to $186 million for the three months ended June 30, 2003 from $193 million for the comparable 2002 period. This decrease is primarily due to a $7 million reduction in the cost of the New York assigned risk plan and a $2 million reduction of expenses resulting from the completion of the St. Paul integration. The expense ratio decreased to 25.6% in 2003 from 27.4% in 2002. The effective income tax rates for the three months ended June 30, 2003 and 2002 differ from the corporate tax rate of 35% due to the impact of non-taxable investment income. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- AUTO & HOME Premiums increased by $39 million, or 3%, to $1,433 million for the six months ended June 30, 2003 from $1,394 million for the comparable 2002 period. Auto and property premiums increased by $21 million and $16 million, respectively, due to increases in average earned premium due to rate increases. These increases were 9% for auto and 17% for property. Premiums from other personal lines increased by $2 million to $28 million. Other revenues decreased by $3 million, or 19%, to $13 million for the six months ended June 30, 2003 from $16 million for the comparable 2002 period. This decrease is the result of a revision to an estimate of a reinsurance recoverable and related reinsurance balances on former reinsurance business. Policyholder benefits and claims increased by $49 million, or 5%, to $1,061 million for the six months ended June 30, 2003 from $1,012 million for the comparable 2002 period. Auto policyholder benefits and claims increased by $60 million primarily due to an increase in claims frequencies resulting largely from adverse road conditions in the first quarter of 2003 and higher losses due to adverse claims development related to prior accident years, resulting mostly from bodily injury and uninsured motorists claims also in the first quarter of 2003. The auto loss ratio increased to 80.4% for the first six months of 2003 from 76.2% for the comparable 2002 period. Property policyholder benefits and claims decreased by $12 million due to improved claims frequencies, a reduction in the number of homeowners policies in-force, and underwriting and agency management actions. The property loss ratio decreased to 56.9% from 63.4%. Other policyholder benefits and claims increased by $1 million to $12 million. Other expenses decreased by $16 million, or 4%, to $385 million for the six months ended June 30, 2002 from $401 million for the comparable 2002 period. This decrease is primarily due to a $7 million reduction in the cost of the New York assigned risk plan and a $6 million reduction in expenses resulting from the completion of the St. Paul integration. The expense ratio decreased to 26.8% in 2003 from 28.8% in 2002. The effective income tax rates for the six months ended June 30, 2003 and 2002 differ from the corporate tax rate of 35% due to the impact of non-taxable investment income and a $7 million tax recovery recorded in the first quarter of 2003 for prior year tax overpayments on non-taxable investment income. 57 INTERNATIONAL The following table presents consolidated financial information for the International segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- ------------- 2003 2002 2003 2002 ----- ----- ------ ---- (DOLLARS IN MILLIONS) REVENUES Premiums............................................... $390 $274 $ 785 $649 Universal life and investment-type product policy fees................................................. 71 7 122 14 Net investment income.................................. 131 95 254 170 Other revenues......................................... 26 3 34 6 Net investment (losses) gains.......................... (1) 8 (1) (14) ---- ---- ------ ---- Total revenues....................................... 617 387 1,194 825 ---- ---- ------ ---- EXPENSES Policyholder benefits and claims....................... 286 262 644 589 Interest credited to policyholder account balances..... 36 11 73 20 Policyholder dividends................................. 8 6 27 17 Other expenses......................................... 195 96 316 189 ---- ---- ------ ---- Total expenses....................................... 525 375 1,060 815 ---- ---- ------ ---- Income from continuing operations before provision for income taxes......................................... 92 12 134 10 Provision (Benefit) for income taxes................... (6) 5 8 12 ---- ---- ------ ---- Income (Loss) from continuing operations............... 98 7 126 (2) Cumulative effect of change in accounting.............. -- -- -- 5 ---- ---- ------ ---- Net income............................................. $ 98 $ 7 $ 126 $ 3 ==== ==== ====== ====
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- INTERNATIONAL Premiums increased by $116 million, or 42%, to $390 million for the three months ended June 30, 2003 from $274 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 contributed $113 million to this increase. Excluding Hidalgo, premiums increased by $3 million, or 1%, over the comparable 2002 period. South Korea's premiums increased by $23 million primarily due to a larger professional sales force and new business growth. Taiwan's premiums increased by $12 million due to renewal premium growth in its individual life business. Chile's premiums increased by $10 million primarily due to higher sales results in the individual annuities business. Offsetting these increases, Mexico's premiums (excluding Hidalgo) decreased by $41 million, which is attributable to decreases in both its group and individual life businesses. Actions taken by the Mexican government, which were anticipated, impacting the insurance and annuities market, caused certain products to be less advantageous to customers, which resulted in reduced sales. In addition, the cancellation of a large broker-sponsored case at the end of 2002 and the weakening of the peso against the dollar contributed to the decline. The remainder of the variance is attributable to minor fluctuations in several countries. Universal life and investment type-product policy fees increased by $64 million, or 914%, to $71 million for the three months ended June 30, 2003 from $7 million for the comparable 2002 period primarily due to the acquisition of Hidalgo in June 2002, which accounted for $60 million of this increase. Excluding Hidalgo, universal life and investment type-product policy fees increased $4 million, or 57%, over the comparable 2002 58 period. South Korea's and Spain's universal life and investment type product policy fees increased by $2 million and $1 million, respectively, due to growth in sales. The remainder of the variance is attributable to minor fluctuations in several countries. Other revenues increased by $23 million, or 767%, to $26 million for the three months ended June 30, 2003 from $3 million for the comparable 2002 period. This increase is largely attributable to the acquisition of Hidalgo in June 2002. Policyholder benefits and claims increased by $24 million, or 9%, to $286 million for the three months ended June 30, 2003 from $262 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 increased policyholder benefits by $119 million. Excluding the impact of the Hidalgo acquisition, policyholder benefits and claims decreased by $95 million, or 36%, from the comparable 2002 period. Mexico's policyholder benefits (excluding the impact of the Hidalgo acquisition) decreased by $123 million primarily as a result of a reduction in policyholder liabilities of $79 million related to a change in reserve methodology and the impact of the overall premium decreases discussed above. Offsetting this decrease, South Korea's, Chile's and Taiwan's policyholder benefits and claims increased by $12 million, $12 million and $2 million, respectively, primarily as a result of the premium increases discussed above. The remainder of the variance is attributable to minor fluctuations in several countries. Interest credited to policyholder account balances increased by $25 million, or 227%, to $36 million for the three months ended June 30, 2003 from $11 million for the comparable 2002 period. This increase is largely attributable to the acquisition of Hidalgo in June 2002. Policyholder dividends increased by $2 million, or 33%, to $8 million for the three months ended June 30, 2003 from $6 million for the comparable 2002 period. This increase is largely attributable to the acquisition of Hidalgo in June 2002. Other expenses increased by $99 million, or 103%, to $195 million for the three months ended June 30, 2003 from $96 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 contributed $46 million to this increase. Excluding the impact of the Hidalgo acquisition, other expenses increased primarily as a result of an increase in amortization of the value of business acquired of $45 million related to the change in reserve methodology discussed above. In addition, South Korea's other expenses increased by $6 million as a result of new business growth and general expansion of operations. The remainder of the variance is attributable to minor fluctuations in several countries. Income taxes for the three months ended June 30, 2003 was a benefit of $6 million as compared to a provision of $5 million for the comparable 2002 period. As a result of the merger of the Company's Mexican operations, the Company recorded a tax benefit of $40 million for the reduction of deferred tax valuation allowances. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- INTERNATIONAL Premiums increased by $136 million, or 21%, to $785 million for the six months ended June 30, 2003 from $649 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 contributed $255 million to this increase. Partially offsetting this increase is a decrease of $108 million attributable to a non-recurring sale of an annuity contract in the first quarter of 2002 in Canada. Excluding these items, premiums decreased by $11 million, or 2%, from the comparable 2002 period. Mexico's premiums (excluding Hidalgo) decreased by $89 million, which is attributable to decreases in both its group and individual life businesses. Actions taken by the Mexican government, which were anticipated, impacting the insurance and annuities market, caused certain products to be less advantageous to customers and resulted in reduced sales. In addition, the cancellation of a large broker-sponsored case at the end of 2002 and the weakening of the peso against the dollar contributed to the decline. Offsetting these declines, South Korea's premiums increased by $49 million primarily due to a larger professional sales force and new business growth. Taiwan's premiums increased by $15 million due primarily to renewal premium growth in its individual life business and Spain's premiums increased by $10 million primarily due to the strengthening of the Euro. Chile's premiums 59 increased by $2 million mainly due to higher sales results in the individual annuities business. The remainder of the variance is attributable to minor fluctuations in several countries. Universal life and investment type-product policy fees increased by $108 million, or 771%, to $122 million for the six months ended June 30, 2003 from $14 million for the comparable 2002 period primarily due to the acquisition of Hidalgo in June 2002 which accounted for $102 million of this increase. Excluding Hidalgo, universal life and investment type-product policy fees increased $6 million, or 43%, over the comparable 2002 period. South Korea's and Spain's universal life and investment type product policy fees increased by $3 million and $1 million, respectively, due to growth in sales. The remainder of the variance is attributable to minor fluctuations in several countries. Other revenues increased by $28 million, or 467%, to $34 million for the six months ended June 30, 2003 from $6 million for the comparable 2002 period. This increase is largely attributable to the acquisition of Hidalgo in June 2002. Policyholder benefits and claims increased by $55 million, or 9%, to $644 million for the six months ended June 30, 2003 from $589 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 increased policyholder benefits and claims by $256 million, partially offset by a decrease of $108 million related to the aforementioned non-recurring sale of an annuity contract during the first quarter of 2002. Excluding these items, policyholder benefits and claims decreased by $93 million, or 16%, from the comparable 2002 period. Mexico's policyholder benefits (excluding the impact of the Hidalgo acquisition) decreased by $171 million primarily as a result of a reduction in policyholder liabilities of $79 million related to a change in reserve methodology and the impact of the overall premium decreases discussed above. Partially offsetting this decrease, South Korea's, Spain's, Chile's and Taiwan's policyholder benefits and claims increased by $36 million, $17 million, $13 million and $5 million, respectively, primarily as a result of the overall premium increase previously discussed and, in the case of Spain, the strengthening of the Euro. In addition, Brazil's policyholder benefits increased by $5 million due primarily to higher claims in 2003. The remainder of the variance is attributable to minor fluctuations in several countries. Interest credited to policyholder account balances increased by $53 million, or 265%, to $73 million for the six months ended June 30, 2003 from $20 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 contributed $50 million to this variance. Excluding Hidalgo, interest credited increased by $3 million, or 15%, over the comparable 2002 period, which is attributable to an increase of $3 million in Spain primarily due to the strengthening of the Euro. Policyholder dividends increased by $10 million, or 59%, to $27 million for the six months ended June 30, 2003 from $17 million for the comparable 2002 period. This increase is largely attributable to the acquisition of Hidalgo in June 2002. Other expenses increased by $127 million, or 67%, to $316 million for the six months ended June 30, 2003 from $189 million for the comparable 2002 period. The acquisition of Hidalgo in June 2002 contributed $77 million to this increase. Excluding the impact of the Hidalgo acquisition, other expenses increased $50 million, or 26%, over the comparable 2002 period. Mexico's other expenses (excluding the impact of the Hidalgo acquisition) increased by $41 million primarily as a result of an increase in amortization of the value of business acquired of $45 million related to the change in reserve methodology discussed above. This increase is partially offset by a $4 million decrease mostly from the reduction in administrative staff following the acquisition of Hidalgo. South Korea's other expenses increased by $11 million as a result of new business growth and general expansion of operations. The remaining variance is attributable to minor fluctuations in several countries. Provision for income taxes decreased by $4 million, or 33%, to $8 million for the six months ended June 30, 2003 from $12 million for the comparable 2002 period. As a result of the merger of the Company's Mexican operations, the Company recorded a tax benefit of $40 million for the reduction of deferred tax valuation allowances. 60 REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- --------------- 2003 2002 2003 2002 ----- ----- ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums.............................................. $588 $472 $1,140 $ 947 Net investment income................................. 121 102 231 201 Other revenues........................................ 12 11 24 19 Net investment gains.................................. 5 -- 1 2 ---- ---- ------ ------ Total revenues...................................... 726 585 1,396 1,169 ---- ---- ------ ------ EXPENSES Policyholder benefits and claims...................... 460 379 888 774 Interest credited to policyholder account balances.... 45 32 88 66 Policyholder dividends................................ 6 6 11 11 Other expenses........................................ 182 135 346 248 ---- ---- ------ ------ Total expenses...................................... 693 552 1,333 1,099 ---- ---- ------ ------ Income before provision for income taxes.............. 33 33 63 70 Provision for income taxes............................ 11 12 21 25 ---- ---- ------ ------ Net income............................................ $ 22 $ 21 $ 42 $ 45 ==== ==== ====== ======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- REINSURANCE Premiums increased by $116 million, or 25%, to $588 million for the three months ended June 30, 2003 from $472 million for the comparable 2002 period. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business, particularly in the U.S. and U.K. reinsurance operations, 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 $1 million, or 9%, to $12 million for the three months ended June 30, 2003 from $11 million for the comparable 2002 period. The increase is due to an increase in fees earned on financial reinsurance and asset-intensive business in the U.S. Policyholder benefits and claims increased by $81 million, or 21%, to $460 million for the three months ended June 30, 2003 from $379 million for the comparable 2002 period. As a percentage of premiums, policyholder benefits and claims decreased to 78% for the three months ended June 30, 2003 from 80% for the comparable 2002 period. Favorable mortality in the U.S. traditional business was the primary reason for the decrease in this ratio. Mortality and morbidity are expected to vary from period to period, but generally remain fairly constant over the long-term. Interest credited to policyholder account balances increased by $13 million, or 41%, to $45 million for the three months ended June 30, 2003 from $32 million for the comparable 2002 period. Interest credited to policyholder account balances relates to amounts credited on deposit-type contracts, such as annuities, and certain cash-value contracts. This increase was a direct result of increasing deposits from several annuity treaties. The crediting rate on certain blocks of annuities is based on the performance of the underlying assets. Therefore, any fluctuations in interest credited related to these blocks are generally offset by a corresponding change in net investment income. 61 Policyholder dividends were unchanged at $6 million for both the three months ended June 30, 2003 and 2002. Other expenses increased by $47 million, or 35%, to $182 million for the three months ended June 30, 2003 from $135 million for the comparable 2002 period. Other expenses, which include underwriting, acquisition and insurance expenses, and minority interest expense were 25% of segment revenues for the three months ended June 30, 2003 compared with 23% in the comparable 2002 period. This percentage fluctuates on a quarterly basis 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. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- REINSURANCE Premiums increased by $193 million, or 20%, to $1,140 million for the six months ended June 30, 2003 from $947 million for the comparable 2002 period. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business, particularly in the U.S. and U.K. reinsurance operations, 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 $5 million, or 26%, to $24 million for the six months ended June 30, 2003 from $19 million for the comparable 2002 period. The increase is due to an increase in fees earned on financial reinsurance and asset-intensive business in the U.S. Policyholder benefits and claims increased by $114 million, or 15%, to $888 million for the six months ended June 30, 2003 from $774 million for the comparable 2002 period. As a percentage of premiums, policyholder benefits and claims decreased to 78% for the first six months of 2003 from 82% for the comparable 2002 period. Favorable mortality in the U.S. traditional business was the primary reason for the decrease in this ratio. Mortality and morbidity are expected to vary from period to period, but generally remain fairly constant over the long-term. Interest credited to policyholder account balances increased by $22 million, or 33%, to $88 million for the six months ended June 30, 2003 from $66 million for the comparable 2002 period. Interest credited to policyholder account balances relates to amounts credited on deposit-type contracts, such as annuities, and certain cash-value contracts. This increase was a direct result of increasing deposits from several annuity treaties. The crediting rate on certain blocks of annuities is based on the performance of the underlying assets. Therefore, any fluctuations in interest credited related to these blocks are generally offset by a corresponding change in net investment income. Policyholder dividends were unchanged at $11 million for both the three months ended June 30, 2003 and 2002. Other expenses increased by $98 million, or 40%, to $346 million for the six months ended June 30, 2003 from $248 million for the comparable 2002 period. Other expenses, which include underwriting, acquisition and insurance expenses, and minority interest expense were 25% of segment revenues for the first six months of 2003 compared with 21% in the comparable 2002 period. This percentage fluctuates on a quarterly basis 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. 62 ASSET MANAGEMENT The following table presents consolidated financial information for the Asset Management segment for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- (DOLLARS IN MILLIONS) REVENUES Net investment income............................... $16 $15 $ 32 $ 29 Other revenues...................................... 37 50 66 90 Net investment gains (losses)....................... -- -- 8 (4) --- --- ---- ---- Total revenues.................................... 53 65 106 115 --- --- ---- ---- OTHER EXPENSES...................................... 44 57 87 109 --- --- ---- ---- Income before provision for income taxes............ 9 8 19 6 Provision for income taxes.......................... 4 3 8 2 --- --- ---- ---- Net income.......................................... $ 5 $ 5 $ 11 $ 4 === === ==== ====
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- ASSET MANAGEMENT Other revenues, which primarily consist of management and advisory fees from third parties, decreased $13 million, or 26%, to $37 million for the three months ended June 30, 2003 from $50 million for the comparable 2002 period. This decrease is primarily the result of lower average assets under management on which these fees are earned. In addition, performance fees earned in the second quarter of 2003 on certain hedge fund products were lower than in the prior period. Other expenses decreased by $13 million, or 23%, to $44 million for the three months ended June 30, 2003 from $57 million for the comparable 2002 period. A decrease of $7 million is attributable to staff reductions in the third and fourth quarters of 2002. In addition, a $4 million reduction resulted from lower average assets under management. The remainder of the variance is attributable to a $2 million decrease in general and administrative expenses. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- ASSET MANAGEMENT Other revenues, which primarily consist of management and advisory fees from third parties, decreased $24 million, or 27%, to $66 million for the six months ended June 30, 2003 from $90 million for the comparable 2002 period. This decrease is predominantly due to lower average assets under management on which these fees are earned. In addition, performance fees earned in the second quarter of 2003 on certain hedge fund products were lower than in the prior period. Other expenses decreased by $22 million, or 20%, to $87 million for the six months ended June 30, 2003 from $109 million for the comparable 2002 period. A $10 million decrease is largely due to staff reductions in the third and fourth quarters of 2002. In addition, an $8 million decrease is largely due to reduced expenses as a result of lower average assets under management. The remainder of the variance is attributable to a $4 million decrease in general and administrative expenses. 63 CORPORATE & OTHER THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 -- CORPORATE & OTHER Other revenues increased by $3 million, or 25%, to $15 million for the three months ended June 30, 2003 from $12 million for the comparable 2002 period. This variance is primarily due to the amortization of a deferred gain related to a property sale and leaseback transaction. The Company anticipates that the deferred gain will be amortized into income through 2005. Other expenses decreased by $41 million, or 64%, to $23 million for the three months ended June 30, 2003 from $64 million for the comparable 2002 period. This variance is primarily due to a $46 million reduction in legal expenses. The 2003 quarter includes a $100 million reduction of a previously established liability related to the Company's race-conscious underwriting settlement, which was partially offset by an increase in costs associated with various other legal matters. The 2002 quarter includes a $46 million reduction of a previously established liability for settlement death benefits related to the sales practices class action settlement recorded in 1999. In addition, $15 million of the decrease in other expenses is attributable to the remeasurement of the asbestos insurance recoverable and the amortization of the deferred gain on asbestos insurance, both of which are impacted by equity market performance. These decreases are partially offset by a $14 million increase in interest expense related to the Company's long-term debt activities in the fourth quarter of 2002 and the first quarter of 2003. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 -- CORPORATE & OTHER Other revenues increased by $6 million, or 29%, to $27 million for the six months ended June 30, 2003 from $21 million for the comparable 2002 period. This variance is primarily due to the amortization of a deferred gain related to a property sale and leaseback transaction. The Company anticipates that the deferred gain will be amortized into income through 2005. Other expenses decreased by $91 million, or 39%, to $141 million for the six months ended June 30, 2003 from $232 million for the comparable 2002 period. This variance is primarily due to a $98 million reduction in legal expenses. The 2003 period includes a $100 million reduction of a previously established liability related to the Company's race-conscious underwriting settlement, which was partially offset by an increase in costs associated with various other legal matters. The 2002 period includes a $55 million charge to cover costs associated with the resolution of a federal government investigation of General American's former Medicare business and a $46 million reduction of a previously established liability for settlement death benefits related to the sales practices class action settlement recorded in 1999. In addition, $18 million of the decrease in other expenses is attributable to the remeasurement of the asbestos insurance recoverable and the amortization of the deferred gain on asbestos insurance, both of which are impacted by equity market performance. These decreases were partially offset by a $30 million increase in interest expense related to the Company's long-term debt activities in the fourth quarter of 2002 and the first quarter of 2003. LIQUIDITY AND CAPITAL RESOURCES THE HOLDING COMPANY CAPITAL 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 June 30, 2003, MetLife and its insured depository institution subsidiary were in compliance with the aforementioned guidelines. 64 LIQUIDITY Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. It is managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and is provided by a variety of sources, including a portfolio of liquid assets, a diversified mix of short- and long-term funding sources from the wholesale financial markets and the ability to borrow through committed credit facilities. The Holding Company is an active participant in the global financial markets through which it obtains a significant amount of funding. These markets, which serve as cost-effective sources of funds, are critical components of the Holding Company's liquidity management. Decisions to access these markets are based upon relative costs, prospective views of balance sheet growth, and a targeted liquidity profile. A disruption in the financial markets could limit the Holding Company's access to liquidity. The Holding Company's ability to maintain regular access to competitively priced wholesale funds is fostered by its current debt ratings from the major credit rating agencies. Management views its capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and its liquidity monitoring procedures as critical to retaining high credit ratings. Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and term-debt transactions, and exposure to contingent draws on the Holding Company's liquidity. LIQUIDITY SOURCES Dividends. The primary source of the Holding Company's liquidity is dividends it receives from Metropolitan Life. 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 two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the distribution. 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 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 Holding 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. In addition, the Holding Company also receives dividends from its other subsidiaries. The Holding Company's other insurance subsidiaries are also subject to restrictions on the payment of dividends to their respective parent companies. The dividend limitation is based on statutory financial results. Statutory accounting practices, as prescribed by insurance regulators of various states in which the Company conducts business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of deferred policy acquisition costs, certain deferred income taxes, required investment reserves, reserve calculation assumptions, goodwill and surplus notes. Liquid Assets. An integral part of the Holding Company's liquidity management is the amount of liquid assets that it holds. Liquid assets include cash, cash equivalents, short-term investments and marketable equity and fixed maturity securities. Liquid assets exclude assets relating to securities lending and dollar roll activity. At June 30, 2003 and December 31, 2002, the Holding Company had $1,615 million and $597 million in liquid assets, respectively. 65 Global Funding Sources. Liquidity is also provided by a variety of both short- and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, capital securities and stockholders' equity. The diversification of the Holding Company's funding sources enhances funding flexibility and limits dependence on any one source of funds, and generally lowers the cost of funds. At June 30, 2003, the Holding Company did not have short-term debt outstanding. At December 31, 2002, the Holding Company had $249 million in short-term debt outstanding. At both June 30, 2003 and December 31, 2002, the Holding Company had $3.3 billion in long-term debt outstanding. The Holding Company filed a $4.0 billion shelf registration statement, effective June 1, 2001, with the U.S. Securities and Exchange Commission, which permits the registration and issuance of debt and equity securities as described more fully therein. The Holding Company has issued senior debt in the amount of $2.25 billion under this registration statement. In December 2002, the Holding Company issued $400 million 5.375% senior notes due 2012 and $600 million 6.50% senior notes due 2032 and, in November 2001, the Holding Company issued $500 million 5.25% senior notes due 2006 and $750 million 6.125% senior notes due 2011. In addition, in February 2003, the Holding Company remarketed under the shelf registration statement $1,006 million aggregate principal amount of debentures previously issued in connection with the issuance of equity security units described below. In connection with MetLife, Inc.'s initial public offering in April 2000, the Holding Company and MetLife Capital Trust I (the "Trust") issued equity security units (the "units"). Each unit originally consisted of (i) a contract to purchase, for $50, shares of the Holding Company's common stock (the "purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust, with a stated liquidation amount of $50. On May 15, 2003, the purchase contracts associated with the units were settled. In exchange for $1,006 million, the Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract, or approximately 59.8 million shares of treasury stock. Approximately $656 million, which represents the excess of the Company's cost of the treasury stock ($1,662 million) over the contract price of the stock issued to the purchase contract holders ($1,006 million), was recorded as a direct reduction to retained earnings. Other sources of the Holding Company's liquidity include programs for short- and long-term borrowing, as needed, arranged through Metropolitan Life. Credit Facilities. The Holding Company maintains a committed and unsecured credit facility, which expires in 2005, for approximately $1.25 billion that it shares with Metropolitan Life and MetLife Funding, Inc. ("MetLife Funding"). In April 2003, Metropolitan Life and MetLife Funding replaced an expiring $1 billion five-year credit facility with a $1 billion 364-day credit facility and the Holding Company was added as a borrower. Drawdowns under these facilities bear interest at varying rates stated in the agreements. These facilities are primarily used for general corporate purposes and as back-up lines of credit for the borrowers' commercial paper programs. At June 30, 2003, none of the Holding Company, Metropolitan Life or MetLife Funding had drawn against these credit facilities. LIQUIDITY USES The primary uses of liquidity of the Holding Company include cash dividends on common stock, service on debt, contributions to subsidiaries, payment of general operating expenses and the repurchase of the Holding Company's common stock. Dividends. In the fourth quarter of 2002, the Holding Company declared an annual dividend for 2002 of $0.21 per share. The 2002 dividend represented an increase of $0.01 per share from the 2001 annual dividend of $0.20 per share. Dividends, if any, in any year will be determined by the Holding Company's Board of Directors after taking into consideration factors such as the Holding Company's current earnings, expected medium- and long-term earnings, financial condition, regulatory capital position, and applicable governmental regulations and policies. Capital Contributions to Subsidiaries. During the six months ended June 30, 2003, the Holding Company contributed $10 million to MetLife Group, Inc., $25 million to MetLife Bank and $7 million to 66 MetLife International Holdings, Inc. There were no contributions from the Holding Company to its subsidiaries during the six months ended June 30, 2002. Share Repurchase. 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. The Holding Company did not acquire any shares of common stock during the six months ended June 30, 2003. The Holding Company acquired 13,644,492 shares of common stock for $431 million during the six months ended June 30, 2002. At June 30, 2003 the Holding Company had approximately $806 million remaining on its existing share repurchase authorization. Any repurchases during the remainder of 2003 will be dependent upon several factors, including the Company's capital position, its financial strength and credit ratings, general market conditions and the price of the Company's common stock. Support Agreements. In 2002, the Holding Company entered into a net worth maintenance agreement with three of its insurance subsidiaries, MetLife Investors Insurance Company, First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. Under the agreements, the Holding Company agreed, without limitation as to the amount, to cause each of these subsidiaries to have a minimum capital and surplus of $10 million (or, with respect to MetLife Investors Insurance Company of California, $5 million), total adjusted capital at a level not less than 150% of the company action level Risk-Based Capital ("RBC"), as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At June 30, 2003, the capital and surplus of each of these subsidiaries was in excess of the minimum capital and surplus amounts referenced above, and their total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2002. 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 the borrowings, over (ii) the cash flows generated by these properties. Based on management's analysis of its expected cash inflows from the dividends it receives from subsidiaries, including Metropolitan Life, that are permitted to be paid without prior insurance regulatory approval and its portfolio of liquid assets and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Holding Company to make payments on debt, make dividend payments on its common stock, pay all operating expenses and meet other obligations. THE COMPANY 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; 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 to take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. At December 31, 2002, Metropolitan Life's and each of the Holding Company's domestic 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 Codification of Statutory Accounting Principles ("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 67 required adoption of Codification with certain modifications for the preparation of statutory financial statements of insurance companies domiciled in New York effective January 1, 2001. Effective December 31, 2002, the Department adopted a modification to its regulations to be consistent with Codification with respect to the admissibility of deferred income taxes by New York insurers, subject to certain limitations. The adoption of Codification, as modified by the Department, did not adversely affect Metropolitan Life's statutory capital and surplus. Further modifications by state insurance departments may impact the effect of Codification on the statutory capital and surplus of Metropolitan Life and the Holding Company's other insurance subsidiaries. LIQUIDITY SOURCES Cash Flow from Operations. The Company's principal cash inflows from its insurance activities come from insurance premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contractholder and policyholder withdrawal. The Company 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 market volatilities. The Company closely monitors and manages these risks through its credit risk management process. Liquid Assets. An integral part of the Company's liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments and marketable equity and fixed maturity securities. Liquid assets exclude assets relating to securities lending and dollar roll activity. At June 30, 2003 and December 31, 2002, the Company had $122 billion and $108 billion in liquid assets, respectively. Global Funding Sources. Liquidity is also provided by a variety of both short- and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, capital securities and stockholders' equity. The diversification of the Company's funding sources enhances funding flexibility and limits dependence on any one source of funds, and generally lowers the cost of funds. At June 30, 2003 and December 31, 2002, the Company had $3,443 million and $1,161 million in short-term debt outstanding, respectively, and $5,562 million and $4,425 million in long-term debt outstanding, respectively. See "-- The Holding Company -- Global Funding Sources." 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 June 30, 2003 and December 31, 2002, MetLife Funding had a tangible net worth of $10.8 million and $10.7 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 June 30, 2003 and December 31, 2002, MetLife Funding had total outstanding liabilities, including accrued interest payable, of $388 million and $400 million, respectively, consisting primarily of commercial paper. Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $2.5 billion ($1 billion expiring in 2004, $1.3 billion expiring in 2005 and $175 million expiring in 2006). In April 2003, the Company replaced an expiring $1 billion five-year credit facility with a $1 billion 364-day credit facility. In May 2003, the Company replaced an expiring $140 million three-year credit facility with a $175 million three-year credit facility, which expires in 2006. If these facilities were drawn upon, they would bear interest at varying rates in accordance with the agreements. The facilities can be used for general corporate purposes and also as back-up lines of credit for the Company's commercial paper programs. At June 30, 2003, the Company had drawn approximately $37.6 million under two of the three facilities expiring 68 in 2005 at interest rates ranging from 4.12% to 5.39% and another approximately $40 million under a facility expiring in 2006 at an interest rate of 1.72%. LIQUIDITY USES Insurance Liabilities. The Company's principal cash outflows primarily relate to the liabilities associated with its various life insurance, property and casualty, annuity and group pension products, operating expenses and income 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 aforementioned products, as well as payments for policy surrenders, withdrawals and loans. Investment and Other. Additional cash outflows include those related to obligations of securities lending activities, investments in real estate, limited partnership and joint ventures, as well as legal liabilities. The following table summarizes the Company's major contractual obligations (other than those arising from its ordinary product and investment purchase activities) as of June 30, 2003:
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 THEREAFTER - ----------------------- ------ ------ ---- ------ ---- ---- ---------- (DOLLARS IN MILLIONS) Long-term debt(1)..................... $5,572 $ 407 $126 $1,323 $642 $ 28 $3,046 Partnership investments............... 1,488 1,488 -- -- -- -- -- Operating leases...................... 1,425 108 195 175 152 129 666 Mortgage commitments.................. 805 805 -- -- -- -- -- Company-obligated securities(1)....... 350 -- -- -- -- -- 350 ------ ------ ---- ------ ---- ---- ------ Total............................... $9,640 $2,808 $321 $1,498 $794 $157 $4,062 ====== ====== ==== ====== ==== ==== ======
- --------------- (1) Amounts differ from the balances presented on the consolidated balance sheets. The amounts above do not include related premiums and discounts. On April 11, 2003, 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 June 30, 2003. 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. Letters of Credit. At June 30, 2003 and December 31, 2002, the Company had outstanding approximately $695 million and $625 million, respectively, 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, these amounts do not necessarily reflect the actual future cash funding requirements. Support Agreements. In addition to the support agreements described above, Metropolitan Life entered into a net worth maintenance agreement with New England Life Insurance Company ("New England Life") at the time Metropolitan Life acquired New England Life. Under the agreement, Metropolitan Life agreed without limitation as to the amount to cause New England Life to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At June 30, 2003, the capital and surplus of New England Life was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2002. 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"). Under the agreement, Metropolitan Life agreed without limitation as to amount to cause General American to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 180% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. The agreement was subsequently amended to provide that, for the five year period from 2003 through 2007, total adjusted capital must be maintained at a level not less than 200% of 69 the company action level RBC, as defined by state insurance statutes. At June 30, 2003, the capital and surplus of General American was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2002. Metropolitan Life has entered into a net worth maintenance agreement with Security Equity Life Insurance Company ("Security Equity"), an insurance subsidiary acquired in the GenAmerica transaction. Under the agreement, Metropolitan Life agreed without limitation as to amount to cause Security Equity to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 150% of the company action level RBC, as defined by state insurance statutes, and sufficient liquidity to meet its current obligations. At June 30, 2003, the capital and surplus of Security Equity was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2002. Metropolitan Life has also entered into arrangements for the benefit of some of its other subsidiaries and affiliates to assist such subsidiaries and affiliates in meeting various jurisdictions' regulatory requirements regarding capital and surplus and security deposits. In addition, Metropolitan Life has entered into a support arrangement with respect to a subsidiary under which Metropolitan Life may become responsible, in the event that the subsidiary becomes the subject of insolvency proceedings, for the payment of certain reinsurance recoverables due from the subsidiary to one or more of its cedents in accordance with the terms and conditions of the applicable reinsurance agreements. General American has agreed to guarantee the obligations of its subsidiary, Paragon Life Insurance Company, and certain obligations of its former subsidiaries, Security Equity, MetLife Investors Insurance Company ("MetLife Investors"), First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. In addition, General American has entered into a contingent reinsurance agreement with MetLife Investors. Under this agreement, in the event that MetLife Investors statutory capital and surplus is less than $10 million or total adjusted capital falls below 150% of the company action level RBC, as defined by state insurance statutes, General American would assume as assumption reinsurance, subject to regulatory approvals and required consents, all of MetLife Investors life insurance policies and annuity contract liabilities. At June 30, 2003, the capital and surplus of MetLife Investors was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2002. Management does not anticipate that these arrangements will place any significant demands upon the Company's liquidity resources. 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 except with respect to certain matters. 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 unaudited interim condensed 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 consolidated net income or cash flows in particular quarterly or annual periods. 70 Based on management's analysis of its expected cash inflows from operating activities, the dividends it receives from subsidiaries, including Metropolitan Life, that are permitted to be paid without prior insurance regulatory approval and its portfolio of liquid assets and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Company to make payments on debt, make dividend payments on its common stock, pay all operating expenses and meet its other obligations. 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 2003. Consolidated cash flows. Net cash provided by operating activities was $3,460 million and $1,895 million for the six months ended June 30, 2003 and 2002, respectively. The $1,565 million increase in operating cash flows in 2003 over the comparable 2002 period is primarily attributable to the growth in MetLife Bank's customer deposits, income generated from the securities lending program and an increase in reinsurance activity. In addition, operating cash flows from insurance products increased due to sales growth in the group life, dental, disability and long-term care businesses, as well as higher sales in retirement and savings' structured settlement products. These increases were partially offset by the payment for an additional COLI policy purchased late in the first quarter of 2003. Net cash used in investing activities was $8,284 million and $7,336 million for the six months ended June 30, 2003 and 2002, respectively. The $948 million increase in net cash used in investing activities in 2003 over the comparable 2002 period is primarily attributable to increases in investments held as collateral received in connection with the securities lending program and proceeds from sales of fixed maturities being reinvested in cash equivalents, as well as additional purchases of fixed maturities. These items were partially offset by the June 2002 acquisition of Hidalgo and the 2002 sales of equity securities which were purchased as part of the Company's investment in the equity markets following the September 11, 2001 tragedies. Net cash provided by financing activities was $8,215 million and $1,531 million for the six months ended June 30, 2003 and 2002, respectively. The $6,684 million increase in financing activities in 2003 over the comparable 2002 period is due to a $2,360 million net increase in policyholder account balances primarily from sales of annuity products and the issuance of $2,585 million in short-term debt related to dollar roll activity. In 2003, the Company received $1,006 million on the settlement of common stock purchase contracts, while the Company acquired treasury stock for $431 million in the comparable 2002 period. The Company had a $185 million reduction in cash outflows related to the repayment of long-term debt in 2003 versus the comparable 2002 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 In July 2003, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1 provides guidance on separate account presentation and valuation, the accounting for sales inducements and the classification and valuation of long-duration contract liabilities. SOP 03-1 is effective for fiscal years beginning after December 15, 2003. The Company is in the process of quantifying the impact of SOP 03-1 on its unaudited interim condensed consolidated financial statements. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as a liability or, in certain circumstances, an asset. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150, as of July 1, 2003, requires the Company to reclassify 71 $277 million of company-obligated mandatorily redeemable securities of subsidiary trusts from mezzanine equity to liabilities beginning with its unaudited interim condensed consolidated financial statements at and for the periods ending September 30, 2003. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 is effective October 1, 2003. The Company is in the process of quantifying the impact of the adoption of Issue B36 on its consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Except for certain implementation guidance that is incorporated in SFAS 149 and already effective, SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company's adoption of SFAS 149 on July 1, 2003 did not have a significant impact on its unaudited interim condensed consolidated financial statements. During 2003, the Company adopted or applied the following accounting standards and/or interpretations: (i) FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others; (ii) SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure; (iii) SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities; and (iv) SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. None of the accounting standards and/or interpretations described in this paragraph had a significant impact on the Company's unaudited interim condensed consolidated financial statements. Effective February 1, 2003, FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46") established new accounting guidance relating to the consolidation of variable interest entities ("VIEs"). Certain of the Company's asset-backed securitizations, collateralized debt obligations, structured investment transactions, and investments in real estate joint ventures and other limited partnership interests meet the definition of a VIE under FIN 46. The Company consolidates VIEs created or acquired on or after February 1, 2003 for which it is the primary beneficiary and, effective July 1, 2003, consolidates VIEs created or acquired prior to February 1, 2003 for which it is the primary beneficiary. For consolidated VIEs, the Company discloses the nature, purpose, size, activities, maximum loss exposure, carrying amount and classification of consolidated assets that are collateral of the VIEs' obligations. The Company does not consolidate VIEs for which it is not the primary beneficiary; however, it will disclose the nature, purpose, size, activity and maximum loss exposure for each non-consolidated VIE. See "Investments -- Variable Interest Entities." INVESTMENTS The Company had total cash and invested assets at June 30, 2003 and December 31, 2002 of $214.0 billion and $190.7 billion, respectively. In addition, the Company had $67.5 billion and $59.7 billion held in its separate accounts, for which the Company generally does not bear investment risk, as of June 30, 2003 and December 31, 2002, respectively. 72 The Company's primary investment objective is to maximize net investment 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. 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:
JUNE 30, 2003 DECEMBER 31, 2002 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (DOLLARS IN MILLIONS) Fixed maturities available-for-sale, at fair value.......................................... $158,822 74.2% $140,288 73.6% Mortgage loans on real estate.................... 25,289 11.8 25,086 13.2 Policy loans..................................... 8,627 4.0 8,580 4.5 Cash and cash equivalents........................ 5,714 2.7 2,323 1.2 Real estate and real estate joint ventures held-for-investment............................ 4,559 2.1 4,559 2.4 Other invested assets............................ 4,261 2.0 3,727 1.9 Equity securities and other limited partnership interests...................................... 4,023 1.9 4,008 2.1 Short-term investments........................... 2,640 1.3 1,921 1.0 Real estate held-for-sale........................ 26 0.0 166 0.1 -------- ----- -------- ----- Total cash and invested assets................. $213,961 100.0% $190,658 100.0% ======== ===== ======== =====
VARIABLE INTEREST ENTITIES Effective February 1, 2003, FIN 46 established new accounting guidance relating to the consolidation of VIEs. Certain of the Company's asset-backed securitizations, collateralized debt obligations, structured investment transactions, and investments in real estate joint ventures and other limited partnership interests meet the definition of a VIE under FIN 46. The Company consolidates VIEs created or acquired on or after February 1, 2003 for which it is the primary beneficiary and, effective July 1, 2003, consolidates VIEs created or acquired prior to February 1, 2003 for which it is the primary beneficiary. 73 The following table presents the total assets and liabilities of VIEs for which the Company has concluded that it is the primary beneficiary and will be consolidated in the Company's financial statements for periods ending after June 30, 2003:
JUNE 30, 2003 -------------------------- TOTAL TOTAL ASSETS(1) LIABILITIES(1) --------- -------------- (DOLLARS IN MILLIONS) Real estate joint ventures(2)............................... $498 $143 Structured investment transactions(3)....................... 388 173 Other limited partnerships(4)............................... 27 -- ---- ---- Total..................................................... $913 $316 ==== ====
- --------------- (1) The assets and liabilities of the real estate joint ventures and other limited partnerships are reflected at the carrying amounts at which such assets and liabilities would have been reflected on the Company's balance sheet had the Company consolidated the VIE from the date of its initial involvement with the entity. The assets and liabilities of the structured investment transactions are reflected at fair value as of June 30, 2003. (2) Real estate joint ventures include partnerships and other ventures, which engage in the acquisition, development, management and disposal of real estate investments. (3) Structured investment transactions represent trusts, which hold municipal bond obligations and issue beneficial interests in such assets. (4) Other limited partnerships include partnerships established for the purpose of investing in public and private debt and equity securities, as well as limited partnerships established for the purpose of investing in low-income housing that qualifies for Federal tax credits. The Company's financial statements for the quarter ended September 30, 2003 will include a transition adjustment of $17 million, net of an income tax benefit of $4 million, associated with the consolidation of these entities as a cumulative effect of a change in accounting. Of the $913 million in total assets to be consolidated, $535 million is held as collateral for the various VIEs' obligations. General creditors and beneficial interest holders of the consolidated VIEs have no recourse to the Company. The following table presents the total assets of and the maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary:
JUNE 30, 2003 ---------------------------- TOTAL MAXIMUM EXPOSURE ASSETS(1) TO LOSS(2) --------- ---------------- (DOLLARS IN MILLIONS) Asset-backed securitizations and collateralized debt obligations............................................. $ 619 $25 Other limited partnerships................................ 420 11 Real estate joint ventures................................ 57 55 ------ --- Total................................................... $1,096 $91 ====== ===
- --------------- (1) The assets and liabilities of the asset-backed securitizations and collateralized debt obligations are reflected at fair value as of June 30, 2003. (2) The maximum exposure to loss of the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. The maximum exposure to loss relating to the other limited partnerships and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments reduced by amounts guaranteed by other partners. Due to the complexity of the judgments and interpretations required in the application of FIN 46 to the Company's collateralized debt obligations, the Company is continuing to evaluate certain entities for 74 consolidation and/or disclosure under FIN 46. At June 30, 2003, the fair value of both the assets and liabilities of the entities still under evaluation approximate $1.5 billion. The Company's maximum exposure to loss related to these entities at June 30, 2003 is approximately $5 million. INVESTMENT RESULTS Net investment income, including net investment income from discontinued operations, on general account cash and invested assets totaled $2,889 million and $2,861 million for the three months ended June 30, 2003 and 2002, respectively, and $5,788 million and $5,650 million for the six months ended June 30, 2003 and 2002, respectively. The annualized yields on general account cash and invested assets, including net investment income from discontinued operations and excluding all net investment gains and losses, were 6.62% and 7.30% for the three months ended June 30, 2003 and 2002, respectively, and 6.74% and 7.24% for the six months ended June 30, 2003 and 2002, respectively. The following table illustrates the net investment income and annualized yields on average assets for each of the components of the Company's investment portfolio for the three months and six months ended June 30, 2003 and 2002:
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------- ----------------------------------------- 2003 2002 2003 2002 ------------------- ------------------- ------------------- ------------------- YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) FIXED MATURITIES:(2) Investment income............ 6.87% $ 2,073 7.51% $ 1,998 6.91% $ 4,117 7.54% $ 3,952 Net investment losses........ (43) (210) (192) (375) -------- -------- -------- -------- Total...................... $ 2,030 $ 1,788 $ 3,925 $ 3,577 -------- -------- -------- -------- Ending assets................ $158,822 $123,796 $158,822 $123,796 -------- -------- -------- -------- MORTGAGE LOANS ON REAL ESTATE:(3) Investment income............ 7.50% $ 472 7.97% $ 472 7.50% $ 942 7.89% $ 934 Net investment losses........ (8) (3) (22) (22) -------- -------- -------- -------- Total...................... $ 464 $ 469 $ 920 $ 912 -------- -------- -------- -------- Ending assets................ $ 25,289 $ 23,733 $ 25,289 $ 23,733 -------- -------- -------- -------- REAL ESTATE AND REAL ESTATE JOINT VENTURES:(4) Investment income, net of expenses................... 10.97% $ 125 11.80% $ 174 10.92% $ 252 11.09% $ 324 Net investment gains (losses)................... (6) (14) 86 (16) -------- -------- -------- -------- Total...................... $ 119 $ 160 $ 338 $ 308 -------- -------- -------- -------- Ending assets................ $ 4,585 $ 5,963 $ 4,585 $ 5,963 -------- -------- -------- -------- POLICY LOANS: Investment income............ 6.46% $ 139 6.56% $ 137 6.47% $ 278 6.46% $ 268 -------- -------- -------- -------- Ending assets................ $ 8,627 $ 8,316 $ 8,627 $ 8,316 -------- -------- -------- -------- EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS: Investment income............ 3.32% $ 32 5.22% $ 47 4.40% $ 86 2.92% $ 59 Net investment gains (losses)................... 1 81 (70) 242 -------- -------- -------- -------- Total...................... $ 33 $ 128 $ 16 $ 301 -------- -------- -------- -------- Ending assets................ $ 4,023 $ 3,717 $ 4,023 $ 3,717 -------- -------- -------- --------
75
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------- ----------------------------------------- 2003 2002 2003 2002 ------------------- ------------------- ------------------- ------------------- YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Investment income............ 2.23% $ 42 2.85% $ 38 3.40% $ 106 3.92% $ 121 Net investment gains (losses)................... -- (1) (4) 1 -------- -------- -------- -------- Total...................... $ 42 $ 37 $ 102 $ 122 -------- -------- -------- -------- Ending assets................ $ 8,354 $ 5,796 $ 8,354 $ 5,796 -------- -------- -------- -------- OTHER INVESTED ASSETS: Investment income............ 6.71% $ 69 6.53% $ 56 6.61% $ 132 6.08% $ 102 Net investment gains (losses)................... 2 (119) (22) (201) -------- -------- -------- -------- Total...................... $ 71 $ (63) $ 110 $ (99) -------- -------- -------- -------- Ending assets................ $ 4,261 $ 3,271 $ 4,261 $ 3,271 -------- -------- -------- -------- TOTAL INVESTMENTS: Investment income before expenses and fees.......... 6.76% $ 2,952 7.46% $ 2,922 6.89% $ 5,913 7.38% $ 5,760 Investment expenses and fees....................... (0.14)% (63) (0.16)% (61) (0.15)% (125) (0.14)% (110) ----- -------- ----- -------- ----- -------- ----- -------- Net investment income........ 6.62% $ 2,889 7.30% $ 2,861 6.74% $ 5,788 7.24% $ 5,650 Net investment losses........ (54) (266) (224) (371) Adjustments to investment gains (losses)(5).......... -- 73 38 86 -------- -------- -------- -------- Total...................... $ 2,835 $ 2,668 $ 5,602 $ 5,365 ======== ======== ======== ========
- --------------- (1) Yields are based on quarterly average asset carrying values, 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 $887 million and $958 million at June 30, 2003 and 2002, 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 securities lending program. (3) Investment income from mortgage loans on real estate includes prepayment fees. (4) Real estate and real estate joint venture income is shown net of depreciation of $43 million and $56 million for the three months ended June 30, 2003 and 2002, respectively, and $88 million and $114 million for the six months ended June 30, 2003 and 2002, respectively. Real estate and real estate joint venture income includes amounts classified as discontinued operations of $(3) million and $33 million for the three months ended June 30, 2003 and 2002, respectively, and $(1) million and $60 million for the six months ended June 30, 2003 and 2002, respectively. These amounts are net of depreciation of zero and $14 million for the three months ended June 30, 2003 and 2002, respectively, and $323 thousand and $32 million for the six months ended June 30, 2003 and 2002, respectively. Net investment gains (losses) include $1 million and $91 million of gains classified as discontinued operations for the three months and six months ended June 30, 2003, respectively. Net investment gains (losses) include $8 million of losses classified as discontinued operations for both the three months and six months ended June 30, 2002. (5) Adjustments to investment gains and losses include amortization of deferred policy acquisition costs and adjustments to the policyholder dividend obligation resulting from investment gains and losses. 76 FIXED MATURITIES Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 74.2% and 73.6% of total cash and invested assets at June 30, 2003 and December 31, 2002, respectively. Based on estimated fair value, public fixed maturities represented $138,515 million, or 87.2%, and $121,191 million, or 86.4%, of total fixed maturities at June 30, 2003 and December 31, 2002, respectively. Based on estimated fair value, private fixed maturities represented $20,307 million, or 12.8%, and $19,097 million, or 13.6%, of total fixed maturities at June 30, 2003 and December 31, 2002, 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 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 fixed maturity investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC designations." The NAIC ratings are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC ratings 1 and 2 include bonds generally considered investment grade (rated "Baa3" or higher by Moody's Investors Services ("Moody's"), or rated "BBB-" or higher by Standard & Poor's ("S&P")) by such rating organizations. NAIC ratings 3 through 6 include bonds generally considered below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P). 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:
JUNE 30, 2003 DECEMBER 31, 2002 ----------------------------- ----------------------------- 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 $102,818 $110,806 69.8% $ 91,250 $ 97,495 69.5% 2 Baa 31,662 34,944 22.0 29,345 31,060 22.1 3 Ba 7,368 7,807 4.9 7,413 7,304 5.2 4 B 3,545 3,645 2.3 3,463 3,227 2.3 5 Caa and lower 648 629 0.4 434 339 0.3 6 In or near default 447 507 0.3 430 416 0.3 -------- -------- ----- -------- -------- ----- Subtotal 146,488 158,338 99.7 132,335 139,841 99.7 Redeemable preferred stock 568 484 0.3 564 447 0.3 -------- -------- ----- -------- -------- ----- Total fixed maturities $147,056 $158,822 100.0% $132,899 $140,288 100.0% ======== ======== ===== ======== ======== =====
- --------------- (1) Amounts presented are based on rating agency designations. Comparisons between NAIC ratings and rating agency designations are published by the NAIC. The rating agency designations are based upon the availability of the applicable ratings beginning with Moody's, followed by S&P. 77 Based on estimated fair values, investment grade fixed maturities comprised 91.8% and 91.6% of total fixed maturities in the general account at June 30, 2003 and December 31, 2002, respectively. The following table shows the amortized cost and estimated fair value of fixed maturities, by contractual maturity dates (excluding scheduled sinking funds) at:
JUNE 30, 2003 DECEMBER 31, 2002 --------------------- --------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- --------- --------- --------- (DOLLARS IN MILLIONS) Due in one year or less............................ $ 4,870 $ 5,020 $ 4,592 $ 4,662 Due after one year through five years.............. 26,696 28,432 26,200 27,354 Due after five years through ten years............. 25,617 28,368 23,297 24,987 Due after ten years................................ 38,062 43,481 35,507 38,452 -------- -------- -------- -------- Subtotal......................................... 95,245 105,301 89,596 95,455 Mortgage-backed and other asset-backed securities....................................... 51,243 53,037 42,739 44,386 -------- -------- -------- -------- Subtotal......................................... 146,488 158,338 132,335 139,841 Redeemable preferred stock......................... 568 484 564 447 -------- -------- -------- -------- Total fixed maturities........................... $147,056 $158,822 $132,899 $140,288 ======== ======== ======== ========
Actual maturities may differ as a result of prepayments by the issuer. The Company diversifies its fixed maturities by security sector. The following tables set forth the amortized cost, gross unrealized gain and 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:
JUNE 30, 2003 ------------------------------------------------- GROSS UNREALIZED AMORTIZED ---------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- -------- ----- ---------- ----- (DOLLARS IN MILLIONS) U.S. corporate securities....................... $ 51,906 $ 4,946 $304 $ 56,548 35.6% Mortgage-backed securities...................... 40,182 1,676 43 41,815 26.3 Foreign corporate securities.................... 19,895 2,236 101 22,030 13.9 U.S. treasuries/agencies........................ 12,133 1,874 15 13,992 8.8 Asset-backed securities......................... 11,061 265 104 11,222 7.1 Foreign government securities................... 7,842 1,116 20 8,938 5.6 State and political subdivisions................ 2,788 250 16 3,022 1.9 Other fixed income assets....................... 681 200 110 771 0.5 -------- ------- ---- -------- ----- Total bonds................................... 146,488 12,563 713 158,338 99.7 Redeemable preferred stocks..................... 568 -- 84 484 0.3 -------- ------- ---- -------- ----- Total fixed maturities........................ $147,056 $12,563 $797 $158,822 100.0% ======== ======= ==== ======== =====
78
DECEMBER 31, 2002 -------------------------------------------------- GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (DOLLARS IN MILLIONS) U.S. corporate securities...................... $ 47,021 $3,193 $ 957 $ 49,257 35.1% Mortgage-backed securities..................... 33,256 1,649 22 34,883 24.9 Foreign corporate securities................... 18,001 1,435 207 19,229 13.7 U.S. treasuries/agencies....................... 14,373 1,565 4 15,934 11.4 Asset-backed securities........................ 9,483 228 208 9,503 6.8 Foreign government securities.................. 7,012 636 52 7,596 5.4 State and political subdivisions............... 2,580 182 20 2,742 1.9 Other fixed income assets...................... 609 191 103 697 0.5 -------- ------ ------ -------- ----- Total bonds.................................. 132,335 9,079 1,573 139,841 99.7 Redeemable preferred stocks.................... 564 -- 117 447 0.3 -------- ------ ------ -------- ----- Total fixed maturities....................... $132,899 $9,079 $1,690 $140,288 100.0% ======== ====== ====== ======== =====
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 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. 79 The following table presents the estimated fair value of the Company's total fixed maturities classified as performing, potential problem, problem and restructured at:
JUNE 30, 2003 DECEMBER 31, 2002 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Performing....................................... $157,904 99.4% $139,452 99.4% Potential problem................................ 468 0.3 450 0.3 Problem.......................................... 420 0.3 358 0.3 Restructured..................................... 30 0.0 28 0.0 -------- ----- -------- ----- Total.......................................... $158,822 100.0% $140,288 100.0% ======== ===== ======== =====
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: - length of time and the extent to which the market value has been below amortized cost; - 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; - potential for impairments in an entire industry sector or sub-sector; - potential for impairments in certain economically depressed geographic locations; - 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 $63 million and $250 million for the three months ended June 30, 2003 and 2002, respectively, and $239 million and $525 million for the six months ended June 30, 2003 and 2002, respectively. The Company's three largest writedowns totaled $25 million and $188 million for the three months ended June 30, 2003 and 2002, respectively, and $101 million and $236 million for the six months ended June 30, 2003 and 2002, respectively. The circumstances that gave rise to these impairments were either financial restructurings or bankruptcy filings. During the three months ended June 30, 2003 and 2002, the Company sold fixed maturities with a fair value of $6,406 million and $3,233 million at a loss of $67 million and $280 million, respectively. During the six months ended June 30, 2003 and 2002, the Company sold fixed maturities with a fair value of $11,990 million and $7,245 million at a loss of $140 million and $482 million, respectively. 80 The gross unrealized loss related to the Company's fixed maturities at June 30, 2003 was $797 million. These fixed maturities mature as follows: 2% due in one year or less; 20% due in greater than one year to five years; 15% due in greater than five years to ten years; and 63% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in U.S. corporates (60%), foreign corporates (14%) and asset-backed (11%); and are concentrated by industry in utilities (11%), asset-backed (11%), and finance (10%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 16% of the $18,454 million fair value and 34% of the $797 million 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:
JUNE 30, 2003 ------------------------------------------------------------------- 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................ $13,294 $288 $330 $ 74 678 48 Six months or greater but less than nine months....................... 1,080 53 32 16 156 13 Nine months or greater but less than twelve months..................... 1,049 193 46 59 129 23 Twelve months or greater............ 3,187 107 204 36 257 12 ------- ---- ---- ---- ----- --- Total............................. $18,610 $641 $612 $185 1,220 96 ======= ==== ==== ==== ===== ===
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 and overall economic conditions. 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:
JUNE 30, 2003 ------------------------- GROSS % OF UNREALIZED LOSSES TOTAL ----------------- ----- (DOLLARS IN MILLIONS) Less than 20%............................................... $612 76.8% 20% or more for less than six months........................ 74 9.3 20% or more for six months or greater....................... 111 13.9 ---- ----- Total..................................................... $797 100.0% ==== =====
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 1,220 securities with an amortized cost of $18,610 million and a gross unrealized loss of $612 million at June 30, 2003. These fixed maturities mature as follows: 2% due in one year or less; 20% due in greater than one year to five years; 14% due in greater than five years to ten years; and 64% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in U.S. corporates (61%) and foreign corporates (17%); and are concentrated by industry in utilities (12%), services (10%) and finance (7%) (calculated as a percentage of 81 gross unrealized loss). Non-investment grade securities represent 15% of the $17,998 million fair value and 27% of the $612 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 comprised of 48 securities with an amortized cost of $288 million and a gross unrealized loss of $74 million at June 30, 2003. These fixed maturities mature as follows: 22% due in greater than one year to five years; 19% due in greater than five years to ten years; and 59% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in U.S. corporates (51%) and asset-backed (36%); and are concentrated by industry in asset-backed (36%), finance (18%), and transportation (14%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 55% of the $214 million fair value and 57% of the $74 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 48 securities with an amortized cost of $353 million and a gross unrealized loss of $111 million at June 30, 2003. These fixed maturities mature as follows: 15% due in greater than one year to five years; 31% due in greater than five years to ten years; and 54% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in U.S. corporates (56%) and asset-backed (22%); and are concentrated by industry in transportation (34%), finance (23%) and asset-backed (22%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 55% of the $242 million fair value and 54% of the $111 million gross unrealized loss. The Company held five fixed maturity securities each with a gross unrealized loss at June 30, 2003 greater than $10 million. Two of these securities represent 19% 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 June 30, 2003 for these securities were $29 million and $21 million, respectively. These securities were concentrated in the U.S. corporate and asset-backed sectors. The Company analyzed, on a case-by-case basis, both fixed maturity securities as of June 30, 2003 to determine if the securities were other-than-temporarily impaired. The Company believes that the estimated fair value of these securities, primarily transportation and asset-backed securities, were depressed as a result of 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 June 30, 2003. 82 Corporate Fixed Maturities. The table below shows the major industry types that comprise the corporate bond holdings at:
JUNE 30, 2003 DECEMBER 31, 2002 ---------------------- ------------------- ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ------------- ------ ---------- ------ (DOLLARS IN MILLIONS) Industrial..................................... $31,599 40.2% $29,077 42.5% Utility........................................ 9,678 12.3 7,219 10.5 Finance........................................ 13,753 17.5 12,596 18.4 Yankee/Foreign(1).............................. 22,030 28.1 19,229 28.1 Other.......................................... 1,518 1.9 365 0.5 ------- ------ ------- ------ Total........................................ $78,578 100.0% $68,486 100.0% ======= ====== ======= ======
- --------------- (1) Includes publicly traded, U.S. 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 June 30, 2003, the Company's combined holdings in the ten issuers to which it had the greatest exposure totaled $4,996 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 June 30, 2003 was $551 million. At June 30, 2003 and December 31, 2002, investments of $16,080 million and $14,778 million, respectively, or 73.0% and 76.9%, respectively, of the Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The balance of this exposure was primarily U.S. dollar-denominated and concentrated by security type in industrial and financial institutions. 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. Mortgage-Backed Securities. The following table shows the types of mortgage-backed securities the Company held at:
JUNE 30, 2003 DECEMBER 31, 2002 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Pass-through securities.......................... $15,165 36.3% $12,515 35.9% Collateralized mortgage obligations.............. 18,001 43.0 15,511 44.5 Commercial mortgage-backed securities............ 8,649 20.7 6,857 19.6 ------- ----- ------- ----- Total.......................................... $41,815 100.0% $34,883 100.0% ======= ===== ======= =====
At June 30, 2003 and December 31, 2002, pass-through and collateralized mortgage obligations totaled $33,166 million and $28,026 million, respectively, or 79.3% and 80.4%, respectively, 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 June 30, 2003 and December 31, 2002, approximately $4,647 million and $3,598 million, respectively, or 53.7% and 52.5%, respectively, of the commercial mortgage-backed securities, and $33,098 million and $27,590 million, respectively, or 99.8% and 98.4%, respectively, of the pass-through securities and collateralized mortgage obligations, were rated Aaa/AAA by Moody's or S&P. 83 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 $6,749 million and $4,912 million, or 60.1% and 51.7%, of total asset-backed securities were rated Aaa/AAA by Moody's or S&P at June 30, 2003 and December 31, 2002, 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, primarily asset securitizations and structured notes. These transactions enhance the Company's total return on its investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes consisting of equity-linked notes and similar instruments. The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and also is the collateral manager and a beneficial interest holder in such transactions (commonly referred to as collateralized debt obligations). As the collateral manager, the Company earns management fees on the outstanding securitized asset balance, which are recorded in income as earned. When the Company transfers assets to a bankruptcy-remote special purpose entity ("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 carrying amount of the financial assets transferred. Such gains or losses are allocated to the assets sold and the beneficial interests retained based on relative fair values at the date of transfer. Beneficial interests in securitizations are carried at fair value in fixed maturities. Income on the beneficial interests is recognized using the prospective method in accordance with EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Prior to the effective date of FIN 46, the SPEs used to securitize assets were not consolidated by the Company because unrelated third parties hold controlling interests through ownership of equity in the SPEs, representing at least three percent of the value 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 interest of the SPE. See "-- Variable Interest Entities." The Company purchases or receives beneficial interests in SPEs, which generally acquire financial assets, including corporate equities, debt securities and purchased options. The Company has not guaranteed the performance, liquidity or obligations of the SPEs and the Company's exposure to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company uses the beneficial interests as part of its risk management strategy, including asset-liability management. Prior to the effective date of FIN 46, these SPEs were not consolidated by the Company because unrelated third parties hold controlling interests through ownership of equity in the SPEs, representing at least three percent of the value 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 interest of the SPE. See "-- Variable Interest Entities." The beneficial interests in SPEs where the Company exercises significant influence over the operating and financial policies of the SPE are accounted for in accordance with the equity method of accounting. Impairments of these beneficial interests are included in net investment gains and losses. The beneficial interests in SPEs where the Company does not exercise significant influence are accounted for based on the substance of the beneficial interest's rights and obligations. Beneficial 84 interests are included in fixed maturities. These beneficial interests are generally structured notes, as defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. 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 11.8% and 13.2% of the Company's total cash and invested assets at June 30, 2003 and December 31, 2002, 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:
JUNE 30, 2003 DECEMBER 31, 2002 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (DOLLARS IN MILLIONS) Commercial......................................... $19,823 78.4% $19,552 78.0% Agricultural....................................... 5,090 20.1 5,146 20.5 Residential........................................ 376 1.5 388 1.5 ------- ----- ------- ----- Total............................................ $25,289 100.0% $25,086 100.0% ======= ===== ======= =====
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:
JUNE 30, 2003 DECEMBER 31, 2002 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (DOLLARS IN MILLIONS) REGION South Atlantic..................................... $ 5,139 25.9% $ 5,076 26.0% Pacific............................................ 4,130 20.8 4,180 21.4 Middle Atlantic.................................... 3,543 17.9 3,441 17.6 East North Central................................. 2,331 11.8 2,147 11.0 New England........................................ 1,181 6.0 1,323 6.8 West South Central................................. 1,256 6.3 1,097 5.6 Mountain........................................... 845 4.3 833 4.2 West North Central................................. 580 2.9 645 3.3 International...................................... 631 3.2 632 3.2 East South Central................................. 187 0.9 178 0.9 ------- ----- ------- ----- Total............................................ $19,823 100.0% $19,552 100.0% ======= ===== ======= =====
85
JUNE 30, 2003 DECEMBER 31, 2002 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (DOLLARS IN MILLIONS) PROPERTY TYPE Office............................................. $ 9,414 47.4% $ 9,340 47.8% Retail............................................. 4,471 22.6 4,320 22.1 Apartments......................................... 2,805 14.2 2,793 14.3 Industrial......................................... 1,922 9.7 1,910 9.7 Hotel.............................................. 955 4.8 942 4.8 Other.............................................. 256 1.3 247 1.3 ------- ----- ------- ----- Total............................................ $19,823 100.0% $19,552 100.0% ======= ===== ======= =====
The following table presents the scheduled maturities for the Company's commercial mortgage loans at:
JUNE 30, 2003 DECEMBER 31, 2002 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ------ -------- ------ (DOLLARS IN MILLIONS) Due in one year or less............................ $ 924 4.7% $ 713 3.6% Due after one year through two years............... 803 4.1 1,204 6.2 Due after two years through three years............ 2,784 14.0 1,939 9.9 Due after three years through four years........... 1,484 7.4 2,048 10.5 Due after four years through five years............ 2,846 14.4 2,443 12.5 Due after five years............................... 10,982 55.4 11,205 57.3 ------- ------ ------- ------ Total............................................ $19,823 100.0% $19,552 100.0% ======= ====== ======= ======
Problem, Potential Problem and Restructured Mortgage Loans. The Company monitors its mortgage loan investments on an ongoing 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 on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis and tenant creditworthiness. The Company 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 diversification 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. 86 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 establishes valuation allowances for loans that it deems impaired, as determined through its mortgage review process. The Company's valuation allowance is established both on a loan specific basis for those loans where a property or market specific risk has been identified that could likely result in a future default, as well as for pools of loans with similar high risk characteristics where a property specific or market risk has not been identified. Loans that are individually reviewed are evaluated based on the definition of impaired loans consistent with SFAS No. 114, Accounting by Creditors for Impairments of a Loan ("SFAS 114"), as loans on 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. The allowance for loan loss for pools of other loans with similar characteristics is established in accordance with SFAS No. 5, Accounting for Contingencies ("SFAS 5"), when a loss contingency exists. A loss contingency exists when the likelihood that a future event will occur is probable based on past events. SFAS 5 works in conjunction with, but does not overlap with, SFAS 114. The Company applies SFAS 5 to groups of loans with similar characteristics based on property types and loan to value risk factors. The Company records loan loss reserves as investment losses. The Company has a $525 million non-recourse 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 continues to be in discussions with the borrower to acquire its interest in the office complex. The most recent appraisal obtained by the Company shows that the office complex had a market value in excess of the Company's recorded investment amount. A change in circumstances could result in a borrower default, MetLife classifying the loan as impaired or the transfer of ownership of the property to the Company. The Company did not classify this loan as a problem or potential problem as of June 30, 2003, since the obligor is performing as agreed and the estimated collateral value provides sufficient coverage for the loan. Based on the Company's estimate of the property's market value at June 30, 2003, the Company would not record a loss in accordance with SFAS 114 in the event the loan was classified as impaired. The following table presents the amortized cost and valuation allowance for commercial mortgage loans distributed by loan classification at:
JUNE 30, 2003 DECEMBER 31, 2002 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing............... $19,775 99.2% $ 64 0.3% $19,343 98.3% $ 60 0.3% Restructured............. 80 0.4 25 31.3% 246 1.3 49 19.9% Delinquent or under foreclosure............ 55 0.3 14 25.5% 14 0.1 -- 0.0% Potentially delinquent... 16 0.1 -- 0.0% 68 0.3 10 14.7% ------- ----- ---- ------- ----- ---- Total.................. $19,926 100.0% $103 0.5% $19,671 100.0% $119 0.6% ======= ===== ==== ======= ===== ====
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. 87 The following table presents the changes in valuation allowances for commercial mortgage loans for the:
SIX MONTHS ENDED JUNE 30, 2003 --------------------- (DOLLARS IN MILLIONS) Balance, beginning of period................................ $119 Net additions............................................... 8 Deductions for dispositions, foreclosures and writedowns.... (24) ---- Balance, end of period...................................... $103 ====
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 65.2% of the $5,090 million of agricultural mortgage loans outstanding at June 30, 2003 were subject to rate resets prior to maturity. A substantial portion of these loans generally is successfully renegotiated and remains outstanding to maturity. The process and policies for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial loans. The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
JUNE 30, 2003 DECEMBER 31, 2002 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing............... $4,903 95.8% $-- 0.0% $4,980 96.7% $ -- 0.0% Restructured............. 115 2.3 14 12.2% 140 2.7 5 3.6% Delinquent or under foreclosure............ 75 1.5 5 6.7% 14 0.3 -- 0.0% Potentially delinquent... 18 0.4 2 11.1% 18 0.3 1 5.6% ------ ----- --- ------ ----- ----- Total.................. $5,111 100.0% $21 0.4% $5,152 100.0% $ 6 0.1% ====== ===== === ====== ===== =====
- --------------- (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:
SIX MONTHS ENDED JUNE 30, 2003 --------------------- (DOLLARS IN MILLIONS) Balance, beginning of period................................ $ 6 Net additions............................................... 15 --- Balance, end of period...................................... $21 ===
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. 88 REAL ESTATE AND REAL ESTATE JOINT VENTURES The Company's real estate and real estate joint venture investments consist of commercial and agricultural properties located primarily throughout the U.S. The Company manages these investments through a network of regional offices overseen by its investment department. At June 30, 2003 and December 31, 2002, the carrying value of the Company's real estate, real estate joint ventures and real estate held-for-sale was $4,585 million and $4,725 million, respectively, or 2.1% and 2.5% 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. The following table presents the carrying value of the Company's real estate, real estate joint ventures, real estate held-for-sale and real estate acquired upon foreclosure at:
JUNE 30, 2003 DECEMBER 31, 2002 ---------------- ------------------ CARRYING % OF CARRYING % OF TYPE VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (DOLLARS IN MILLIONS) Real estate held-for-investment..................... $4,161 90.7% $4,179 88.4% Real estate joint ventures held-for-investment...... 397 8.7 377 8.0 Foreclosed real estate held-for-investment.......... 1 0.0 3 0.1 ------ ----- ------ ----- 4,559 99.4 4,559 96.5 ------ ----- ------ ----- Real estate held-for-sale........................... 23 0.5 159 3.4 Foreclosed real estate held-for-sale................ 3 0.1 7 0.1 ------ ----- ------ ----- 26 0.6 166 3.5 ------ ----- ------ ----- Total real estate, real estate joint ventures and real estate held-for-sale......................... $4,585 100.0% $4,725 100.0% ====== ===== ====== =====
Office properties represent 57% and 58% of the Company's equity real estate portfolio at June 30, 2003 and December 31, 2002, respectively. The average occupancy level of office properties was 90% and 92% at June 30, 2003 and December 31, 2002, 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. 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 took advantage of a significant demand for Class A, institutional grade properties and, as a result, sold certain real estate holdings in its portfolio mostly during the fourth quarter of 2002, although several sales occurred in the first quarter of 2003. 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 investment gains and losses as 89 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 valuation allowances as investment losses and subsequent adjustments as investment gains or losses. If circumstances arise that were previously 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 held-for-sale, including real estate acquired upon foreclosure of commercial and agricultural mortgage loans, in the amounts of $26 million and $166 million at June 30, 2003 and December 31, 2002, respectively, are net of impairments of zero and $5 million, respectively, and net of valuation allowances of $9 million and $11 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. Certain of the Company's investments in real estate joint ventures meet the definition of a VIE under FIN 46. See "-- Variable Interest Entities." EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS The Company's carrying value of equity securities, which primarily consist of investments in common stocks, was $1,617 million and $1,613 million at June 30, 2003 and December 31, 2002, 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 $2,406 million and $2,395 million at June 30, 2003 and December 31, 2002, 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 uses the equity method of accounting for investments in limited partnership interests in which it has more than a minor interest, has influence over the partnership's operating and financial policies and does not have a controlling interest. The Company uses the cost method for minor interest investments and when it has virtually no influence over the partnership's operating and financial policies. The Company's investments in equity securities excluding partnerships represented 0.8% of cash and invested assets at both June 30, 2003 and December 31, 2002. Equity securities include private equity securities with an estimated fair value of $435 million and $443 million at June 30, 2003 and December 31, 2002, respectively. The Company may not freely trade its private equity securities because of restrictions imposed by federal and state securities laws and illiquid markets. The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $1,488 million and $1,667 million at June 30, 2003 and December 31, 2002, respectively. The Company anticipates that these amounts will be invested in the partnerships over the next three to five years. Some of the Company's investments in other limited partnership interests meet the definition of a VIE under FIN 46. See "-- Variable Interest Entities." 90 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:
JUNE 30, 2003 ----------------------------------------- GROSS UNREALIZED ----------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ---- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks.............................. $ 808 $158 $5 $ 961 59.4% Nonredeemable preferred stocks............. 610 50 4 656 40.6 ------ ---- --- ------ ----- Total equity securities................. $1,418 $208 $9 $1,617 100.0% ====== ==== === ====== =====
DECEMBER 31, 2002 ----------------------------------------- GROSS UNREALIZED ----------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ---- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks.............................. $ 877 $115 $79 $ 913 56.6% Nonredeemable preferred stocks............. 679 25 4 700 43.4 ------ ---- --- ------ ----- Total equity securities................. $1,556 $140 $83 $1,613 100.0% ====== ==== === ====== =====
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 entered into 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. 91 Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following: - length of time and the extent to which the market value has been below cost; - 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; - potential for impairments in an entire industry sector or sub-sector; - potential for impairments in certain economically depressed geographic locations; - 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 $13 million and $24 million for the three months ended June 30, 2003 and 2002, respectively and $90 million and $60 million for the six months ended June 30, 2003 and 2002, respectively. During the three months ended June 30, 2003 and 2002, the Company sold equity securities with an estimated fair value of $22 million and $47 million, respectively, at a loss of $1 million and $10 million, respectively. During the six months ended June 30, 2003 and 2002, the Company sold equity securities with an estimated fair value of $42 million and $75 million, respectively, at a loss of $6 million and $41 million, respectively. The gross unrealized loss related to the Company's equity securities at June 30, 2003 was $9 million. Such securities are concentrated by security type in common stock (71%) and mutual funds (22%); and are concentrated by industry in financial (59%) and domestic broad market mutual funds (20%) (calculated as a percentage of gross unrealized loss). The following table presents the cost, 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:
JUNE 30, 2003 ------------------------------------------------------------ GROSS NUMBER COST UNREALIZED LOSSES 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........... $284 $4 $7 $1 18 31 Six months or greater but less than nine months............. 11 -- -- -- 25 -- Nine months or greater but less than twelve months........... 12 -- 1 -- 10 -- Twelve months or greater....... 31 -- -- -- 13 -- ---- --- --- --- --- --- Total........................ $338 $4 $8 $1 66 31 ==== === === === === ===
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 and overall economic conditions. While all 92 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 June 30, 2003 where the estimated fair value had declined and remained below cost by:
JUNE 30, 2003 ---------------------- GROSS UNREALIZED % OF LOSSES TOTAL ------------ ------- (DOLLARS IN MILLIONS) Less than 20%............................................... $ 8 88.9% 20% or more for less than six months........................ 1 11.1 20% or more for six months or greater....................... -- -- --- ----- Total..................................................... $ 9 100.0% === =====
The category of equity securities where the estimated fair value has declined and remained below cost by less than 20% is comprised of 66 equity securities with a cost of $338 million and a gross unrealized loss of $8 million. These securities are concentrated by security type in common stock (77%) and mutual funds (15%); and concentrated by industry in financial (65%) and domestic broad market mutual funds (13%) (calculated as a percentage of gross unrealized loss). The significant factors considered at June 30, 2003 in the review of equity securities for other-than-temporary impairment were generally poor economic and market conditions. 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 31 equity securities with a cost of $4 million and a gross unrealized loss of $1 million. These securities are concentrated by security type in mutual funds (57%) and common stock (40%); and concentrated by industry in domestic broad market mutual funds (50%) and financial (32%) (calculated as a percentage of gross unrealized loss). The significant factors considered at June 30, 2003 in the review of equity securities for other-than-temporary impairment were generally poor economic and market conditions. The Company did not hold any equity securities with a gross unrealized loss at June 30, 2003 greater than $5 million. OTHER INVESTED ASSETS The Company's other invested assets consist principally of leveraged leases and funds withheld at interest of $3.4 billion and $3.1 billion at June 30, 2003 and December 31, 2002, respectively. 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 2.0% and 1.9% of cash and invested assets at June 30, 2003 and December 31, 2002, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative instruments to manage risk through one of four principal risk management strategies: (i) the hedging of liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; and (iv) firm commitments and forecasted transactions. Additionally, the Company enters into income generation and replication derivative transactions as permitted by its insurance subsidiaries' derivatives use plans approved by 93 the applicable state insurance departments. The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards and options, including caps and floors. The table below provides a summary of the notional amount and fair value of derivative financial instruments held at:
JUNE 30, 2003 DECEMBER 31, 2002 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- Financial futures.............. $ 196 $ -- $ 2 $ 4 $ -- $ -- Interest rate swaps............ 6,063 315 84 3,866 196 126 Floors......................... 325 12 -- 325 9 -- Caps........................... 9,040 -- -- 8,040 -- -- Financial forwards............. 1,971 11 10 1,945 -- 12 Foreign currency swaps......... 3,485 27 429 2,371 92 181 Options........................ 90 8 -- 78 9 -- Foreign currency forwards...... 53 1 -- 54 -- 1 Credit default swaps........... 456 2 1 376 2 -- ------- ---- ---- ------- ---- ---- Total contractual commitments............... $21,679 $376 $526 $17,059 $308 $320 ======= ==== ==== ======= ==== ====
SECURITIES LENDING The Company participates in a securities lending program whereby blocks of securities, which are included in investments, are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $20,725 million and $16,196 million and an estimated fair value of $22,685 million and $17,625 million were on loan under the program at June 30, 2003 and December 31, 2002, respectively. The Company was liable for cash collateral under its control of $23,028 million and $17,862 million at June 30, 2003 and December 31, 2002, 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 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. 94 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has material exposure to interest rate, equity market and foreign currency 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 June 30, 2003 is relatively unchanged in amount from that reported on December 31, 2002, a description of which may be found in the 2002 Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation as of June 30, 2003, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective. There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II -- OTHER INFORMATION ITEM I. LEGAL PROCEEDINGS The following should be read in conjunction with Note 8 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. Certain class members have opted out of these class action settlements and have brought or continued non-class action sales practices lawsuits. In addition, other sales practices lawsuits have been brought. As of June 30, 2003, there are approximately 375 sales practices lawsuits pending against Metropolitan Life, approximately 60 sales practices lawsuits pending against New England Mutual and approximately 35 sales practices lawsuits pending against General American. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. ASBESTOS-RELATED CLAIMS As previously reported, Metropolitan Life received approximately 66,000 asbestos-related claims in 2002. Publicity regarding legislative reform efforts may be resulting in an increase in the number of claims. During the first six months of 2003 and 2002, Metropolitan Life received approximately 48,000 and 28,000 asbestos-related claims, respectively. Of the approximately 48,000 claims received in the first six months of 2003, approximately 23,000 were received in April 2003. Except as to April, the number of asbestos-related claims received in 2003 are in line with the claims received in 2002 for the same period. However, we can provide no assurance with respect to the timing of receipt of new claims. The Company believes adequate provision has been made in its unaudited interim condensed consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The 95 ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. It is likely that a bill reforming asbestos litigation will be voted on by the Senate in 2003. While the Company strongly supports reform efforts, there can be no assurance that legislative reform will be enacted. Metropolitan Life will continue to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, 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 unaudited interim condensed 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. In 2003, Metropolitan Life also has been named as a defendant in a small number of silicosis, welding and mixed dust cases. The cases are pending in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana, Kentucky and Arkansas. The Company intends to vigorously defend itself against these cases. PROPERTY AND CASUALTY ACTIONS As previously reported, 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. In a lawsuit involving another insurer, the Tennessee Supreme Court held that diminished value is not covered under a Tennessee automobile policy. Based on that decision, plaintiffs in Tennessee have dismissed their alleged diminished value lawsuit against Metropolitan Property and Casualty Insurance Company. DEMUTUALIZATION ACTIONS The Company has previously reported that 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. Five purported class actions pending in the New York state court in New York County were consolidated within the commercial part. In addition, there remained a separate purported class action in New York state court in New York County. On February 21, 2003, the defendants' motions to dismiss both the consolidated action and separate action were granted; leave to replead as a proceeding under Article 78 of New York's Civil Practice Law and Rules has been granted in the separate action. Plaintiffs in the consolidated action and separate action have filed notices of appeal. Three purported class actions were previously 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. On February 4, 2003, plaintiffs filed a consolidated amended complaint adding a fraud claim under the Securities Exchange Act of 1934. Metropolitan Life has filed a motion to dismiss the consolidated amended complaint and a motion for summary judgment in this action. 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. 96 A purported class action was previously 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. In January 2003, the United States Court of Appeals for the Second Circuit affirmed the dismissal. In June 2003, the United States Supreme Court denied plaintiffs' petition for certiorari in this action. 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 United States District Court for the Western District of Pennsylvania. The Holding Company, Metropolitan Life, the trustee of the policyholder trust, and certain present and former individual directors and officers of Metropolitan Life are named as defendants. After the defendants' motion to transfer the lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an amended complaint that dropped all claims against the trustee of the policyholder trust and the individual directors and officers. In the amended complaint, plaintiffs allege that the treatment of the cost of the sales practices settlement in connection with the demutualization of Metropolitan Life breached the terms of the settlement. Plaintiffs seek compensatory and punitive damages, as well as attorneys' fees and costs. The defendants have moved to dismiss the action. Plaintiffs' motion for class certification has been adjourned. The defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting them vigorously. RACE-CONSCIOUS UNDERWRITING CLAIMS As previously reported, 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 affiliates. The New York Insurance Department has concluded its examination of Metropolitan Life concerning possible past race-conscious underwriting practices. The 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 were 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. On April 28, 2003, the United States District Court approved a class action settlement of the consolidated actions. Several persons who had objected to the settlement have filed notices of appeal from the order approving the settlement. Metropolitan Life recorded a charge in the fourth quarter of 2001 in connection with the anticipated resolution of these matters. During the second quarter of 2003, the Company reduced this charge by $64 million, after-tax. The Company believes the remaining portion of the previously recorded charge is adequate to cover the costs associated with the resolution of these matters. Eighteen lawsuits involving approximately 130 plaintiffs have been filed in federal and state court in Alabama, Mississippi and Tennessee alleging federal and/or state law claims of racial discrimination in connection with the sale, formation, administration or servicing of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in these 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. Plaintiffs have filed a motion for class certification. Opposition papers were filed by Metropolitan Life. The parties have reached a settlement in principle and are seeking the Court's preliminary approval. 97 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. The parties are engaged in settlement discussions. The United States Securities and Exchange Commission (the "SEC") has commenced a formal investigation of New England Securities Corporation, an indirect subsidiary of New England Life Insurance Company ("NES"), in response to NES informing the SEC that certain systems and controls relating to one NES advisory program were not operating effectively. NES is cooperating fully with the SEC and is continuing to research the effect, if any, of this issue upon approximately 6,000 active and closed accounts. The American Dental Association and two individual providers have sued MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought in a Florida federal district court. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. MetLife is vigorously defending the case. Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's unaudited interim condensed 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 consolidated net income or cash flows in particular quarterly or annual periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of stockholders on April 22, 2003, the stockholders elected four Class I directors, each for a term expiring at the Company's 2006 annual meeting. The voting results are as follows:
NAME VOTES FOR VOTES WITHHELD - ---- ----------- -------------- Robert H. Benmosche............... 637,384,347 12,272,706 Gerald Clark...................... 640,880,051 8,777,002 John J. Phelan, Jr................ 643,163,289 6,493,764 Hugh B. Price..................... 578,625,614 71,031,439
98 The directors whose terms continued and the years their terms expire are as follows: Class II Directors -- Term Expires in 2004 Curtis H. Barnette John C. Danforth Burton A. Dole, Jr. Harry P. Kamen Charles M. Leighton Class III Directors -- Term Expires in 2005 James R. Houghton Helene L. Kaplan Catherine R. Kinney Stewart G. Nagler William C. Steere, Jr. The stockholders also ratified the appointment of Deloitte & Touche LLP as the Company's independent auditors for 2003. The voting results are as follows:
FOR AGAINST ABSTAIN - ----------- --------- ------- 643,295,312 6,210,074 151,667
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Credit Agreement, dated as of April 25, 2003, among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K During the three months ended June 30, 2003, the following current reports were filed on Form 8-K: 1. Form 8-K filed May 5, 2003 (dated May 5, 2003) attaching press release and Quarterly Financial Supplement regarding first quarter 2003 results. 2. Form 8-K filed May 19, 2003 (dated May 19, 2003) attaching press release regarding completion of the MetLife Capital Trust I transaction. 3. Form 8-K filed June 17, 2003 (dated June 17, 2003) attaching press release regarding organizational changes. 99 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: August 13, 2003 100 EXHIBIT INDEX
EXHIBIT PAGE NUMBER EXHIBIT NAME NUMBER - ------- ------------ ------ 10.1 Credit Agreement, dated as of April 25, 2003, among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-10.1 3 y87663exv10w1.txt CREDIT AGREEMENT EXECUTION COPY ================================================================================ CREDIT AGREEMENT dated as of April 25, 2003 among METLIFE, INC. METROPOLITAN LIFE INSURANCE COMPANY, and METLIFE FUNDING, INC., as Borrowers, The LENDERS Party Hereto, CITIBANK, N.A., JPMORGAN CHASE BANK and WACHOVIA BANK, NATIONAL ASSOCIATION, as Syndication Agents and BANK ONE, NA as Administrative Agent --------------------- $1,000,000,000 --------------------- BANC ONE CAPITAL MARKETS, INC., as Sole Lead Arranger and Book Manager ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS .................................................................. 1 Section 1.1 Defined Terms ......................................................... 1 Section 1.2 Classification of Loans and Borrowings ................................ 14 Section 1.3 Terms Generally ....................................................... 14 Section 1.4 Accounting Terms; GAAP; SAP ........................................... 15 ARTICLE II THE CREDITS ................................................................. 15 Section 2.1 Commitments ........................................................... 15 Section 2.2 Loans and Borrowings .................................................. 15 Section 2.3 Requests for Revolving Borrowings ..................................... 16 Section 2.4 Competitive Bid Procedure ............................................. 17 Section 2.5 Funding of Borrowings ................................................. 19 Section 2.6 Interest Elections .................................................... 20 Section 2.7 Termination and Reduction of Commitments .............................. 21 Section 2.8 Repayment of Loans; Evidence of Debt .................................. 22 Section 2.9 Prepayment of Loans ................................................... 23 Section 2.10 Fees ................................................................. 23 Section 2.11 Interest ............................................................. 24 Section 2.12 Alternate Rate of Interest ........................................... 25 Section 2.13 Increased Costs ...................................................... 25 Section 2.14 Break Funding Payments ............................................... 27 Section 2.15 Taxes ................................................................ 27 Section 2.16 Payments Generally; Pro Rata Treatment; Sharing of Set-offs .......... 30 Section 2.17 Mitigation Obligations; Replacement of Lenders ....................... 31 ARTICLE III REPRESENTATIONS AND WARRANTIES ............................................. 32 Section 3.1 Organization; Powers .................................................. 32 Section 3.2 Authorization; Enforceability ......................................... 32 Section 3.3 Governmental Approvals; No Conflicts .................................. 33 Section 3.4 Financial Condition; No Material Adverse Change ....................... 33 Section 3.5 Properties ............................................................ 33 Section 3.6 Litigation and Environmental Matters .................................. 34 Section 3.7 Compliance with Laws and Agreements ................................... 34 Section 3.8 Investment and Holding Company Status ................................. 34 Section 3.9 Taxes ................................................................. 34 Section 3.10 ERISA ................................................................ 35 Section 3.11 Disclosure ........................................................... 35 Section 3.12 Margin Stock ......................................................... 35 ARTICLE IV CONDITIONS .................................................................. 35 Section 4.1 Effective Date ........................................................ 35 Section 4.2 Each Credit Event ..................................................... 36 ARTICLE V AFFIRMATIVE COVENANTS ........................................................ 37 Section 5.1 Financial Statements and Other Information ............................ 37
- i - TABLE OF CONTENTS (Continued)
Page ---- Section 5.2 Notices of Defaults ................................................... 38 Section 5.3 Existence; Conduct of Business ........................................ 38 Section 5.4 Payment of Obligations ................................................ 38 Section 5.5 Maintenance of Properties; Insurance .................................. 38 Section 5.6 Books and Records; Inspection Rights .................................. 38 Section 5.7 Compliance with Laws .................................................. 39 Section 5.8 Use of Proceeds ....................................................... 39 Section 5.9 Support Agreement ..................................................... 39 ARTICLE VI NEGATIVE COVENANTS .......................................................... 39 Section 6.1 Liens ................................................................. 39 Section 6.2 Fundamental Changes ................................................... 40 Section 6.3 Transactions with Affiliates .......................................... 41 Section 6.4 Adjusted Statutory Surplus ............................................ 41 Section 6.5 Consolidated Net Worth ................................................ 41 ARTICLE VII EVENTS OF DEFAULT .......................................................... 41 ARTICLE VIII THE ADMINISTRATIVE AGENT .................................................. 44 Section 8.1 Appointment; Nature of Relationship ................................... 44 Section 8.2 Powers ................................................................ 44 Section 8.3 General Immunity ...................................................... 44 Section 8.4 No Responsibility for Loans, Recitals, etc ............................ 44 Section 8.5 Action on Instructions of Lenders ..................................... 45 Section 8.6 Employment of Administrative Agents and Counsel ....................... 45 Section 8.7 Reliance on Documents; Counsel ........................................ 45 Section 8.8 Administrative Agent's Reimbursement and Indemnification .............. 45 Section 8.9 Notice of Default ..................................................... 46 Section 8.10 Rights as a Lender ................................................... 46 Section 8.11 Lender Credit Decision ............................................... 46 Section 8.12 Successor Administrative Agent ....................................... 46 Section 8.13 Administrative Agent and Arranger Fees ............................... 47 Section 8.14 Delegation to Affiliates ............................................. 47 Section 8.15 Syndication Agents, Senior Managing Agents, Managing Agents, etc...... 47 ARTICLE IX BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ........................... 48 Section 9.1 Successors and Assigns ................................................ 48 Section 9.2 Participations ........................................................ 48 Section 9.3 Assignments ........................................................... 49 Section 9.4 Dissemination of Information .......................................... 51 Section 9.5 Tax Treatment ......................................................... 51 ARTICLE X MISCELLANEOUS ................................................................ 51 Section 10.1 Notices .............................................................. 51 Section 10.2 Waivers; Amendments .................................................. 51
- ii - TABLE OF CONTENTS (Continued)
Page ---- Section 10.3 Expenses; Indemnity: Damage; Waiver ................................... 52 Section 10.4 Survival .............................................................. 53 Section 10.5 Counterparts; Integration; Effectiveness .............................. 53 Section 10.6 Severability .......................................................... 54 Section 10.7 Right of Setoff ....................................................... 54 Section 10.8 Governing Law; Jurisdiction; Consent to Service of Process ............ 54 Section 10.9 WAIVER OF JURY TRIAL .................................................. 55 Section 10.10 Headings ............................................................. 55 Section 10.11 Confidentiality ...................................................... 55
- iii - TABLE OF CONTENTS (Continued)
Page ---- SCHEDULES: Schedule 2.1 - Commitments Schedule 2.10 - Pricing Schedule Schedule 3.6 - Disclosed Matters EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Opinion of Counsel to the Borrowers Exhibit C - Form of Promissory Note
- iv - CREDIT AGREEMENT This CREDIT AGREEMENT dated as of April 25, 2003, is among METLIFE, INC. ("MetLife"), METROPOLITAN LIFE INSURANCE COMPANY (the "Company") and METLIFE FUNDING, INC. ("Funding" and together with the Company and MetLife, the "Borrowers"), the LENDERS party hereto, and BANK ONE, NA, as Administrative Agent. RECITALS: A. The Borrowers have requested the Lenders to make financial accommodations to them in the aggregate principal amount of $1,000,000,000; and B. The Lenders are willing to extend such financial accommodations on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual agreements made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted Statutory Surplus" means, at any time, the sum of (i) surplus (calculated in accordance with the Statutory Statements), plus (ii) asset valuation reserve (calculated in accordance with the Statutory Statements). "Administrative Agent" means Bank One in its capacity as contractual representative of the Lenders pursuant to Article VIII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VIII. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Administrative Agent-Related Persons" means the Administrative Agent and any successor agent arising under Article VIII, together with their respective Affiliates (including, in the case of Bank One, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (a) the Prime Rate for such day and (b) the sum of (i) the Federal Funds Effective Rate for such day plus (ii) 1/2% per annum. "Applicable Facility Fee Rate" means, at any time, the percentage rate per annum at which Facility Fees are accruing on the Aggregate Commitment (without regard to usage) or the total Revolving Credit Exposures, as applicable, at such time as set forth in the Pricing Schedule. "Applicable Insurance Regulatory Authority" means the insurance department or similar insurance regulatory or administrative authority or agency of the jurisdiction in which the Company is domiciled. "Applicable Margin" means, with respect to Eurodollar Revolving Loans at any time, the percentage rate per annum which is applicable at such time with respect to such Loans as set forth in the Pricing Schedule. "Applicable Percentage" means, with respect to any Lender, the percentage of the Aggregate Commitment represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means the rate determined in accordance with Schedule 2.10. "Applicable Term Out Premium Rate" means, at any time, the percentage rate per annum which is applicable at such time with respect to Loans as set forth in the Pricing Schedule. "Applicable Utilization Fee Rate" means, at any time, the percentage rate per annum at which Utilization Fees are accruing as set forth in the Pricing Schedule. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. "Arranger" means Banc One Capital Markets, Inc., a Delaware corporation, and its successors, in its capacity as sole Lead Arranger and Bank Manager. "Asset Securitization" means a public or private transfer of installment receivables, credit card receivables, lease receivables, mortgage loan receivables, policyholder loan receivables or any other type of secured or unsecured financial assets, which transfer is recorded as a sale according to GAAP as of the date of such transfer. -2- "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.3.2), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Availability Period" means the period from and including the Effective Date to but excluding the earlier of (a) the Termination Date and (b) the Maturity Date. "Bank One" means Bank One, NA, a national banking association having its principal office in Chicago, Illinois, in its individual capacity, and its successors. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrowing" means (a) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect. "Borrowing Request" means a request by a Borrower for a Revolving Borrowing in accordance with Section 2.3. "Business Day" means (a) with respect to any borrowing, payment or rate selection of Eurodollar Loans, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York City for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (b) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York City for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of MetLife, (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of MetLife by Persons who were neither (i) nominated by the board of directors of MetLife nor (ii) appointed by directors so nominated, (c) the failure of the Company to be a Wholly-Owned Subsidiary of MetLife, or -3- (d) except as provided in the proviso to Section 6.2(a), the failure of Funding to be a Wholly-Owned Subsidiary of MetLife. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Competitive Loans. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.7, and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.3. The initial amount of each Lender's Commitment is set forth on Schedule 2.1, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $1,000,000,000. "Competitive Bid" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.4. "Competitive Bid Margin" means the margin above or below the applicable Eurodollar Base Rate (adjusted for reserve costs, if applicable) offered for a Eurodollar Competitive Borrowing, expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added to or subtracted from such Eurodollar Base Rate. "Competitive Bid Rate" means, with respect to any Competitive Bid, the Competitive Bid Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "Competitive Bid Request" means a request by a Borrower for Competitive Bids in accordance with Section 2.4. "Competitive Loan" means a Loan made pursuant to Section 2.4. "Consolidated Net Worth" means the consolidated stockholders' equity, determined in accordance with GAAP, of MetLife and its Consolidated Subsidiaries. "Consolidated Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date. -4- "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.6. "dollars" or "$" refers to lawful money of the United States of America. "Effective Date" means the date on which the conditions specified in Section 4.1 are satisfied (or waived in accordance with Section 10.2). "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of MetLife or any of its Material Subsidiaries directly or indirectly resulting from or based upon (a) the violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) any exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with MetLife, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived and other than an event which is based on a certain level of unfunded vested benefits, or the requirement to pay variable PBGC premiums, provided that the amount of unfunded vested benefits, when determined on a FAS87 basis, do not exceed $50,000,000); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by MetLife -5- or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by MetLife or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by MetLife or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by MetLife or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from MetLife or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Eurodollar Rate (or, in the case of a Competitive Loan, the Eurodollar Bid Rate). "Eurodollar Base Rate" means, with respect to a Eurodollar Borrowing to a Borrower for the relevant Eurodollar Interest Period, the applicable British Bankers' Association LIBOR rate for deposits in U.S. dollars as reported by any generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, and having a maturity equal to such Eurodollar Interest Period, provided that, if no such British Bankers' Association LIBOR rate is available to the Administrative Agent, the applicable Eurodollar Base Rate for the relevant Eurodollar Interest Period shall instead be the rate determined by the Administrative Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of Bank One's relevant Eurodollar Revolving Loan, or, in the case of a Eurodollar Competitive Borrowing, the amount of the Eurodollar Competitive Loan requested by such Borrower, and having a maturity equal to such Eurodollar Interest Period. "Eurodollar Bid Rate" means, with respect to a Eurodollar Competitive Borrowing made by a given Lender for the relevant Eurodollar Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable to such Interest Period, divided by (ii) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (b) the Competitive Bid Margin offered by such Lender and accepted by the Requesting Borrower. "Eurodollar Interest Period" means, with respect to a Eurodollar Borrowing, a period of one, two, three or six months commencing on a Business Day selected by a Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter; provided, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, that if said next succeeding Business Day falls in a new calendar month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. -6- "Eurodollar Rate" means, with respect to a Eurodollar Revolving Borrowing for the relevant Eurodollar Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (ii) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (b) the Applicable Margin, plus (c) from and after the Termination Date, the Applicable Term Out Premium Rate. "Event of Default" has the meaning assigned to such term in Article VII. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of any Borrower hereunder, (a) income, franchise or similar taxes, in each case, imposed on (or measured by) its net income by the United States of America, or by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, or, in the case of a jurisdiction (or any political subdivision thereof) that imposes taxes on the basis of management or control or other concept or principle of residence, the jurisdiction (or any political subdivision thereof) in which such recipient is so resident, (b) Taxes imposed by reason of any present or former connection between such Person and the jurisdiction (or any political subdivision thereof) imposing such Taxes, other than as a result of the execution and delivery of this Agreement, the making of any Loans hereunder or the performance of any action provided for hereunder, (c) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which any Borrower is located and (d) in the case of a Lender (other than an assignee pursuant to a request by the Company under Section 2.17(b)), any withholding tax that (i) is imposed on amounts payable to a Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from such Borrower with respect to such withholding tax pursuant to Section 2.15(a) or (ii) is attributable to such Lender's failure to comply with Section 2.15(e). "Facility Fee" has the meaning set forth in Section 2.10(a). "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Fee Letter" has the meaning set forth in Section 2.10(c). "Financial Officer" means the chief financial officer, principal accounting officer, treasurer, assistant treasurer or controller of MetLife or, in the case of Section 4.1(d), any Borrower. -7- "Fixed Rate" means, with respect to a Competitive Loan (other than a Eurodollar Competitive Loan) made by a given Lender for the relevant Fixed Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender and accepted by the requesting Borrower pursuant to Section 2.4. "Fixed Rate Interest Period" means, with respect to any Fixed Rate Competitive Loan, a period of not less than seven and not more than 180 days commencing on a Business Day selected by the Requesting Borrower pursuant to this Agreement. If such Fixed Rate Interest Period would end on a day which is not a Business Day, such Fixed Rate Interest Period shall end on the next succeeding Business Day. "Fixed Rate Loan" means a Competitive Loan bearing interest at a Fixed Rate. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which any Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Funding" means MetLife Funding, Inc., a Delaware corporation. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. -8- "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances, and (k) all Surplus Relief Reinsurance ceded by such Person. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Interest Election Request" means a request by any Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.6. "Interest Period" means a Eurodollar Interest Period or a Fixed Rate Interest Period. "Lenders" means the Persons listed on Schedule 2.1 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. -9- "Loan Documents" means this Agreement and any Notes issued pursuant to Section 2.8(e). "Loans" means the loans made by the Lenders to the Borrowers pursuant to this Agreement. "Margin Stock" means "margin stock" within the meaning of Regulations U and X. "Material Adverse Change" means any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, assets, property, condition (financial or otherwise) or prospects of MetLife and its Subsidiaries taken as a whole, or (b) the validity or enforceability of this Agreement or the rights and remedies of the Administrative Agent and the Lenders in respect of any Borrower hereunder. "Material Indebtedness" means Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of MetLife or any of its Material Subsidiaries in an aggregate principal amount exceeding $200,000,000 (or its equivalent in any other currency). For purposes of determining Material Indebtedness, the "principal amount" of the obligations of MetLife or any of its Material Subsidiaries in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that MetLife or such Material Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Material Subsidiary" means, at any time, (i) Funding, (ii) the Company and (iii) each Subsidiary of MetLife that as of such time meets the definition of "significant subsidiary" contained as of the date hereof in Regulation S-X of the SEC. "Maturity Date" means (a) the one year anniversary of the Termination Date or (b) any earlier date on which (i) the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof (other than pursuant to Section 2.7(a)) or (ii) the Loans and other obligations of the Borrowers hereunder shall become due and payable. "MetLife" means MetLife, Inc., a Delaware corporation. "Moody's" means Moody's Investors Service, a subsidiary of Moody's Corporation, and its successors. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NAIC" means the National Association of Insurance Commissioners and any successor thereto. "Note" has the meaning set forth in Section 2.8(e). "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made -10- hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Participant" has the meaning set forth in Section 9.2.1. "Payment Date" means (a) with respect to any ABR Loan, Facility Fee or Utilization Fee, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period, and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Payment Dates with respect to such Borrowing. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.4; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.4; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; and (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of any Borrower; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. -11- "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which MetLife or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pricing Schedule" means Schedule 2.10 hereto. "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Purchasers" has the meaning set forth in Section 9.3.1. "Register" has the meaning set forth in Section 9.3.4. "Regulations D, U and X" means, respectively, Regulations D, U and X of the Board (or any successor), as the same may be modified and supplemented and in effect from time to time. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Requesting Borrower" means, with respect to a Revolving Borrowing or a Competitive Borrowing pursuant to Article II, the relevant Borrower requesting such a Borrowing. "Required Lenders" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time; provided that, for all purposes after the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Revolving Credit Exposure" means, with respect to any Lender at any time, the outstanding principal amount of such Lender's Revolving Loans. "Revolving Loan" means a Loan made pursuant to Section 2.3. "Revolving Loan Termination Balance" means the aggregate principal amount of Revolving Loans outstanding on the Termination Date after giving effect to any Revolving Loans made or repaid on such date. -12- "SAP" means the accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority or the NAIC. "S&P" means Standard & Poor's Credit Market Services, a division of The McGraw-Hill Companies, Inc., and any successor thereto. "SEC" means the Securities and Exchange Commission or any governmental authority succeeding to its principal functions. "Securities Transactions" means (a) securities lending arrangements, and (b) repurchase and reverse repurchase arrangements with respect to securities and financial instruments. "Separate Accounts Assets" means, as at any date, the "Separate Accounts Assets" of the Company, determined in accordance with SAP, reported as such in the Statutory Statements of the Company. "Statutory Statement" means a statement of the condition and affairs of the Company, prepared in accordance with SAP, and filed with the Applicable Insurance Regulatory Authority. "Structured Transaction Liens" means Liens granted by the Company to (A) a 99%-owned Subsidiary (the "Relevant Subsidiary") in connection with a structured private investment transaction entered into in September 1999, as the same may be amended from time to time (the "Structured Transaction"), where (i) in connection with such transaction, such Liens are assigned to a special purpose Subsidiary of the Company (the "SPV") in which the Company is the holder of all outstanding obligations (other than ordinary course administrative expenses and common equity interests) and (ii) the assets covered by such Liens consist solely of the rights of the Company against the SPV; and (B) the SPV in connection with the Structured Transaction which are subordinated to, and exercisable only after, the Liens described in the preceding clause (A) and which cover only the assets covered by the Liens described in said clause (A). "Subsidiary" means, with respect to any Person (the "parent") at any date, any Consolidated Subsidiary of the parent, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Support Agreement" means the Support Agreement dated as of November 30, 1984 between the Company and Funding, as amended and restated effective as of that date on July 2, 1985. "Surplus Relief Reinsurance" means any transaction in which the Company or any Subsidiary of the Company cedes business under a reinsurance agreement that would be considered a "financing-type" reinsurance agreement as determined by the independent certified public accountants of the Company in accordance with principles published by the Financial -13- Accounting Standards Board or the Second Edition of the AICPA Audit Guide for Stock Life Insurance Companies (pp. 91-92), as the same may be revised from time to time. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority including penalties, interest and additions to tax. "Termination Date" means April 23, 2004. "Transactions" means the execution, delivery and performance by the Borrowers of this Agreement, the borrowing of Loans when made and the use of the proceeds thereof. "Transferee" has the meaning set forth in Section 9.4. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Eurodollar Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the Eurodollar Bid Rate or a Fixed Rate. "Utilization Fee" has the meaning set forth in Section 2.10(b). "Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or Controlled, directly or indirectly, by such Person or one of more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or Controlled. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Section 1.2 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). Section 1.3 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to -14- include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. Section 1.4 Accounting Terms; GAAP; SAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or SAP, as the case may be, as in effect from time to time; provided that, if MetLife notifies the Administrative Agent that MetLife requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or SAP, as the case may be, or in the application thereof on the operation of such provision (or if the Administrative Agent notifies MetLife that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or SAP, as the case may be, or in the application thereof, then such provision shall be interpreted on the basis of GAAP or SAP, as the case may be, as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II THE CREDITS Section 2.1 Commitments. Subject to the terms and conditions set forth herein, each Lender severally and not jointly agrees to make Revolving Loans to the Borrowers from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit Exposures of all Lenders plus the aggregate principal amount of all outstanding Competitive Loans exceeding the Aggregate Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, any Borrower or all Borrowers may borrow, prepay and reborrow Revolving Loans. The Commitments to lend hereunder shall expire on the Termination Date. Section 2.2 Loans and Borrowings. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.4. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and not joint, and no Lender shall be responsible for any other Lender's failure to make Loans as required. The obligations of the Borrowers to repay Loans shall be several, not joint. -15- (b) Subject to Section 2.12, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Requesting Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Requesting Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Requesting Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000; provided, that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of ten (10) Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrowers shall not be entitled to request, or to elect to convert or continue, any Revolving Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. Section 2.3 Requests for Revolving Borrowings. To request a Revolving Borrowing, the Requesting Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 10:00 a.m., Chicago time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 10:00 a.m., Chicago time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Requesting Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.2: (i) the name of the Requesting Borrower and aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto (which may not end after the Maturity Date); and -16- (v) the location and number of the Requesting Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.5. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Requesting Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. Section 2.4 Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period any Borrower or all Borrowers may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that the sum of the total Revolving Credit Exposures of all Lenders plus the aggregate principal amount of all outstanding Competitive Loans at any time shall not exceed the Aggregate Commitment. To request Competitive Bids, the Requesting Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 10:00 a.m., Chicago time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 9:00 a.m., Chicago time, one Business Day before the date of the proposed Borrowing; provided that the Borrowers may submit up to (but not more than) three Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Requesting Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.2: (i) the name of the Borrower and aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing (which may not end after the Termination Date); and -17- (v) the location and number of the Requesting Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.5. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Requesting Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:00 a.m., Chicago time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:00 a.m., Chicago time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of $10,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Requesting Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans, and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Requesting Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Requesting Borrower may accept or reject any Competitive Bid. Such Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing, not later than 10:00 a.m., Chicago time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., Chicago time, on the proposed date of the Competitive Borrowing; provided that (i) the failure of such Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) such Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if such Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by such Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, such Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made by such Borrower in -18- consultation with the Administrative Agent pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; and provided further that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by the Requesting Borrower in consultation with the Administrative Agent. A notice given by the Requesting Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Requesting Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. Section 2.5 Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 11:00 a.m., Chicago time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Requesting Borrower by transferring the amounts so received on the proposed date of the Borrowing, in immediately available funds, to an account of such Borrower maintained with the Administrative Agent in Chicago or as designated by such Borrower in the applicable Borrowing Request or Competitive Bid Request. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Requesting Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Requesting Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to such Borrower to but excluding the date of payment to the -19- Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (ii) in the case of such Borrower, the interest rate applicable to the relevant Loan. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. Section 2.6 Interest Elections. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Requesting Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Requesting Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Requesting Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.3 if such Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Requesting Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.2: (i) the name of the Borrower and Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election (which may not end after the Maturity Date). -20- If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Requesting Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Requesting Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Revolving Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Requesting Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. Section 2.7 Termination and Reduction of Commitments. (a) Unless previously terminated, the Commitments shall terminate on the Termination Date. (b) Upon the occurrence of a Change in Control, the Administrative Agent shall, at the request of the Required Lenders, by notice to the Borrowers, terminate the Commitments and thereupon the Commitments shall terminate immediately. (c) The Borrowers may at any time terminate, or from time to time reduce, the Aggregate Commitment; provided that (i) each reduction of the Aggregate Commitment shall be in an amount that is an integral multiple of $10,000,000 and (ii) the Borrowers shall not terminate or reduce the Aggregate Commitment if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.9, the sum of the Revolving Credit Exposures of all Lenders plus the aggregate principal amount of all outstanding Competitive Loans would exceed the Aggregate Commitment. (d) The Borrowers shall notify the Administrative Agent of any election to terminate or reduce the Aggregate Commitment under paragraph (c) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrowers pursuant to this Section shall be irrevocable; provided that a notice of termination or reduction of the Aggregate Commitment delivered by the Borrowers may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrowers (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not -21- satisfied. Any termination or reduction of the Aggregate Commitment shall be permanent. Each reduction of the Aggregate Commitment shall be made ratably among the Lenders in accordance with their respective Commitments. All accrued Facility Fees and Utilization Fees shall be payable on the effective date of the termination of the obligations of the Lenders to make Loans hereunder. Section 2.8 Repayment of Loans; Evidence of Debt. (a) Each Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan made to such Borrower hereunder on the Termination Date, and (ii) to the Administrative Agent for account of each Lender the then unpaid principal amount of each Competitive Loan made to such Borrower on the last day of the Interest Period applicable to such Loan; provided, that upon the written request of the Borrowers delivered to the Administrative Agent at least ten (10) Business Days prior to the Termination Date and so long as no Default has occurred and is continuing on the Termination Date, the Revolving Loan Termination Balance shall be converted to a term loan which shall be due and payable on the Maturity Date. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the name of the Borrower and amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent from any Borrower hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of any Borrower to repay its Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by promissory notes substantially in the form of Exhibit C (each, a "Note"). In such event, each Borrower shall prepare, execute and deliver to such Lender a Note payable to such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Article IX) be represented by one or more Notes in such form payable to the payee named therein (or to its registered assigns). -22- Section 2.9 Prepayment of Loans. (a) Each Borrower shall have the right at any time and from time to time to prepay without penalty (except as may be provided in Section 2.14) any Borrowing of such Borrower in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; provided that no Borrower shall have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) The Borrowers shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 10:00 a.m., Chicago time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 10:00 a.m., Chicago time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the name of the Borrower, the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Aggregate Commitment as contemplated by Section 2.7, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.7. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.2. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11. (c) Upon the occurrence of a Change in Control, each Borrower agrees that if requested by the Administrative Agent (acting at the request of the Required Lenders) such Borrower will promptly prepay each Loan, together with accrued interest. Section 2.10 Fees. (a) Facility Fee. The Borrowers jointly and severally agree to pay to the Administrative Agent for the account of each Lender a facility fee (the "Facility Fee") as follows: (i) from the Effective Date to but not including the Termination Date, the Borrowers agree to pay a Facility Fee at a per annum rate equal to the Applicable Facility Fee Rate on each Lender's Commitment, regardless of usage; and (ii) from and after the Termination Date, the Borrowers agree to pay a Facility Fee at a per annum rate equal to the Applicable Facility Fee Rate on each Lender's Revolving Credit Exposure. The Facility Fee shall be based on the Level Status (as defined in the Pricing Schedule) of the Borrower which has the lowest Level Status of all Borrowers. The Facility Fee is payable quarterly in arrears on each Payment Date hereafter, on the Termination Date and on the Maturity Date. (b) Utilization Fee. The Borrowers agree to pay to the Administrative Agent for the account of each Lender a utilization fee (the "Utilization Fee") as follows: (i) for -23- each day from the Effective Date to but not including the Termination Date on which the aggregate principal amount of all outstanding Loans (including both Revolving Loans and Competitive Loans) to all Borrowers exceeds 50% of the Aggregate Commitment, each Borrower agrees to pay a Utilization Fee based on each Lender's outstanding Loans at a per annum rate equal to the Applicable Utilization Fee Rate on the average daily amount of all outstanding Loans to such Borrower and (ii) on and after the Termination Date, each Borrower agrees to pay a Utilization Fee based on each Lender's outstanding Loans at a rate per annum equal to the Applicable Utilization Fee Rate on the average daily amount of all outstanding Loans to such Borrower. The Utilization Fee is payable quarterly in arrears on each Payment Date hereafter, on the Termination Date and on the Maturity Date. (c) Competitive Bid Fee. Each Borrower agrees to pay to the Administrative Agent for its own account a fee for each Competitive Bid Request submitted by such Borrower under Section 2.4 in an amount agreed to in the fee letter dated March 31, 2003 (the "Fee Letter"). (d) Payment of Fees. All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of the Utilization Fee and the Facility Fee, to the Lenders. Fees paid shall not be refundable under any circumstances. Section 2.11 Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate. Changes in the rate of interest on any ABR Borrowing will take effect simultaneously with each change in the Alternate Base Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at (i) in the case of a Eurodollar Revolving Loan, the Eurodollar Rate for the Interest Period in effect for such Borrowing, or (ii) in the case of a Eurodollar Competitive Loan, the Eurodollar Bid Rate for the Interest Period in effect for such Borrowing. (c) Each Fixed Rate Loan shall bear interest at the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by any Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (e) Accrued interest on each Loan shall be payable in arrears on each Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the -24- Commitments; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (f) All interest and fees hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Eurodollar Rate, Eurodollar Bid Rate or Eurodollar Base Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. Section 2.12 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, the Eurodollar Base Rate or the Eurodollar Bid Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Eurodollar Rate, the Eurodollar Base Rate or the Eurodollar Bid Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrowers and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the relevant Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the relevant Borrower for a Eurodollar Competitive Borrowing shall be ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by such Borrower for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowing, then the other Type of Borrowing shall be permitted. Section 2.13 Increased Costs. -25- (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Eurodollar Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the relevant Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company as a consequence of this Agreement or the Loans made to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time each Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company, as the case may be, for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the relevant Borrower(s) and shall be conclusive absent manifest error. Such Borrower(s) shall pay such Lender the amount shown as due on any such certificate within ten (10) days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that no Borrower shall be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 90 days prior to the date that such Lender notifies the relevant Borrower(s) of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided, further, that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 90-day period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall -26- have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. Section 2.14 Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including, without limitation, as a result of a mandatory prepayment under Section 2.9(c) or an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.9(b) and is revoked in accordance therewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by any Borrower pursuant to Section 2.17, then, in any such event, the relevant Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Eurodollar Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the relevant Borrower and shall be conclusive absent manifest error. Such Borrower shall pay such Lender the amount shown as due on any such certificate within ten (10) days after receipt thereof. Section 2.15 Taxes. (a) Any and all payments by or on account of any obligation of each Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if any Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, each Borrower shall pay any Other Taxes not paid pursuant to Section 2.15(a)(iii) to the relevant Governmental Authority in accordance with applicable law. -27- (c) Each Borrower shall indemnify the Administrative Agent and each Lender within thirty (30) days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender, as the case may be, on or with respect to any payment by or on account of any obligation of such Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest, additions to tax and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority; provided, that such Borrower shall not be obligated to make a payment pursuant to this Section 2.15 in respect of penalties, interest and additions to tax attributable to any Indemnified Taxes or Other Taxes, if (i) such penalties, interest and additions to tax are attributable to the failure of the Administrative Agent or such Lender, as the case may be, to pay amounts paid to the Administrative Agent or such Lender by such Borrower (for Indemnified Taxes or Other Taxes) to the relevant Governmental Authority within thirty (30) days after receipt of such payment from such Borrower or (ii) such penalties, interest and additions to tax are attributable to the gross negligence or willful misconduct of the Administrative Agent or such Lender, as the case may be. Within 180 days after the Administrative Agent or such Lender learns of the imposition of Indemnified Taxes or Other Taxes, such Person shall give notice to the relevant Borrower of the payment by the Administrative Agent or such Lender, as the case may be, of such Indemnified Taxes or Other Taxes, and of the assertion by any Governmental Authority that such Indemnified Taxes or Other Taxes are due and payable, but the failure to give such notice shall not affect such Borrower's obligations hereunder to reimburse the Administrative Agent and such Lender for such Indemnified Taxes or Other Taxes, except that such Borrower shall not be liable for penalties, interest and other liabilities accrued or incurred after such 180 day period until such time as it receives the notice contemplated above, after which time it shall be liable for penalties, interest and other liabilities accrued or incurred prior to or during such 180 day period and accrued or incurred after such receipt. Such Borrower shall not be liable for any penalties, interest and other liabilities with respect to such Indemnified Taxes or Other Taxes to the extent it has reimbursed the amount thereof to the Administrative Agent or such Lender, as the case may be. A certificate as to the amount of such payment or liability delivered to the relevant Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the relevant Borrower to a Governmental Authority, such Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Each Foreign Lender, before it signs and delivers this Agreement if listed on the signature pages hereof, and before it becomes a Lender in the case of each other Foreign Lender, shall provide such Borrower and the Administrative Agent either (i) two accurate, complete and signed copies of either (x) U.S. Internal Revenue Service Form -28- W-8ECI or any successor form, or (y) U.S. Internal Revenue Service Form W-8BEN or U.S. Internal Revenue Service Form W-8IMY, or any successor form, in each case, indicating that such Lender is on the date of delivery thereof entitled to receive payments of interest hereunder free from, or subject to a reduced rate of withholding of United States Federal income tax or (ii) in the case of such a Lender that is entitled to claim exemption from withholding of United States Federal income tax under Section 871(h) or Section 881(c) of the Code with respect to payments of "portfolio interest", (x) a certificate to the effect that such Lender is (A) not a "bank" within the meaning of Section 881(c)(3)(A) of the Code, (B) not a "10 percent shareholder" of any Borrower within the meaning of Section 881(c)(3)(B) of the Code and (C) not a controlled foreign corporation related to any Borrower within the meaning of Section 881(c)(3)(C) of the Code and (y) two accurate, complete and signed copies of U.S. Internal Revenue Service Form W-8BEN or U.S. Internal Revenue Service Form W-81MY, or any successor Form. To the extent permitted by applicable law, from time to time thereafter, at the request of any Borrower, each Foreign Lender shall deliver renewals or additional copies of such forms (or successor forms) on or before the date that such form expires or becomes obsolete. Upon the written request of a Borrower to the Administrative Agent and any Lender which is not a Foreign Lender, such Lender shall provide such Borrower and the Administrative Agent with two accurate, complete and signed copies of the U.S. Internal Revenue Service Form W-9. (f) If the U.S. Internal Revenue Service or any other Governmental Authority asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this paragraph (f), together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this paragraph (f) shall survive the payment of the Loans and termination of this Agreement. (g) If the Administrative Agent or any Lender determines, in its good faith judgment, that it has actually received or realized any refund of tax or any reduction of its tax liabilities or otherwise recovered any amount in connection with any deduction or withholding or payment of any additional amount by any Borrower pursuant to Section 2.13(a) or this Section 2.15, such Person shall reimburse such Borrower in an amount equal to the net benefit, after tax, and net of all expenses incurred by such Person in connection with such refund, reduction or recovery; provided, that nothing in this paragraph (g) shall require any Person to make available its tax returns (or any other information relating to its taxes which it deems to be confidential). Each Borrower shall return such amount to the applicable Person in the event that such Person is required to repay such refund of tax or is not entitled to such reduction of, or credit against, its tax liabilities. If the Administrative Agent or any Lender shall become aware that it is -29- entitled to receive a refund or direct credit in respect of Indemnified Taxes or Other Taxes as to which it has been indemnified by any Borrower or with respect to which any Borrower has paid additional amounts, it shall promptly notify such Borrower of the availability of such refund or direct credit and shall, within 30 days after receipt of a request for such by such Borrower (whether as a result of notification that it has made of such to such Borrower or otherwise), make a claim to such Governmental Authority for such refund or direct credit and contest such Indemnified Taxes, Other Taxes or liabilities if (i) such Borrower has agreed in writing to pay all of such Lender's or Administrative Agent's reasonable costs and expenses relating to such claim or contest, (ii) such Lender or the Administrative Agent determines, in its good faith judgment, that it would not be materially disadvantaged or prejudiced as a result of such claim or contest (it being understood that the mere existence of fees, charges, costs or expenses that such Borrower has offered to and agreed to pay on behalf of such Lender or the Administrative Agent shall not be deemed to be materially disadvantageous to such person) and (iii) such Borrower furnishes, upon request of such Lender or the Administrative Agent, an opinion of reputable tax counsel (such opinion and such counsel to be acceptable to such Lender or the Administrative Agent) to the effect that such Indemnified Taxes or Other Taxes were wrongly or illegally imposed. Section 2.16 Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) Each Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or of amounts payable under Section 2.13, 2.14 or 2.15, or otherwise) prior to 11:00 a.m., Chicago time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 1 Bank One Plaza, Chicago, Illinois, 60670, except that payments pursuant to Sections 2.13, 2.14, 2.15 and 10.3 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its -30- Revolving Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by any Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to MetLife or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against such Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the relevant Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that such Borrower will not make such payment, the Administrative Agent may assume that such Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders, the amount due. In such event, if such Borrower has not in fact made such payment, then each of the Lenders, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.5(b) or 2.16(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. Section 2.17 Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.13, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, then such Lender shall, upon the request of such Borrower, use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations -31- hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. Each Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender (or, subject to Section 9.2.3, any Participant in Loans made by such Lender) requests compensation under Section 2.13, or if any Borrower is required to pay any additional amount to any Lender (or, subject to Section 9.2.3, any Participant in Loans made by such Lender) or any Governmental Authority for account of any Lender (or any Participant in Loans made by such Lender) pursuant to Section 2.15, or if any Lender defaults in its obligation to fund Loans hereunder, then the Company may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.3), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Company shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld and (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the relevant Borrower (in the case of all other amounts). A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to the Lenders, as to itself and its Subsidiaries, as applicable, that: Section 3.1 Organization; Powers. MetLife and each of its Material Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. Section 3.2 Authorization; Enforceability. The Transactions are within each Borrower's corporate powers and have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by each Borrower and constitutes a legal, -32- valid and binding obligation of each Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. The Support Agreement has been duly executed and delivered by and constitutes a legal, valid and binding obligation of the Company and Funding, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. Section 3.3 Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of any Borrower or any order of any Governmental Authority, and (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon any Borrower or its assets, or give rise to a right thereunder to require any payment to be made by any Borrower. Section 3.4 Financial Condition; No Material Adverse Change. (a) MetLife has heretofore furnished to the Lenders its audited consolidated balance sheet and statements of earnings, equity and cash flows as of and for the fiscal year ended December 31, 2002, reported on by Deloitte & Touche, LLP, independent public accountants. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of MetLife and its Consolidated Subsidiaries, as of the date thereof and for such fiscal year, in accordance with GAAP. (b) The Company has heretofore furnished to each of the Lenders the annual Statutory Statement of the Company as at and for the year ended December 31, 2002, as filed with the Applicable Insurance Regulatory Authority. Such Statutory Statement presents fairly, in all material respects, the financial position and results of operations of the Company, as of the date thereof and for such year, in accordance with SAP. (c) Since December 31, 2002, there has been no material adverse change in the business, assets, property, condition (financial or otherwise) or prospects of MetLife and its Subsidiaries taken as a whole from that set forth in the respective financial statements referred to in Sections 3.4(a) and 3.4(b). Section 3.5 Properties. (a) MetLife and each of its Material Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for defects in title that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. -33- (b) MetLife and each of its Material Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by MetLife and its Material Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. Section 3.6 Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of any Borrower, threatened against or affecting MetLife or any of its Material Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, is reasonably likely, individually or in the aggregate, to result in a Material Adverse Change (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, neither MetLife nor any of its Material Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. Section 3.7 Compliance with Laws and Agreements. MetLife and each of its Material Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. No Default has occurred and is continuing. Section 3.8 Investment and Holding Company Status. Neither MetLife nor any of its Material Subsidiaries (other than Funding) is an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, and Funding is an "investment company" as defined in such Act that is exempt from the requirements of such Act. Neither MetLife nor any of its Material Subsidiaries is a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. Section 3.9 Taxes. MetLife and each of its Subsidiaries has timely filed or caused to be filed all tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which MetLife or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Change. -34- Section 3.10 ERISA. Each Plan and, to the knowledge of MetLife, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law, and no ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Change. Section 3.11 Disclosure. None of the reports, financial statements, certificates or other information furnished by or on behalf of any Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that with respect to projected financial information, each Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. Section 3.12 Margin Stock. No part of the proceeds of any Loan hereunder will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. Not more than 25% of the value (as determined by any reasonable method) of the assets of any of the Borrowers is represented by Margin Stock. ARTICLE IV CONDITIONS Section 4.1 Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date (the "Effective Date") on which each of the following conditions is satisfied (or waived in accordance with Section 10.2): (a) Charters and Good Standing Certificates. The Administrative Agent shall have received copies of the charter or certificate of incorporation of each Borrower, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation and, in the case of the Company, a certificate of authority (or its equivalent) issued by the Applicable Insurance Regulatory Authority. (b) By-Laws and Resolutions. The Administrative Agent shall have received copies, certified by the Secretary or Assistant Secretary of each Borrower, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which such Borrower is a party. (c) Incumbency Certificate. The Administrative Agent shall have received an incumbency certificate, executed by the Secretary or Assistant Secretary of each Borrower, which shall identify by name and title and bear the signatures of any officers of such Borrower authorized to sign the Loan Documents to which such Borrower is a -35- party, upon which certificate the Administrative Agent and the Lenders shall be entitled to rely until informed of any change in writing by such Borrower. (d) Closing Certificate. The Administrative Agent shall have received a certificate, signed by the Financial Officer of each Borrower, stating that on the Effective Date no Default has occurred and is continuing. (e) Opinion. The Administrative Agent shall have received a written opinion of the Borrowers' counsel, addressed to the Lenders in substantially the form of Exhibit B. (f) Notes. Each Lender which has requested that the Loans made by it be evidenced by Notes shall have received such Notes executed by the Borrowers. (g) Termination of Existing Credit Agreement. The Administrative Agent shall have received evidence satisfactory to the Administrative Agent that all principal, interest and other amounts due under that certain Five-Year Credit Agreement, dated as of April 27, 1998, among the Company, Funding, the financial institutions party thereto, JPMorgan Chase Bank, as Administrative Agent, and the other agents party thereto and all other loan documents identified therein shall have been paid in full and such agreement and all related documents shall have been terminated. (h) Upfront Fee. The Arranger shall have received from the Borrowers for distribution to the Lenders the upfront fee described in the Fee Letter. (i) Other. The Administrative Agent shall have received such other documents as any Lender or its counsel may have reasonably requested. The Administrative Agent shall notify the Borrowers and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 10.2) at or prior to 3:00 p.m., Chicago time, on April 25, 2003 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). Section 4.2 Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) The representations and warranties of each of the Borrowers set forth in this Agreement (other than, after the Effective Date, in Section 3.4(c) and in Section 3.6) shall be true and correct on and as of the date of such Borrowing. (b) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. (c) At the time of and immediately after giving effect to such Borrowing, no default or event or condition which constitutes a default or which upon notice, lapse of -36- time or both would, unless cured or waived, become a default shall have occurred and be continuing under the Support Agreement. (d) The Borrower is authorized to perform its obligations in respect of the proposed Borrowing. Each Borrowing shall be deemed to constitute a representation and warranty by each Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V AFFIRMATIVE COVENANTS Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, each Borrower covenants and agrees with the Lenders that: Section 5.1 Financial Statements and Other Information. MetLife will furnish to the Administrative Agent and each Lender: (a) (i) as soon as available, but not later than 120 days after the end of each fiscal year of MetLife, copies of MetLife's annual report on Form 10-K as filed with the SEC for such fiscal year; and (ii) as soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year of MetLife, copies of MetLife's quarterly report on Form 10-Q as filed with the SEC for such fiscal quarter, in each case certified by an appropriate Financial Officer as being the complete and correct copies of the statements on such forms furnished by MetLife to the SEC; (b) concurrently with any delivery of financial statements under clause (a) above or (except as to clause (ii) of this paragraph (b)) clause (c) or (d) below, a certificate of a Financial Officer of MetLife (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.4 and 6.5 and (iii) stating whether any change in GAAP or SAP, as the case may be, or in the application thereof has occurred since December 31, 2002 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (c) within five days after filing with the Applicable Insurance Regulatory Authority and in any event within 60 days after the end of each year, the annual Statutory Statement of the Company for such year, certified by one of its Financial Officers as presenting fairly in all material respects the financial position of the Company for such year in accordance with SAP; (d) within five days after filing with the Applicable Insurance Regulatory Authority and in any event within 60 days after the end of each of the first three quarterly periods of each year, the quarterly Statutory Statement of the Company for such period, -37- certified by one of its Financial Officers as presenting fairly in all material respects the financial position of the Company for such period in accordance with SAP; and (e) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of MetLife or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. The delivery requirements of this Section 5.1 and of Section 3.4 may be complied with by the Borrowers posting the required information on an Intralinks site (or a successor site) available to the Lenders and payment of the applicable Intralinks fees. Section 5.2 Notices of Defaults. The Borrowers will furnish to the Administrative Agent and each Lender prompt written notice of the occurrence of any Default. Each such notice shall be accompanied by a statement of a Financial Officer or other executive officer of MetLife setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. Section 5.3 Existence; Conduct of Business. MetLife will, and will cause each of its Material Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation, dissolution or other transaction permitted under Section 6.2. Section 5.4 Payment of Obligations. MetLife will, and will cause each of its Material Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Change before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) MetLife or such Material Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Change. Section 5.5 Maintenance of Properties; Insurance. MetLife will, and will cause each of its Material Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. Section 5.6 Books and Records; Inspection Rights. MetLife will, and will cause each of its Material Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. MetLife will, and will cause each of its Material Subsidiaries to, permit any representative designated by the Administrative Agent (and, if a Default shall have occurred and be continuing, any representatives designated by any Lender), upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, -38- finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. Section 5.7 Compliance with Laws. MetLife will, and will cause each of its Material Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. Section 5.8 Use of Proceeds. The proceeds of the Loans will be used only for general corporate purposes (including the back-up of commercial paper) of MetLife and its Subsidiaries in the ordinary course of business; provided that no part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X; provided further that no part of the proceeds of any Loan will be used, whether directly or indirectly, to acquire the capital stock or business of any other Person without the consent of such Person; and provided further that neither the Administrative Agent nor any Lender shall have any responsibility as to the use of any such proceeds. Section 5.9 Support Agreement. The Company and Funding will maintain the Support Agreement in full force and effect, and comply with the provisions thereof, and will not modify, supplement or waive any of its provisions without the prior consent of the Administrative Agent (with the approval of the Required Lenders); provided that any modification, supplement or waiver that reduces or impairs the support provided to Funding shall require the approval of all Lenders. ARTICLE VI NEGATIVE COVENANTS Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, each Borrower covenants and agrees with the Lenders that: Section 6.1 Liens. None of the Borrowers will create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien existing on any property or asset prior to the acquisition thereof by such Borrower; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien shall not apply to any other property or assets of such Borrower, and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition; (c) Liens on assets acquired, constructed or improved by such Borrower; provided that (i) such Liens and the Indebtedness secured thereby are incurred prior to or within 360 days after such acquisition or the completion of such construction or -39- improvement, (ii) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such assets, and (iii) such security interests shall not apply to any other property or assets of such Borrower; (d) Liens on any property or assets of any Person existing at the time such Person is merged or consolidated with or into such Borrower and not created in contemplation of such event; (e) Liens on any real property securing Indebtedness in respect of which (i) the recourse of the holder of such Indebtedness (whether direct or indirect and whether contingent or otherwise) under the instrument creating the Lien or providing for the Indebtedness secured by the Lien is limited to such real property directly securing such Indebtedness and (ii) such holder may not under the instrument creating the Lien or providing for the Indebtedness secured by the Lien collect by levy of execution or otherwise against assets or property of such Borrower (other than such real property directly securing such Indebtedness) if such Borrower fails to pay such Indebtedness when due and such holder obtains a judgment with respect thereto, except for recourse obligations that are customary in "non-recourse" real estate transactions; (f) Liens arising out of Securities Transactions entered into in the ordinary course of business and on ordinary business terms; (g) Structured Transaction Liens; (h) Liens arising out of Asset Securitizations; (i) Liens on Separate Accounts Assets; (j) Liens arising out of the ordinary course of the Borrowers' business that do not secure any Indebtedness; provided that the obligations of the Borrowers secured by such Liens shall not exceed $2,000,000,000 at any one time outstanding; (k) Liens on debt obligations of such Borrower which are pledged to the Federal Home Loan Bank Board (the "FHLBB") to secure loans made by the FHLBB to such Borrower in the ordinary course of business and on ordinary business terms; (l) Liens not otherwise permitted by the foregoing clauses of this Section 6.1; provided that the aggregate principal amount of the Indebtedness secured by such Liens shall not exceed $3,000,000,000 at any one time outstanding; and (m) any extension, renewal or replacement of the foregoing; provided that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or assets (other than a substitution of like assets) unless such additional Indebtedness or assets would have been permitted in connection with the original creation, incurrence or assumption of such Lien. Section 6.2 Fundamental Changes. -40- (a) No Borrower will merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of its assets (excluding assets sold or disposed of in the ordinary course of business), or (in the case of the Company) all or any substantial part of the stock of Funding (except to MetLife) or (in the case of MetLife) all or any substantial part of the stock of the Company (in each case, whether now owned or hereafter acquired), or liquidate or dissolve; provided that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Subsidiary of a Borrower may merge into such Borrower in a transaction in which such Borrower is the surviving corporation, (ii) Funding may sell, transfer, lease or otherwise dispose of its assets to MetLife or the Company, including via liquidation, so long as MetLife or the Company, as the case may be, expressly assumes the obligations of Funding hereunder and under the Notes issued hereunder, and (iii) a Borrower may merge or consolidate with any other Person if such Borrower is the surviving corporation. (b) MetLife will not, and will not permit any of its Material Subsidiaries to, engage to any material extent in any business other than (i) businesses of the type conducted by MetLife and its Material Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto or (ii) the business of providing financial services. Section 6.3 Transactions with Affiliates. MetLife will not, and will not permit any of its Material Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to MetLife or such Material Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, and (b) transactions between or among MetLife and its wholly-owned Subsidiaries not involving any other Affiliate. Section 6.4 Adjusted Statutory Surplus. The Company will not permit the Adjusted Statutory Surplus, calculated as of the last day of each fiscal quarter of the Company, to be less than $6,750,000,000. Section 6.5 Consolidated Net Worth. MetLife will not permit its Consolidated Net Worth, calculated as of the last day of each fiscal quarter, to be less than $12,000,000,000. ARTICLE VII EVENTS OF DEFAULT If any of the following events ("Events of Default") shall occur: (a) any Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; -41- (b) any Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five or more Business Days; (c) any representation or warranty made or deemed made by or on behalf of MetLife or any of its Material Subsidiaries in or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, shall prove to have been incorrect in any material respect when made or deemed made; (d) any Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.2, 5.3 (with respect to such Borrower's existence), 5.8 or 5.9 or in Article VI; (e) any Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the relevant Borrower (which notice will be given at the request of any Lender); (f) MetLife or any of its Material Subsidiaries shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of MetLife or any of its Material Subsidiaries or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for MetLife or any or its Material Subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) MetLife or any of its Material Subsidiaries shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief -42- under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for MetLife or any or its Material Subsidiaries or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) MetLife or any of its Material Subsidiaries shall become unable, admit in writing or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $200,000,000 (or its equivalent in any other currency) shall be rendered against MetLife, any Material Subsidiary of MetLife or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed; or (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of MetLife and its Material Subsidiaries in an aggregate amount exceeding $200,000,000 in any year; then, and in every such event (other than an event with respect to any Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, (A) the Administrative Agent shall, at the request of the Required Lenders, by notice to the Borrowers, terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (B) the Administrative Agent shall, at the request of the Lenders holding more than 50% of the aggregate outstanding principal amount of the Loans, by notice to the Borrowers, declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; and in case of any event with respect to any Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers. -43- ARTICLE VIII THE ADMINISTRATIVE AGENT Section 8.1 Appointment; Nature of Relationship. Bank One, NA is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Administrative Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Administrative Agent agrees to act as such contractual representative upon the express conditions contained in this Article VIII. Notwithstanding the use of the defined term "Administrative Agent," it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Administrative Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Administrative Agent (a) does not hereby assume any fiduciary duties to any of the Lenders, (b) is a "representative" of the Lenders within the meaning of the term "secured party" as defined in the New York Uniform Commercial Code and (c) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. Section 8.2 Powers. The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Administrative Agent. Section 8.3 General Immunity. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable to the Borrowers, any Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. Section 8.4 No Responsibility for Loans, Recitals, etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default; (e) the validity, enforceability, effectiveness, sufficiency or -44- genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of any Borrower or any guarantor of any of the Loans or of any Borrower's or any such guarantor's respective Subsidiaries. The Administrative Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by any Borrower to the Administrative Agent at such time, but is voluntarily furnished by any Borrower to the Administrative Agent (either in its capacity as Administrative Agent or in its individual capacity). Section 8.5 Action on Instructions of Lenders. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. The Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. Section 8.6 Employment of Administrative Agents and Counsel. The Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Administrative Agent and the Lenders and all matters pertaining to the Administrative Agent's duties hereunder and under any other Loan Document. Section 8.7 Reliance on Documents; Counsel. The Administrative Agent shall be entitled to rely upon any note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and, with respect to legal matters, upon the opinion of counsel selected by the Administrative Agent, which counsel may be employees of the Administrative Agent. Section 8.8 Administrative Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (a) for any amounts not reimbursed by the Borrowers for which the Administrative Agent is entitled to reimbursement by the Borrowers under the Loan Documents, (b) for any other expenses incurred by the Administrative Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders) and (c) for any -45- liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Administrative Agent and (ii) any indemnification required pursuant to Section 2.15(f) shall, notwithstanding the provisions of this Section 8.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 8.8 shall survive payment of the Loans and all interest and fees with respect thereto and termination of this Agreement. Section 8.9 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default hereunder unless the Administrative Agent has received written notice from a Lender or a Borrower referring to this Agreement describing such Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. Section 8.10 Rights as a Lender. In the event the Administrative Agent is a Lender, the Administrative Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" shall, at any time when the Administrative Agent is a Lender, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with any Borrower or any Subsidiary of any Borrower in which such Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. Section 8.11 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on the financial statements prepared by MetLife and the Company and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. Section 8.12 Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrowers, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor -46- Administrative Agent has been appointed, forty-five days after the retiring Administrative Agent gives notice of its intention to resign. The Administrative Agent may be removed at any time with or without cause by written notice received by the Administrative Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrowers and the Lenders, a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrowers and the Lenders, a successor Administrative Agent. Notwithstanding the foregoing, the Administrative Agent may at any time without the consent of any Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article VIII shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 8.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. Section 8.13 Administrative Agent and Arranger Fees. The Borrowers agree to pay to the Administrative Agent and the Arranger, for their respective accounts, the fees agreed to by the Borrowers, the Administrative Agent and the Arranger pursuant to the Fee Letter, or as otherwise agreed from time to time. Section 8.14 Delegation to Affiliates. The Borrowers and the Lenders agree that the Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Administrative Agent is entitled under Articles VIII and X. Section 8.15 Syndication Agents, Senior Managing Agents, Managing Agents, etc. Neither any of the Lenders identified in this Agreement as a "co-agent" nor any Syndication Agent, Senior Managing Agent or Managing Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments -47- with respect to such Lenders as it makes with respect to the Administrative Agent in Section 8.11. ARTICLE IX BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS Section 9.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (a) no Borrower shall have the right to assign its rights or obligations under the Loan Documents without the prior written consent of each Lender, (b) any assignment by any Lender must be made in compliance with Section 9.3, and (c) any transfer by Participation must be made in compliance with Section 9.2. Any attempted assignment or transfer by any party not made in compliance with this Section 9.1 shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with Section 9.2. The parties to this Agreement acknowledge that clause (b) of this Section 9.1 relates only to absolute assignments and this Section 9.1 does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank or (y) in the case of a Lender which is a Fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee; provided, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 9.3. The Administrative Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 9.3; provided, that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan. Section 9.2 Participations. 9.2.1. Permitted Participants; Effect. Any Lender may at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrowers under this Agreement shall be determined as if such Lender had not sold such participating interests, -48- and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 9.2.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which would require consent of all of the Lenders pursuant to the terms of Section 10.2 or of any other Loan Document. 9.2.3. Benefit of Certain Provisions. Each Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 10.7 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 10.7 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 10.7, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 2.16(c) as if each Participant were a Lender. The Borrowers further agree that each Participant shall be entitled to the benefits of Sections 2.13, 2.14 and 2.15 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 9.3, provided that (a) a Participant shall not be entitled to receive any greater payment under Section 2.13, 2.14 or 2.15 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of MetLife, and (b) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 2.15 to the same extent as if it were a Lender. Section 9.3 Assignments. 9.3.1. Permitted Assignments. Subject to Section 9.3.2, any Lender may at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit A or in such other form as may be agreed to by the parties thereto. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate of a Lender or an Approved Fund shall either be in an amount equal to the entire applicable Commitment and Loans of the assigning Lender or (unless each of MetLife and the Administrative Agent otherwise consents) be in an aggregate amount not less than $5,000,000. The amount of the assignment shall be based on the Commitment or outstanding Loans (if the Commitment has been terminated) subject to the assignment, determined as of the date of such assignment or as of the "Trade Date," if the "Trade Date" is specified in the assignment. -49- 9.3.2. Consents. The consent of MetLife shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund, provided that the consent of MetLife shall not be required if an Event of Default has occurred and is continuing. The consent of the Administrative Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund. Any consent required under this Section 9.3.2 shall not be unreasonably withheld or delayed. 9.3.3 Effect; Effective Date. Upon (a) delivery to the Administrative Agent of an assignment, together with any consents required by Sections 9.3.1 and 9.3.2, and (b) payment of a $3,500 fee to the Administrative Agent for processing such assignment (unless such fee is waived by the Administrative Agent), such assignment shall become effective on the effective date specified in such assignment. The assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and the transferor Lender shall be released with respect to the Commitment and Loans assigned to such Purchaser without any further consent or action by the Borrowers, the Lenders or the Administrative Agent. In the case of an assignment covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Loans and all interest and fees with respect thereto and termination of the applicable agreement. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.3 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 9.2. Upon the consummation of any assignment to a Purchaser pursuant to this Section 9.3.3, the transferor Lender, the Administrative Agent and the Borrowers shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. 9.3.4 Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at one of its offices in Chicago, Illinois a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this -50- Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by any Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. Section 9.4 Dissemination of Information. The Borrowers authorize each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrowers and their Subsidiaries, including without limitation any information contained in any audit reports pertaining to any Borrower's assets; provided that each Transferee and prospective Transferee agrees to be bound by Section 10.11 of this Agreement. Section 9.5 Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.15(e). ARTICLE X MISCELLANEOUS Section 10.1 Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to MetLife, the Company or Funding, to it at One MetLife Plaza, Area 7B, Long Island City, NY 11101, Attention: Tracey Dedrick (Fax: (212) 578-0266); (b) if to the Administrative Agent, to 1 Bank One Plaza, Chicago, Illinois 60670, Attention: Mark Goldstein (Fax: (212) 373-1439); and (c) if to any Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Section 10.2 Waivers; Amendments. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive -51- of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrowers therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders or by the Borrowers and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.16(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, or (v) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Section 10.3 Expenses; Indemnity: Damage; Waiver. (a) Each Borrower jointly and severally agrees to pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. (b) Each Borrower jointly and severally agrees to indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing -52- Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the use or proposed use of the proceeds of any Loan, or (ii) any actual or prospective claim, litigation, investigation or proceeding relating thereto, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent that the Borrowers fail to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, in its capacity as such. (d) To the extent permitted by applicable law, the Borrowers shall not assert, and each Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable not later than 10 days after written demand therefor. Section 10.4 Survival. All covenants, agreements, representations and warranties made by the Borrowers herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.13, 2.14, 2.15 and 10.3 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. Section 10.5 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which -53- shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.1, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. Section 10.6 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. Section 10.7 Right of Setoff. Subject to Section 2.16(c), if an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the relevant Borrower against any of and all the obligations of such Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. Section 10.8 Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any United States Federal or New York State court sitting in New York, New York in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrowers or their respective properties in the courts of any jurisdiction. -54- (c) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. Section 10.9 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. Section 10.10 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. Section 10.11 Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Company or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Company. In the event that any Lender becomes legally compelled to disclose any confidential Information pursuant to paragraph (c) of this Section, such Lender shall give prompt written notice of that fact to the -55- Borrowers prior to the disclosure so that the Borrowers may seek an appropriate remedy to prevent or limit such disclosure and the Lenders shall cooperate reasonably (at the expense of the Borrowers) with the Borrowers in seeking such remedy. For the purposes of this Section, "Information" means all information received from the Company relating to the Company or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis, prior to disclosure by the Company; provided that, in the case of information received from the Company after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. Notwithstanding anything in this Agreement to the contrary, the Administrative Agent, the Lenders, the Borrowers and all other parties to the transactions contemplated hereunder hereby agree that all parties (and each employee, representative, or other agent of such parties) may disclose to any and all persons, without limitation of any kind, the U.S. "tax treatment" or "tax structure" (in each case, within the meaning of Treasury Regulation section 1.6011-4) of the transactions contemplated hereunder and all materials of any kind (including opinions or other tax analyses) that are provided to such parties relating to such U.S. "tax treatment" and "tax structure" (in each case, within the meaning of Treasury Regulation section 1.6011-4); provided, that to the extent any document contains Information that relates to the U.S. "tax treatment" or "tax structure" and contains other information, this paragraph shall only apply to the information relating to the U.S. "tax treatment" or "tax structure." [signature pages follow] -56- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. METLIFE, INC. /s/ Anthony J. Williamson ------------------------- By: Anthony J. Williamson Title: Senior Vice President and Treasurer METROPOLITAN LIFE INSURANCE COMPANY /s/ Anthony J. Williamson ------------------------- By: Anthony J. Williamson Title: Senior Vice President and Treasurer METLIFE FUNDING, INC. /s/ Anthony J. Williamson ------------------------- By: Anthony J. Williamson Title: Chairman of the Board, President and Chief Executive Officer BANK ONE, NA, individually and as Administrative Agent /s/ Gretchen [illegible] ------------------------ By: Gretchen [illegible] Title: Director S-1 [TO CREDIT AGREEMENT] CITIBANK, N.A., individually and as Syndication Agent /s/ David A. Dodge ------------------ By: David A. Dodge Title: Managing Director S-2 [TO CREDIT AGREEMENT] JPMORGAN CHASE BANK, individually and as Syndication Agent /s/ Heather Lindstrom --------------------- By: Heather Lindstrom Title: Vice President S-3 [TO CREDIT AGREEMENT] WACHOVIA BANK, NATIONAL ASSOCIATION, individually and as Syndication Agent /s/ Thomas L. Stitchberry ------------------------- By: Thomas L. Stitchberry Title: Managing Director S-4 [TO CREDIT AGREEMENT] BANK OF AMERICA, N.A., individually and as Senior Managing Agent /s/ Leslie Nannen ----------------- By: Leslie Nannen Title: Vice President S-5 [TO CREDIT AGREEMENT] CREDIT SUISSE FIRST BOSTON, acting through its Cayman Islands Branch, individually and as Senior Managing Agent /s/ Jay Chall ------------- By: Jay Chall Title: Director /s/ Cassandra Droogan --------------------- By: Cassandra Droogan Title: Associate S-6 [TO CREDIT AGREEMENT] BARCLAYS BANK plc, individually and as Senior Managing Agent /s/ Alison A. McGuigan ---------------------- By: Alison A. McGuigan Title: Associate Director S-7 [TO CREDIT AGREEMENT] DEUTSCHE BANK AG NEW YORK BRANCH, individually and as Senior Managing Agent /s/ Ruth Leung -------------- By: Ruth Leung Title: Director /s/ John S. McGill ------------------ By: John S. McGill Title: Director S-8 [TO CREDIT AGREEMENT] FLEET NATIONAL BANK, individually and as Senior Managing Agent /s/ Lawrence C. Bigelow ----------------------- By: Lawrence C. Bigelow Title: Managing Director S-9 [TO CREDIT AGREEMENT] MERRILL LYNCH BANK USA, individually and as Senior Managing Agent /s/ D. Kevin Imlay ------------------ By: D. Kevin Imlay Title: Director S-10 [TO CREDIT AGREEMENT] UBS AG, CAYMAN ISLANDS BRANCH, individually and as Senior Managing Agent /s/ [Illegible] --------------- By: [Illegible] Title: Director /s/ [Illegible] --------------- By: [Illegible] Title: Associate Director S-11 [TO CREDIT AGREEMENT] HSBC BANK USA, individually and as Managing Agent /s/ Kenneth J. Johnson ---------------------- By: Kenneth J. Johnson Title: First Vice President S-12 [TO CREDIT AGREEMENT] MELLON BANK, N.A., individually and as Managing Agent /s/ [Illegible] --------------- By: [Illegible] Title: Assistant Vice President S-13 [TO CREDIT AGREEMENT] BNP PARIBAS, individually /s/ Laurent Vanderzyppe ----------------------- By: Laurent Vanderzyppe Title: Director /s/ Marguerite L. Lebon ----------------------- By: Marguerite L. Lebon Title: Vice President S-14 [TO CREDIT AGREEMENT] STATE STREET BANK AND TRUST COMPANY, individually /s/ [Illegible] --------------- By: [Illegible] Title: Vice President S-15 [TO CREDIT AGREEMENT] THE NORTHERN TRUST COMPANY, individually /s/ Eric Dybing --------------- By: Eric Dybing Title: Second Vice President S-16 [TO CREDIT AGREEMENT] U.S. BANK, National Association, individually /s/ Eric Hartman ---------------- By: Eric Hartman Title: Vice President S-17 [TO CREDIT AGREEMENT] LEHMAN BROTHERS BANK, FSB, individually /s/ Gary T. Taylor ------------------ By: Gary T. Taylor Title: Vice President S-18 [TO CREDIT AGREEMENT] PNC BANK, NATIONAL ASSOCIATION, individually /s/ Donald Davis ---------------- By: Donald Davis Title: Vice President S-19 [TO CREDIT AGREEMENT] Schedule 2.1 COMMITMENTS
Lender Commitment ------ ---------- Bank One, NA $ 90,000,000 - ------------------------------------------------------------------------------------------------ Citibank, N.A. $ 80,000,000 - ------------------------------------------------------------------------------------------------ JPMorgan Chase Bank $ 80,000,000 - ------------------------------------------------------------------------------------------------ Wachovia Bank, National Association $ 80,000,000 - ------------------------------------------------------------------------------------------------ Bank of America, N.A. $ 60,000,000 - ------------------------------------------------------------------------------------------------ Credit Suisse First Boston (Cayman Islands Branch) $ 60,000,000 - ------------------------------------------------------------------------------------------------ Barclays Bank plc $ 60,000,000 - ------------------------------------------------------------------------------------------------ Deutsche Bank AG New York Branch $ 60,000,000 - ------------------------------------------------------------------------------------------------ Fleet National Bank $ 60,000,000 - ------------------------------------------------------------------------------------------------ Merrill Lynch Bank USA $ 60,000,000 - ------------------------------------------------------------------------------------------------ UBS AG, Cayman Islands Branch $ 60,000,000 - ------------------------------------------------------------------------------------------------ HSBC Bank USA $ 50,000,000 - ------------------------------------------------------------------------------------------------ Mellon Bank, N.A. $ 50,000,000 - ------------------------------------------------------------------------------------------------ BNP Paribas $ 25,000,000 - ------------------------------------------------------------------------------------------------ State Street Bank and Trust Company $ 25,000,000 - ------------------------------------------------------------------------------------------------ The Northern Trust Company $ 25,000,000 - ------------------------------------------------------------------------------------------------ US Bank, N.A. $ 25,000,000 - ------------------------------------------------------------------------------------------------ Lehman Brothers Bank, FSB $ 25,000,000 - ------------------------------------------------------------------------------------------------ PNC Bank, National Association $ 25,000,000 - ------------------------------------------------------------------------------------------------ TOTAL: $1,000,000,000 ==============
Schedule 2.10 PRICING SCHEDULE
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V STATUS STATUS STATUS STATUS STATUS BORROWER DEBT ------ ------ ------ ------ ------ RATING A+/A1 A/A2 A-/A3 BBB+/Baa1 [less than] BBB+/Baa1 - ----------------------------------------------------------------------------------------------------------------- Applicable .06% .07% .10% .125% .175% Facility Fee Rate - ----------------------------------------------------------------------------------------------------------------- Applicable .19% .23% .25% .275% .45% Margin - ----------------------------------------------------------------------------------------------------------------- Applicable .05% .05% .10% .10% .125% Utilization Fee Rate - ----------------------------------------------------------------------------------------------------------------- Applicable .075% .10% .125% .15% .25% Term Out Premium Rate - -----------------------------------------------------------------------------------------------------------------
Subject to the following two sentences, a particular Level Status shall exist with respect to a Borrower on a particular day if on such day such Borrower does not qualify for a Level Status with more advantageous pricing and either the Moody's Rating or the S&P Rating is at least equal to the corresponding rating specified for such Level Status in the table above. In the event of a difference in the equivalent "rating level" from S&P and Moody's resulting in a split of only one level, then the Level Status shall be determined by reference to the higher of the two Ratings. In the event of a difference in the equivalent "rating level" from S&P and Moody's resulting in a split of greater than one level, then the Level Status shall be that Level Status one above the Level Status determined by reference to the lower of the two Ratings. The above ratings are in the format of S&P Rating/Moody's Rating. For the purposes of this Schedule, the following terms have the following meanings, subject to the final paragraph of this Schedule: "Level Status" means either Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status. "Moody's Rating" means, at any time, the long term unsecured senior, non-credit enhanced debt rating of a Borrower issued by Moody's and then in effect. "Rating" means Moody's Rating or S&P Rating. "S&P Rating" means, at any time, the long term unsecured senior, non-credit enhanced debt rating of a Borrower issued by S&P and then in effect. The Applicable Margin, Applicable Utilization Fee Rate and Applicable Term Out Premium Rate shall be determined for each Borrower in accordance with the foregoing table based on such Borrower's Level Status as determined from its then-current Moody's and S&P Ratings. The Applicable Facility Fee Rate for all Borrowers shall be determined in accordance with the foregoing table based on the Level Status of the Borrower which has the lowest Level Status of all Borrowers. The Rating in effect on any date for the purposes of this Schedule is that in effect at the close of business on such date. If at any time a Borrower has no Moody's Rating or no S&P Rating or such Borrower does not qualify for a Level Status with more advantageous pricing, Level V Status shall exist with respect to such Borrower; provided, that if Funding has no Moody's Rating or S&P Rating, it shall be deemed to have the same Level Status as the Company or MetLife, whichever has the lower Level Status. For the purpose of this Schedule 2.10 and the Credit Agreement, Level I Status is the highest Level Status and Level V Status is the lowest Level Status. Schedule 3.6 DISCLOSED MATTERS LEGAL PROCEEDINGS 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 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. In addition, other sales practices lawsuits have been brought. As of December 31, 2002, there are approximately 420 sales practices lawsuits pending against Metropolitan Life, approximately 60 sales practices lawsuits pending against New England Mutual and approximately 35 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 a federal court in 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. The action was transferred to a federal court in Massachusetts. New England Mutual moved to dismiss the case and in November 2002, the federal district court dismissed the case. S-G Metals has filed a notice of appeal. New England Mutual intends to continue to defend itself vigorously against the case. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. 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 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 manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life issued liability or workers' compensation insurance to companies in the business of 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. Metropolitan Life believes that it should not have legal liability in such cases. Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. Although Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse monetary judgments in respect of these claims, due to the risks and expenses of litigation, almost all past cases have been resolved by settlements. Metropolitan Life's defenses (beyond denial of certain factual allegations) to plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In defending asbestos cases, Metropolitan Life selects various strategies depending upon the jurisdictions in which such cases are brought and other factors which, in Metropolitan Life's judgment, best protect Metropolitan Life's interests. Strategies include seeking to settle or compromise claims, motions challenging the legal or factual basis for such claims or defending on the merits at trial. In early 2002 and in early 2003, two trial courts granted motions dismissing claims against Metropolitan Life on some or all of the above grounds. Other courts have denied motions brought by Metropolitan Life to dismiss cases without the necessity of trial. There can be no assurance that Metropolitan Life will receive favorable decisions on motions in the future. 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 following table sets forth the total number of asbestos personal injury claims pending against Metropolitan Life as of the dates indicated, the number of new claims during the years ended on those dates and the total settlement payments made to resolve asbestos personal injury claims during those years:
AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 2002 2001 2000 ------- ------ ------ (DOLLARS IN MILLIONS) Asbestos personal injury claims at year end (approximate) 106,500 89,000 73,000 Number of new claims during the year (approximate) 66,000 59,500 54,500 Settlement payments during the year(1) $ 95.1 $ 90.7 $ 71.1
- ---------- (1) Settlement payments represent payments made by Metropolitan Life during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life's attorneys' fees and expenses and do not reflect amounts received from insurance carriers. During the fourth quarter of 2002, Metropolitan Life analyzed its claims experience and reviewed external publications and numerous variables to identify trends and assessed their impact on its recorded asbestos liability. Certain publications suggest a trend towards more asbestos-related claims and a greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers. Plaintiffs' lawyers continue to advertise heavily with respect to asbestos litigation. Bankruptcies and reorganizations of other defendants in asbestos litigation may increase the pressures on remaining defendants, including Metropolitan Life. Through the first nine months of 2002, the number of new claims received by Metropolitan Life was lower than those received during the comparable 2001 period. However, the number of new claims received by Metropolitan Life during the fourth quarter of 2002 was significantly higher than those received in the prior year quarter, resulting in more new claims being received by Metropolitan Life in 2002 than in 2001. Factors considered also included expected trends in filing cases, the dates of initial exposure of plaintiffs to asbestos, the likely percentage of total asbestos claims which included Metropolitan Life as a defendant and experience in claims settlement negotiations. Metropolitan Life also considered views derived from actuarial calculations it made in the fourth quarter of 2002. These calculations were made using, among other things, current information regarding Metropolitan Life's claims and settlement experience, information available in public reports, as well as a study regarding the possible future incidence of mesothelioma. Based on all of the above information, including greater than expected claims experience over the last three years, Metropolitan Life expects to receive more claims in the future than it had previously expected. Previously, Metropolitan Life's liability reflected that the increase in asbestos-related claims was a result of an acceleration in the reporting of such claims; the liability now reflects that such an increase is also the result of an increase in the total number of asbestos-related claims expected to be received by Metropolitan Life. Accordingly, Metropolitan Life increased its recorded liability for asbestos-related claims by $402 million from approximately $820 million to $1,225 million at December 31, 2002. This total recorded asbestos-related liability (after the self-insured retention) is within the coverage of the excess insurance policies discussed below. 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. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to Metropolitan Life 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 Metropolitan Life 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. A claim will be made under the excess insurance policies in 2003 for the amounts paid with respect to asbestos litigation in excess of the retention. Based on performance of the reference fund, at December 31, 2002, the loss reimbursements to Metropolitan Life in 2003 and the recoverable with respect to later periods will be $42 million less than the amount of the recorded losses. Such foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. The foregone loss reimbursements are estimated to be $9 million with respect to 2002 claims and $42 million in the aggregate. The $402 million increase in the recorded liability for asbestos claims less the foregone loss reimbursement adjustment of $42 million ($27 million, net of income tax) resulted in an increase in the recoverable of $360 million. At December 31, 2002, a portion ($136 million) of the $360 million recoverable was recognized in income while the remainder ($224 million) was recorded as a deferred gain which is expected to be recognized in income in the future over the estimated settlement period of the excess insurance policies. The $402 million increase in the recorded liability, less the portion of the recoverable recognized in income, resulted in a net expense of $266 million ($169 million, net of income tax). The $360 million recoverable may change depending on the future performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. As a result of the excess insurance policies, $1,237 million is recorded as a recoverable at December 31, 2002 ($224 million of which is recorded as a deferred gain as mentioned above); the amount includes recoveries expected to be obtained in 2003 for amounts paid in 2002. 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 recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts 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 adverse 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. It is likely that bills will be introduced in 2003 in the United States Congress to reform asbestos litigation. While the Company strongly supports reform efforts, there can be no assurance that legislative reforms will be enacted. Metropolitan Life will continue to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, 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. 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. Total loss valuation methods 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. The court has dismissed the action. An appeal has been filed. 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 New York state court in New York County were consolidated within the commercial part. In addition, there remained a separate purported class action in New York state court in New York County. On February 21, 2003, the defendants' motions to dismiss both the consolidated action and separate action were granted; leave to replead as a proceeding under Article 78 of New York's Civil Practice Law and Rules has been granted in the separate action. 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 New York state court in 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. Plaintiff has withdrawn her notice of appeal. 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. On February 4, 2003, plaintiffs filed a consolidated amended complaint adding a fraud claim under the Securities Exchange Act of 1934. 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. In January 2003, the United States Court of Appeals for the Second Circuit affirmed the dismissal. 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 United States District Court for the Western District of Pennsylvania. The Holding Company, Metropolitan Life, the trustee of the policyholder trust, and 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' motion to transfer the lawsuit to the Western District of Pennsylvania was granted on February 14, 2003. The defendants' motion to dismiss is pending. Plaintiffs have filed a motion for class certification which the Texas court has adjourned. 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 affiliates. The New York Insurance Department has concluded its examination of 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 was held on 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. Sixteen lawsuits involving approximately 125 plaintiffs have been filed in federal and state court in Alabama, Mississippi and Tennessee alleging federal and/or state law claims of racial discrimination in connection with the sale, formation, administration or servicing of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in these 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 United States District Court for the District of Columbia, 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 these 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 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 these affiliates intend to vigorously defend themselves against the claims of the reinsurer, including the purported rate increase. The SEC is conducting an examination at New England Securities. The examination commenced in March 2003 after the company notified the SEC of an operational issue involving one of its advisory products. In April 2003, a federal court jury in Arizona awarded approximately $85 million to the plaintiff in a case involving a claim for benefits under a General American individual disability income policy. The defendants, which include General American, have filed or will file post trial motions and, if they are denied, will appeal the judgment. A substantial amount of General American's individual disability income business is reinsured with various carriers. 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 consolidated net income or cash flows in particular quarterly or annual periods. EXHIBIT A ASSIGNMENT AND ACCEPTANCE This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the respective facilities identified below (including without limitation any letters of credit, guaranties and swingline loans included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including without limitation contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor: ________________________________________ 2. Assignee: ________________________________________[and is an Affiliate/Approved Fund of [identify Lender](1) 3. Borrowers: MetLife, Inc., Metropolitan Life Insurance Company and MetLife Funding, Inc. 4. Administrative Agent: Bank One, NA , as the agent under the Credit Agreement. 5. Credit Agreement: The $1,000,000,000 Credit Agreement dated as of April 25, 2003 among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc., the Lenders party thereto, Bank One, NA, as Administrative Agent, and the other agents party thereto. - ------------------ (1) Select as applicable. A-1 6. Assigned Interest:
Aggregate Amount of Amount of Percentage Assigned Commitment/Loans for all Commitment/Loans of Facility Assigned Lenders* Assigned* Commitment/Loans(2) - ----------------- ------------------------ ---------------- ------------------- Revolving Credit $ $ _______% Commitment
7. Trade Date: ___________________________________________(3) Effective Date: ____________________, 20__ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE ADMINISTRATIVE AGENT.] The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR: [NAME OF ASSIGNOR] By: __________________________ Title: ASSIGNEE [NAME OF ASSIGNEE] By: __________________________ Title: [Consented to and](4) Accepted: - ------------------ (*) Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. (2) Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder. (3) Insert if satisfaction of minimum amounts to be determined as of the Trade Date. A-2 BANK ONE, NA, as Administrative Agent By: ______________________________________ Title: [Consented to:](5) METLIFE, INC. By: ______________________________________ Title: - ------------------ (4) To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement. (5) To be added only if the consent of MetLife is required by the terms of the Credit Agreement. A-3 ANNEX 1 TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1 Assignor. The Assignor represents and warrants that (a) it is the legal and beneficial owner of the Assigned Interest, (b) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (c) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrowers, any of their Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, (iv) the performance or observance by the Borrowers, any of their Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document, (v) inspecting any of the property, books or records of the Borrowers, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in A-4 taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. 2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York. A-5 ADMINISTRATIVE QUESTIONNAIRE (Schedule to be supplied by Closing Unit or Trading Documentation Unit) (For Forms for Primary Syndication call Peterine Svoboda at 312-732-8844) (For Forms after Primary Syndication call Jim Bartz at 312-732-1242) A-6 US AND NON-US TAX INFORMATION REPORTING REQUIREMENTS (Schedule to be supplied by Closing Unit or Trading Documentation Unit) (For Forms for Primary Syndication call Peterine Svoboda at 312-732-8844) (For Forms after Primary Syndication call Jim Bartz at 312-732-1242) A-7 EXHIBIT B FORM OF OPINION April 25, 2003 To the Lenders Referred to Below and Bank One, NA, as Administrative Agent 1 Bank One Plaza Chicago, Illinois 60670 Dear Sirs: I am an Assistant General Counsel of Metropolitan Life Insurance Company (the "Company"), a New York stock life insurance company, and in such capacity have represented the Company, MetLife, Inc. ("MetLife"), a Delaware corporation, and MetLife Funding, Inc., a Delaware corporation ("Funding" and together with the Company and MetLife, the "Borrowers"), in connection with the Credit Agreement dated as of April 25, 2003 (the "Credit Agreement"), among the Borrowers, the lenders named therein and Bank One, NA, as Administrative Agent, providing for loans to be made by said lenders to the Borrowers in an aggregate principal amount not to exceed $1,000,000,000. Terms defined in the Credit Agreement are used herein with the same meanings. This opinion is being delivered pursuant to Section 4.1(e) of the Credit Agreement. In rendering the opinions expressed below, I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. In my examination, I have assumed the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon statements of governmental officials and upon representations made in or pursuant to the Credit Agreement. In rendering the opinions expressed below, I have assumed, with respect to the Credit Agreement, that (except, to the extent expressly set forth in the opinions below, as to the Borrowers): (i) it has been duly authorized by, has been duly executed and delivered by, and constitutes the legal, valid and binding and enforceable obligations of, all of the parties thereto; (ii) all signatories thereto have been duly authorized; and B-1 (iii) all of the parties thereto are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the Credit Agreement. Upon the basis of the foregoing, I am of the opinion that: 1. (a) MetLife is a corporation duly organized, validly existing and in good standing under the laws of Delaware; (b) the Company is a stock life insurance company duly organized, validly existing and in good standing under the laws of New York; (c) Funding is a corporation duly organized, validly existing and in good standing under the laws of Delaware; (d) each of the Borrowers has all requisite corporate power and authority to carry on its business as now conducted; and (e) except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, MetLife and each of its Material Subsidiaries is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. 2. The Transactions are within each Borrower's corporate powers and have been duly authorized by all necessary corporate action. The Credit Agreement has been duly executed and delivered by each Borrower and constitutes a legal, valid and binding obligation of such Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing, regardless of whether considered in a proceeding in equity or at law. 3. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of any Borrower or any order of any Governmental Authority, and (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon any Borrower or its assets, or give rise to a right thereunder to require any payment to be made by any Borrower. 4. There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to my knowledge, threatened against or affecting MetLife or any of its Material Subsidiaries (a) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, is reasonably likely, individually or in the aggregate, to result in a Material Adverse Change (other than the Disclosed Matters) or (b) that involve the Credit Agreement or the Transactions. 5. Neither MetLife nor any of its Material Subsidiaries (other than Funding) is an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, and Funding is an "investment company" as defined in such Act that is exempt from the requirements of such Act. Neither MetLife nor any of its B-2 Material Subsidiaries is a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 6. The Support Agreement was duly authorized by all necessary corporate action of the Company and Funding. The Support Agreement has been duly executed and delivered by each of the Company and Funding and constitutes a legal, valid and binding obligation of each of the Company and Funding, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing, regardless of whether considered in a proceeding in equity or at law. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 10.3 of the Credit Agreement may be limited by laws or public policy limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction. (B) The enforceability of provisions of the Credit Agreement to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (C) I express no opinion as to (i) the effect of the laws of any jurisdiction in which any Lender is located (other than the State of New York) that limit the interest, fees or other charges such Lenders may impose, (ii) the last sentence of Section 2.16(c) of the Credit Agreement, and (iii) the first sentence of Section 10.8(b) of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of United States Federal Courts sitting in New York, New York to adjudicate any controversy related to the Credit Agreement. The foregoing opinions are limited to matters involving the Federal laws of the United States of America, the law of the State of New York and the General Corporation Law of the State of Delaware, and I do not express any opinion as to the laws of any other jurisdiction. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person (other than your successors and assigns as Lenders and Persons that acquire participations in the Loans) without my prior written consent. Very truly yours, B-3 EXHIBIT C FORM OF PROMISSORY NOTE $_______________ ____________, 20___ The undersigned, for value received, promises to pay to ________________________ (the "Lender"), ________________________ and 00/100 Dollars ($___________) or, if less, the aggregate unpaid amount of all Loans made by the Lender to the undersigned pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Loan made by the Lender to the undersigned from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, dated as of April 25, 2003 (as amended or otherwise modified from time to time, the "Credit Agreement"; terms not otherwise defined herein are used herein as defined in the Credit Agreement), among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc., the Lenders named therein and Bank One, NA, as Administrative Agent for the Lenders, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of New York, applicable to contracts made and to be performed entirely within such State. ____________________________ By: _______________________________ Name: _____________________________ Title: ____________________________ C-1 Schedule attached to Note dated _______________, 20__ of __________________ payable to _________________
Date and Date and Interest Unpaid Amount of Amount of Period/Maturity Principal Notation Class of Loan Loan Repayment Date Balance Made by
1. EURODOLLAR LOANS ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 2. ABR LOANS ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3. FIXED RATE LOANS ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ C-2 EX-31.1 4 y87663exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Robert H. Benmosche ------------------------- Robert H. Benmosche Chairman, President and Chief Executive Officer EX-31.2 5 y87663exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Stewart G. Nagler ------------------------- Stewart G. Nagler Vice Chairman and Chief Financial Officer EX-32.1 6 y87663exv32w1.txt CERTIFICATION Exhibit 32.1 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Robert H. Benmosche, the Chief Executive Officer of MetLife, Inc. (the "Company"), certify that (i) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 By: /s/ Robert H. Benmosche ------------------------------ Robert H. Benmosche Chairman, President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 y87663exv32w2.txt CERTIFICATION Exhibit 32.2 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Stewart G. Nagler, the Chief Financial Officer of MetLife, Inc. (the "Company"), certify that (i) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 By: /s/ Stewart G. Nagler --------------------------------- Stewart G. Nagler Vice Chairman and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----