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METLIFE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations Index to Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Page Forward-Looking Statements and Other Financial Information 99 Executive Summary 99 Industry Trends 102 Summary of Critical Accounting Estimates 111 Economic Capital 112 Acquisitions and Disposition s 112 Results of Operations 112 Investments 141 Derivatives 155 Off-Balance Sheet Arrangements 158 Policyholder Liabilities 159 Liquidity and Capital Resources 167 Adoption of New Accounting Pronouncements 179 Future Adoption of New Accounting Pronouncements 179 Non-GAAP and Other Financial Disclosures 179 Subsequent Event s 180 98-------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements and Other Financial Information For purposes of this discussion, "MetLife," the "Company," "we," "our" and "us" refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with MetLife, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report"), the cautionary language regarding forward-looking statements included below, the "Risk Factors" set forth in Part II, Item 1A, and the additional risk factors referred to therein, "Quantitative and Qualitative Disclosures About Market Risk" and the Company's interim condensed consolidated financial statements included elsewhere herein. This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong. Actual results could differ materially from those expressed or implied in the forward-looking statements. See "Note Regarding Forward-Looking Statements." This Management's Discussion and Analysis of Financial Condition and Results of Operations includes references to our performance measures, operating earnings and operating earnings available to common shareholders, that are not based on accounting principles generally accepted in the United States of America ("GAAP"). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP guidance for segment reporting, operating earnings is our measure of segment performance. Operating earnings is also a measure by which senior management's and many other employees' performance is evaluated for the purposes of determining their compensation under applicable compensation plans. See "- Non-GAAP and Other Financial Disclosures" for definitions of these and other measures. Executive Summary MetLife is a global provider of life insurance, annuities, employee benefits and asset management. MetLife is organized into six segments, reflecting three broad geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, the "Americas"); Asia; and Europe, the Middle East and Africa ("EMEA"). In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Home Loans LLC ("MLHL"), the surviving, non-bank entity of the merger of MetLife Bank, National Association ("MetLife Bank") with and into MLHL. See Note 3 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for information regarding the Company's exit from the MetLife Bank businesses and other business activities. Management continues to evaluate the Company's segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability. See Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on the Company's segments and Corporate & Other. Certain international subsidiaries have a fiscal year cutoff of November 30. Accordingly, the Company's interim condensed consolidated financial statements reflect the assets and liabilities of such subsidiaries as of August 31, 2014 and November 30, 2013 and the operating results of such subsidiaries for the three months and nine months ended August 31, 2014 and 2013. The Company is in the process of converting to calendar year reporting for these subsidiaries. We expect to substantially complete these conversions by 2016. Amounts relating to the conversions to date have been de minimis and, therefore, have been reported in net income in the quarter of conversion. In the first quarter of 2014, the Company entered into a definitive agreement to sell its wholly-owned subsidiary, MetLife Assurance Limited ("MAL") and, as a result, began reporting the operations of MAL as divested business. The sale of MAL was completed in May 2014. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. Consequently, the results for Corporate Benefit Funding decreased by $2 million, net of $0 of income tax, and $11 million, net of $5 million of income tax, for the three months and nine months ended September 30, 2013, respectively. Also, the results for Corporate & Other decreased by $3 million, net of $2 million of income tax, and $10 million, net of $6 million of income tax, for the three months and nine months ended September 30, 2013, respectively. 99-------------------------------------------------------------------------------- Table of Contents In October 2013, MetLife, Inc. completed its previously announced acquisition of Administradora de Fondos de Pensiones Provida S.A. ("ProVida"), the largest private pension fund administrator in Chile based on assets under management and number of pension fund contributors. The acquisition of ProVida supports the Company's growth strategy in emerging markets and further strengthens the Company's overall position in Chile. See Note 3 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for further information on the acquisition of ProVida. MetLife Insurance Company of Connecticut ("MICC") received all regulatory approvals to merge three U.S.-based life insurance companies and a former offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the "Mergers"). The Mergers are expected to occur in the fourth quarter of 2014. The companies to be merged are MICC, MetLife Investors USA Insurance Company and MetLife Investors Insurance Company, each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. ("Exeter"), a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MICC, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. In October 2014, MICC received regulatory approval from the Connecticut Insurance Department and the Delaware Department of Insurance to re-domesticate from Connecticut to Delaware immediately prior to the Mergers. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013. Effective January 1, 2014, following receipt of New York State Department of Financial Services (the "Department of Financial Services") approval, MICC withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MICC reinsured with an affiliate all existing New York insurance policies and annuity contracts that include a separate account feature and deposited investments with an estimated fair market value of $6.3 billion into a custodial account to secure MICC's remaining New York policyholder liabilities not covered by such reinsurance. The Mergers (i) may mitigate to some degree the impact of any restrictions on the use of captive reinsurers that could be adopted by the Department of Financial Services or other state insurance regulators by reducing our exposure to and use of captive reinsurers; (ii) will reduce the reliance on MetLife, Inc. for cash to fund derivative collateral requirements; (iii) will increase transparency relative to our capital allocation and variable annuity risk management; and (iv) may impact the aggregate amount of dividends permitted to be paid without insurance regulatory approval. See "- Liquidity and Capital Resources - MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries," "- Liquidity and Capital Resources - MetLife, Inc. - Liquidity and Capital Uses - Affiliated Capital Transactions" and Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements included herein for further information on the Mergers, and see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Trends - Regulatory Developments - U.S. Regulatory Developments - Insurance Regulatory Examinations" included in MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - The Company - Capital - Affiliated Captive Reinsurance Transactions" included in the 2013 Annual Report for information on our use of captive reinsurers. Sales experience was mixed across our businesses for the three months ended September 30, 2014 as compared to the same period of 2013. As a result of our continued focus on pricing discipline and risk management, sales of our variable annuity and Japan life and accident & health products declined. Higher investment income was driven by growth in our investment portfolio, as well as improved yields, despite the sustained low interest rate environment. In addition, a strengthening of the U.S. dollar relative to other key currencies and changes in long-term interest rates resulted in derivative gains for the current period compared with losses in the prior period. Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) Income (loss) from continuing operations, net of income tax $ 2,094 $ 973 $ 4,812 $ 2,476 Less: Net investment gains (losses) 109 (85 ) (427 ) 339 Less: Net derivative gains (losses) 478 (546 ) 1,132 (2,866 ) Less: Other adjustments to continuing operations (1) (146 ) (465 ) (923 ) (1,294 ) Less: Provision for income tax (expense) benefit (202 ) 544 (38 ) 1,499 Operating earnings 1,855 1,525 5,068 4,798 Less: Preferred stock dividends 30 30 91 91 Operating earnings available to common shareholders $ 1,825 $ 1,495 $ 4,977 $ 4,707 __________________(1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments. 100-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 During the three months ended September 30, 2014, income (loss) from continuing operations, net of income tax, increased $1.1 billion over the prior period. The change was predominantly due to a favorable change in net derivative gains (losses) of $1.0 billion ($666 million, net of income tax) driven by the strengthening of the U.S. dollar relative to other key currencies and changes in interest rates. Also included in income (loss) from continuing operations, before provision for income tax, is a $262 million ($174 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC. Operating earnings available to common shareholders increased $330 million over the prior period. This increase is the result of higher net investment income from portfolio growth and improved yields, despite the sustained low interest rate environment, higher asset-based fee revenues from business growth and a decline in expenses. A tax reform bill was enacted in Chile on September 29, 2014 which includes, among other things, a gradual increase in the corporate tax rate. Our Chile businesses, including ProVida, incurred a one-time tax charge of $41 million as a result of this legislation. Excluding the impact of this tax reform, the fourth quarter 2013 acquisition of ProVida in Chile increased operating earnings available to common shareholders by $54 million, net of income tax. Results for the current period also include a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return. Effective January 1, 2014, the Patient Protection and Affordable Care Act ("PPACA") mandated that an annual fee be imposed on health insurers. This fee, which was not deductible for income tax purposes, reduced operating earnings by $15 million in the current period. In addition, the prior period included a $57 million reserve strengthening in Australia. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 During the nine months ended September 30, 2014, income (loss) from continuing operations, net of income tax, increased $2.3 billion over the prior period. The change was predominantly due to a favorable change in net derivative gains (losses) of $4.0 billion ($2.6 billion, net of income tax) driven by changes in interest rates and foreign currency exchange rates. This was offset by an unfavorable change in net investment gains (losses) of $766 million ($498 million, net of income tax) primarily driven by a loss on the disposition of MAL. Also included in income (loss) from continuing operations, before provision for income tax, is a $262 million ($174 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC. Operating earnings available to common shareholders increased $270 million over the prior period. This increase reflects higher net investment income from portfolio growth, higher asset-based fee revenues from continued strong equity market performance and a decrease in interest credited expense, partially offset by unfavorable mortality, morbidity and claims experience and a decrease in investment yields. Our results for the current period include charges totaling $57 million for a settlement with the Department of Financial Services and the District Attorney, New York County, in relation to their respective inquiries into whether American Life Insurance Company ("American Life") and Delaware American Life Insurance Company ("DelAm") conducted business in New York without a license and whether representatives acting on behalf of the companies solicited, sold or negotiated insurance products in New York without a license. Our results for the current period also include a $56 million, net of income tax, favorable reserve adjustment related to disability premium waivers in our retail life business. Excluding the impact of the aforementioned tax reform, the fourth quarter 2013 acquisition of ProVida in Chile increased operating earnings available to common shareholders by $165 million, net of income tax. Results for the current period also include a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return. The PPACA fee, which was not deductible for income tax purposes, reduced operating earnings by $44 million in the current period. In addition, the prior period included a $57 million reserve strengthening in Australia. 101-------------------------------------------------------------------------------- Table of Contents Consolidated Company Outlook As part of an enterprise-wide strategic initiative, by 2016, we expect to increase our operating return on common equity, excluding accumulated other comprehensive income ("AOCI"), to the 12% to 14% range, driven by higher operating earnings. This target assumes that regulatory capital rules appropriately reflect the life insurance business model and that we have clarity on the rules in a reasonable time frame, allowing for meaningful share repurchases prior to 2016. If we are unable to repurchase a sufficient amount of shares, we expect the range of our operating return on common equity, excluding AOCI, to be 11% to 13%. Also, as part of this initiative, we will leverage our scale to improve the value we provide to customers and shareholders in order to achieve $1 billion in efficiencies, $600 million of which is related to net pre-tax expense savings, and $400 million of which we expect to be primarily reinvested in our technology, platforms and functionality to improve our current operations and develop new capabilities. We also continue to shift our product mix toward protection products and away from more capital-intensive products, in order to generate more predictable operating earnings and cash flows, and improve our risk profile and free cash flow. Finally, we plan to grow our investment management business which provides asset management products and services to our customers. We expect to achieve the 2016 target range on our operating return on common equity by primarily focusing on the following: • Growth in premiums, fees and other revenues driven by: - Accelerated growth in Group, Voluntary & Worksite Benefits; - Increased fee revenue reflecting the benefit of higher equity markets on our separate account balances; and - Increases in our businesses outside of the U.S., notably accident & health, from continuing organic growth throughout our various geographic regions and leveraging of our multichannel distribution network. • Expanding our presence in emerging markets, including potential merger and acquisition activity. We expect that by 2016, 20% or more of our operating earnings will come from emerging markets, with the acquisition of ProVida contributing to this increase. • Focus on disciplined underwriting. We see no significant changes to the underlying trends that drive underwriting results; however, unanticipated catastrophes could result in a high volume of claims. • Focus on expense management in the light of the low interest rate environment, and continued focus on expense control throughout the Company. • Continued disciplined approach to investing and asset/liability management ("ALM"), through our enterprise risk and ALM governance process. Industry Trends The following information on industry trends should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Trends" in Part II, Item 7, of the 2013 Annual Report and in Part I, Item 2, of MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. We continue to be impacted by the unstable global financial and economic environment that has been affecting the industry. 102-------------------------------------------------------------------------------- Table of Contents Financial and Economic Environment Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation and inflation, all affect the business and economic environment and, ultimately, the amount and profitability of our business. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals in the financial markets can also affect our business through their effects on general levels of economic activity, employment and customer behavior. While our diversified business mix and geographically diverse business operations partially mitigate these risks, correlation across regions, countries and global market factors may reduce the benefits of diversification. Financial markets have also been affected periodically by concerns over U.S. fiscal policy, although these concerns have abated since late 2013. However, unless long-term steps are taken to raise the debt ceiling and reduce the federal deficit, rating agencies have warned of the possibility of future downgrades of U.S. Treasury securities. These issues could, on their own, or combined with the possible slowing of the global economy generally, have severe repercussions to the U.S. and global credit and financial markets, further exacerbate concerns over sovereign debt of other countries and disrupt economic activity in the U.S. and elsewhere. Concerns about the economic conditions, capital markets and the solvency of certain European Union ("EU") member states, including Portugal, Ireland, Italy, Greece and Spain ("Europe's perimeter region"), and of financial institutions that have significant direct or indirect exposure to debt issued by these countries, have been a cause of elevated levels of market volatility. However, after several tumultuous years, economic conditions in Europe's perimeter region seem to be stabilizing or improving, as evidenced by the stabilization of credit ratings, particularly in Spain, Portugal and Ireland. This, combined with greater European Central Bank ("ECB") support and gradually improving macroeconomic conditions at the country level, has reduced the risk of default on the sovereign debt of certain countries in Europe's perimeter region and the risk of possible withdrawal of one or more countries from the Euro zone. See "- Investments - Current Environment" for information regarding credit ratings downgrades, support programs for Europe's perimeter region and our exposure to obligations of European governments and private obligors. The financial markets have also been affected by concerns that other EU member states could experience similar financial troubles or that some countries could default on their obligations, have to restructure their outstanding debt, or that financial institutions with significant holdings of sovereign or private debt issued by borrowers in Europe's perimeter region could experience financial stress, any of which could have significant adverse effects on the European and global economies and on financial markets, generally. In September 2012, the ECB announced a new bond buying program, Outright Monetary Transactions ("OMT"), intended to stabilize the European financial crisis. This program involves the potential purchase by the ECB of unlimited quantities of sovereign bonds with maturities of one to three years. The OMT has not been activated to date, but the possibility of its use by the ECB succeeded in reducing investor concerns over the possible withdrawal of one or more countries from the Euro zone and helped to lower sovereign yields in Europe's perimeter region. However, in October 2014, the Court of Justice of the European Union heard arguments relating to a lawsuit challenging the legality of the OMT. While a decision is not expected until 2015, the outcome could affect the ECB's plan to purchase sovereign bonds and undermine economic stability in Europe. See "- Impact of a Sustained Low Interest Rate Environment" for information regarding the accommodative monetary policy taken by the ECB, as well as countries outside the EU, including the U.S. and Japan. Economic growth in the Euro zone continues to be weak, with concerns over low inflation becoming more pronounced as countries in Europe's perimeter region in particular continue to pursue policies to reduce their relative cost of production and reduce macroeconomic imbalances. In addition, concerns about the political and economic stability of countries in regions outside the EU, including Ukraine, Russia, Argentina and the Middle East, have contributed to global market volatility. See "Risk Factors - Economic Environment and Capital Markets-Related Risks - We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period," and "Risk Factors - Economic Environment and Capital Markets-Related Risks - If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations" included in the 2013 Annual Report. See also "- Investments - Current Environment - Selected Country Investments" for information regarding our investments in Ukraine, Russia, and Argentina. 103-------------------------------------------------------------------------------- Table of Contents We face substantial exposure to the Japanese economy given our operations there. Despite some recovery in Gross Domestic Product ("GDP") growth and rising inflation over the last year, structural weaknesses and debt sustainability have yet to be addressed effectively, which leaves the economy vulnerable to further disruption. Going forward, Japan's structural and demographic challenges may continue to limit its potential growth unless reforms that boost productivity are put into place. Japan's high public sector debt levels are mitigated by low refinancing risks and its nominal yields on government debt have remained at a lower level than that of any other developed country. However, frequent changes in government have prevented policy makers from implementing fiscal reform measures to put public finances on a sustainable path. In January 2013, the government and the Bank of Japan pledged to strengthen policy coordination to end deflation and to achieve sustainable economic growth. This was followed by the announcement of a supplementary budget stimulus program totaling 2% of GDP and the adoption of a 2% inflation target by the Bank of Japan. In early April 2013, the Bank of Japan announced a new round of monetary easing measures including increased government bond purchases at longer maturities. In October 2013, the government agreed to raise the consumption tax from 5% to 8% effective April 1, 2014. While this was a positive step, the fiscal impact is likely to be neutral in the short term given the current stimulus spending package. On October 31, 2014, the Bank of Japan announced a program to purchase larger quantities of government bonds. Such purchases are intended to keep borrowing costs low and support spending. Despite continued weakness in the yen, inflation is not expected to rise materially given still weak GDP growth. Japan's public debt trajectory could continue to rise until a strategy to consolidate public finances and growth-enhancing reforms are implemented. Impact of a Sustained Low Interest Rate Environment As a global insurance company, we are affected by the monetary policy of central banks around the world, as well as the monetary policy of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in the United States. The Federal Reserve Board has taken a number of actions in recent years to spur economic activity by keeping interest rates low and may take further actions to influence interest rates in the future, which may have an impact on the pricing levels of risk-bearing investments, and may adversely impact the level of product sales. On October 29, 2014, the Federal Reserve Board's Federal Open Market Committee ("FOMC"), citing sufficient underlying strength in the economy to support progress toward maximum employment and the substantial improvement in the outlook for labor market conditions since the inception of the current asset purchase program, decided to conclude the program. The end of the Federal Reserve Board's quantitative easing program could potentially increase U.S. interest rates from recent historically low levels, with uncertain impacts on U.S. risk markets, and may affect interest rates and risk markets in other developed and emerging economies. Even after the economy strengthens, the FOMC reaffirmed that it anticipates keeping the target range for the federal funds rate at 0 to 0.25% for a considerable time, subject to labor market conditions and inflation indicators and expectations. Despite expectations for the end of the Federal Reserve Board's quantitative easing program and the potential for future raises in interest rates in the U.S., central banks in other parts of the world, including the ECB and the Bank of Japan, have pursued accommodative monetary policies. In June 2014, the ECB adopted an array of stimulus measures, including a negative rate on bank deposits. In September 2014, the ECB lowered its main lending rate and further reduced the negative rate on bank deposits. The ECB commenced a program to purchase covered bank bonds in October 2014 and plans to commence purchase of asset-backed securities in November 2014. These stimulus measures are intended to lessen the risk of a prolonged period of deflation and support economic recovery in the Euro zone, including Europe's perimeter region. The Bank of Japan is continuing the monetary easing program it introduced in April 2013. In October 2014, the Bank of Japan announced plans to further increase its purchases of government bonds. However, we cannot predict with certainty the effect of these programs and policies on interest rates or the impact on the pricing levels of risk-bearing investments at this time. See "- Investments - Current Environment." In periods of declining interest rates, we may have to invest insurance cash flows and reinvest the cash flows we received as interest or return of principal on our investments in lower yielding instruments. Moreover, borrowers may prepay or redeem the fixed income securities, commercial, agricultural or residential mortgage loans and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates. Therefore, some of our products expose us to the risk that a reduction in interest rates will reduce the difference between the amounts that we are required to credit on contracts in our general account and the rate of return we are able to earn on investments intended to support obligations under these contracts. This difference between interest earned and interest credited, or margin, is a key metric for the management of, and reporting for, many of our businesses. 104-------------------------------------------------------------------------------- Table of Contents Our expectations regarding future margins are an important component impacting the amortization of certain intangible assets such as deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA"). Significantly lower margins may cause us to accelerate the amortization, thereby reducing net income in the affected reporting period. Additionally, lower margins may also impact the recoverability of intangible assets such as goodwill, require the establishment of additional liabilities or trigger loss recognition events on certain policyholder liabilities. We review this long-term margin assumption, along with other assumptions, as part of our annual assumption review. Regulatory Developments The U.S. life insurance industry is regulated primarily at the state level, with some products and services also subject to federal regulation. As life insurers introduce new and often more complex products, regulators refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially impact the statutory reserve and capital requirements of the industry. In addition, regulators have undertaken market and sales practices reviews of several markets or products, including equity-indexed annuities, variable annuities and group products, as well as reviews of the utilization of affiliated captive reinsurers or offshore entities to reinsure insurance risks. The regulation of the global financial services industry has received renewed scrutiny as a result of the disruptions in the financial markets. Significant regulatory reforms have been recently adopted and additional reforms proposed, and these or other reforms could be implemented. See "Risk Factors - Regulatory and Legal Risks - Our Insurance and Brokerage Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth" included elsewhere herein, as well as "Business - U.S. Regulation," "Business - International Regulation," "Risk Factors - Risks Related to Our Business - Our Statutory Life Insurance Reserve Financings May Be Subject to Cost Increases and New Financings May Be Subject to Limited Market Capacity," and "Risk Factors - Regulatory and Legal Risks - Changes in U.S. Federal and State Securities Laws and Regulations, and State Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect Our Operations and Our Profitability" included in the 2013 Annual Report. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), which was signed by President Obama in July 2010, effected the most far-reaching overhaul of financial regulation in the U.S. in decades. The full impact of Dodd-Frank on us will depend on the numerous rulemaking initiatives required or permitted by Dodd-Frank which are in various stages of implementation, many of which are not likely to be completed for some time. U.S. Regulatory Developments NAIC The National Association of Insurance Commissioners ("NAIC") is an organization, the mission of which is to assist state insurance regulatory authorities in serving the public interest and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the "Manual"). However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact the statutory capital and surplus of MetLife, Inc.'s U.S. insurance subsidiaries. The NAIC currently has in place its "Solvency Modernization Initiative," which is designed to review the U.S. financial regulatory system and all aspects of financial regulation affecting insurance companies. Though broad in scope, the NAIC has stated that the Solvency Modernization Initiative will focus on: (1) capital requirements; (2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. In furtherance of this initiative, the NAIC adopted the Corporate Governance Annual Filing Model Act and Regulation at its August 2014 meeting. The new model, which requires insurers to make an annual confidential filing regarding their corporate governance policies, is expected to become effective in 2016. In addition, in September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act ("ORSA"), which has been or is expected to be enacted by our insurance subsidiaries' domiciliary states in the near future. ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer's material risks in normal and stressed environments. The assessment must be documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. MetLife's first ORSA summary report, which will be submitted on behalf of the enterprise, must be prepared beginning in 2015. 105-------------------------------------------------------------------------------- Table of Contents In December 2012, the NAIC approved a new valuation manual containing a principles-based approach to life insurance company reserves. Principles-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based approach will not become effective unless it is enacted into law by a minimum number of state legislatures. Insurance commissioners of certain states oppose (e.g., New York) or do not actively support the principles-based reserve approach. We cannot predict the additional capital requirements or compliance costs, if any, that may result from the above initiatives. The NAIC adopted revisions to the NAIC Insurance Holding Company System Model Act and Insurance Holding Company System Model Regulation in December 2010. The revised models include a new requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. To date, several states where MetLife has domestic insurers have enacted a version of the revised NAIC model act, including the enterprise risk reporting requirement. Regulation of Over-the-Counter Derivatives Dodd-Frank includes a new framework of regulation of the over-the-counter ("OTC") derivatives markets which requires clearing of certain types of transactions currently traded OTC and imposes additional costs, including new reporting and margin requirements, and will likely impose additional regulation on the Company, including new capital requirements. Our costs of risk mitigation are increasing under Dodd-Frank. For example, Dodd-Frank imposes requirements, including the requirement to pledge initial margin (i) for "OTC-cleared" transactions (OTC derivatives that are cleared and settled through central clearing counterparties) entered into after June 10, 2013, and (ii) for "OTC-bilateral" transactions (OTC derivatives that are bilateral contracts between two counterparties) entered into after the phase-in period; these requirements would be applicable to us in 2019 if the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation ("FDIC"), Farm Credit Administration and Federal Housing Finance Agency (collectively, the "Prudential Regulators"), U.S. Commodity Futures Trading Commission ("CFTC") and the U.S. Securities and Exchange Commission adopt the final margin requirements for non-centrally cleared derivatives published by the Bank of International Settlements and International Organization of Securities Commissions in September 2013 and re-proposed by the Prudential Regulators and CFTC in September 2014. These increased margin requirements, combined with restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of increased benefit exposures from our annuity products that offer guaranteed benefits. We have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the implementation of Dodd-Frank and comparable international derivatives regulations. 106-------------------------------------------------------------------------------- Table of Contents Potential Regulation as a Non-Bank SIFI On January 11, 2013, MetLife Bank and MetLife, Inc. completed the sale of the depository business of MetLife Bank to GE Capital Retail Bank. Subsequently, MetLife Bank terminated its deposit insurance and MetLife, Inc. deregistered as a bank holding company. Additionally, in August 2013, MetLife Bank merged with and into MLHL, a non-bank affiliate. As a result, MetLife, Inc. is no longer regulated as a bank holding company or subject to enhanced supervision and prudential standards as a bank holding company with assets of $50 billion or more. However, if, in the future, MetLife, Inc. is designated by the Financial Stability Oversight Council ("FSOC") as a non-bank systemically important financial institution ("non-bank SIFI"), it could once again be subject to regulation by the Federal Reserve Board and to enhanced supervision and prudential standards. See "- Enhanced Prudential Standards for Non-Bank SIFIs." Regulation of MetLife, Inc. as a non-bank SIFI could affect our business. For example, enhanced capital requirements that would be applicable if MetLife, Inc. is designated as a non-bank SIFI, may adversely affect our ability to compete with other insurers that are not subject to those requirements, and our ability to issue guarantees could be constrained. In addition, if MetLife, Inc. is designated as a non-bank SIFI, it would need to obtain Federal Reserve Bank of New York (collectively, with the Federal Reserve Board, the "Federal Reserve") approval before directly or indirectly acquiring, merging or consolidating with a financial company having more than $10 billion of assets or acquiring 5% or more of any voting class of securities of a bank or bank holding company and, depending on the extent of the combined company's liabilities, could be subject to additional restrictions regarding its ability to merge. The Federal Reserve Board would also have the right to require any of our insurance companies, or insurance company affiliates, to take prompt action to correct any financial weaknesses. On September 4, 2014, the FSOC notified MetLife, Inc. that it has been preliminarily designated as a non-bank SIFI. On October 3, 2014, MetLife, Inc. delivered notice to the FSOC requesting a written and oral evidentiary hearing to contest the FSOC's proposed determination. In accordance with its regulations, the FSOC held an evidentiary hearing on November 3, 2014 and will make a final determination on MetLife, Inc.'s status as a non-bank SIFI within 60 days after the hearing. If MetLife, Inc. is designated as a non-bank SIFI, it will be subject to a number of Dodd-Frank requirements that are also applicable to bank holding companies with assets of $50 billion or more, including responsibility to pay assessments and other charges equal to the total expenses the Federal Reserve Board thinks is necessary for its supervision of bank holding companies and savings and loan holding companies with assets of $50 billion or more and non-bank SIFIs, as well as enhanced prudential standards. Enhanced Prudential Standards for Non-Bank SIFIs Regulation of MetLife, Inc. as a non-bank SIFI could materially and adversely affect our business. In December 2011, in accordance with the requirements of section 165 of Dodd-Frank, the Federal Reserve Board proposed a set of prudential standards ("Regulation YY") that would apply to non-bank SIFIs, including enhanced risk-based capital ("RBC") requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures, and recovery and resolution planning. The Federal Reserve Board's proposal contemplates that these standards would be subject to the authority of the Federal Reserve Board to determine, on its own or in response to a recommendation by the FSOC, to tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve Board deems appropriate. As described below, the Federal Reserve Board has finalized a number of these requirements for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more, but generally has not taken further action to implement most of these requirements for non-bank SIFIs. 107-------------------------------------------------------------------------------- Table of Contents In October 2013, the Federal Reserve Board proposed specific regulations relating to liquidity requirements for banking organizations and some non-bank SIFIs, although the rules would not apply to non-bank SIFIs with substantial insurance operations. On February 18, 2014, the Federal Reserve Board adopted amendments to Regulation YY to implement certain of the enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more. The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management (including establishing a risk committee), stress-test requirements, and a 15-to-1 debt-to-equity limit for these companies. The amendments also establish risk committee requirements and capital stress testing requirements for certain bank holding companies and foreign banking organizations with total consolidated assets of $10 billion or more. While Regulation YY, as originally proposed, would have applied to non-bank SIFIs, the final rule does not. The Federal Reserve Board indicated that it plans to apply enhanced prudential standards to non-bank SIFIs by rule or order, enabling it to more appropriately tailor the standards to non-bank SIFIs and will provide affected non-bank SIFIs with notice and the opportunity to comment prior to determination of their enhanced prudential standards. Accordingly, the manner in which MetLife, Inc. would be regulated, if it is designated as a non-bank SIFI, remains unclear. The Federal Reserve Board has stated that it believes other provisions of Dodd-Frank, known as the Collins Amendment, constrain its ability to tailor capital standards for non-bank SIFIs. If the Federal Reserve Board requires insurers that are non-bank SIFIs to comply with capital standards or regimes (such as the Basel capital rules that were developed for banks) that do not take into account the insurance business model and the differences between banks and insurers, the business and competitive position of such insurer non-bank SIFIs could be materially and adversely affected. See "Risk Factors - Regulatory and Legal Risks - Our Insurance and Brokerage Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth - Insurance Regulation - U.S. - Federal Regulatory Agencies." On September 30, 2014, the Federal Reserve Board announced that it will begin a quantitative impact study ("QIS") to evaluate the potential effects of its revised regulatory capital framework on savings and loan holding companies and non-bank financial companies supervised by the Federal Reserve Board that are substantially engaged in insurance underwriting activity (insurance holding companies). The Federal Reserve Board is conducting the QIS in order to enable it to design a capital framework for insurance holding companies it supervises that is in compliance with the Collins Amendment. Legislation that would clarify that the Federal Reserve Board may tailor capital rules for insurer non-bank SIFIs has been adopted by the U.S. Senate and the House of Representatives; however, the bills passed by the Senate and House of Representatives differ, and Congress must take action to reconcile the bills before they can be sent to the President for signature. The stress testing requirements have been implemented and require non-bank SIFIs (as well as bank holding companies with $50 billion or more of assets) to undergo three stress tests each year: an annual supervisory stress test conducted by the Federal Reserve Board and two company-run stress tests (an annual test which coincides with the timing of the supervisory stress test, and a mid-cycle test). Companies will be required to take the results of the stress tests into consideration in their annual capital planning and resolution and recovery planning. If MetLife, Inc. is designated by the FSOC as a non-bank SIFI, its competitive position and its ability to pay dividends, repurchase common stock or other securities or engage in other transactions that could affect its capital or need for capital could be adversely affected by any additional capital requirements that might be imposed as a result of the stress testing requirements, as well as enhanced prudential standards, other measures imposed as a result of the enactment of Dodd-Frank and other regulatory initiatives. Non-bank SIFIs would also be required to submit a resolution plan setting forth how the company could be resolved under the Bankruptcy Code in the event of material financial distress. Resolution plans would have to be resubmitted annually and promptly following any event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan. A failure to submit a "credible" resolution plan could result in the imposition of a variety of measures, including additional capital, leverage, or liquidity requirements, and forced divestiture of assets or operations. If the FSOC determines to make a final designation of MetLife, Inc. as a non-bank SIFI, MetLife, Inc. would be required to submit a resolution plan by July 1, 2016, unless the Federal Reserve Board and FDIC require a different due date. 108-------------------------------------------------------------------------------- Table of Contents In addition, if it were determined that MetLife, Inc. posed a substantial threat to U.S. financial stability, the applicable federal regulators would have the right to require it to take one or more other mitigating actions to reduce that risk, including limiting its ability to merge with or acquire another company, terminating activities, restricting its ability to offer financial products or requiring it to sell assets or off-balance sheet items to unaffiliated entities. Enhanced standards would also permit, but not require, regulators to establish requirements with respect to contingent capital, enhanced public disclosures and short-term debt limits. These standards are described as being more stringent than those otherwise imposed on bank holding companies; however, the Federal Reserve Board is permitted to apply them on an institution-by-institution basis, depending on its determination of the institution's level of risk. International Regulatory Developments Our international insurance operations are principally regulated by insurance regulatory authorities in the jurisdictions in which they are located or operate and are exposed to increased political, legal, financial, operational and other risks. A significant portion of our revenues is generated through operations in foreign jurisdictions, including many countries in early stages of economic and political development. Our international operations may be materially adversely affected by the actions and decisions of foreign authorities and regulators, such as through nationalization or expropriation of assets, the imposition of limits on foreign ownership of local companies, changes in laws (including tax laws and regulations), their application or interpretation, political instability (including any resulting economic or trade sanctions), dividend limitations, price controls, changes in applicable currency, currency exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold into U.S. dollars or other currencies, as well as other adverse actions by foreign governmental authorities and regulators. Changes in the laws and regulations that affect our customers and independent sales intermediaries or their operations also may affect our business relationships with them and their ability to purchase or distribute our products. Such actions may negatively affect our business in these jurisdictions. For example, legislation in Poland became effective on February 1, 2014, enacting significant changes to the country's pension system, including redemption of Polish government bonds held by pension funds. This legislation will have a negative impact on our pension business in Poland, but will not have a material impact on our overall pension business. In addition, a tax reform bill was enacted in Chile on September 29, 2014 which includes, among other things, a gradual increase in the corporate tax rate from 20% to 27%, with a taxpayer election that limits the corporate tax rate to 25% but eliminates the taxable profits fund, an exemption on taxes on corporate income that is reinvested. See "- Results of Operations - Segment Results and Corporate & Other - EMEA" for a discussion of a write-down of DAC and VOBA associated with our EMEA business and "- Results of Operations - Segment Results and Corporate & Other - Latin America" for information regarding the impact on our Latin America business of the new tax legislation in Chile. Also pending in Chile are changes to its pension system: a bill to create a state-owned pension company was introduced and a Presidential Advisory Committee was created to draft a reform proposal of the pension system. Both proposals are not finalized and may still change further if a bill results from their recommendations. It is premature to predict the impact of such reforms on our pension business in Chile. We expect the scope and extent of regulation outside of the U.S., as well as regulatory oversight generally, to continue to increase. The regulatory environment in the countries in which we operate and changes in laws could have a material adverse effect on our results of operations. See "Risk Factors - Risks Related to Our Business - Our International Operations Face Political, Legal, Operational and Other Risks, Including Exposure to Local and Regional Economic Conditions, That Could Negatively Affect Those Operations or Our Profitability" included in the 2013 Annual Report. Solvency II Our insurance business throughout the European Economic Area will be subject to the Solvency II package, consisting of two inter-linked directives: Solvency II and Omnibus II, which have been adopted separately. Solvency II was adopted by European authorities in 2009. It codifies and harmonizes regulation for insurance undertakings established in the EU. It provides a framework for new risk management practices, solvency capital standards and disclosure requirements. Omnibus II was adopted in April 2014. It contains provisions that adapt Solvency II to the new supervisory architecture establishing the European Insurance and Occupational Pensions Authority ("EIOPA") and includes a package of measures to facilitate the provision of insurance products with long-term guarantees. Both directives will become effective on January 1, 2016. Leading up to Solvency II's effective date, EIOPA has published Interim Guidelines aimed at increasing preparedness of both supervisors and insurers. The Interim Guidelines have been applicable since January 1, 2014 and include certain reporting and organizational requirements with which we are complying in accordance with the requirements of our local regulators. Between 2014 and the effective date of both directives in 2016, the European authorities will establish supporting rules and guidance that implement the legislation. 109-------------------------------------------------------------------------------- Table of Contents In addition, our insurance business in Mexico will be impacted by Mexico's insurance law reform, adopted in February 2013 (effective in April 2015). The reform envisions a Solvency II-type regulatory framework, instituting changes to reserve and capital requirements and corporate governance and fostering greater transparency. The new regime includes secondary regulations subject to a 16-month consultation period, during which quantitative and qualitative impact studies will be performed and input from affected companies will be reviewed. In Chile, the law implementing Solvency II-like regulation is currently in the studies stage. However, the Chilean insurance regulator has already issued two resolutions, one for governance, and the other for risk management and control framework requirements. MetLife Chile has already implemented governance changes and risk policies to comply with these resolutions. The impact study considering the second draft of the regulation for RBC requirements was completed in May 2014. The law is expected to be published and approved in 2015, with the RBC regulation in force in 2016. In China, the business of our joint venture will be impacted by a new risk-based solvency regime which is expected to be finalized by the China Insurance Regulatory Commission ("CIRC") in 2014 and implemented in 2016, although it is likely there will be transitional arrangements applying from 2015. Like Solvency II, the new regime focuses on risk management and has three pillars (strengthened quantitative capital requirements, enhanced qualitative supervision and establishing a governance and market discipline process). A second quantitative impact study was announced by CIRC on September 22, 2014 to further review the first pillar of the framework. Global Systemically Important Insurers The International Association of Insurance Supervisors ("IAIS"), an association of insurance supervisors and regulators and a member of the Financial Stability Board ("FSB"), an international entity established to coordinate, develop and promote regulatory, supervisory and other financial sector policies in the interest of financial stability, is participating in the FSB's initiative to identify global systemically important financial institutions and has devised and published a methodology to assess the systemic relevance of global insurers and a framework of policy measures to be applied to global systemically important insurers ("G-SIIs"). In July 2013, the FSB published its initial list of nine G-SIIs, based on the IAIS' assessment methodology, which includes MetLife, Inc. The FSB will update the list annually beginning in November 2014. For G-SIIs which engage in activities deemed to be systemically risky, the framework of policy measures calls for imposition of additional capital (higher loss absorbency ("HLA")) requirements on those activities. Given the absence of a common global base on which to calculate an HLA for insurers, the FSB directed the IAIS to develop basic capital requirements ("BCR"). On October 23, 2014, the IAIS released the final BCR approved by the FSB for submission to the Group of Twenty (20 major world economies) leaders in November 2014. The BCR will apply to G-SIIs in 2015. Work on HLA development is in very early stages and how the HLA requirements will be computed remains unclear. The HLA requirements are required to be finalized by the end of 2015. From 2015 to 2018, reporting will be on a confidential basis and subject to refinement by the IAIS. HLA requirements are to be applied in 2019 to companies designated as G-SIIs in 2017. In addition, the IAIS proposes to develop a risk-based global insurance capital standard by 2016 which will apply to all internationally active insurance groups, including G-SIIs, with implementation to begin in 2019 after two years of testing and refinement. The FSB and IAIS propose that national authorities ensure that any insurers identified as G-SIIs be subject to additional requirements consistent with the framework of policy measures, which include preparation of a systemic risk management plan, preparation of a recovery and resolution plan, enhanced liquidity planning and management, more intensive supervision, closer coordination among regulators through global supervisory colleges led by a regulator with group-wide supervisory authority, and a policy bias in favor of separation of non-traditional insurance and non-insurance activities from traditional insurance activities. The IAIS policy measures would need to be implemented by legislation or regulation in each applicable jurisdiction, and the impact on MetLife, Inc. and other designated G-SIIs is uncertain. Mortgage and Foreclosure-Related Exposures MetLife no longer engages in the origination, sale and servicing of forward and reverse residential mortgage loans. See Note 14 of the Notes to the Interim Condensed Consolidated Financial Statements for further information regarding our mortgage and foreclosure-related exposures. 110-------------------------------------------------------------------------------- Table of Contents Notwithstanding its exit from the origination and servicing businesses, MetLife Bank remained obligated to repurchase loans or compensate for losses upon demand due to alleged defects by MetLife Bank or its predecessor servicers in past servicing of the loans and material representations made in connection with MetLife Bank's sale of the loans. Reserves for representation and warranty repurchases and indemnifications were $104 million at both September 30, 2014 and December 31, 2013. Reserves for estimated future losses due to alleged deficiencies on loans originated and sold, as well as servicing of the loans including servicing acquired, are estimated based on unresolved claims and projected losses under investor servicing contracts where MetLife Bank's past actions or inactions are likely to result in missing certain stipulated investor timelines. Reserves for servicing defects were $45 million and $46 million at September 30, 2014 and December 31, 2013, respectively. Management is satisfied that adequate provision has been made in the Company's interim condensed consolidated financial statements for those representation and warranty obligations that are currently probable and reasonably estimable. 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 Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining: (i) liabilities for future policy benefits and the accounting for reinsurance; (ii) capitalization and amortization of DAC and the establishment and amortization of VOBA; (iii) estimated fair values of investments in the absence of quoted market values; (iv) investment impairments; (v) estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; (vi) measurement of goodwill and related impairment; (vii) measurement of employee benefit plan liabilities; (viii) measurement of income taxes and the valuation of deferred tax assets; and (ix) liabilities for litigation and regulatory matters. In addition, the application of acquisition accounting requires the use of estimation techniques in determining the estimated fair values of assets acquired and liabilities assumed - the most significant of which relate to aforementioned critical accounting estimates. In applying our accounting policies, we make 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 our business and operations. Actual results could differ from these estimates. The above critical accounting estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates" and Note 1 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Goodwill Goodwill is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, the implied fair value of the reporting unit goodwill is compared to the carrying value of that goodwill to measure the amount of impairment loss, if any. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business acquisition. In the third quarter of 2014, the Company performed its annual goodwill impairment testing on all of its reporting units based upon data as of June 30, 2014. The Company determined that the fair values of its reporting units were in excess of their carrying values and, therefore, goodwill was not impaired. 111-------------------------------------------------------------------------------- Table of Contents Economic Capital Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in our business. Our economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon and applying an industry standard method for the inclusion of diversification benefits among risk types. Economic capital-based risk estimation is an evolving science and industry best practices have emerged and continue to evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for the calculation of diversification benefits, and the quantification of appropriate shock levels. MetLife management is responsible for the on-going production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards. For our domestic segments, net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact our consolidated net investment income, operating earnings or income (loss) from continuing operations, net of income tax. Acquisitions and Dispositions In July 2014, all regulatory approvals necessary to establish the previously announced life insurance joint venture in Vietnam among MetLife, Inc. (through MetLife Limited), Joint Stock Commercial Bank for Investment & Development of Vietnam and Bank for Investment & Development of Vietnam Insurance Joint Stock Corporation were received. Operations of the joint venture (BIDV MetLife Life Insurance Limited Liability Company) are expected to commence in the fourth quarter of 2014. In April 2014, MetLife, Inc. and Malaysia's AMMB Holdings Bhd successfully completed the formation of their previously announced strategic partnership, in which each now holds approximately 50% of both AmMetLife Insurance Berhad and AmMetTakaful Berhad, each of which are parties to new exclusive 20-year distribution agreements with AMMB Holdings Bhd bank affiliates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Dispositions" included in the 2013 Annual Report for additional information. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements for further information regarding the Company's disposition. Results of Operations Consolidated Results Sales experience was mixed across our businesses for the three months ended September 30, 2014 as compared to the same period of 2013. Despite the slow economic recovery in the U.S., our group term life, disability and dental businesses generated premium growth through stronger sales and improved persistency, with the dental business also benefiting from the positive impact of pricing actions on existing business. The introduction of new products also drove growth in our voluntary benefits business. The sustained low interest rate environment has contributed to the underfunding of pension plans; as a result, we experienced a decrease in sales of pension closeouts. Competitive pricing and a relative increase in participation drove an increase in structured settlement sales. Income annuity sales were strong in the current period, rebounding from the discontinuance of one contract in the prior period. Sales of domestic variable annuities and Japan life and accident & health products declined as we continue to focus on pricing discipline and risk management. Sales in the majority of our other businesses abroad have improved. In our Retail segment, higher fixed and indexed annuity sales were partially offset by lower sales of life products, mainly driven by the discontinuance of all but one of our secondary guarantees on universal life products. 112-------------------------------------------------------------------------------- Table of Contents Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) Revenues Premiums $ 9,703 $ 9,094 $ 28,795 $ 27,403 Universal life and investment-type product policy fees 2,628 2,372 7,507 7,034 Net investment income 5,410 5,026 15,704 16,385 Other revenues 518 476 1,486 1,446 Net investment gains (losses) 109 (85 ) (427 ) 339 Net derivative gains (losses) 478 (546 ) 1,132 (2,866 ) Total revenues 18,846 16,337 54,197 49,741 Expenses Policyholder benefits and claims and policyholder dividends 9,859 9,784 29,871 28,781 Interest credited to policyholder account balances 1,817 1,600 4,995 6,036 Capitalization of DAC (1,071 ) (1,153 ) (3,149 ) (3,621 ) Amortization of DAC and VOBA 1,054 841 3,174 2,623 Amortization of negative VOBA (107 ) (126 ) (333 ) (410 ) Interest expense on debt 295 317 919 959 Other expenses 4,047 4,098 11,992 12,589 Total expenses 15,894 15,361 47,469 46,957 Income (loss) from continuing operations before provision for income tax 2,952 976 6,728 2,784 Provision for income tax expense (benefit) 858 3 1,916 308 Income (loss) from continuing operations, net of income tax 2,094 973 4,812 2,476 Income (loss) from discontinued operations, net of income tax - 2 (3 ) 1 Net income (loss) 2,094 975 4,809 2,477 Less: Net income (loss) attributable to noncontrolling interests - 3 21 17 Net income (loss) attributable to MetLife, Inc. 2,094 972 4,788 2,460 Less: Preferred stock dividends 30 30 91 91 Net income (loss) available to MetLife, Inc.'s common shareholders $ 2,064 $ 942 $ 4,697 $ 2,369 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 During the three months ended September 30, 2014, income (loss) from continuing operations, before provision for income tax, increased $2.0 billion ($1.1 billion, net of income tax) from the prior period primarily driven by favorable changes in net derivative gains (losses), operating earnings and net investment gains (losses). Also included in income (loss) from continuing operations, before provision for income tax, is a $262 million ($174 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC. 113-------------------------------------------------------------------------------- Table of Contents We manage our investment portfolio using disciplined ALM principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities. Other invested asset classes, including, but not limited to, equity securities, other limited partnership interests and real estate and real estate joint ventures, provide additional diversification and opportunity for long-term yield enhancement in addition to supporting the cash flow and duration objectives of our investment portfolio. We also use derivatives as an integral part of our management of the investment portfolio to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. Additional considerations for our investment portfolio include current and expected market conditions and expectations for changes within our specific mix of products and business segments. In addition, the general account investment portfolio includes, within fair value option ("FVO") and trading securities, contractholder-directed unit-linked investments supporting unit-linked variable annuity type liabilities, which do not qualify as separate account assets. The returns on these contractholder-directed unit-linked investments, which can vary significantly from period to period, include changes in estimated fair value subsequent to purchase, inure to contractholders and are offset in earnings by a corresponding change in policyholder account balances ("PABs") through interest credited to policyholder account balances. The composition of the investment portfolio of each business segment is tailored to the specific characteristics of its insurance liabilities, causing certain portfolios to be shorter in duration and others to be longer in duration. Accordingly, certain portfolios are more heavily weighted in longer duration, higher yielding fixed maturity securities, or certain sub-sectors of fixed maturity securities, than other portfolios. We purchase investments to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currency exchange rates, credit spreads and equity markets; counterparty specific factors such as financial performance, credit rating and collateral valuation; and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of both impairments and realized gains and losses on investments sold. We use freestanding interest rate, equity, credit and currency derivatives to hedge certain invested assets and insurance liabilities. Certain of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged which creates volatility in earnings. Certain variable annuity products with guaranteed minimum benefits contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). We use freestanding derivatives to hedge the market risks inherent in these variable annuity guarantees. The valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged and can be a significant driver of net derivative gains (losses) and volatility in earnings, but does not have an economic impact on us. The variable annuity embedded derivatives and associated freestanding derivative hedges are collectively referred to as "VA program derivatives" in the following table. All other derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as "non-VA program derivatives" in the following table. The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives: 114-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, 2014 2013 (In millions) Non-VA program derivatives Interest rate $ 82 $ (286 ) Foreign currency exchange rate 199 (176 ) Credit (8 ) 65 Equity (4 ) (54 ) Non-VA embedded derivatives 17 6 Total non-VA program derivatives 286 (445 ) VA program derivatives Market risks in embedded derivatives (119 ) 1,247 Nonperformance risk on embedded derivatives 5 (145 ) Other risks in embedded derivatives 32 (210 ) Total embedded derivatives (82 ) 892 Freestanding derivatives hedging embedded derivatives 274 (993 ) Total VA program derivatives 192 (101 ) Net derivative gains (losses) $ 478 $ (546 ) The favorable change in net derivative gains (losses) on non-VA program derivatives was $731 million ($475 million, net of income tax). This was primarily due to the strengthening of the U.S. dollar relative to other key currencies, favorably impacting foreign currency swaps that primarily hedge foreign denominated fixed maturity securities. In addition, long-term interest rates decreased in the current period but increased in the prior period favorably impacting receive-fixed interest rate swaps and interest rate swaptions. These freestanding derivatives were primarily hedging long duration liability portfolios. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged. The favorable change in net derivative gains (losses) on VA program derivatives was $293 million ($190 million, net of income tax). This was due to a favorable change of $242 million ($157 million, net of income tax) on other risks in embedded derivatives and a favorable change of $150 million ($98 million, net of income tax) related to the change in the nonperformance risk adjustment on embedded derivatives, partially offset by an unfavorable change of $99 million ($65 million, net of income tax) on market risks in embedded derivatives, net of the impact of freestanding derivatives hedging those risks. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged. The foregoing $242 million ($157 million, net of income tax) favorable change in other risks in embedded derivatives was primarily due to the following: • Refinements in the valuation model, including an update to the actuarial assumptions, resulted in a favorable period over period change in the valuation of embedded derivatives. • In-force changes and the mismatch of fund performance between actual and modeled funds resulted in a favorable period over period change in the valuation of the embedded derivatives. • Foreign currency translation adjustments caused by a strengthening of the U.S. dollar against the Japanese yen resulted in an unfavorable period over period change in the valuation of the embedded derivatives. • An increase in the risk margin adjustment caused by higher policyholder behavior risks, along with updates to the actuarial assumptions, resulted in an unfavorable period over period change in the valuation of the embedded derivatives. • A combination of other factors, including the cross effect of capital markets changes resulted in a favorable period over period change in the valuation of the embedded derivatives. 115-------------------------------------------------------------------------------- Table of Contents The aforementioned $150 million ($98 million, net of income tax) favorable change in the nonperformance risk adjustment was due to a favorable change of $144 million, before income tax, in our own credit spread and a favorable change of $6 million, before income tax, as a result of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees. We calculate the nonperformance risk adjustment as the change in the embedded derivative discounted at the risk adjusted rate (which includes our own credit spread to the extent that the embedded derivative is in-the-money) less the change in the embedded derivative discounted at the risk free rate. When equity index levels decrease in isolation, the variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk free rate, thus creating a gain from including an adjustment for nonperformance risk. When the risk free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk free interest rate had remained constant. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk free rate, thus creating a gain from including an adjustment for nonperformance risk. When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction. The foregoing $99 million ($65 million, net of income tax) unfavorable change was comprised of a $1.4 billion ($889 million, net of income tax) unfavorable change in market risks in embedded derivatives, which was largely offset by a $1.3 billion ($824 million, net of income tax) favorable change in freestanding derivatives hedging market risks in embedded derivatives. The primary changes in market factors are summarized as follows: • Long-term interest rates decreased in the current period and increased in the prior period, contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. • Key equity index levels were mixed in the current period but increased in the prior period, contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. • Key equity volatility measures increased in the current period and decreased in the prior period, contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. • Changes in foreign currency exchange rates contributed to a favorable change in our embedded derivatives and an unfavorable change in our freestanding derivatives. The favorable change in net investment gains (losses) of $194 million ($126 million, net of income tax) primarily reflects gains on sales of fixed maturity securities and real estate and real estate joint ventures, partially offset by an unfavorable change in other gains (losses), primarily driven by the impact of changes in foreign currency exchange rates. Results for the current period include a $161 million ($105 million, net of income tax) benefit associated with our annual assumption review related to reserves and DAC, of which $137 million ($89 million, net of income tax) was recognized in net derivative gains (losses). Of the $161 million benefit, $82 million ($53 million, net of income tax) was related to DAC and $79 million ($52 million, net of income tax) was associated with reserves. The $137 million gain recognized in net derivative gains (losses) associated with our annual assumption review was included within the other risks in embedded derivatives caption in the table above. As a result of our annual assumption review, changes were made to economic, policyholder behavior, mortality and other assumptions. The most significant impacts were in the Retail Life and Annuity blocks of businesses and are summarized as follows: • Changes in economic assumptions resulted in a decrease in reserves, offset by unfavorable DAC, resulting in a net benefit of $229 million ($149 million, net of income tax). • Changes to policyholder behavior and mortality assumptions resulted in reserve increases, offset by favorable DAC, resulting in a net loss of $175 million ($114 million, net of income tax). • The remaining updates resulted in a decrease in reserves, coupled with favorable DAC, resulting in a benefit of $107 million ($70 million, net of income tax). The most notable update was related to our projection of closed block results. 116-------------------------------------------------------------------------------- Table of Contents Results for the prior period include a $101 million ($69 million, net of income tax) charge associated with our annual assumption review related to reserves and DAC, of which $138 million ($90 million, net of income tax) was recognized in net derivative gains (losses). Of the $101 million charge, $228 million ($150 million, net of income tax) was related to reserves, offset by $127 million ($81 million, net of income tax) associated with DAC. The $138 million loss recorded in net derivative gains (losses) associated with our annual assumption review was included within the other risks in embedded derivatives caption in the table above. Income (loss) from continuing operations, before provision for income tax, related to the divested businesses, excluding net investment gains (losses) and net derivative gains (losses), increased $12 million to a loss of $12 million in the current period from a loss of $24 million in the prior period. Included in this improvement was a decrease in total revenues of $64 million, before income tax, and a decrease in total expenses of $76 million, before income tax. Income tax expense for the three months ended September 30, 2014 was $858 million, or 29% of income (loss) from continuing operations before provision for income tax, compared with $3 million, or less than 1% of income (loss) from continuing operations before provision for income tax, for the three months ended September 30, 2013. The Company's third quarter 2014 effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, and foreign earnings taxed at lower rates than the U.S. statutory rate. The Company's third quarter 2013 effective tax rate was different from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, and foreign earnings taxed at lower rates than the U.S. statutory rate, including tax benefits in Japan related to the 2012 branch restructuring and the estimated reversal of temporary differences. The current period includes a $54 million tax charge related to tax reform in Chile, a $5 million tax charge related to the fee imposed by the PPACA, which was not deductible for income tax purposes, and a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return. As more fully described in "- Non-GAAP and Other Financial Disclosures," we use operating earnings, which does not equate to income (loss) from continuing operations, net of income tax, as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. We believe that the presentation of operating earnings and operating earnings available to common shareholders, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings and operating earnings available to common shareholders should not be viewed as substitutes for income (loss) from continuing operations, net of income tax, and net income (loss) available to MetLife, Inc.'s common shareholders, respectively. Operating earnings available to common shareholders increased $330 million, net of income tax, to $1.8 billion, net of income tax, for the three months ended September 30, 2014 from $1.5 billion, net of income tax, for the three months ended September 30, 2013. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 During the nine months ended September 30, 2014, income (loss) from continuing operations, before provision for income tax, increased $3.9 billion ($2.3 billion, net of income tax) from the prior period primarily driven by a favorable change in net derivative gains (losses), partially offset by an unfavorable change in net investment gains (losses). Also included in income (loss) from continuing operations, before provision for income tax, is a $262 million ($174 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC. 117-------------------------------------------------------------------------------- Table of Contents The variable annuity embedded derivatives and associated freestanding derivative hedges are collectively referred to as "VA program derivatives" in the following table. All other derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as "non-VA program derivatives" in the following table. The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives: Nine Months Ended September 30, 2014 2013 (In millions) Non-VA program derivatives Interest rate $ 502 $ (1,452 ) Foreign currency exchange rate 207 (988 ) Credit 36 124 Equity (44 ) (37 ) Non-VA embedded derivatives (62 ) 108 Total non-VA program derivatives 639 (2,245 ) VA program derivatives Market risks in embedded derivatives 235 4,433 Nonperformance risk on embedded derivatives (3 ) (795 ) Other risks in embedded derivatives (115 ) (85 ) Total embedded derivatives 117 3,553 Freestanding derivatives hedging embedded derivatives 376 (4,174 ) Total VA program derivatives 493 (621 ) Net derivative gains (losses) $ 1,132 $ (2,866 ) The favorable change in net derivative gains (losses) on non-VA program derivatives was $2.9 billion ($1.9 billion, net of income tax). This was primarily due to long-term interest rates decreasing in the current period and increasing in the prior period, favorably impacting receive-fixed interest rate swaps and interest rate swaptions. These freestanding derivatives were primarily hedging long duration liability portfolios. The strengthening of the U.S. dollar relative to other key currencies, as well as the U.S. dollar strengthening less against the Japanese yen in the current period versus the prior period, favorably impacted foreign currency forwards and swaps that primarily hedge foreign denominated fixed maturity securities. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged. The favorable change in net derivative gains (losses) on VA program derivatives was $1.1 billion ($723 million, net of income tax). This was due to a favorable change of $792 million ($515 million, net of income tax) related to the change in the nonperformance risk adjustment on embedded derivatives and a favorable change of $352 million ($228 million, net of income tax) on market risks in embedded derivatives, net of the impact of freestanding derivatives hedging those risks, partially offset by an unfavorable change of $30 million ($20 million, net of income tax) on other risks in embedded derivatives. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged. The aforementioned $792 million ($515 million, net of income tax) favorable change in the nonperformance risk adjustment was due to a favorable change of $529 million, before income tax, as a result of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees, as well as a favorable change of $263 million, before income tax, related to changes in our own credit spread. The foregoing $352 million ($228 million, net of income tax) favorable change is comprised of a $4.6 billion ($2.9 billion, net of income tax) favorable change in freestanding derivatives hedging market risks in embedded derivatives, which was largely offset by a $4.2 billion ($2.7 billion, net of income tax) unfavorable change in market risks in embedded derivatives. 118-------------------------------------------------------------------------------- Table of Contents The primary changes in market factors are summarized as follows: • Long-term interest rates decreased in the current period and increased in the prior period, contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. • Key equity index levels increased less in the current period than in the prior period contributing to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. Changes in foreign currency exchange rates contributed to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives. The foregoing $30 million ($20 million, net of income tax) unfavorable change in other risks in embedded derivatives was primarily due to the following: • An increase in the risk margin adjustment caused by higher policyholder behavior risks, along with updates to the actuarial assumptions, resulted in an unfavorable period over period change in the valuation of the embedded derivatives. • In-force changes and the mismatch of fund performance between actual and modeled funds resulted in an unfavorable period over period change in the valuation of the embedded derivatives. • The cross effect of capital markets changes resulted in a favorable period over period change in the valuation of embedded derivatives. • Foreign currency translation adjustments caused by the Japanese yen weakening less against the U.S. dollar in the current period than in the prior period, resulted in a favorable change in the valuation of the embedded derivatives. • Refinements in the valuation model, including an update to the actuarial assumptions, resulted in a favorable period over period change in the valuation of embedded derivatives. • Other factors, including reserve changes influenced by benefit features and policyholder behavior, resulted in an unfavorable period over period change in the valuation of embedded derivatives. The unfavorable change in net investment gains (losses) of $766 million ($498 million, net of income tax) primarily reflects a loss on the disposition of MAL and lower net gains on sales of fixed maturity securities in the current period. Results for the current period include a $161 million ($105 million, net of income tax) benefit associated with our annual assumption review related to reserves and DAC, of which $137 million ($89 million, net of income tax) was recognized in net derivative gains (losses). Of the $161 million benefit, $82 million ($53 million, net of income tax) was related to DAC and $79 million ($52 million, net of income tax) associated with reserves. The $137 million gain recognized in net derivative gains (losses) associated with our annual assumption review was included within the other risks in embedded derivatives caption in the table above. As a result of our annual assumption review, changes were made to economic, policyholder behavior, mortality and other assumptions. The most significant impacts were in the Retail Life and Annuity blocks of businesses and are summarized as follows: • Changes in economic assumptions resulted in a decrease in reserves, offset by unfavorable DAC, resulting in a net benefit of $229 million ($149 million, net of income tax). • Changes to policyholder behavior and mortality assumptions resulted in reserve increases, offset by favorable DAC, resulting in a net loss of $175 million ($114 million, net of income tax). • The remaining updates resulted in a decrease in reserves, coupled with favorable DAC, resulting in a benefit of $107 million ($70 million, net of income tax). The most notable update was related to our projection of closed block results. Results for the prior period include a $101 million ($69 million, net of income tax) charge associated with our annual assumption review related to reserves and DAC, of which $138 million ($90 million, net of income tax) was recognized in net derivative gains (losses). Of the $101 million charge, $228 million ($150 million, net of income tax) was related to reserves, offset by $127 million ($81 million, net of income tax) associated with DAC. The $138 million loss recorded in net derivative gains (losses) associated with our annual assumption review was included within the other risks in embedded derivatives caption in the table above. Income (loss) from continuing operations, before provision for income tax, related to the divested businesses, excluding net investment gains (losses) and net derivative gains (losses), increased $166 million to income of $8 million in the current period from a loss of $158 million in the prior period. Included in this improvement was a decrease in total revenues of $118 million, before income tax, and a decrease in total expenses of $284 million, before income tax. 119-------------------------------------------------------------------------------- Table of Contents Income tax expense for the nine months ended September 30, 2014 was $1.9 billion, or 28% of income (loss) from continuing operations before provision for income tax, compared with $308 million, or 11% of income (loss) from continuing operations before provision for income tax, for the nine months ended September 30, 2013. The Company's 2014 effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, foreign earnings taxed at lower rates than the U.S. statutory rate and the tax effects of the MAL divestiture. The Company's 2013 effective tax rate was different from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, and foreign earnings taxed at lower rates than the U.S. statutory rate, including tax benefits in Japan related to the 2012 branch restructuring and the estimated reversal of temporary differences. The 2014 period includes a $54 million tax charge related to tax reform in Chile, a $33 million tax charge related to a portion of the aforementioned settlement of a licensing matter and the PPACA fee, both of which were not deductible for income tax purposes, and a $45 million tax charge related to the repatriation of earnings from Japan. These charges were partially offset by a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return. In addition, in 2013, the Company received an income tax refund from the Japanese tax authority and recorded a $119 million reduction to income tax expense. On June 11, 2014, the Internal Revenue Service ("IRS") concluded its audit of the Company's tax returns for the years 2003 through 2006 and issued a Revenue Agent's Report. The Company agreed with certain tax adjustments and protested other tax adjustments to IRS Appeals. The protest was filed on July 10, 2014. Management believes it has established adequate tax liabilities and final resolution of the audit for the years 2003 through 2006 is not expected to have a material impact on the Company's financial statements. Operating earnings available to common shareholders increased $270 million, net of income tax, to $5.0 billion, net of income tax, for the nine months ended September 30, 2014 from $4.7 billion, net of income tax, for the nine months ended September 30, 2013. 120-------------------------------------------------------------------------------- Table of Contents Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings available to common shareholders Three Months Ended September 30, 2014 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Income (loss) from continuing operations, net of income tax $ 823 $ 274 $ 522 $ 149 $ 334 $ 95 $ (103 ) $ 2,094 Less: Net investment gains (losses) 9 (9 ) 180 (4 ) 136 (9 ) (194 ) 109 Less: Net derivative gains (losses) 283 106 28 (61 ) (80 ) 16 186 478 Less: Other adjustments to continuing operations (1) (100 ) (41 ) (31 ) 87 (32 ) 1 (30 ) (146 ) Less: Provision for income tax (expense) benefit (68 ) (19 ) (63 ) (25 ) 4 (9 ) (22 ) (202 ) Operating earnings $ 699 $ 237 $ 408 $ 152 $ 306 $ 96 (43 ) 1,855 Less: Preferred stock dividends 30 30 Operating earnings available to common shareholders $ (73 ) $ 1,825 Three Months Ended September 30, 2013 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Income (loss) from continuing operations, net of income tax $ 313 $ 84 $ 193 $ 116 $ 536 $ 117 $ (386 ) $ 973 Less: Net investment gains (losses) (28 ) (3 ) (15 ) (5 ) 52 10 (96 ) (85 ) Less: Net derivative gains (losses) (202 ) (173 ) (140 ) 3 164 30 (228 ) (546 ) Less: Other adjustments to continuing operations (1) (302 ) (44 ) (7 ) (18 ) (31 ) 9 (72 ) (465 ) Less: Provision for income tax (expense) benefit 186 78 57 3 94 (17 ) 143 544 Operating earnings $ 659 $ 226 $ 298 $ 133 $ 257 $ 85 (133 ) 1,525 Less: Preferred stock dividends 30 30 Operating earnings available to common shareholders $ (163 ) $ 1,495 __________________(1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments. 121-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Income (loss) from continuing operations, net of income tax $ 2,017 $ 735 $ 891 $ 335 $ 1,092 $ 335 $ (593 ) $ 4,812 Less: Net investment gains (losses) 25 (10 ) (556 ) 11 375 (16 ) (256 ) (427 ) Less: Net derivative gains (losses) 579 293 256 (57 ) (122 ) 103 80 1,132 Less: Other adjustments to continuing operations (1) (521 ) (122 ) (55 ) (146 ) (50 ) 31 (60 ) (923 ) Less: Provision for income tax (expense) benefit (29 ) (56 ) 109 32 (64 ) (60 ) 30 (38 ) Operating earnings $ 1,963 $ 630 $ 1,137 $ 495 $ 953 $ 277 (387 ) 5,068 Less: Preferred stock dividends 91 91 Operating earnings available to common shareholders $ (478 ) $ 4,977 Nine Months Ended September 30, 2013 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Income (loss) from continuing operations, net of income tax $ 1,015 $ 241 $ 832 $ 450 $ 425 $ 269 $ (756 ) $ 2,476 Less: Net investment gains (losses) 68 (14 ) 4 4 265 49 (37 ) 339 Less: Net derivative gains (losses) (779 ) (612 ) (244 ) (16 ) (874 ) 20 (361 ) (2,866 ) Less: Other adjustments to continuing operations (1) (598 ) (129 ) 77 88 (417 ) (4 ) (311 ) (1,294 ) Less: Provision for income tax (expense) benefit 458 265 57 (27 ) 531 (36 ) 251 1,499 Operating earnings $ 1,866 $ 731 $ 938 $ 401 $ 920 $ 240 (298 ) 4,798 Less: Preferred stock dividends 91 91 Operating earnings available to common shareholders $ (389 ) $ 4,707 __________________(1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments. 122-------------------------------------------------------------------------------- Table of Contents Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses Three Months Ended September 30, 2014 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Total revenues $ 5,717 $ 4,822 $ 2,268 $ 1,425 $ 3,391 $ 1,107 $ 116 $ 18,846 Less: Net investment gains (losses) 9 (9 ) 180 (4 ) 136 (9 ) (194 ) 109 Less: Net derivative gains (losses) 283 106 28 (61 ) (80 ) 16 186 478 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) - - - - 7 1 - 8 Less: Other adjustments to revenues (1) (13 ) (41 ) (15 ) 15 145 238 4 333 Total operating revenues $ 5,438 $ 4,766 $ 2,075 $ 1,475 $ 3,183 $ 861 $ 120 $ 17,918 Total expenses $ 4,460 $ 4,402 $ 1,463 $ 1,165 $ 2,910 $ 967 $ 527 $ 15,894 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (28 ) - - - (1 ) 2 - (27 ) Less: Other adjustments to expenses (1) 115 - 16 (72 ) 185 236 34 514 Total operating expenses $ 4,373 $ 4,402 $ 1,447 $ 1,237 $ 2,726 $ 729 $ 493 $ 15,407 Three Months Ended September 30, 2013 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Total revenues $ 4,803 $ 4,280 $ 1,881 $ 1,310 $ 3,220 $ 1,022 $ (179 ) $ 16,337 Less: Net investment gains (losses) (28 ) (3 ) (15 ) (5 ) 52 10 (96 ) (85 ) Less: Net derivative gains (losses) (202 ) (173 ) (140 ) 3 164 30 (228 ) (546 ) Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (3 ) - - - 1 - - (2 ) Less: Other adjustments to revenues (1) (23 ) (44 ) 80 44 (75 ) 151 23 156 Total operating revenues $ 5,059 $ 4,500 $ 1,956 $ 1,268 $ 3,078 $ 831 $ 122 $ 16,814 Total expenses $ 4,333 $ 4,160 $ 1,584 $ 1,159 $ 2,689 $ 845 $ 591 $ 15,361 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (52 ) - - - (1 ) - - (53 ) Less: Other adjustments to expenses (1) 328 - 87 62 (42 ) 142 95 672 Total operating expenses $ 4,057 $ 4,160 $ 1,497 $ 1,097 $ 2,732 $ 703 $ 496 $ 14,742 __________________ (1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments. 123-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Total revenues $ 16,509 $ 14,447 $ 5,909 $ 4,217 $ 9,592 $ 3,266 $ 257 $ 54,197 Less: Net investment gains (losses) 25 (10 ) (556 ) 11 375 (16 ) (256 ) (427 ) Less: Net derivative gains (losses) 579 293 256 (57 ) (122 ) 103 80 1,132 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (1 ) - - - 8 7 - 14 Less: Other adjustments to revenues (1) (58 ) (122 ) 39 39 95 620 30 643Total operating revenues $ 15,964 $ 14,286 $ 6,170 $ 4,224 $ 9,236 $ 2,552 $ 403 $ 52,835 Total expenses $ 13,439 $ 13,318 $ 4,516 $ 3,758 $ 8,011 $ 2,791 $ 1,636 $ 47,469 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) 33 - - - (5 ) 9 - 37 Less: Other adjustments to expenses (1) 429 - 94 185 158 587 90 1,543Total operating expenses $ 12,977 $ 13,318 $ 4,422 $ 3,573 $ 7,858 $ 2,195 $ 1,546 $ 45,889 Nine Months Ended September 30, 2013 Group, Voluntary Corporate & Worksite Benefit Latin Corporate Retail Benefits Funding America Asia EMEA & Other Total (In millions) Total revenues $ 14,226 $ 12,904 $ 5,949 $ 3,725 $ 9,832 $ 2,938 $ 167 $ 49,741 Less: Net investment gains (losses) 68 (14 ) 4 4 265 49 (37 ) 339 Less: Net derivative gains (losses) (779 ) (612 ) (244 ) (16 ) (874 ) 20 (361 ) (2,866 ) Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (9 ) - - - 4 5 - - Less: Other adjustments to revenues (1) (94 ) (129 ) 249 57 999 412 88 1,582Total operating revenues $ 15,040 $ 13,659 $ 5,940 $ 3,680 $ 9,438 $ 2,452 $ 477 $ 50,686 Total expenses $ 12,698 $ 12,558 $ 4,667 $ 3,133 $ 9,526 $ 2,560 $ 1,815 $ 46,957 Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) (228 ) - - - (12 ) 5 - (235 ) Less: Other adjustments to expenses (1) 723 - 172 (31 ) 1,432 416 399 3,111Total operating expenses $ 12,203 $ 12,558 $ 4,495 $ 3,164 $ 8,106 $ 2,139 $ 1,416 $ 44,081 __________________ (1) See definitions of operating revenues and operating expenses under "- Non-GAAP and Other Financial Disclosures" for the components of such adjustments. 124-------------------------------------------------------------------------------- Table of Contents Consolidated Results - Operating Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 9,685 $ 9,054 $ 28,755 $ 27,314 Universal life and investment-type product policy fees 2,522 2,276 7,205 6,768 Net investment income 5,193 4,998 15,373 15,137 Other revenues 518 486 1,502 1,467 Total operating revenues 17,918 16,814 52,835 50,686 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 9,854 9,243 29,191 27,442 Interest credited to policyholder account balances 1,426 1,472 4,252 4,547 Capitalization of DAC (1,071 ) (1,153 ) (3,148 ) (3,621 ) Amortization of DAC and VOBA 999 979 3,074 3,100 Amortization of negative VOBA (96 ) (113 ) (298 ) (368 ) Interest expense on debt 292 288 885 863 Other expenses 4,003 4,026 11,933 12,118 Total operating expenses 15,407 14,742 45,889 44,081 Provision for income tax expense (benefit) 656 547 1,878 1,807 Operating earnings 1,855 1,525 5,068 4,798 Less: Preferred stock dividends 30 30 91 91 Operating earnings available to common shareholders $ 1,825 $ 1,495 $ 4,977 $ 4,707 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. The increase in operating earnings was the result of higher net investment income from portfolio growth and improved yields, despite the sustained low interest rate environment, higher asset-based fee revenues from business growth and a decline in expenses. Excluding the impact of the aforementioned tax reform, the fourth quarter 2013 acquisition of ProVida in Chile increased operating earnings by $54 million. Changes in foreign currency exchange rates had an $11 million negative impact on results compared to the prior period. We benefited from strong sales and business growth across many of our products. However, we continue to focus on pricing discipline and risk management which resulted in a decrease in sales of our variable annuity and Japan life and accident & health products. Excluding the impact of the divested businesses and the acquisition of ProVida, growth in our investment portfolios in the majority of our segments generated higher net investment income. Growth in our businesses resulted in higher asset-based fees, but also increased DAC amortization. The changes in business growth discussed above resulted in a $137 million increase in operating earnings. 125-------------------------------------------------------------------------------- Table of Contents Market factors, including the improved equity markets and the sustained low interest rate environment, continued to impact our investment yields, as well as our crediting rates. Excluding the results of the divested businesses, the acquisition of ProVida and the impact of inflation-indexed investments in the Latin America segment, investment yields increased. Certain of our inflation-indexed products are backed by inflation-indexed investments. Changes in inflation cause fluctuations in net investment income with a corresponding fluctuation in policyholder benefits, resulting in a minimal impact to operating earnings. Investment yields were positively impacted by higher returns on other limited partnership interests and real estate joint ventures, increased prepayment fees and higher income on interest rate and currency derivatives. Yields were also favorably impacted by increased foreign currency-denominated fixed annuities in Japan resulting in increased holdings of higher yielding foreign currency-denominated fixed maturity securities. These increases in yields were partially offset by the adverse impacts of the sustained low interest rate environment on fixed maturity securities and mortgage loan yields, as well as increased holdings of lower yielding Japanese government securities in the Japan fixed annuity business. The sustained low interest rate environment also resulted in lower interest credited expense as we set interest credited rates lower on both new business and certain in-force business with rate resets that are contractually tied to external indices or contain discretionary rate reset provisions. Very favorable equity market returns in the prior period drove lower DAC amortization in that period as compared to the current period where equity returns were much less favorable. Continued strong equity market performance since the last period increased our average separate account balances, which drove higher asset-based fees, partially offset by asset-based commissions, which are also driven, in part, by separate account balances. The changes in market factors discussed above resulted in a $14 million increase in operating earnings. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a $12 million decrease in operating earnings. In addition to our annual updates, refinements to DAC and certain insurance-related liabilities that were recorded in both periods increased operating earnings by $36 million. Also, the prior period includes a reserve strengthening in Australia within our Asia segment of $57 million, net of reinsurance. A decrease of $47 million in other operating expenses, primarily driven by lower employee-related costs, was partially offset by the fee imposed by the PPACA, which reduced operating earnings by $15 million in the current period. Favorable mortality in our Corporate Benefit Funding segment was more than offset by less favorable mortality experience in our Retail and Group, Voluntary & Worksite Benefits segments. Favorable morbidity experience in our Retail segment was partially offset by unfavorable experience in our Group, Voluntary & Worksite Benefits segment. In addition, we had unfavorable claims experience in our Asia segment. The combined impact of mortality, morbidity and claims experience decreased operating earnings by $5 million. The Company's effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, and foreign earnings taxed at lower rates than the U.S. statutory rate. In the current period, the Company realized a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return, as well as additional tax benefits of $27 million related to the separate account dividends received deduction and $12 million primarily related to the repatriation of earnings from Japan and other foreign tax benefits. This was slightly offset by a $5 million tax charge related to the PPACA fee, which is not deductible for income tax purposes. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. The primary drivers of the increase in operating earnings were higher net investment income from portfolio growth, higher asset-based fee revenues from continued strong equity market performance and a decrease in interest credited expense, partially offset by unfavorable mortality, morbidity and claims experience and a decrease in investment yields. Excluding the impact of the aforementioned tax reform charge in Chile, the fourth quarter 2013 acquisition of ProVida increased operating earnings by $165 million. Changes in foreign currency exchange rates had a $75 million negative impact on results compared to the prior period. We benefited from strong sales and business growth across many of our products. However, we continue to focus on pricing discipline and risk management which resulted in a decrease in sales of our variable annuity and Japan life and accident & health products. Excluding the impact of the divested businesses and the acquisition of ProVida, growth in our investment portfolios in the majority of our segments generated higher net investment income. Our property & casualty businesses benefited from an increase in average premium per policy. These positive results were partially offset by an associated increase in DAC amortization. The changes in business growth discussed above resulted in a $255 million increase in operating earnings. 126-------------------------------------------------------------------------------- Table of Contents Market factors, including the sustained low interest rate environment, continued to impact our investment yields, as well as our crediting rates. Excluding the results of the divested businesses, the acquisition of ProVida and the impact of inflation-indexed investments in the Latin America segment, investment yields decreased. Certain of our inflation-indexed products are backed by inflation-indexed investments. Changes in inflation cause fluctuations in net investment income with a corresponding fluctuation in policyholder benefits, resulting in a minimal impact to operating earnings. Investment yields were negatively impacted by the adverse impact of the sustained low interest rate environment on fixed maturity securities and mortgage loans yields, as well as increased holdings of lower yielding Japanese government securities in the Japan fixed annuity business. These decreases were partially offset by higher returns on other limited partnership interests and real estate joint ventures, increased prepayment fees and higher income on interest rate derivatives. Yields were also favorably impacted by increased sales of foreign currency-denominated fixed annuities in Japan, resulting in an increase in higher yielding foreign currency-denominated fixed maturity securities. The sustained low interest rate environment also resulted in lower interest credited expense as we set interest credited rates lower on both new business and certain in-force business with rate resets that are contractually tied to external indices or contain discretionary rate reset provisions. Our average separate account balances grew with the equity markets driving higher fee income in our annuity business. However, this was partially offset by higher DAC amortization due to the significant prior period equity market increase, as well as higher asset-based commissions and costs associated with our variable annuity guaranteed minimum death benefits ("GMDBs"). The changes in market factors discussed above resulted in a $49 million increase in operating earnings. Less favorable mortality and morbidity was driven by our Group, Voluntary & Worksite Benefits segment. In addition, in our property & casualty businesses, catastrophe-related losses increased due to severe storm activity in the current period. Non-catastrophe related claim costs also increased as a result of severe winter weather in the current period. Claims experience in our Latin America and Asia segments was also unfavorable. The combined impact of mortality, morbidity and claims experience decreased operating earnings by $194 million. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a $12 million decrease in operating earnings. In addition to our annual updates, refinements to DAC and certain insurance-related liabilities that were recorded in both periods increased operating earnings by $71 million. Such refinements include a favorable reserve adjustment in the current period related to disability premium waivers in our life business within our Retail segment and a write-down of DAC and VOBA in the prior period related to pension reform in Poland within our EMEA segment. Also, the prior period includes a reserve strengthening in Australia within our Asia segment of $57 million, net of reinsurance. A $59 million decrease in expenses was primarily driven by lower employee-related costs. In addition, our results for the current period include charges totaling $57 million related to the aforementioned settlement of a licensing matter with the Department of Financial Services and the District Attorney, New York County. The PPACA fee reduced operating earnings by $44 million in the current period. The Company's effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income, tax credits for low income housing, and foreign earnings taxed at lower rates than the U.S. statutory rate. In the current period, the Company realized a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return, as well as additional tax benefits of $27 million related to the separate account dividends received deduction and $31 million primarily related to foreign earnings taxed at rates lower than the U.S. and other tax preference items. However, this was partially offset by a $33 million tax charge related to a portion of the aforementioned settlement of a licensing matter and the PPACA fee, both of which were not deductible for income tax purposes. The Company also recorded an $8 million tax charge related to the repatriation of earnings from Japan. 127-------------------------------------------------------------------------------- Table of Contents Segment Results and Corporate & Other Retail Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 1,869 $ 1,607 $ 5,405 $ 4,735 Universal life and investment-type product policy fees 1,311 1,257 3,814 3,662 Net investment income 1,983 1,928 5,960 5,876 Other revenues 275 267 785 767 Total operating revenues 5,438 5,059 15,964 15,040 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 2,555 2,234 7,400 6,659 Interest credited to policyholder account balances 567 582 1,683 1,750 Capitalization of DAC (239 ) (318 ) (722 ) (1,036 ) Amortization of DAC and VOBA 335 315 1,142 1,042 Interest expense on debt (1 ) (1 ) (1 ) - Other expenses 1,156 1,245 3,475 3,788 Total operating expenses 4,373 4,057 12,977 12,203 Provision for income tax expense (benefit) 366 343 1,024 971 Operating earnings $ 699 $ 659 $ 1,963 $ 1,866 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts (with the exception of sales data) discussed below are net of income tax. Changes to our guarantee features since 2012, along with continued management of sales in the current period by focusing on pricing discipline and risk management, drove a $1.2 billion, or 43%, decrease in variable annuity sales. Life sales were also lower, mainly driven by the discontinuance of all but one of our secondary guarantees on universal life products. These declines were partially offset by an increase in fixed and indexed annuity sales. A $40 million increase in operating earnings was attributable to business growth. Our life businesses had positive net flows, despite a decline in universal life sales, which resulted in higher net investment income. This favorable impact was partially offset by lower fees as the prior period benefited from the first year fees received on the now discontinued secondary guarantees on our universal life products. In our deferred annuities business, surrenders and withdrawals exceeded sales for the period, resulting in negative cash flows contributing to a reduction in interest credited expenses in the general account and a decrease in average separate account balances and, consequently, asset-based fees. Additionally, costs associated with our variable annuity GMDBs were lower. In our property & casualty business, an increase in average premium per policy in both our auto and homeowners businesses contributed to the increase in operating earnings. In addition, we earned more income on a larger invested asset base, which resulted from a higher amount of allocated equity as compared to the prior period. A $10 million decrease in operating earnings was attributable to changes in market factors, including equity markets and interest rates. Very favorable equity market returns in the prior period drove lower DAC amortization in that period as compared to the current period where equity returns were much less favorable. Also, equity markets drove higher net investment income from other limited partnership interests. Continued strong equity market performance since the last period increased our average separate account balances, which drove higher asset-based fees, partially offset by asset-based commissions, which are also driven, in part, by separate account balances. The sustained low interest rate environment resulted in a decline in net investment income on our fixed maturity securities as proceeds from maturing investments were reinvested at lower yields. This negative interest rate impact was partially offset by lower interest credited expense as we reduced interest credited rates on contracts with discretionary rate reset provisions. 128-------------------------------------------------------------------------------- Table of Contents Favorable morbidity experience in our individual disability income business resulted in an $8 million increase in operating earnings. Less favorable mortality experience in our variable and universal life business, partially offset by favorable mortality experience in the traditional life business, resulted in a $15 million decrease in operating earnings. In our property & casualty business, catastrophe-related losses decreased by $6 million compared to the prior period. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates which occurred in both periods resulted in a net operating earnings decrease of $11 million and were primarily related to unfavorable DAC unlockings in the variable annuity business, partially offset by favorable DAC unlockings in our traditional and universal life businesses. A decline in expenses of $29 million contributed to the increase in operating earnings, mainly the result of lower employee-related costs. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. An $89 million increase in operating earnings was attributable to business growth. Our life businesses had positive net flows, despite a decline in universal life sales, which resulted in higher net investment income. This favorable impact was partially offset by increases in DAC amortization and interest credited expenses, as well as lower fees as the prior period benefited from the first year fees received on the now discontinued secondary guarantees on our universal life products. In our deferred annuities business, surrenders and withdrawals exceeded sales for the period, resulting in negative cash flows contributing to a decrease in average separate account balances and, consequently, asset-based fees, partially offset by a reduction in interest credited expenses in the general account. Additionally, costs associated with our variable annuity GMDBs were lower. In our property & casualty business, an increase in average premium per policy in both our auto and homeowners businesses contributed to the increase in operating earnings. In addition, we earned more income on a larger invested asset base, which resulted from a higher amount of allocated equity as compared to the prior period. Changes in market factors, including equity markets and interest rates, resulted in a slight net increase in operating earnings. Strong equity market performance increased our average separate account balances, driving an increase in asset-based fee income. This positive equity market performance also drove higher net investment income from private equity investments. These positive impacts were partially offset by higher asset-based commissions, which are, in part, driven by separate account balances, costs associated with our variable annuity GMDBs, and higher DAC amortization. The more favorable equity market returns in the prior period drove lower DAC amortization in that period compared to the current period where equity returns were much less favorable. The sustained low interest rate environment resulted in a decline in net investment income on our fixed maturity securities and mortgage loans as proceeds from maturing investments were reinvested at lower yields. This negative interest rate impact was partially offset by lower interest credited expense as we reduced interest credited rates on contracts with discretionary rate reset provisions, and lower DAC amortization in our life business. Lower returns in our hedge funds also decreased operating earnings and were partially offset by higher income from real estate joint ventures. Less favorable mortality experience in our variable and universal life business, primarily driven by three large, unreinsured claims, partially offset by favorable experience in the immediate annuities and traditional life businesses, resulted in a $27 million decrease in operating earnings. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings decrease of $11 million and were primarily related to unfavorable DAC unlockings in the variable annuity business, partially offset by favorable DAC unlockings in our traditional and universal life businesses. Refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in an $8 million decrease in operating earnings, which included a $56 million favorable reserve adjustment in the current period related to disability premium waivers in our life business. Operating earnings increased due to a decline in expenses of $59 million, mainly the result of lower employee-related costs. 129-------------------------------------------------------------------------------- Table of Contents Group, Voluntary & Worksite Benefits Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 4,010 $ 3,767 $ 12,050 $ 11,438 Universal life and investment-type product policy fees 180 171 538 521 Net investment income 473 459 1,384 1,384 Other revenues 103 103 314 316 Total operating revenues 4,766 4,500 14,286 13,659 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 3,729 3,527 11,299 10,681 Interest credited to policyholder account balances 38 38 117 116 Capitalization of DAC (37 ) (37 ) (107 ) (105 ) Amortization of DAC and VOBA 38 37 109 104 Interest expense on debt - - - 1 Other expenses 634 595 1,900 1,761 Total operating expenses 4,402 4,160 13,318 12,558 Provision for income tax expense (benefit) 127 114 338 370 Operating earnings $ 237 $ 226 $ 630 $ 731 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. The macroeconomic environment continues to signal stronger growth and is likely to instill further confidence in the U.S. economy. The improvement in the U.S. economy and overall employment remain slow and steady. In the current period, premiums increased across the segment. Our term life, dental and disability businesses generated premium growth through stronger sales and improved persistency, with the dental business also benefiting from pricing actions on existing business. In addition, premiums in our term life business increased due to the impact of experience adjustments on our participating contracts; however, changes in premiums for these contracts were almost entirely offset by the related changes in policyholder benefits. The introduction of new products also drove growth in the voluntary benefits business. Although we have discontinued selling our long-term care ("LTC") product, we continue to collect premiums and administer the existing block of business, contributing to asset growth in the segment. Favorable claims experience in accidental death and dismemberment, within our group life business, and in our disability business was partially offset by increased utilization of services across most channels of our dental business, resulting in a $7 million increase in operating earnings. Operating earnings from our term life business increased by $17 million as a result of a favorable reserve refinement in the current period; however, this was largely offset by a $15 million decrease due to increased claims severity, primarily in our group universal life business. In our LTC business, increases in new and pending claims resulted in an $11 million decrease in operating earnings; however, this was almost entirely offset by a $10 million favorable reserve refinement in the current period. In our property & casualty business, catastrophe-related losses increased by $5 million as compared to the prior period, mainly due to severe storm activity in the current period. The impact of changes in market factors, including higher returns on other limited partnership interests, real estate joint ventures and increased prepayment fee income, partially offset by lower yields on our fixed maturity securities, resulted in higher investment yields. Unlike in the Retail and Corporate Benefit Funding segments, a change in investment yield does not necessarily drive a corresponding change in the rates credited on certain insurance liabilities. The increase in investment yields, along with a slight decrease in crediting rates, improved operating earnings by $5 million. 130-------------------------------------------------------------------------------- Table of Contents The increase in average premium per policy in both our auto and homeowners businesses improved operating earnings by $12 million. Growth in premiums and deposits in the current period, partially offset by a reduction in PABs and allocated equity, resulted in an increase in our average invested assets, increasing operating earnings by $7 million. Consistent with the growth in average invested assets from premiums and deposits, primarily in our LTC business, interest credited on long-duration contracts increased by $8 million. The PPACA fee increased other expenses by $15 million in the current period; however, the impact of the assessment was mostly offset by a related increase in premiums in the dental business. The remaining increase in other operating expenses, including higher marketing and sales support costs in our property & casualty business, was more than offset by the remaining increase in premiums, fees and other revenues. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Our life business experienced less favorable mortality in the current period, mainly due to increased claims incidence and severity in the group universal life business and an increase in claims severity in the term life business, which resulted in a $52 million decrease in operating earnings. Unfavorable claims experience in our disability business, driven by higher approvals and lower net closures, coupled with increased utilization of services across most channels of our dental business, were partially offset by a decline in new and pending claims in our LTC business, resulting in a $56 million decrease in operating earnings. The impact of favorable reserve refinements in the current period resulted in an increase in operating earnings of $50 million. In our property & casualty business, catastrophe-related losses increased $19 million as compared to the prior period, mainly due to severe storm activity in the current period. In addition, severe winter weather in the current period increased non-catastrophe claim costs by $10 million, which was the result of higher frequencies in both our auto and homeowners businesses, as well as higher severities in our homeowners business, partially offset by lower severities in our auto business. These unfavorable results were partially offset by additional favorable development of prior year non-catastrophe losses, which improved operating earnings by $8 million. The impact of changes in market factors, including lower returns on our fixed maturity securities and mortgage loans, and decreased income on alternative investments and interest rate derivatives, partially offset by higher returns on our real estate joint ventures and private equity investments, resulted in lower investment yields. The decrease in investment yields, slightly offset by lower crediting rates in the current period, reduced operating earnings by $25 million. The increase in average premium per policy in both our auto and homeowners businesses improved operating earnings by $32 million. Growth in premiums and deposits in the current period, partially offset by a reduction in PABs and allocated equity, resulted in an increase in our average invested assets, increasing operating earnings by $27 million. Consistent with the growth in average invested assets from premiums and deposits, primarily in our LTC business, interest credited on long-duration contracts and PABs increased by $19 million. The PPACA fee increased other expenses by $44 million in the current period; however, the impact of the assessment was mostly offset by a related increase in premiums in the dental business. The remaining increase in other operating expenses, including higher marketing and sales support costs in our property & casualty business, was partially offset by the remaining increase in premiums, fees and other revenues. 131-------------------------------------------------------------------------------- Table of Contents Corporate Benefit Funding Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 451 $ 450 $ 1,438 $ 1,369 Universal life and investment-type product policy fees 60 54 172 187 Net investment income 1,493 1,384 4,346 4,176 Other revenues 71 68 214 208 Total operating revenues 2,075 1,956 6,170 5,940 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 1,033 1,071 3,194 3,168 Interest credited to policyholder account balances 279 292 844 940 Capitalization of DAC (11 ) (2 ) (30 ) (25 ) Amortization of DAC and VOBA 5 4 15 21 Interest expense on debt 2 3 6 7 Other expenses 139 129 393 384 Total operating expenses 1,447 1,497 4,422 4,495 Provision for income tax expense (benefit) 220 161 611 507 Operating earnings $ 408 $ 298 $ 1,137 $ 938 In the first quarter of 2014, the Company entered into a definitive agreement to sell MAL and began reporting such operations as divested business. The sale of MAL was completed in the second quarter of 2014. See "- Executive Summary" for further information. Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. The sustained low interest rate environment has contributed to the underfunding of pension plans, which limits our customers' ability to engage in full pension plan closeout terminations. However, we expect that customers may choose to close out portions of pension plans over time, at costs reflecting current interest rates and availability of capital. Lower pension plan closeouts in the current period resulted in a decrease in premiums. However, competitive pricing and a relative increase in participation drove an increase in structured settlement sales in the current period. Income annuity sales were also strong in the current period, rebounding from the discontinuance of one contract in the prior period. Changes in premiums for these businesses were almost entirely offset by the related changes in policyholder benefits. The impact of changes in market factors drove higher investment yields, including higher returns on other limited partnership interests and real estate joint ventures, and higher income on interest rate derivatives. These favorable changes were partially offset by the impact of the sustained low interest rate environment on fixed maturity securities. Many of our funding agreement and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. The impact of lower interest credited expense and higher investment returns resulted in an increase in operating earnings of $24 million. Increases in allocated equity and funding agreement issuances resulted in higher invested assets, which drove an increase in net investment income that was slightly offset by the related increase in interest credited expense and resulted in a $50 million increase in operating earnings. In addition, strong investment performance and large case sales for our separate account products drove higher average account balances which resulted in a slight increase in separate account fees. Favorable mortality in both periods, spread across products, resulted in a $20 million increase in operating earnings. The net impact of insurance liability refinements that were recorded in both periods resulted in an $11 million increase in operating earnings. 132-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. The impact of changes in market factors drove higher investment yields, including higher income on interest rate derivatives, improved returns on real estate joint ventures and private equity investments, and increased prepayment fees. These favorable changes were partially offset by the impact of the sustained low interest rate environment on fixed maturity securities and mortgage loans. Many of our funding agreements and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. The impact of lower interest credited expense and higher investment returns resulted in an increase in operating earnings of $95 million. Increases in allocated equity and other liabilities resulted in higher invested assets, which drove an increase in net investment income that was slightly offset by the related increase in interest credited expense and resulted in a $64 million increase in operating earnings. In addition, strong investment performance and large case sales for our separate account products drove higher average account balances which resulted in an increase in separate account fees of $6 million. Favorable mortality in the current period, primarily in our structured settlements business, resulted in a $14 million increase in operating earnings. The net impact of insurance liability refinements that were recorded in both periods increased operating earnings by $16 million. Latin America Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 794 $ 692 $ 2,242 $ 2,077 Universal life and investment-type product policy fees 328 222 956 682 Net investment income 346 354 1,003 912 Other revenues 7 - 23 9 Total operating revenues 1,475 1,268 4,224 3,680 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 719 637 2,066 1,792 Interest credited to policyholder account balances 97 106 295 313 Capitalization of DAC (97 ) (103 ) (279 ) (316 ) Amortization of DAC and VOBA 101 63 261 220 Amortization of negative VOBA - (1 ) (1 ) (2 ) Interest expense on debt - - - - Other expenses 417 395 1,231 1,157 Total operating expenses 1,237 1,097 3,573 3,164 Provision for income tax expense (benefit) 86 38 156 115 Operating earnings $ 152 $ 133 $ 495 $ 401 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $19 million over the prior period. The impact of changes in foreign currency exchange rates decreased operating earnings by $7 million for the third quarter of 2014 compared to the prior period. A tax reform bill was enacted in Chile on September 29, 2014 which includes, among other things, a gradual increase in the corporate tax rate. Our Chile businesses, including ProVida, incurred a one-time tax charge of $41 million as a result of this legislation. The fourth quarter 2013 acquisition of ProVida increased operating earnings by $54 million, which excludes the impact of the aforementioned tax reform. 133-------------------------------------------------------------------------------- Table of Contents Latin America also experienced organic growth and increased sales of retirement, life and accident & health products in several countries. The increase in premiums for these products was partially offset by related changes in policyholder benefits. Growth in our businesses and the impact of inflation drove an increase in average invested assets, which generated higher net investment income and higher policy fee income, partially offset by a corresponding increase in interest credited on certain insurance liabilities. Increases in marketing costs and commissions resulted in higher operating expenses. The items discussed above were the primary drivers of a $12 million increase in operating earnings. The net impact of changes in market factors resulted in a $12 million decrease in operating earnings. This decrease was primarily driven by the unfavorable impact of inflation, lower investment yields from alternative investments and lower income on derivatives in Chile, partially offset by higher investment yields on fixed income securities in Chile. Higher interest credited expense also decreased operating earnings. Lower employee- and information technology-related costs across several countries increased operating earnings by $8 million. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. This annual update resulted in a net operating earnings decrease of $7 million. In addition to our annual updates, refinements to DAC and other adjustments recorded in both periods resulted in an $11 million increase in operating earnings. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $94 million over the prior period. The impact of changes in foreign currency exchange rates decreased operating earnings by $33 million compared to the prior period. Our Chile businesses, including ProVida, incurred a one-time tax charge of $41 million as a result of the aforementioned tax reform. The fourth quarter 2013 acquisition of ProVida increased operating earnings by $165 million, which excludes the impact of the aforementioned tax reform. Latin America experienced organic growth and increased sales of life and accident & health products in several countries, as well as in our U.S. sponsored direct business. This was partially offset by decreased pension sales in Mexico and Brazil. The increase in premiums for these products was partially offset by related changes in policyholder benefits. Growth in our businesses and the impact of inflation drove an increase in average invested assets, which generated higher net investment income and higher policy fee income, partially offset by a corresponding increase in interest credited on certain insurance liabilities. Increases in marketing costs and commissions resulted in higher operating expenses. Business growth also drove an increase in DAC amortization. The items discussed above were the primary drivers of a $61 million increase in operating earnings. The net impact of changes in market factors resulted in an $11 million decrease in operating earnings. This decrease was primarily driven by the unfavorable impact of inflation, higher interest credited expense and lower yields from alternative investments in Chile, partially offset by higher investment yields on fixed income securities in Chile, Argentina and Brazil. Higher expenses, primarily generated by employee- and information technology-related costs across several countries, decreased operating earnings by $24 million. In addition, unfavorable claims experience in Mexico, Chile, Brazil, Argentina and Uruguay resulted in a $28 million decrease in operating earnings. These decreases were partially offset by increased operating earnings of $17 million primarily related to a tax benefit in Argentina due to the devaluation of the peso. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. This annual update resulted in a net operating earnings decrease of $7 million. 134-------------------------------------------------------------------------------- Table of Contents Asia Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 1,939 $ 1,922 $ 5,742 $ 5,900 Universal life and investment-type product policy fees 487 438 1,276 1,324 Net investment income 730 696 2,140 2,151 Other revenues 27 22 78 63 Total operating revenues 3,183 3,078 9,236 9,438 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 1,535 1,506 4,357 4,354 Interest credited to policyholder account balances 394 407 1,175 1,286 Capitalization of DAC (507 ) (515 ) (1,458 ) (1,583 ) Amortization of DAC and VOBA 367 393 1,067 1,186 Amortization of negative VOBA (89 ) (99 ) (275 ) (325 ) Other expenses 1,026 1,040 2,992 3,188 Total operating expenses 2,726 2,732 7,858 8,106 Provision for income tax expense (benefit) 151 89 425 412 Operating earnings $ 306 $ 257 $ 953 $ 920 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $49 million over the prior period. The impact of changes in foreign currency exchange rates increased operating earnings by $1 million for the third quarter of 2014 compared to the prior period. Asia sales grew compared to the prior period mainly driven by strong group sales in Australia, continued accident & health sales growth in China and strong agency sales in Korea. This was partially offset by lower sales of life and accident & health products in Japan consistent with our focus on disciplined pricing and risk management. Asia's premiums, fees and other revenues increased from the prior period primarily driven by growth in our group business in Australia and higher surrender fee income in Japan. Positive net flows in Japan and Korea, combined with growth in our life businesses in India and Bangladesh, resulted in higher average invested assets and generated an increase in net investment income. Changes in premiums for these businesses were offset by related changes in policyholder benefits and DAC amortization. The combined impact of the items discussed above improved operating earnings by $38 million. Investment yields were positively impacted by increased sales of foreign currency-denominated fixed annuities resulting in an increase in higher yielding foreign currency-denominated fixed maturity securities in Japan and increased prepayment fee income. These increases in yields were partially offset by the adverse impact of the low interest rate environment on mortgage loans and an increase in lower yielding Japanese government securities combined with lower returns on our real estate investments. Increases in investment yields, combined with the impact of foreign currency hedges, resulted in a $7 million increase in operating earnings. The prior period results included a strengthening of group and permanent disability claim reserves of $57 million, net of reinsurance, in Australia and a favorable liability refinement of $13 million in China. In addition, refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in an $8 million decrease in operating earnings. Current period results include $6 million of unfavorable claims experience primarily in our life business and due to regulatory changes in Korea. Prior period results include a $17 million tax benefit in Japan related to the estimated reversal of temporary differences. 135-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $33 million over the prior period. The impact of changes in foreign currency exchange rates reduced operating earnings by $34 million for the first nine months of 2014 compared to the prior period and resulted in significant variances in the financial statement line items. Asia's premiums, fees and other revenues increased over the prior period primarily driven by broad based in-force growth across the region, including in our ordinary life business in Japan and our group insurance business in Australia. This was partially offset by lower surrender fee income in Japan. Positive net flows in Korea and Japan, combined with growth in our life business in India and Bangladesh, resulted in higher average invested assets and generated an increase in net investment income. Changes in premiums for these businesses were offset by related changes in policyholder benefits. The combined impact of the items discussed above improved operating earnings by $53 million. Investment returns were negatively impacted by the adverse impact of the low interest rate environment on mortgage loans and an increase in lower yielding Japanese government securities, combined with lower returns on our other limited partnership interests and decreased prepayment fee income. These declines in yields were partially offset by the favorable impact of increased sales of foreign currency-denominated fixed annuities resulting in an increase in higher yielding foreign currency-denominated fixed maturity securities in Japan. Declines in yields, combined with the impact of foreign currency hedges, resulted in an $8 million decrease in operating earnings. The prior period results include a strengthening of group and permanent disability claim reserves of $57 million, net of reinsurance, in Australia. In addition, refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in a $7 million decrease in operating earnings. Current period results include $21 million of unfavorable claims experience, primarily in our accident & health business in Japan and our life business in Korea, as well as due to regulatory changes in Korea. Current period results include a $9 million tax benefit related to U.S. taxation of dividends from Japan and a $4 million tax benefit resulting from a tax rate change in Japan. Prior period results include a $17 million tax benefit in Japan related to the estimated reversal of temporary differences and a one-time tax benefit of $6 million related to the disposal of our interest in a Korean asset management company at the beginning of 2013. 136-------------------------------------------------------------------------------- Table of Contents EMEA Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 581 $ 586 $ 1,762 $ 1,711 Universal life and investment-type product policy fees 127 100 353 287 Net investment income 131 124 388 372 Other revenues 22 21 49 82 Total operating revenues 861 831 2,552 2,452 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 252 243 784 736 Interest credited to policyholder account balances 43 37 112 109 Capitalization of DAC (165 ) (173 ) (511 ) (542 ) Amortization of DAC and VOBA 152 166 476 526 Amortization of negative VOBA (7 ) (13 ) (22 ) (41 ) Interest expense on debt - - - - Other expenses 454 443 1,356 1,351 Total operating expenses 729 703 2,195 2,139 Provision for income tax expense (benefit) 36 43 80 73 Operating earnings $ 96 $ 85 $ 277 $ 240 Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $11 million over the prior period. The impact of changes in foreign currency exchange rates reduced operating earnings by $5 million for the third quarter of 2014 compared to the prior period. In the current period, we converted to calendar year reporting for certain of our subsidiaries, which increased operating earnings by $5 million. In addition, the current period includes a $4 million increase in operating earnings due to a one-time benefit related to the pension reform in Poland. A $5 million increase in operating earnings was the result of a prior period tax charge in Slovakia. An increase in sales over the prior period, primarily in the Middle East and Central and Eastern Europe, was partially offset by the impact of regulatory changes in the United Kingdom ("U.K."). Net investment income also increased driven by an increase in average invested assets from business growth in Egypt and the Persian Gulf, as well as a slight increase in yields from the lengthening of the Ireland and Greece shorter-term portfolios into higher yielding longer duration fixed maturity securities. The amortization, or release, of negative VOBA associated with the conversion of certain policies generally results in an increase in operating earnings. In the current period, the number of policies converted declined and so, relative to the prior period, this reduced operating earnings. The combined impact of the items discussed above decreased operating earnings by $4 million. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $6 million. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings increased by $37 million over the prior period. The impact of changes in foreign currency exchange rates reduced operating earnings by $7 million for the first nine months of 2014 compared to the prior period. 137-------------------------------------------------------------------------------- Table of Contents The Company received tax benefits of $17 million and $47 million in the current and prior periods, respectively, as a result of its decision to permanently reinvest certain foreign earnings. Prior period operating earnings were negatively impacted as a result of a $30 million tax charge related to the write-off of a U.K. tax loss carryforward and by a $26 million write-down of DAC and VOBA related to pension reform in Poland. This was partially offset by the prior period impact of a change in the local corporate tax rate in Greece, which increased operating earnings by $4 million in the first quarter of 2013. Operating earnings in the prior period were also higher due to liability refinements totaling $4 million in our ordinary and deferred annuity businesses in Greece. In addition, in the current period, we converted to calendar year reporting for certain of our subsidiaries, which resulted in a $10 million increase to operating earnings. On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $6 million. An increase in sales over the prior period, primarily in the Middle East and Central Europe, was partially offset by the impact of regulatory changes in the U.K. and pension reform in Poland. An increase in average invested assets from business growth in Egypt, the Persian Gulf and Russia was offset by the unfavorable impact of the sustained low interest rate environment on our fixed maturity securities. The amortization, or release, of negative VOBA associated with the conversion of certain policies generally results in an increase in operating earnings. In the current period, the number of policies converted declined and so, relative to the prior period, this reduced operating earnings. Operating earnings in the current period benefited as a result of a review of certain tax liabilities. The combined impact of the items discussed above increased operating earnings by $10 million. Corporate & Other Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) OPERATING REVENUES Premiums $ 41 $ 30 $ 116 $ 84 Universal life and investment-type product policy fees 29 34 96 105 Net investment income 37 53 152 266 Other revenues 13 5 39 22 Total operating revenues 120 122 403 477 OPERATING EXPENSES Policyholder benefits and claims and policyholder dividends 31 25 91 52 Interest credited to policyholder account balances 8 10 26 33 Capitalization of DAC (15 ) (5 ) (41 ) (14 ) Amortization for DAC and VOBA 1 1 4 1 Interest expense on debt 291 286 880 855 Other expenses 177 179 586 489 Total operating expenses 493 496 1,546 1,416 Provision for income tax expense (benefit) (330 ) (241 ) (756 ) (641 ) Operating earnings (43 ) (133 ) (387 ) (298 ) Less: Preferred stock dividends 30 30 91 91 Operating earnings available to common shareholders $ (73 ) $ (163 ) $ (478 ) $ (389 ) 138-------------------------------------------------------------------------------- Table of Contents The table below presents operating earnings available to common shareholders by source on an after-tax basis: Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (In millions) Various business activities $ 11 $ 7 $ 34 $ 40 Other net investment income 24 35 99 174 Interest expense on debt (189 ) (186 ) (572 ) (556 ) Preferred stock dividends (30 ) (30 ) (91 ) (91 ) Acquisition costs - (5 ) (5 ) (17 ) Corporate initiatives and projects (38 ) (24 ) (106 ) (68 ) Incremental tax benefit 199 110 356 312 Other (50 ) (70 ) (193 ) (183 ) Operating earnings available to common shareholders $ (73 ) $ (163 ) $ (478 ) $ (389 ) Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings available to common shareholders and operating earnings each increased by $90 million, primarily due to higher incremental tax benefits. Operating earnings from various business activities increased by $4 million primarily as a result of higher returns from the assumed reinsurance from our former operating joint venture in Japan. Other net investment income decreased by $11 million. This decrease was driven by an increase in the amount credited to the segments due to growth in the economic capital managed by Corporate & Other on their behalf, lower mark-to-market income on trading securities and the adverse impact of the sustained low interest rate environment on yields from our fixed maturity securities. These decreases were partially offset by improved returns on other limited partnership interests and higher mark-to-market income on residential mortgage loans carried at fair value. Expenses related to corporate initiatives and projects increased by $14 million, primarily due to higher relocation costs, severance and consulting expenses. Other expenses in the current period decreased by $20 million, primarily driven by lower employee-related costs and lower interest on uncertain tax positions totaling $13 million. Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. The third quarter of 2014 includes a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return, as well as additional tax benefits of $27 million related to the separate account dividends received deduction and $12 million relating to the timing of certain tax credits. In addition, we had higher utilization of tax preferenced investments and other benefits which increased our operating earnings by $12 million over the prior period. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Unless otherwise stated, all amounts discussed below are net of income tax. Operating earnings available to common shareholders and operating earnings each decreased by $89 million, primarily due to lower net investment income, higher interest on debt and higher expenses related to corporate initiatives and projects, partially offset by higher incremental tax benefits. Operating earnings from various business activities decreased by $6 million. Lower operating earnings from the assumed reinsurance from our former operating joint venture in Japan, primarily due to lower returns in the current period, were partially offset by higher operating earnings from start-up operations. 139-------------------------------------------------------------------------------- Table of Contents Other net investment income decreased by $75 million. This decrease was driven by an increase in the amount credited to the segments due to growth in the economic capital managed by Corporate & Other on their behalf, the adverse impact of the sustained low interest rate environment on yields from our fixed maturity securities and lower returns on real estate investments. These decreases were partially offset by improved returns on other limited partnership interests and higher mark-to-market income on residential mortgage loans carried at fair value. Interest expense on debt increased by $16 million, mainly due to the issuance of $1.0 billion of senior notes in April 2014 and the recognition of issuance costs related to the early redemption of senior notes in May 2014. Acquisition costs decreased by $12 million due to lower internal resource costs for associates committed to certain acquisition activities. Expenses related to corporate initiatives and projects increased by $38 million, primarily due to higher relocation costs, severance and consulting expenses. These expenses include an $8 million decrease in restructuring charges, the majority of which related to severance. Our results for the current period include charges totaling $57 million related to the aforementioned settlement of a licensing matter with the Department of Financial Services and the District Attorney, New York County. This was partially offset by an $18 million increase in operating earnings resulting from net adjustments to certain reinsurance assets and liabilities. In addition, declines in interest on uncertain tax positions and employee-related costs, totaling $21 million, improved operating earnings. Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. The tax benefit in 2014 includes a $32 million one-time tax benefit related to the filing of the Company's U.S. federal tax return, additional tax benefits relating to the separate account dividends received deduction, an $18 million tax charge related to a portion of the aforementioned settlement of a licensing matter that was not deductible for income tax purposes and a $16 million tax charge related to the timing of certain tax credits. In addition, we had higher utilization of tax preferenced investments and other benefits which increased our operating earnings by $18 million over the prior period. 140-------------------------------------------------------------------------------- Table of Contents Investments Investment Risks Our primary investment objective is to optimize, net of income tax, risk-adjusted investment income and risk-adjusted total return while ensuring that assets and liabilities are managed on a cash flow and duration basis. The Investments Department, led by the Chief Investment Officer, manages investment risks using a risk control framework comprised of policies, procedures and limits, as discussed further below. The Investments Risk Committee of our Global Risk Management Department ("GRM") reviews, monitors and reports investment risk limits and tolerances. We are exposed to the following primary sources of investment risks: • credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; • interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds; • liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions; • market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio, will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure, and, if credit spreads widen significantly or for an extended period of time, will likely result in higher other-than-temporary impairment ("OTTI"). Credit spread tightening will reduce net investment income associated with purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio; • currency risk, relating to the variability in currency exchange rates for foreign denominated investments. This risk relates to potential decreases in estimated fair value and net investment income resulting from changes in currency exchange rates versus the U.S. dollar. In general, the weakening of foreign currencies versus the U.S. dollar will adversely affect the estimated fair value of our foreign denominated investments; and • real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include, but are not limited to, market conditions, including the demand and supply of leasable commercial space, creditworthiness of tenants and partners, capital markets volatility and the inherent interest rate movement. We manage investment risk through in-house fundamental credit analysis of the underlying obligors, issuers, transaction structures and real estate properties. We also manage credit risk, market valuation risk and liquidity risk through industry and issuer diversification and asset allocation. Risk limits to promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit exposure as measured by our economic capital framework are approved annually by a committee of directors that oversees our investment portfolio. For real estate assets, we manage credit risk and market valuation risk through geographic, property type and product type diversification and asset allocation. We manage interest rate risk as part of our ALM strategies. These strategies include maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration of our estimated liability cash flow profile, and utilizing product design, such as the use of market value adjustment features and surrender charges, to manage interest rate risk. We also manage interest rate risk through proactive monitoring and management of certain non-guaranteed elements of our products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. In addition to hedging with foreign currency derivatives, we manage currency risk by matching much of our foreign currency liabilities in our foreign subsidiaries with their respective foreign currency assets, thereby reducing our risk to foreign currency exchange rate fluctuation. We also use certain derivatives in the management of credit, interest rate, and equity market risks. We use purchased credit default swaps to mitigate credit risk in our investment portfolio. Generally, we purchase credit protection by entering into credit default swaps referencing the issuers of specific assets we own. In certain cases, basis risk exists between these credit default swaps and the specific assets we own. For example, we may purchase credit protection on a macro basis to reduce exposure to specific industries or other portfolio concentrations. In such instances, the referenced entities and obligations under the credit default swaps may not be identical to the individual obligors or securities in our investment portfolio. In addition, our purchased credit default swaps may have shorter tenors than the underlying investments they are hedging. However, we dynamically hedge this risk through the rebalancing and rollover of its credit default swaps at their most liquid tenors. We believe that our purchased credit default swaps serve as effective economic hedges of our credit exposure. 141-------------------------------------------------------------------------------- Table of Contents We generally enter into market standard purchased and written credit default swap contracts. Payout under such contracts is triggered by certain credit events experienced by the referenced entities. For credit default swaps covering North American corporate issuers, credit events typically include bankruptcy and failure to pay on borrowed money. For European corporate issuers, credit events typically also include involuntary restructuring. With respect to credit default contracts on Western European sovereign debt, credit events typically include failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association deems that a credit event has occurred. Current Environment The global economy and markets continue to be affected by stress and volatility, which has adversely affected the financial services sector, in particular, and global capital markets. Recently, concerns about the political and economic stability of countries in regions outside the EU, including Ukraine, Russia, Argentina and the Middle East, have contributed to global market volatility. As a global insurance company, we are also affected by the monetary policy of central banks around the world. Financial markets have also been affected by concerns over the direction of U.S. fiscal policy. See "- Industry Trends - Financial and Economic Environment." The Federal Reserve Board has taken a number of policy actions in recent years to spur economic activity, by keeping interest rates low and, more recently, through its asset purchase programs. The ECB has also recently adopted an array of stimulus measures, including a negative rate on bank deposits. In October 2014, the ECB commenced a program to purchase covered bank bonds and expects to begin purchases of asset-backed securities in November 2014. These actions are intended to lessen the risk of a prolonged period of deflation and support economic recovery in the Euro zone. See "- Industry Trends - Impact of a Sustained Low Interest Rate Environment" for information on actions taken by the Federal Reserve Board and central banks around the world to support the economic recovery. See "- Industry Trends - Financial and Economic Environment" for information on actions taken by Japan's central government and the Bank of Japan to boost inflation expectations and achieve sustainable economic growth in Japan. The Federal Reserve and other central banks around the world may take further actions to influence interest rates in the future, which may have an impact on the pricing levels of risk-bearing investments and may adversely impact the level of product sales. European Region Investments Excluding Europe's perimeter region and Cyprus which is discussed below, our holdings of sovereign debt, corporate debt and perpetual hybrid securities in certain EU member states and other countries in the region that are not members of the EU (collectively, the "European Region") were concentrated in the U.K., Germany, France, the Netherlands, Poland, Norway and Sweden. The sovereign debt of these countries continues to maintain investment grade credit ratings from all major rating agencies. In the European Region, we have proactively mitigated risk in both direct and indirect exposures by investing in a diversified portfolio of high quality investments with a focus on the higher-rated countries. Sovereign debt issued by countries outside of Europe's perimeter region and Cyprus comprised $9.0 billion, or 99% of our European Region sovereign fixed maturity securities, at estimated fair value, at September 30, 2014. The European Region corporate securities (fixed maturity and perpetual hybrid securities classified as non-redeemable preferred stock) are invested in a diversified portfolio of primarily non-financial services securities, which comprised $23.6 billion, or 73% of European Region total corporate securities, at estimated fair value, at September 30, 2014. Of these European Region sovereign fixed maturity and corporate securities, 92% were investment grade and, for the 8% that were below investment grade, the majority was comprised of non-financial services corporate securities at September 30, 2014. European Region financial services corporate securities, at estimated fair value, were $8.6 billion, including $6.2 billion within the banking sector, with 95% invested in investment grade corporate securities, at September 30, 2014. Selected Country Investments Concerns about the economic conditions, capital markets and the solvency of certain EU member states, including Europe's perimeter region and Cyprus, and of financial institutions that have significant direct or indirect exposure to debt issued by these countries, have been a cause of elevated levels of market volatility, and has affected the performance of various asset classes in recent years. However, after several tumultuous years, economic conditions in Europe's perimeter region seem to be stabilizing or improving, as evidenced by the stabilization of credit ratings, particularly in Spain, Portugal and Ireland. This, combined with greater ECB support and gradually improving macroeconomic conditions at the country level, has reduced the risk of default on the sovereign debt of certain countries in Europe's perimeter region and Cyprus and the risk of possible withdrawal of one or more countries from the Euro zone. 142-------------------------------------------------------------------------------- Table of Contents As presented in the table below, our exposure to the sovereign debt of Europe's perimeter region and Cyprus is not significant. Accordingly, we do not expect such investments to have a material adverse effect on our results of operations or financial condition. We manage direct and indirect investment exposure in these countries through fundamental credit analysis and we continually monitor and adjust our level of investment exposure in these countries. The following table presents a summary of investments by invested asset class across Europe's perimeter region, by country, and Cyprus. The Company has written credit default swaps where the underlying is an index comprised of companies across various sectors in the European Region. At September 30, 2014, the written credit default swaps exposure to Europe's perimeter region and Cyprus was $68 million in notional amount and less than $1 million in estimated fair value. The information below is presented at carrying value and on a country of risk basis (i.e. the country where the issuer primarily conducts business). Summary of Selected European Country Investment Exposure at September 30, 2014 Fixed Maturity Securities (1) All Other General Account Financial Non-Financial Investment Total Exposure Sovereign Services Services Total Exposure (2) (3) % (In millions) Europe's perimeter region: Portugal $ - $ - $ - $ - $ 6 $ 6 - % Italy 35 148 578 761 75 836 31 Ireland - 12 50 62 838 900 33 Greece - - - - 152 152 6 Spain 25 101 531 657 72 729 27 Total Europe's perimeter region 60 261 1,159 1,480 1,143 2,623 97 Cyprus 44 - 11 55 20 75 3 Total $ 104 $ 261 $ 1,170 $ 1,535 $ 1,163 $ 2,698 100 % As percent of total cash and invested assets 0.0 % 0.1 % 0.2 % 0.3 % 0.2 % 0.5 % Investment grade % 58 % 91 % 81 % 81 % Non-investment grade % 42 % 9 % 19 % 19 % __________________(1) The par value and amortized cost of the fixed maturity securities were $1.3 billion and $1.4 billion, respectively, at September 30, 2014. (2) Comprised of equity securities, mortgage loans, real estate and real estate joint ventures, other limited partnership interests, cash, cash equivalents and short-term investments, and other invested assets at carrying value. See Note 1 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for an explanation of the carrying value for these invested asset classes. Excludes FVO contractholder-directed unit-linked investments of $907 million. See "- FVO and Trading Securities." (3) We had $1 million of commitments to fund partnership investments in Greece at September 30, 2014. Recently there have been concerns about the political and economic stability of Ukraine, Russia and Argentina. We maintain general account investments in Ukraine, Russia and Argentina to support our insurance operations and related policyholder liabilities in these countries. As of September 30, 2014, cash, cash equivalents, short-term investments and available-for-sale ("AFS") securities invested in Ukraine, Russia and Argentina, at estimated fair value, were $97 million, $680 million and $727 million, respectively, which were comprised primarily of local sovereign debt and corporate debt securities. We manage direct and indirect investment exposure in these countries through fundamental credit analysis and we continually monitor and adjust our level of investment exposure in these countries. We do not expect exposure to the general account investments in these countries to have a material adverse effect on our results of operations or financial condition. 143-------------------------------------------------------------------------------- Table of Contents Current Environment - Summary All of these factors have had and could continue to have an adverse effect on the financial results of companies in the financial services industry, including MetLife. Such global economic conditions, as well as the global financial markets, continue to impact our net investment income, net investment gains (losses), net derivative gains (losses), and level of unrealized gains (losses) within the various asset classes in our investment portfolio and our level of investment in lower yielding cash equivalents, short-term investments and government securities. See "- Industry Trends" included elsewhere herein and "Risk Factors - Economic Environment and Capital Markets-Related Risks - We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period" included in the 2013 Annual Report. Investment Portfolio Results The following yield table presents the yield and investment income (loss) for our investment portfolio for the periods indicated. As described in the footnotes below, this table reflects certain differences from the presentation of net investment income presented in the GAAP consolidated statements of operations. This yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results. At or For the Three Months Ended September 30, At or For the Nine Months Ended September 30, 2014 2013 2014 2013 Yield % (1) Amount Yield % (1) Amount Yield % (1) Amount Yield % (1) Amount (In millions) (In millions) (In millions) (In millions) Fixed maturity securities (2)(3) 4.73 % $ 3,704 4.92 % $ 3,792 4.80 % $ 11,185 4.82 % $ 11,312 Mortgage loans (3) 5.44 % 774 5.34 % 725 5.19 % 2,191 5.42 % 2,179 Real estate and real estate joint ventures 3.69 % 94 3.09 % 77 3.88 % 297 3.25 % 243 Policy loans 5.37 % 158 5.38 % 158 5.36 % 473 5.26 % 465 Equity securities 3.95 % 31 3.87 % 28 4.18 % 98 4.14 % 88 Other limited partnerships 14.77 % 299 7.95 % 144 14.14 % 834 12.50 % 665 Cash and short-term investments 1.06 % 40 0.97 % 39 1.09 % 124 0.98 % 126 Other invested assets 233 217 653 618 Total before investment fees and expenses 5.03 % 5,333 4.98 % 5,180 5.02 % 15,855 4.97 % 15,696 Investment fees and expenses (0.13 ) (137 ) (0.13 ) (137 ) (0.13 ) (412 ) (0.13 ) (411 ) Net investment income including divested businesses (4), (5) 4.90 % 5,196 4.85 % 5,043 4.89 % 15,443 4.84 % 15,285 Less: net investment income from divested businesses (4), (5) 3 45 70 148 Net investment income (6) $ 5,193 $ 4,998 $ 15,373 $ 15,137 __________________ (1) Yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses and reflects GAAP adjustments presented in footnote (6) below. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets, collateral received from derivative counterparties, the effects of consolidating certain variable interest entities ("VIEs") under GAAP that are treated as consolidated securitization entities ("CSEs") and contractholder-directed unit-linked investments. A yield is not presented for other invested assets, as it is not considered a meaningful measure of performance for this asset class. (2) Investment income (loss) includes amounts for FVO and trading securities of $14 million and $95 million for the three months and nine months ended September 30, 2014, respectively, and $14 million and $24 million for the three months and nine months ended September 30, 2013, respectively. (3) Investment income from fixed maturity securities and mortgage loans includes prepayment fees. 144-------------------------------------------------------------------------------- Table of Contents (4) Yield calculations include the net investment income and ending carrying values of the divested businesses. The net investment income adjustment for divested businesses for the three months and nine months ended September 30, 2014 was $3 million and $70 million, respectively, and $45 million and $148 million for the three months and nine months ended September 30, 2013, respectively. The net investment income adjustment includes scheduled periodic settlement payments on derivatives not qualifying for hedge accounting adjustment that are excluded in the scheduled periodic settlement payments on derivatives not qualifying for hedge accounting line in the GAAP net investment income reconciliation presented below. The scheduled periodic settlement payments excluded were $0 and $1 million for the three months and nine months ended September 30, 2014, respectively, and $1 million and $8 million for the three months and nine months ended September 30, 2013, respectively. (5) Certain amounts in the prior periods have been reclassified to conform with the current period segment presentation. In the first quarter of 2014, MetLife, Inc. began reporting the operations of MAL as divested business. See "- Executive Summary." (6) Net investment income presented in the yield table varies from the most directly comparable GAAP measure due to certain reclassifications and excludes the effects of consolidating certain VIEs under GAAP that are treated as CSEs and contractholder-directed unit-linked investments. Such reclassifications are presented in the table below. Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 (Inmillions) Net investment income - in the above yield table $ 5,193 $ 4,998 $ 15,373 $ 15,137 Real estate discontinued operations - (3 ) (1 ) (7 ) Scheduled periodic settlement payments on derivatives not qualifying for hedge accounting (169 ) (175 ) (513 ) (473 ) Equity method operating joint ventures 1 - 2 (1 ) Contractholder-directed unit-linked investments 379 132 739 1,485 Divested businesses 3 45 70 148 Incremental net investment income from CSEs 3 29 34 96 Net investment income - GAAP consolidated statements of operations $ 5,410 $ 5,026 $ 15,704 $ 16,385 See "- Results of Operations - Consolidated Results - Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013" and "- Results of Operations - Consolidated Results - Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013" for an analysis of the period over period changes in net investment income. Fixed Maturity and Equity Securities Available-for-Sale Fixed maturity securities AFS, which consisted principally of publicly-traded and privately-placed fixed maturity securities and redeemable preferred stock, were $368.1 billion and $350.2 billion, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively, or 71% of total cash and invested assets at both September 30, 2014 and December 31, 2013. Publicly-traded fixed maturity securities represented $317.7 billion and $302.3 billion, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively, or 86% of total fixed maturity securities at both September 30, 2014 and December 31, 2013. Privately placed fixed maturity securities represented $50.4 billion and $47.9 billion, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively, or 14% of total fixed maturity securities at both September 30, 2014 and December 31, 2013. Equity securities AFS, which consisted principally of publicly-traded and privately-held common and non-redeemable preferred stock, including certain perpetual hybrid securities and mutual fund interests, were $3.7 billion and $3.4 billion, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively, or 0.7% of total cash and invested assets at both September 30, 2014 and December 31, 2013. Publicly-traded equity securities represented $2.6 billion and $2.4 billion, at estimated fair value, or 70% and 71% of total equity securities, at September 30, 2014 and December 31, 2013, respectively. Privately-held equity securities represented $1.1 billion and $1.0 billion, at estimated fair value, or 30% and 29% of total equity securities, at September 30, 2014 and December 31, 2013, respectively. 145-------------------------------------------------------------------------------- Table of Contents Included within fixed maturity and equity securities were $1.0 billion and $1.1 billion of perpetual securities, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively. Upon acquisition, we classify perpetual securities that have attributes of both debt and equity as fixed maturity securities if the securities have an interest rate step-up feature which, when combined with other qualitative factors, indicates that the securities have more debt-like characteristics; while those with more equity-like characteristics are classified as equity securities. Many of such securities, commonly referred to as "perpetual hybrid securities," have been issued by non-U.S. financial institutions that are accorded the highest two capital treatment categories by their respective regulatory bodies (i.e. core capital, or "Tier 1 capital" and perpetual deferrable securities, or "Upper Tier 2 capital"). Included within fixed maturity securities were $1.2 billion and $1.5 billion of redeemable preferred stock with a stated maturity, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively. These securities, which are commonly referred to as "capital securities," primarily have cumulative interest deferral features and are primarily issued by U.S. financial institutions. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Fixed Maturity and Equity Securities Available-for-Sale - Valuation of Securities" included in the 2013 Annual Report for further information on the processes used to value securities and the related controls. Fair Value of Fixed Maturity and Equity Securities - AFS Fixed maturity and equity securities AFS measured at estimated fair value on a recurring basis and their corresponding fair value pricing sources are as follows: September 30, 2014 Fixed Maturity Equity Securities Securities (In millions) (In millions) Level 1 Quoted prices in active markets for identical assets $ 35,663 9.7 % $ 1,606 43.5 % Level 2 Independent pricing source 272,862 74.1 764 20.7 Internal matrix pricing or discounted cash flow techniques 36,771 10.0 971 26.3 Significant other observable inputs 309,633 84.1 1,735 47.0 Level 3 Independent pricing source 5,847 1.6 231 6.3 Internal matrix pricing or discounted cash flow techniques 13,792 3.7 101 2.7 Independent broker quotations 3,135 0.9 16 0.5 Significant unobservable inputs 22,774 6.2 348 9.5 Total estimated fair value $ 368,070 100.0 % $ 3,689 100.0 % See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for the fixed maturity securities and equity securities AFS fair value hierarchy. 146-------------------------------------------------------------------------------- Table of Contents The composition of fair value pricing sources for and significant changes in Level 3 securities at September 30, 2014 are as follows: • The majority of the Level 3 fixed maturity and equity securities AFS were concentrated in four sectors: U.S. and foreign corporate securities, residential mortgage-backed securities ("RMBS"), and asset-backed securities ("ABS"). • Level 3 fixed maturity securities are priced principally through market standard valuation methodologies, independent pricing services and, to a much lesser extent, independent non-binding broker quotations using inputs that are not market observable or cannot be derived principally from or corroborated by observable market data. Level 3 fixed maturity securities consist of less liquid securities with very limited trading activity or where less price transparency exists around the inputs to the valuation methodologies. Level 3 fixed maturity securities include: alternative residential mortgage loan ("Alt-A") and sub-prime RMBS; certain below investment grade private securities and less liquid investment grade corporate securities (included in U.S. and foreign corporate securities); less liquid collateralized debt obligation ABS and foreign government securities. • During the three months ended September 30, 2014, Level 3 fixed maturity securities decreased by $1.6 billion, or 6%. The decrease was driven by net transfers out of Level 3 and a decrease in estimated fair value recognized in other comprehensive income (loss) ("OCI"), partially offset by purchases in excess of sales. The net transfers out of Level 3 were concentrated in ABS, U.S. and foreign corporate securities, foreign government securities and RMBS and the decrease in estimated fair value recognized in OCI was concentrated in foreign corporate securities. The purchases in excess of sales were concentrated in ABS, U.S. and foreign corporate securities and RMBS. • During the nine months ended September 30, 2014, Level 3 fixed maturity securities decreased by $1.5 billion, or 6%. The decrease was driven by net transfers out of Level 3, partially offset by purchases in excess of sales and an increase in estimated fair value recognized in OCI. The net transfers out of Level 3 were concentrated in ABS, U.S. and foreign corporate securities and foreign government securities. The purchases in excess of sales were concentrated in ABS, U.S. and foreign corporate securities and RMBS and the increase in estimated fair value recognized in OCI were concentrated in U.S. and foreign corporate securities. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for a rollforward of the fair value measurements for fixed maturity securities and equity securities AFS measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs; analysis of transfers into and/or out of Level 3; and further information about the valuation techniques and inputs by level by major classes of invested assets that affect the amounts reported above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates - Estimated Fair Value of Investments" included in the 2013 Annual Report for further information on the estimates and assumptions that affect the amounts reported above. Fixed Maturity Securities AFS See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for further information about fixed maturity securities AFS. Fixed Maturity Securities Credit Quality - Ratings See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Fixed Maturity and Equity Securities Available-for-Sale - Fixed Maturity Securities Credit Quality - Ratings" included in the 2013 Annual Report for a discussion of the credit quality ratings assigned by rating agencies and credit quality designations assigned by and methodologies used by the Securities Valuation Office of the NAIC for fixed maturity securities. The NAIC has adopted revised methodologies for certain structured securities comprised of non-agency RMBS, commercial mortgage-backed securities ("CMBS") and ABS. The NAIC's objective with the revised methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from structured securities. We apply the revised NAIC methodologies to structured securities held by MetLife, Inc.'s insurance subsidiaries that maintain the NAIC statutory basis of accounting. The NAIC's present methodology is to evaluate structured securities held by insurers using the revised NAIC methodologies on an annual basis. If MetLife, Inc.'s insurance subsidiaries acquire structured securities that have not been previously evaluated by the NAIC, but are expected to be evaluated by the NAIC in the upcoming annual review, an internally developed designation is used until a final designation becomes available. 147-------------------------------------------------------------------------------- Table of Contents The following table presents total fixed maturity securities by Nationally Recognized Statistical Ratings Organizations ("NRSRO") rating and the equivalent designations of the NAIC, except for certain structured securities, which are presented using the revised NAIC methodologies as described above, as well as the percentage, based on estimated fair value that each designation is comprised of at: September 30, 2014 December 31, 2013 Estimated Estimated NAIC Amortized Unrealized Fair % of Amortized Unrealized Fair % of Designation NRSRO Rating Cost Gain (Loss) Value Total Cost Gain (Loss) Value Total (In millions) (In millions) 1 Aaa/Aa/A $ 237,340 $ 19,780 $ 257,120 69.9 % $ 230,429 $ 11,640 $ 242,069 69.1 % 2 Baa 79,045 6,640 85,685 23.3 79,732 4,382 84,114 24.0 Subtotal investment grade 316,385 26,420 342,805 93.2 310,161 16,022 326,183 93.1 3 Ba 14,790 255 15,045 4.1 13,239 358 13,597 3.9 4 B 8,553 36 8,589 2.3 9,216 162 9,378 2.7 5 Caa and lower 1,426 109 1,535 0.4 932 23 955 0.3 6 In or near default 44 52 96 - 51 23 74 - Subtotal below investment grade 24,813 452 25,265 6.8 23,438 566 24,004 6.9 Total fixed maturity securities $ 341,198 $ 26,872 $ 368,070 100.0 % $ 333,599 $ 16,588 $ 350,187 100.0 % The following tables present total fixed maturity securities, based on estimated fair value, by sector classification and by NRSRO rating and the equivalent designations of the NAIC, except for certain structured securities, which are presented using the NAIC methodologies as described above: Fixed Maturity Securities - by Sector & Credit Quality Rating NAIC Designation: 1 2 3 4 5 6 Total In or Near Estimated NRSRO Rating: Aaa/Aa/A Baa Ba B Caa and Lower Default Fair Value (In millions) September 30, 2014 U.S. corporate $ 46,480 $ 45,602 $ 9,879 $ 5,495 $ 502 $ 16 $ 107,974 Foreign corporate 25,792 31,187 3,270 1,522 105 1 61,877 Foreign government 48,299 6,011 671 865 490 60 56,396 U.S. Treasury and agency 56,862 - - - - - 56,862 RMBS 36,948 1,594 953 691 418 15 40,619 CMBS 14,474 58 99 14 4 - 14,649 ABS 13,950 738 143 2 16 4 14,853 State and political subdivision 14,315 495 30 - - - 14,840 Total fixed maturity securities $ 257,120 $ 85,685 $ 15,045 $ 8,589 $ 1,535 $ 96 $ 368,070 Percentage of total 69.9 % 23.3 % 4.1 % 2.3 % 0.4 % - % 100.0 % December 31, 2013 U.S. corporate $ 46,038 $ 45,639 $ 9,349 $ 4,998 $ 415 $ 30 $ 106,469 Foreign corporate 27,957 30,477 2,762 1,910 45 1 63,152 Foreign government 47,767 4,481 648 1,363 178 - 54,437 U.S. Treasury and agency 45,123 - - - - - 45,123 RMBS 31,385 1,657 753 974 248 38 35,055 CMBS 16,393 47 45 14 51 - 16,550 ABS 14,184 1,215 30 119 18 5 15,571 State and political subdivision 13,222 598 10 - - - 13,830 Total fixed maturity securities $ 242,069 $ 84,114 $ 13,597 $ 9,378 $ 955 $ 74 $ 350,187 Percentage of total 69.1 % 24.0 % 3.9 % 2.7 % 0.3 % - % 100.0 % 148-------------------------------------------------------------------------------- Table of Contents U.S. and Foreign Corporate Fixed Maturity Securities We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. This portfolio does not have any exposure to any single issuer in excess of 1% of total investments and the top ten holdings comprise 2% of total investments at both September 30, 2014 and December 31, 2013. The tables below present our U.S. and foreign corporate securities holdings at: September 30, 2014 December 31, 2013 Estimated Estimated Fair % of Fair % of Value Total Value Total (In millions) (In millions) Corporate fixed maturity securities - by sector: Foreign corporate (1) $ 61,877 36.4 % $ 63,152 37.2 % U.S. corporate fixed maturity securities - by industry: Consumer 28,068 16.5 27,953 16.5 Industrial 28,056 16.5 27,462 16.2 Finance 20,062 11.8 20,135 11.9 Utility 19,702 11.6 19,066 11.2 Communications 8,041 4.8 8,074 4.8 Other 4,045 2.4 3,779 2.2 Total $ 169,851 100.0 % $ 169,621 100.0 % __________________(1) Includes both U.S. dollar and foreign denominated securities. Structured Securities We held $70.1 billion and $67.2 billion of structured securities, at estimated fair value, at September 30, 2014 and December 31, 2013, respectively, as presented in the RMBS, CMBS and ABS sections below. RMBS The table below presents our RMBS holdings at: September 30, 2014 December 31, 2013 Estimated Net Estimated Net Fair % of Unrealized Fair % of Unrealized Value Total Gains (Losses) Value Total Gains (Losses) (In millions) (In millions) (In millions) (In millions) By security type: Collateralized mortgage obligations $ 19,977 49.2 % $ 1,107 $ 19,046 54.3 % $ 705 Pass-through securities 20,642 50.8 501 16,009 45.7 183 Total RMBS $ 40,619 100.0 % $ 1,608 $ 35,055 100.0 % $ 888 By risk profile: Agency $ 28,068 69.1 % $ 1,229 $ 23,686 67.6 % $ 762 Prime 2,796 6.9 77 2,935 8.4 71 Alt-A 5,480 13.5 130 4,986 14.2 (25 ) Sub-prime 4,275 10.5 172 3,448 9.8 80 Total RMBS $ 40,619 100.0 % $ 1,608 $ 35,055 100.0 % $ 888 Ratings profile: Rated Aaa/AAA $ 28,825 71.0 % $ 24,764 70.6 % Designated NAIC 1 $ 36,948 91.0 % $ 31,385 89.5 % See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Fixed Maturity and Equity Securities Available-for-Sale - Structured Securities" included in the 2013 Annual Report for further information about collateralized mortgage obligations and pass-through mortgage-backed securities, as well as agency, prime, Alt-A and sub-prime RMBS. 149-------------------------------------------------------------------------------- Table of Contents The Company's Alt-A RMBS portfolio has performed within our expectations and is comprised primarily of fixed rate mortgage loans (95% and 94% at September 30, 2014 and December 31, 2013, respectively) and has an insignificant amount of option adjustable rate mortgage loans ($235 million and $34 million, at estimated fair value, or 4% and less than 1%, at September 30, 2014 and December 31, 2013, respectively). These option adjustable rate mortgage loans backing these securities are past the initial period that allowed negative amortization of principal and are now traditional amortizing adjustable rate mortgage loans. Historically, we have managed our exposure to sub-prime RMBS holdings by: acquiring older vintage year securities that benefit from better underwriting, improved credit enhancement and higher levels of residential property price appreciation; reducing our overall exposure; stress testing the portfolio with severe loss assumptions; and closely monitoring the performance of the portfolio. Since 2012, we increased our exposure by purchasing sub-prime RMBS at significant discounts to the expected principal recovery value of these securities. The sub-prime RMBS purchases since 2012 of $3.4 billion and $2.5 billion, at estimated fair value, are performing within our expectations and were in an unrealized gain position of $144 million and $96 million at September 30, 2014 and December 31, 2013, respectively. CMBS Our CMBS holdings are diversified by vintage year. The following tables present our CMBS holdings by rating agency rating and by vintage year at: September 30, 2014 Below Investment Aaa Aa A Baa Grade Total Estimated Estimated Estimated Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value (In millions) 2003 - 2004 $ 540 $ 550 $ 101 $ 104 $ 72 $ 75 $ 41 $ 41 $ 17 $ 17 $ 771 $ 787 2005 2,827 2,884 419 436 273 284 111 117 12 16 3,642 3,737 2006 2,036 2,121 121 126 95 98 44 51 22 22 2,318 2,418 2007 717 742 64 68 195 207 71 76 121 118 1,168 1,211 2008 - 2011 570 604 24 24 89 90 - - 4 4 687 722 2012 447 504 228 232 921 928 - - 4 4 1,600 1,668 2013 740 759 409 425 1,512 1,533 12 12 - - 2,673 2,729 2014 288 289 475 478 589 597 13 13 - - 1,365 1,377 Total $ 8,165 $ 8,453 $ 1,841 $ 1,893 $ 3,746 $ 3,812 $ 292 $ 310 $ 180 $ 181 $ 14,224 $ 14,649 Ratings Distribution 57.7 % 12.9 % 26.0 % 2.1 % 1.3 % 100.0 % December 31, 2013 Below Investment Aaa Aa A Baa Grade Total Estimated Estimated Estimated Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value (In millions)2003 - 2004 $ 2,483 $ 2,522 $ 227 $ 236 $ 118 $ 124 $ 92 $ 95 $ 22 $ 21 $ 2,942 $ 2,998 2005 3,294 3,442 363 387 372 393 102 110 29 36 4,160 4,368 2006 2,355 2,466 246 260 145 156 16 21 36 37 2,798 2,940 2007 782 814 65 70 208 220 184 187 75 69 1,314 1,360 2008 - 2011 587 613 25 24 142 139 1 1 13 13 768 790 2012 439 477 271 264 937 892 - - 17 51 1,664 1,684 2013 719 715 396 384 1,354 1,311 - - - - 2,469 2,410 Total $ 10,659 $ 11,049 $ 1,593 $ 1,625 $ 3,276 $ 3,235 $ 395 $ 414 $ 192 $ 227 $ 16,115 $ 16,550 Ratings Distribution 66.8 % 9.8 % 19.5 % 2.5 % 1.4 % 100.0 % The tables above reflect rating agency ratings assigned by NRSROs including Moody's Investors Service, Standard & Poor's Ratings Services, Fitch Ratings and Morningstar, Inc. CMBS designated NAIC 1 were 98.8% and 99.1% of total CMBS at September 30, 2014 and December 31, 2013, respectively. 150-------------------------------------------------------------------------------- Table of Contents ABS Our ABS are diversified both by collateral type and by issuer. The following table presents our ABS holdings at: September 30, 2014 December 31, 2013 Estimated Net Estimated Net Fair % of Unrealized Fair % of Unrealized Value Total Gains (Losses) Value Total Gains (Losses) (In millions) (In millions) (In millions) (In millions) By collateral type: Foreign residential loans $ 2,516 16.9 % $ 79 $ 3,415 21.9 % $ 80 Collateralized loan obligations 5,031 33.9 (13 ) 2,960 19.0 (6 ) Automobile loans 1,755 11.8 12 2,635 16.9 12 Student loans 2,042 13.8 51 2,332 15.0 17 Credit card loans 1,489 10.0 51 2,187 14.1 20 Equipment loans 289 1.9 4 427 2.7 6 Other loans 1,731 11.7 13 1,615 10.4 (16 ) Total $ 14,853 100.0 % $ 197 $ 15,571 100.0 % $ 113 Ratings profile: Rated Aaa/AAA $ 8,726 58.7 % $ 9,616 61.8 % Designated NAIC 1 $ 13,950 93.9 % $ 14,184 91.1 % Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about the evaluation of fixed maturity securities and equity securities AFS for OTTI and evaluation of temporarily impaired AFS securities. OTTI Losses on Fixed Maturity and Equity Securities AFS Recognized in Earnings See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about OTTI losses and gross gains and gross losses on AFS securities sold. Overview of Fixed Maturity and Equity Security OTTI Losses Recognized in Earnings Impairments of fixed maturity and equity securities were $32 million and $91 million for the three months and nine months ended September 30, 2014, respectively, and $34 million and $155 million for the three months and nine months ended September 30, 2013, respectively. Impairments of fixed maturity securities were $31 million and $56 million for the three months and nine months ended September 30, 2014, respectively, and $34 million and $133 million for the three months and nine months ended September 30, 2013, respectively. Impairments of equity securities were $1 million and $35 million for the three months and nine months ended September 30, 2014, respectively, and less than $1 million and $22 million for the three months and nine months ended September 30, 2013, respectively. Credit-related impairments of fixed maturity securities were $31 million and $56 million for the three months and nine months ended September 30, 2014, respectively, and $33 million and $114 million for the three months and nine months ended September 30, 2013, respectively. Explanations of changes in fixed maturity and equity securities impairments are as follows: Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 Overall OTTI losses recognized in earnings on fixed maturity and equity securities were $32 million for the three months ended September 30, 2014 as compared to $34 million in the prior period. The most significant decreases were in RMBS and U.S. and foreign corporate securities, which comprised $18 million for the three months ended September 30, 2014, as compared to $34 million for the three months ended September 30, 2013. A decrease of $9 million in OTTI losses on RMBS and $7 million on U.S. and foreign corporate securities reflect improving economic fundamentals. The $7 million decrease on U.S. and foreign corporate securities was concentrated in the consumer and transportation services industries. These decreases were partially offset by an increase in OTTI losses of $13 million on CMBS. 151-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 Overall OTTI losses recognized in earnings on fixed maturity and equity securities were $91 million for the nine months ended September 30, 2014 as compared to $155 million in the prior period. The most significant decreases were in U.S. and foreign corporate securities and RMBS, which comprised $36 million for the nine months ended September 30, 2014, as compared to $133 million for the nine months ended September 30, 2013. A decrease of $50 million in OTTI losses on U.S. and foreign corporate securities and a $47 million decrease on RMBS reflect improving economic fundamentals. The $50 million decrease on U.S. and foreign corporate securities was concentrated in the utility and financial services industries. Future Impairments Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, interest rates and credit spreads. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods. FVO and Trading Securities FVO and trading securities are primarily comprised of securities for which the FVO has been elected ("FVO Securities"). FVO Securities include certain fixed maturity and equity securities held-for-investment by the general account to support ALM strategies for certain insurance products and investments in certain separate accounts. FVO Securities are primarily comprised of contractholder-directed investments supporting unit-linked variable annuity type liabilities which do not qualify for presentation as separate account summary total assets and liabilities. These investments are primarily mutual funds and, to a lesser extent, fixed maturity and equity securities, short-term investments and cash and cash equivalents. The investment returns on these investments inure to contractholders and are offset by a corresponding change in PABs through interest credited to policyholder account balances. FVO Securities also include securities held by CSEs. We have a trading securities portfolio, principally invested in fixed maturity securities, to support investment strategies that involve the active and frequent purchase and sale of actively traded securities and the execution of short sale agreements. FVO and trading securities were $17.2 and $17.4 billion at estimated fair value, or 3.3% and 3.5% of total cash and invested assets, at September 30, 2014 and December 31, 2013, respectively. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for the FVO and trading securities fair value hierarchy and a rollforward of the fair value measurements for FVO and trading securities measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. Securities Lending We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned at inception of the loan. We monitor the estimated fair value of the securities loaned on a daily basis with additional collateral obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or repledged by the transferee. We are liable to return to our counterparties the cash collateral under our control. Security collateral on deposit from counterparties may not be sold or repledged, unless the counterparty is in default, and is not reflected in the consolidated financial statements. These transactions are treated as financing arrangements and the associated cash collateral liability is recorded at the amount of the cash received. See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Securities Lending" and Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding our securities lending program. Mortgage Loans Our mortgage loans held-for-investment are principally collateralized by commercial real estate, agricultural real estate and residential properties. Mortgage loans held-for-investment and related valuation allowances are summarized as follows at: September 30, 2014 December 31, 2013 % of % of Recorded % of Valuation Recorded Recorded % of Valuation Recorded Investment Total Allowance Investment Investment Total Allowance Investment (Dollars in millions) (Dollars in millions) Commercial $ 40,540 70.2 % $ 227 0.6 % $ 40,926 73.0 % $ 258 0.6 % Agricultural 11,929 20.7 38 0.3 % 12,391 22.1 44 0.4 % Residential 5,265 9.1 42 0.8 % 2,772 4.9 20 0.7 % Total $ 57,734 100.0 % $ 307 0.5 % $ 56,089 100.0 % $ 322 0.6 % 152-------------------------------------------------------------------------------- Table of Contents Excluded from the table above are mortgage loans for which the FVO has been elected and mortgage loans held-for-sale. See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about these mortgage loans. We diversify our mortgage loan portfolio by both geographic region and property type to reduce the risk of concentration. Of our commercial and agricultural mortgage loan portfolios, 86% are collateralized by properties located in the U.S., with the remaining 14% collateralized by properties located outside the U.S., calculated as a percent of the total commercial and agricultural mortgage loans held-for-investment at September 30, 2014. The carrying value of our commercial and agricultural mortgage loans located in California, New York and Texas were 19%, 12% and 8%, respectively, of total commercial and agricultural mortgage loans held-for-investment at September 30, 2014. Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral. Commercial Mortgage Loans by Geographic Region and Property Type. Commercial mortgage loans are the largest component of the mortgage loan invested asset class, as such loans represented over 70% of total mortgage loans held-for-investment at both September 30, 2014 and December 31, 2013. The tables below present the diversification across geographic regions and property types of commercial mortgage loans held-for-investment: September 30, 2014 December 31, 2013 % of % of Amount Total Amount Total (In millions) (In millions) Region Pacific $ 8,815 21.7 % $ 8,961 21.9 % Middle Atlantic 7,582 18.7 7,367 18.0 South Atlantic 6,705 16.5 6,977 17.1 International 6,636 16.4 6,709 16.4 West South Central 3,763 9.3 3,619 8.8 East North Central 2,589 6.4 2,717 6.6 New England 1,197 3.0 1,404 3.4 Mountain 933 2.3 834 2.0 East South Central 384 0.9 471 1.2 West North Central 142 0.4 148 0.4 Multi-Region and Other 1,794 4.4 1,719 4.2 Total recorded investment 40,540 100.0 % 40,926 100.0 % Less: valuation allowances 227 258 Carrying value, net of valuation allowances $ 40,313 $ 40,668 Property Type: Office $ 21,160 52.2 % $ 20,629 50.4 % Retail 9,263 22.8 9,245 22.6 Hotel 4,317 10.6 4,219 10.3 Apartment 3,392 8.4 3,724 9.1 Industrial 2,178 5.4 2,897 7.1 Other 230 0.6 212 0.5 Total recorded investment 40,540 100.0 % 40,926 100.0 % Less: valuation allowances 227 258 Carrying value, net of valuation allowances $ 40,313 $ 40,668 Mortgage Loan Credit Quality - Monitoring Process. We monitor our mortgage loan investments on an ongoing basis, including reviewing loans that are current, past due, restructured and under foreclosure. See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for tables that present mortgage loans by credit quality indicator, past due and nonaccrual mortgage loans, impaired mortgage loans, as well as loans modified in a troubled debt restructuring. See "- Real Estate and Real Estate Joint Ventures" for real estate acquired through foreclosure. Commercial and Agricultural Mortgage Loans. We review our commercial mortgage loans on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt service coverage ratios, and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt service coverage ratios. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a geographic and sector basis. 153-------------------------------------------------------------------------------- Table of Contents Loan-to-value ratios and debt service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio compares a property's net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 53% and 55% at September 30, 2014 and December 31, 2013, respectively, and our average debt service coverage ratio was 2.5x and 2.4x at September 30, 2014 and December 31, 2013, respectively. The debt service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a rolling basis, with a portion of the portfolio updated each quarter. The loan-to-value ratio is routinely updated for all but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolios. For our agricultural mortgage loans, our average loan-to-value ratio was 44% and 45% at September 30, 2014 and December 31, 2013, respectively. The values utilized in calculating the loan-to-value ratio are developed in connection with the ongoing review of the agricultural mortgage loan portfolio and are routinely updated. Mortgage Loan Valuation Allowances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Mortgage Loans - Mortgage Loan Valuation Allowances" included in the 2013 Annual Report for further information on our mortgage loan valuation allowance policy. See Notes 6 and 8 of the Notes to the Interim Condensed Consolidated Financial Statements for information about activity in and balances of the valuation allowance and the estimated fair value of impaired mortgage loans and related impairments included within net investment gains (losses) as of and for the three months and nine months ended September 30, 2014 and 2013. Real Estate and Real Estate Joint Ventures We diversify our real estate investments by both geographic region and property type to reduce risk of concentration. Of our real estate investments, 83% were located in the United States, with the remaining 17% located outside the United States at September 30, 2014. The three locations with the largest real estate investments were California, Japan and Florida at 16%, 14% and 10%, respectively, at September 30, 2014. Real estate investments by type consisted of the following at: September 30, 2014 December 31, 2013 Carrying % of Carrying % of Value Total Value Total (In millions) (In millions) Traditional $ 9,100 87.6 % $ 9,312 86.9 % Real estate joint ventures and funds 691 6.6 769 7.2 Subtotal 9,791 94.2 10,081 94.1 Foreclosed (commercial, agricultural and residential) 429 4.1 445 4.2 Real estate held-for-investment 10,220 98.3 10,526 98.3 Real estate held-for-sale 173 1.7 186 1.7 Total real estate and real estate joint ventures $ 10,393 100.0 % $ 10,712 100.0 % See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Real Estate and Real Estate Joint Ventures" included in the 2013 Annual Report for a discussion of the types of investments reported within traditional real estate and real estate joint ventures and funds. The estimated fair value of the traditional and held-for-sale real estate investment portfolios was $12.8 billion and $12.5 billion at September 30, 2014 and December 31, 2013, respectively. In connection with our investment management business, in the fourth quarter of 2013, we contributed real estate investments with an estimated fair value of $1.4 billion to the MetLife Core Property Fund, our newly formed open ended core real estate fund, in return for the issuance of ownership interests in that fund. As part of the initial closing on December 31, 2013, we redeemed 76% of our interest in this fund as new third party investors were admitted. The MetLife Core Property Fund was consolidated as of December 31, 2013. As a result of our quarterly reassessment in the first quarter of 2014, we no longer consolidate the MetLife Core Property Fund, effective March 31, 2014. See Note 6 of the Notes to Interim Condensed Consolidated Financial Statements for further information. 154-------------------------------------------------------------------------------- Table of Contents Other Limited Partnership Interests The carrying value of other limited partnership interests was $8.2 billion and $7.4 billion at September 30, 2014 and December 31, 2013, respectively, which included $2.4 billion and $1.9 billion of hedge funds, at September 30, 2014 and December 31, 2013, respectively. Other Invested Assets The following table presents the carrying value of our other invested assets by type: September 30, 2014 December 31, 2013 Carrying % of Carrying % of Value Total Value Total (In millions) (In millions) Freestanding derivatives with positive estimated fair values $ 10,171 56.8 % $ 8,595 53.0 % Tax credit and renewable energy partnerships 2,702 15.1 2,657 16.3 Leveraged leases, net of non-recourse debt 1,816 10.1 1,946 12.0 Funds withheld 694 3.9 649 4.0 Joint venture investments 415 2.3 113 0.7 Other 2,107 11.8 2,269 14.0 Total $ 17,905 100.0 % $ 16,229 100.0 % Short-term Investments and Cash Equivalents The carrying value of short-term investments, which approximates estimated fair value, was $12.2 billion and $14.0 billion, or 2.4% and 2.8% of total cash and invested assets, at September 30, 2014 and December 31, 2013, respectively. The carrying value of cash equivalents, which approximates estimated fair value, was $3.7 billion and $3.8 billion at September 30, 2014 and December 31, 2013, respectively, or 0.7% and 0.8% of total cash and invested assets, at September 30, 2014 and December 31, 2013, respectively. Derivatives Derivative Risks We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for: • A comprehensive description of the nature of our derivatives, including the strategies for which derivatives are used in managing various risks. • Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at September 30, 2014 and December 31, 2013. • The statement of operations effects of derivatives in cash flow, fair value, or non-qualifying hedge relationships for the three months and nine months ended September 30, 2014 and 2013. See "Quantitative and Qualitative Disclosures About Market Risk - Management of Market Risk Exposures - Hedging Activities" for more information about our use of derivatives by major hedge program. Fair Value Hierarchy See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy. The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income. 155-------------------------------------------------------------------------------- Table of Contents Derivatives categorized as Level 3 at September 30, 2014 include: interest rate forwards with maturities which extend beyond the observable portion of the yield curve; cancellable foreign currency swaps with unobservable currency correlation inputs; foreign currency swaps and forwards with certain unobservable inputs, including unobservable portion of the yield curve; credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs; and equity options with unobservable correlation inputs. At both September 30, 2014 and December 31, 2013, less than 1% of the net derivative estimated fair value was priced through independent broker quotations. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. Level 3 derivatives had a ($38) million and ($95) million gain (loss) recognized in net income (loss) for the three months and nine months ended September 30, 2014, respectively. This gain (loss) primarily relates to certain purchased equity options that are valued using models dependent on an unobservable market correlation input, equity variance swaps that are valued using observable equity volatility data plus an unobservable equity variance spread and foreign currency swaps and forwards that are valued using unobservable swap yield curve. The unobservable equity variance spread is calculated from a comparison between broker offered variance swap volatility and observable equity option volatility. Other significant inputs, which are observable, include equity index levels, equity volatility and the swap yield curve. We validate the reasonableness of these inputs by valuing the positions using internal models and comparing the results to broker quotations. The primary drivers of the net loss during the three months ended September 30, 2014 were strengthening of U.S. dollar versus foreign currencies on receive-foreign, pay-U.S. dollar forwards and swaps, largely offset by increases in equity volatility which, in total, accounted for 296% of the loss. Changes in the unobservable inputs accounted for an offsetting reduction in the loss of 196%. The primary drivers of the loss during the nine months ended September 30, 2014 were strengthening of U.S. dollar versus foreign currencies on receive-foreign, pay-U.S. dollar forwards and swaps, and decreases in equity volatility which, in total, accounted for 136% of the loss. Changes in the unobservable inputs accounted for an offsetting reduction in the loss of 36%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates - Derivatives" included in the 2013 Annual Report for further information on the estimates and assumptions that affect derivatives. Credit Risk See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral. Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives in the consolidated balance sheets, and does not affect our legal right of offset. Credit Derivatives The following table presents the gross notional amount and estimated fair value of credit default swaps at: September 30, 2014 December 31, 2013 Notional Estimated Notional Estimated Credit Default Swaps Amount Fair Value Amount Fair Value (In millions) Purchased (1) $ 2,773 $ (24 ) $ 3,725 $ (44 ) Written (2) 10,929 147 9,055 165 Total $ 13,702 $ 123 $ 12,780 $ 121 __________________(1) The notional amount and estimated fair value for purchased credit default swaps in the trading portfolio were $245 million and ($5) million, respectively, at September 30, 2014 and $355 million and ($10) million, respectively, at December 31, 2013. (2) The notional amount and estimated fair value for written credit default swaps in the trading portfolio were $45 million and $2 million, respectively, at September 30, 2014 and $10 million and $0, respectively, at December 31, 2013. 156-------------------------------------------------------------------------------- Table of Contents The following table presents the gross gains, gross losses and net gain (losses) recognized in income for credit default swaps as follows: Three Months Nine Months Ended Ended September 30, September 30, 2014 2013 2014 2013 Gross Gross Net Gross Gross Net Gross Gross Net Gross Gross Net Gains Losses Gains Gains Losses Gains Gains Losses Gains Gains Losses Gains Credit Default Swaps (1) (1) (Losses) (1) (1) (Losses) (1) (1) (Losses) (1) (1) (Losses) (In millions) Purchased (2), (4) $ 6 $ - $ 6 $ 2 $ (10 ) $ (8 ) $ 18 $ (18 ) $ - $ 12 $ (29 ) $ (17 ) Written (3), (4) (15 ) (17 ) (32 ) 43 3 46 20 (39 ) (19 ) 95 (22 ) 73 Total $ (9 ) $ (17 ) $ (26 ) $ 45 $ (7 ) $ 38 $ 38 $ (57 ) $ (19 ) $ 107 $ (51 ) $ 56 __________________(1) Gains (losses) are reported in net derivative gains (losses), except for gains (losses) on the trading portfolio, which are reported in net investment income. (2) The gross gains and gross (losses) for purchased credit default swaps in the trading portfolio were $1 million and $0, respectively, for the three months ended September 30, 2014 and $4 million and ($3) million, respectively, for the nine months ended September 30, 2014. The gross gains and gross (losses) for purchased credit default swaps in the trading portfolio were $0 and ($5) million, respectively, for the three months ended September 30, 2013 and $2 million and ($11) million, respectively, for the nine months ended September 30, 2013. (3) The gross gains and gross (losses) for written credit default swaps in the trading portfolio were not significant for both the three months and nine months ended September 30, 2014. The gross gains and gross (losses) for written credit default swaps in the trading portfolio were $1 million and $0, respectively, for both the three months and nine months ended September 30, 2013. (4) Gains (losses) do not include earned income (expense) on credit default swaps. Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013 The favorable change in net gains (losses) on purchased credit default swaps of $14 million was due to credit spreads widening in the current period as compared to credit spreads narrowing in the prior period on credit default swaps hedging certain bonds. The unfavorable change in net gains (losses) on written credit default swaps of ($78) million was due to certain credit spreads being mixed in the current period compared to credit spreads narrowing in the prior period on certain credit default swaps used as replications. Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013 The favorable change in net gains (losses) on purchased credit default swaps of $17 million was due to credit spreads widening in the current period as compared to credit spreads narrowing in the prior period on credit default swaps hedging certain bonds. The unfavorable change in net gains (losses) on written credit default swaps of ($92) million was due to certain credit spreads being mixed in the current period compared to credit spreads narrowing in the prior period on certain credit default swaps used as replications. The maximum amount at risk related to our written credit default swaps is equal to the corresponding notional amount. The increase in the notional amount of written credit default swaps is primarily a result of our decision to add to our credit replication holdings within the Company. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by insurance regulators and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we will seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasing Treasury bonds (or other high-quality assets) and associating them with written credit default swaps on the desired corporate credit name, we, at times, can replicate the desired bond exposures and meet our ALM needs. In addition, given the shorter tenor of the credit default swaps (generally five-year tenors) versus a long-dated corporate bond, we have more flexibility in managing our credit exposures. 157-------------------------------------------------------------------------------- Table of Contents Embedded Derivatives See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements for a rollforward of the fair value measurements for net embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates - Derivatives" included in the 2013 Annual Report for further information on the estimates and assumptions that affect embedded derivatives. Off-Balance Sheet Arrangements Credit and Committed Facilities We maintain an unsecured credit facility and certain committed facilities with various financial institutions. See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities" for further descriptions of such arrangements. Collateral for Securities Lending, Repurchase Program and Derivatives We participate in a securities lending program in the normal course of business for the purpose of enhancing the total return on our investment portfolio. Periodically, we receive non-cash collateral for securities lending from counterparties, which cannot be sold or repledged, and which has not been recorded on our consolidated balance sheets. The amount of this collateral was $67 million at estimated fair value at September 30, 2014. We had no such collateral as of December 31, 2013. See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments - Securities Lending" and "Summary of Significant Accounting Policies - Investments - Securities Lending Program" in Note 1 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for discussion of our securities lending program, the classification of revenues and expenses, and the nature of the secured financing arrangement and associated liability. We also participate in third-party custodian administered repurchase programs for the purpose of enhancing the total return on our investment portfolio. We loan certain of our fixed maturity securities to financial institutions and, in exchange, non-cash collateral is put on deposit by the financial institutions on our behalf with third-party custodians. The estimated fair value of securities loaned in connection with these transactions was $764 million and $231 million at September 30, 2014 and December 31, 2013, respectively. Non-cash collateral on deposit with third-party custodians on our behalf was $832 million and $256 million at September 30, 2014 and December 31, 2013, respectively, which cannot be sold or re-pledged, and which has not been recorded on our consolidated balance sheets. We enter into derivatives to manage various risks relating to our ongoing business operations. We have non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which has not been recorded on our consolidated balance sheets. The amount of this non-cash collateral was $3.3 billion and $2.3 billion at September 30, 2014 and December 31, 2013, respectively. In certain instances, cash collateral pledged to the Company as initial margin for OTC-bilateral derivatives is held in separate custodial accounts and is not recorded on the Company's balance sheet because the account title is in the name of the counterparty (but ring-fenced for the benefit of the Company). The amount of this cash collateral was $249 million at September 30, 2014. No cash collateral of this type was held at December 31, 2013. See "- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Pledged Collateral" and Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for information on the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives. 158-------------------------------------------------------------------------------- Table of Contents Other Additionally, we make mortgage loan commitments and commitments to fund partnerships, bank credit facilities, bridge loans and private corporate bond investments in the normal course of business for the purpose of enhancing the total return on our investment portfolio. Other than these investment-related commitments which are disclosed in Note 14 of the Notes to the Interim Condensed Consolidated Financial Statements, there are no other material obligations or liabilities arising from these investment- related commitments. For further information on these investment-related commitments see "- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Contractual Obligations." See "Net Investment Income" and "Net Investment Gains (Losses)" in Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information on the investment income, investment expense, gains and losses from such investments. See also "- Investments - Fixed Maturity and Equity Securities Available-for-Sale," "- Investments - Mortgage Loans," "- Investments - Real Estate and Real Estate Joint Ventures" and "- Investments - Other Limited Partnership Interests" for information on our investments in fixed maturity and equity securities, mortgage loans and partnerships. Policyholder Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the interim condensed consolidated financial statements in conformity with GAAP. For more details on Policyholder Liabilities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates" included in the 2013 Annual Report. Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of actuarial liabilities, we cannot precisely determine the amounts that will ultimately be paid with respect to these actuarial liabilities, and the ultimate amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future. We periodically review our estimates of actuarial liabilities for future benefits and compare them with our actual experience. We revise estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on our business, results of operations and financial condition. Insurance regulators in many of the non-U.S. countries in which we operate require certain MetLife entities to prepare a sufficiency analysis of the reserves presented in the locally required regulatory financial statements, and to submit that analysis to the regulatory authorities. See "Business - International Regulation" included in the 2013 Annual Report. We have experienced, and will likely in the future experience, catastrophe losses and possibly acts of terrorism, as well as turbulent financial markets that may have an adverse impact on our business, results of operations, and financial condition. Due to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes and acts of terrorism, but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils. Future Policy Benefits We establish liabilities for amounts payable under insurance policies. See Notes 1 and 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for additional information. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Trends - Impact of a Sustained Low Interest Rate Environment - Interest Rate Stress Scenario" included in the 2013 Annual Report and "- Variable Annuity Guarantees." A discussion of future policy benefits by segment (as well as Corporate & Other) follows. 159-------------------------------------------------------------------------------- Table of Contents Retail Future policy benefits for the life business are comprised mainly of liabilities for traditional life and for universal and variable life insurance contracts. In order to manage risk, we have often reinsured a portion of the mortality risk on life insurance policies. The reinsurance programs are routinely evaluated and this may result in increases or decreases to existing coverage. We have entered into various derivative positions, primarily interest rate swaps and swaptions, to mitigate the risk that investment of premiums received and reinvestment of maturing assets over the life of the policy will be at rates below those assumed in the original pricing of these contracts. For our property & casualty products, future policy benefits include unearned premium reserves and liabilities for unpaid claims and claim expenses and represent the amount estimated for claims that have been reported but not settled and claims incurred but not reported. For the annuities business, future policy benefits are comprised mainly of liabilities for life-contingent income annuities, and liabilities for the variable annuity guaranteed minimum benefits accounted for as insurance. Group, Voluntary & Worksite Benefits With the exception of our property & casualty products, future policy benefits for our Group and Voluntary & Worksite businesses are comprised mainly of liabilities for disabled lives under disability waiver of premium policy provisions, liabilities for survivor income benefit insurance, LTC policies, active life policies and premium stabilization and other contingency liabilities held under life insurance contracts. The future policy benefits of the property & casualty products offered by the Voluntary & Worksite business are the same as those of the Retail property & casualty business. Liabilities for unpaid claims are estimated based upon assumptions such as rates of claim frequencies, levels of severities, inflation, judicial trends, legislative changes or regulatory decisions. Assumptions are based upon our historical experience and analyses of historical development patterns of the relationship of loss adjustment expenses to losses for each line of business, and consider the effects of current developments, anticipated trends and risk management programs, reduced for anticipated salvage and subrogation. Corporate Benefit Funding Liabilities for this segment are primarily related to payout annuities, including pension closeouts and structured settlement annuities. There is no interest rate crediting flexibility on these liabilities. As a result, a sustained low interest rate environment could negatively impact earnings; however, we mitigate our risks by applying various ALM strategies, including the use of various derivative positions, primarily interest rate floors and interest rate swaps, to mitigate the risks associated with such a scenario. Latin America Future policy benefits for this segment are held primarily for immediate annuities in Chile, Argentina and Mexico and traditional life contracts mainly in Brazil and Mexico. There are also liabilities held for total return pass-through provisions included in certain universal life and savings products in Mexico. Factors impacting these liabilities include sustained periods of lower yields than rates established at policy issuance, lower than expected asset reinvestment rates, and mortality and lapses different than expected. We mitigate our risks by applying various ALM strategies. Asia Future policy benefits for this segment are held primarily for traditional life, endowment, annuity and accident & health contracts. They are also held for total return pass-through provisions included in certain universal life and savings products. They include certain liabilities for variable annuity and variable life guarantees of minimum death benefits, and longevity guarantees. Factors impacting these liabilities include sustained periods of lower yields than rates established at policy issuance, lower than expected asset reinvestment rates, market volatility, actual lapses resulting in lower than expected income, and actual mortality or morbidity resulting in higher than expected benefit payments. We mitigate our risks by applying various ALM strategies. EMEA Future policy benefits for this segment include unearned premium reserves for group life and credit insurance contracts. Future policy benefits are also held for traditional life, endowment and annuity contracts with significant mortality risk and accident & health contracts. Factors impacting these liabilities include sustained periods of lower yields than rates established at issue, lower than expected asset reinvestment rates, market volatility, actual lapses resulting in lower than expected income, and actual mortality or morbidity resulting in higher than expected benefit payments. We mitigate our risks by having premiums which are adjustable or cancellable in some cases, and by applying various ALM strategies. 160-------------------------------------------------------------------------------- Table of Contents Corporate & Other Future policy benefits primarily include liabilities for quota-share reinsurance agreements for certain run-off LTC and workers' compensation business written by MICC. Additionally, future policy benefits include liabilities for variable annuity guaranteed minimum benefits assumed from a former operating joint venture in Japan that are accounted for as insurance. Policyholder Account Balances PABs are generally equal to the account value, which includes accrued interest credited, but excludes the impact of any applicable charge that may be incurred upon surrender. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Trends - Impact of a Sustained Low Interest Rate Environment - Interest Rate Stress Scenario" included in the 2013 Annual Report and "- Variable Annuity Guarantees." See also Notes 1 and 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for additional information. A discussion of PABs by segment (as well as Corporate & Other) follows. Retail Life & Other PABs are held for retained asset accounts, universal life policies and the fixed account of variable life insurance policies. For Annuities, PABs are held for fixed deferred annuities, the fixed account portion of variable annuities, and non-life contingent income annuities. Interest is credited to the policyholder's account at interest rates we determine which are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could negatively impact earnings as a result of the minimum credited rate guarantees present in most of these PABs. We have various derivative positions, primarily interest rate floors, to partially mitigate the risks associated with such a scenario. Additionally, PABs are held for variable annuity guaranteed minimum living benefits that are accounted for as embedded derivatives. The table below presents the breakdown of account value subject to minimum guaranteed crediting rates for Retail: September 30, 2014 Account Account Value at Guaranteed Minimum Crediting Rate Value (1) Guarantee (1) (In millions) Life & Other Greater than 0% but less than 2% $ 121 $ 121 Equal to 2% but less than 4% $ 11,798 $ 4,935 Equal to or greater than 4% $ 10,721 $ 6,767 Annuities Greater than 0% but less than 2% $ 3,291 $ 2,715 Equal to 2% but less than 4% $ 32,720 $ 26,917 Equal to or greater than 4% $ 2,578 $ 2,532 __________________ (1) These amounts are not adjusted for policy loans. As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited rates in excess of market rates as of the applicable acquisition dates. At September 30, 2014, excess interest reserves were $124 million and $352 million for Life & Other and Annuities, respectively. Group, Voluntary & Worksite Benefits PABs in this segment are held for retained asset accounts, universal life policies, the fixed account of variable life insurance policies and specialized life insurance products for benefit programs. PABs are credited interest at a rate we determine, which are influenced by current market rates. A sustained low interest rate environment could negatively impact earnings as a result of the minimum credited rate guarantees present in most of these PABs. We have various derivative positions, primarily interest rate floors, to partially mitigate the risks associated with such a scenario. 161-------------------------------------------------------------------------------- Table of Contents The table below presents the breakdown of account value subject to minimum guaranteed crediting rates for Group, Voluntary & Worksite Benefits: September 30, 2014 Account Account Value at Guaranteed Minimum Crediting Rate Value (1) Guarantee (1) (In millions) Greater than 0% but less than 2% $ 4,915 $ 4,913 Equal to 2% but less than 4% $ 2,195 $ 2,173 Equal to or greater than 4% $ 646 $ 620 __________________ (1) These amounts are not adjusted for policy loans. Corporate Benefit Funding PABs in this segment are comprised of funding agreements. Interest crediting rates vary by type of contract, and can be fixed or variable. Variable interest crediting rates are generally tied to an external index, most commonly the (1-month or 3-month) London Interbank Offered Rate (LIBOR). We are exposed to interest rate risks, as well as foreign currency exchange rate risk when guaranteeing payment of interest and return of principal at the contractual maturity date. We may invest in floating rate assets or enter into receive-floating interest rate swaps, also tied to external indices, as well as caps, to mitigate the impact of changes in market interest rates. We also mitigate our risks by applying various ALM strategies and seek to hedge all foreign currency exchange rate risk through the use of foreign currency hedges, including cross currency swaps. Latin America PABs in this segment are held largely for investment-type products and universal life products in Mexico, and deferred annuities in Brazil. Some of the deferred annuities in Brazil are unit-linked-type funds that do not meet the GAAP definition of separate accounts. The rest of the deferred annuities have minimum credited rate guarantees, and these liabilities and the universal life liabilities are generally impacted by sustained periods of low interest rates. Liabilities for unit-linked-type funds are impacted by changes in the fair value of the associated investments, as the return on assets is generally passed directly to the policyholder. Asia PABs in this segment are held largely for fixed income retirement and savings plans, fixed deferred annuities, interest sensitive whole life products, universal life and, to a lesser degree, liability amounts for unit-linked-type funds that do not meet the GAAP definition of separate accounts. Also included are certain liabilities for retirement and savings products sold in certain countries in Asia that generally are sold with minimum credited rate guarantees. Liabilities for guarantees on certain variable annuities in Asia are accounted for as embedded derivatives and recorded at estimated fair value and are also included within PABs. These liabilities are generally impacted by sustained periods of low interest rates, where there are interest rate guarantees. We mitigate our risks by applying various ALM strategies and with reinsurance. Liabilities for unit-linked-type funds are impacted by changes in the fair value of the associated underlying investments, as the return on assets is generally passed directly to the policyholder. 162-------------------------------------------------------------------------------- Table of Contents The table below presents the breakdown of account value subject to minimum guaranteed crediting rates for Asia: September 30, 2014 Account Account Value at Guaranteed Minimum Crediting Rate (1) Value (2) Guarantee (2) (In millions) Annuities Greater than 0% but less than 2% $ 25,741 $ 2,644 Equal to 2% but less than 4% $ 1,064 $ 329 Equal to or greater than 4% $ 2 $ 2 Life & Other Greater than 0% but less than 2% $ 6,350 $ 5,939 Equal to 2% but less than 4% $ 17,933 $ 8,709 Equal to or greater than 4% $ 265 $ - __________________ (1) Excludes negative VOBA liabilities of $1.8 billion at September 30, 2014, primarily held in Japan. These liabilities were established in instances where the estimated fair value of contract obligations exceeded the book value of assumed insurance policy liabilities in the acquisition of American Life Insurance Company and Delaware American Life Insurance Company (collectively, "ALICO"). These negative liabilities were established primarily for decreased market interest rates subsequent to the issuance of the policy contracts. (2) These amounts are not adjusted for policy loans. EMEA PABs in this segment are held mostly for universal life, deferred annuity, pension products, and unit-linked-type funds that do not meet the GAAP definition of separate accounts. They are also held for endowment products without significant mortality risk. Where there are interest rate guarantees, these liabilities are generally impacted by sustained periods of low interest rates. We mitigate our risks by applying various ALM strategies. Liabilities for unit-linked-type funds are impacted by changes in the fair value of the associated investments, as the return on assets is generally passed directly to the policyholder. Corporate & Other PABs in Corporate & Other are held for variable annuity guaranteed minimum benefits assumed from a former operating joint venture in Japan that are accounted for as embedded derivatives. Variable Annuity Guarantees We issue, directly and through assumed reinsurance, certain variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the benefit base) less withdrawals. In some cases, the benefit base may be increased by additional deposits, bonus amounts, accruals or optional market value resets. See Notes 1 and 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for additional information. Certain guarantees, including portions thereof, have insurance liabilities established that are included in future policy benefits. Guarantees accounted for in this manner include GMDBs, the life-contingent portion of certain guaranteed minimum withdrawal benefits ("GMWBs"), and the portion of guaranteed minimum income benefit ("GMIBs") that requires annuitization. These liabilities are accrued over the life of the contract in proportion to actual and future expected policy assessments based on the level of guaranteed minimum benefits generated using multiple scenarios of separate account returns. The scenarios are based on best estimate assumptions consistent with those used to amortize DAC. When current estimates of future benefits exceed those previously projected or when current estimates of future assessments are lower than those previously projected, liabilities will increase, resulting in a current period charge to net income. The opposite result occurs when the current estimates of future benefits are lower than that previously projected or when current estimates of future assessments exceed those previously projected. At each reporting period, we update the actual amount of business remaining in-force, which impacts expected future assessments and the projection of estimated future benefits resulting in a current period charge or increase to earnings. 163-------------------------------------------------------------------------------- Table of Contents Certain guarantees, including portions thereof, accounted for as embedded derivatives, are recorded at estimated fair value and included in PABs. Guarantees accounted for as embedded derivatives include guaranteed minimum accumulation benefits ("GMABs"), the non-life contingent portion of GMWBs and the portion of certain GMIBs that do not require annuitization. The estimated fair values of guarantees accounted for as embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions including expectations concerning policyholder behavior. A risk neutral valuation methodology is used to project the cash flows from the guarantees under multiple capital market scenarios to determine an economic liability. The reported estimated fair value is then determined by taking the present value of these risk-free generated cash flows using a discount rate that incorporates a spread over the risk-free rate to reflect our nonperformance risk and adding a risk margin. For more information on the determination of estimated fair value, see Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements. The table below contains the carrying value for guarantees at: Future Policy Policyholder Benefits Account Balances September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 (In millions) Americas GMDB $ 677 $ 495 $ - $ - GMIB 1,920 1,608 (1,717 ) (1,904 ) GMAB - - 2 2 GMWB 97 62 (172 ) (441 ) Asia GMDB 35 33 - - GMAB - - 11 3 GMWB 205 204 149 129 EMEA GMDB (5 ) 6 - - GMAB - - 13 11 GMWB 30 19 (113 ) (102 ) Corporate & Other GMDB 13 11 - - GMAB - - 50 83 GMWB 89 109 1,184 1,179 Total $ 3,061 $ 2,547 $ (593 ) $ (1,040 ) The carrying amounts for guarantees included in PABs above include nonperformance risk adjustments of $262 million and $267 million at September 30, 2014 and December 31, 2013, respectively. These nonperformance risk adjustments represent the impact of including a credit spread when discounting the underlying risk neutral cash flows to determine the estimated fair values. The nonperformance risk adjustment does not have an economic impact on us as it cannot be monetized given the nature of these policyholder liabilities. The change in valuation arising from the nonperformance risk adjustment is not hedged. The carrying values of these guarantees can change significantly during periods of sizable and sustained shifts in equity market performance, equity volatility, interest rates or foreign currency exchange rates. Carrying values are also impacted by our assumptions around mortality, separate account returns and policyholder behavior including lapse rates. As discussed below, we use a combination of product design, reinsurance, hedging strategies, and other risk management actions to mitigate the risks related to these benefits. Within each type of guarantee, there is a range of product offerings reflecting the changing nature of these products over time. Changes in product features and terms are in part driven by customer demand but, more importantly, reflect our risk management practices of continuously evaluating the guaranteed benefits and their associated asset-liability matching. The sections below provide further detail by total contract account value for certain of our most popular guarantees. Total contract account values include amounts not reported in the consolidated balance sheets from assumed reinsurance, contractholder-directed investments which do not qualify for presentation as separate account assets, and amounts included in our general account. 164-------------------------------------------------------------------------------- Table of Contents GMDBs We offer a range of GMDBs to our contractholders. The table below presents GMDBs, by benefit type, at September 30, 2014: Total Contract Account Value (1) Corporate & Americas Other (In millions)Return of premium or five to seven year step-up $ 105,268 $ 14,261 Annual step-up 31,184 - Roll-up and step-up combination 39,655 - Total $ 176,107 $ 14,261 __________________ (1) Total contract account value excludes $2.2 billion for contracts with no GMDBs and $11.6 billion of total contract account value in the EMEA and Asia segments. Based on total contract account value, less than 40% of our GMDBs included enhanced death benefits such as the annual step-up or roll-up and step-up combination products. We expect the above GMDB risk profile to be relatively consistent for the foreseeable future. As part of our risk management of the GMDB business, we have been opportunistically reinsuring in-force blocks, taking advantage of favorable capital market conditions. Our approach for such treaties has been to seek coverage for the enhanced GMDBs, such as the annual step-up and the roll-up and step-up combination. These treaties tend to cover long periods until claims start running off, and are written either on a first dollar basis or with a deductible. Living Benefit Guarantees The table below presents our living benefit guarantees based on total contract account values at September 30, 2014: Total Contract Account Value (1) Corporate & Americas Other (In millions) GMIB $ 98,374 $ - GMWB - non-life contingent 6,713 3,576 GMWB - life-contingent 20,945 9,034 GMAB 257 1,651 $ 126,289 $ 14,261 __________________(1) Total contract account value excludes $52.1 billion for contracts with no living benefit guarantees and $9.4 billion of total contract account value in the EMEA and Asia segments. In terms of total contract account value, GMIBs are our most significant living benefit guarantee. Our primary risk management strategy for our GMIB products is our derivatives hedging program as discussed below. Additionally, we have engaged in certain reinsurance agreements covering some of our GMIB business. As part of our overall risk management approach for living benefit guarantees, we continually monitor the reinsurance markets for the right opportunity to purchase additional coverage for our GMIB business. 165-------------------------------------------------------------------------------- Table of Contents The table below presents our GMIBs, by their guaranteed payout basis, at September 30, 2014: Total Contract Account Value (In millions) 7-year setback, 2.5% interest rate $ 36,148 7-year setback, 1.5% interest rate 6,055 10-year setback, 1.5% interest rate 20,233 10-year mortality projection, 10-year setback, 1.0% interest rate 31,360 10-year mortality projection, 10-year setback, 0.5% interest rate 4,578 $ 98,374 The annuitization interest rates on GMIBs have been decreased from 2.5% to 0.5% over time, partially in response to the low interest rate environment, accompanied by an increase in the setback period from seven years to 10 years and the recent introduction of the 10-year mortality projection. We expect new contracts to have comparable guarantee features for the foreseeable future. Additionally, 32% of the $98.4 billion of GMIB total contract account value has been invested in managed volatility funds as of September 30, 2014. These funds seek to manage volatility by adjusting the fund holdings within certain guidelines based on capital market movements. Such activity reduces the overall risk of the underlying funds while maintaining their growth opportunities. These risk mitigation techniques translate to a reduction or elimination of the need for us to manage the funds' volatility through hedging or reinsurance. We expect the proportion of total contract account value invested in these funds to increase for the foreseeable future, as new contracts with GMIB are required to invest in these funds. Our GMIB products typically have a waiting period of 10 years to be eligible for annuitization. As of September 30, 2014, only 10% of our contracts with GMIBs were eligible for annuitization. The remaining contracts are not eligible for annuitization for an average of seven years. Once eligible for annuitization, contractholders would only be expected to annuitize if their contracts were in-the-money. We calculate in-the-moneyness with respect to GMIBs consistent with net amount at risk as discussed in Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements, by comparing the contractholders' income benefits based on total contract account values and current annuity rates versus the guaranteed income benefits. For those contracts with GMIB, the table below presents details of contracts that are in-the-money and out-of-the-money at September 30, 2014: In-the- Total Contract Moneyness Account Value % of Total (In millions) In-the-money 30% + $ 1,204 1.2 % 20% to 30% 974 1.0 % 10% to 20% 2,171 2.2 % 0% to 10% 4,780 4.9 % 9,129 Out-of-the-money -10% to 0% 8,473 8.6 % -20% to -10% 17,932 18.2 % -20% + 62,840 63.9 % 89,245 Total GMIBs $ 98,374 166-------------------------------------------------------------------------------- Table of Contents Derivatives Hedging Variable Annuity Guarantees In addition to reinsurance and our risk mitigating steps described above, we have a hedging strategy that uses various OTC and exchanged traded derivatives. The table below presents the gross notional amount, estimated fair value and primary underlying risk exposure of the derivatives hedging our variable annuity guarantees: September 30, 2014 December 31, 2013 Primary Underlying Notional Estimated FairValue Notional Estimated Fair Value Risk Exposure Instrument Type Amount Assets Liabilities Amount Assets Liabilities (In millions) Interest rate Interest rate swaps $ 25,473 $ 1,546 $ 693 $ 25,474 $ 1,108 $ 669 Interest rate futures 5,503 4 5 5,888 9 9 Interest rate options 32,260 451 94 17,690 131 236 Foreign currency Foreign currency exchange rate forwards 2,293 5 56 2,324 1 171 Foreign currency futures 455 - 2 365 1 1 Equity market Equity futures 6,000 24 5 5,144 1 43 Equity options 35,919 1,345 1,063 35,445 1,344 1,068 Variance swaps 22,272 195 643 21,636 174 577 Total rate of return swaps 3,496 73 13 3,802 - 179 Total $ 133,671 $ 3,643 $ 2,574 $ 117,768 $ 2,769 $ 2,953 The change in estimated fair values of our derivatives is recorded in policyholder benefits and claims if they are hedging guarantees included in future policy benefits, and in net derivative gains (losses) if they are hedging guarantees included in PABs. Our hedging strategy involves the significant use of static longer-term derivative instruments to avoid the need to execute transactions during periods of market disruption or higher volatility. We continually monitor the capital markets for opportunities to adjust our liability coverage, as appropriate. Futures are also used to dynamically adjust the daily coverage levels as markets and liability exposures fluctuate. We remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay. Certain of our reinsurance agreements and most derivative positions are collateralized and derivatives positions are subject to master netting agreements, both of which significantly reduce the exposure to counterparty risk. In addition, we are subject to the risk that hedging and other risk management actions prove ineffective or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. Liquidity and Capital Resources Overview Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. The global markets and economy continue to experience volatility that may affect our financing costs and market interest for our debt or equity securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, see "- Industry Trends" and "- Investments - Current Environment." Liquidity Management Based upon the strength of our franchise, diversification of our businesses, strong financial fundamentals and the substantial funding sources available to us as described herein, we continue to believe we have access to ample liquidity to meet business requirements under current market conditions and reasonably possible stress scenarios. We continuously monitor and adjust our liquidity and capital plans for MetLife, Inc. and its subsidiaries in light of market conditions, changing needs and opportunities. 167-------------------------------------------------------------------------------- Table of Contents Short-term Liquidity We maintain a substantial short-term liquidity position, which was $15.4 billion and $15.8 billion at September 30, 2014 and December 31, 2013, respectively. Short-term liquidity includes cash and cash equivalents and short-term investments, excluding: (i) amounts related to cash collateral received under our securities lending program; (ii) amounts related to cash collateral received from counterparties in connection with derivatives; and (iii) cash held in the closed block. Liquid Assets An integral part of our liquidity management includes managing our level of liquid assets, which was $239.4 billion and $240.9 billion at September 30, 2014 and December 31, 2013, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding: (i) amounts related to cash collateral received under our securities lending program; (ii) amounts related to cash collateral received from counterparties in connection with derivatives; (iii) cash and investments held in the closed block, in regulatory custodial accounts or on deposit with regulatory agencies; (iv) investments held in trust in support of collateral financing arrangements; and (v) investments pledged in support of funding agreements, derivatives and short sale agreements. Capital Management We have established several senior management committees as part of our capital management process. These committees, including the Capital Management Committee and the Enterprise Risk Committee ("ERC"), regularly review actual and projected capital levels (under a variety of scenarios including stress scenarios) and our annual capital plan in accordance with our capital policy. The Capital Management Committee is comprised of members of senior management, including MetLife, Inc.'s Chief Financial Officer, Treasurer and Chief Risk Officer ("CRO"). The ERC is also comprised of members of senior management, including MetLife, Inc.'s Chief Financial Officer, CRO and Chief Investment Officer. Our Board and senior management are directly involved in the development and maintenance of our capital policy. The capital policy sets forth, among other things, minimum and target capital levels and the governance of the capital management process. All capital actions, including proposed changes to the annual capital plan, capital targets or capital policy, are reviewed by the Finance and Risk Committee of the Board prior to obtaining full Board approval. The Board approves the capital policy and the annual capital plan and authorizes capital actions, as required. See "Risk Factors - Capital-Related Risks - Regulatory Restrictions and Uncertainty and Restrictions Under the Terms of Certain of Our Securities May Prevent Us from Repurchasing Our Stock and Paying Dividends at the Level We Wish" included in MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and Note 16 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for information regarding restrictions on payment of dividends and stock repurchases. See also "- The Company - Liquidity and Capital Uses - Common Stock Repurchases" for information regarding MetLife, Inc.'s common stock repurchase program. The Company Liquidity Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. In the event of significant cash requirements beyond anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternatives include cash flows from operations, sales of liquid assets, global funding sources and various credit facilities. Capital We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate strong cash flows within our operating companies and borrow funds at competitive rates, as well as by our demonstrated ability to raise additional capital to meet operating and growth needs despite adverse market and economic conditions. 168-------------------------------------------------------------------------------- Table of Contents Summary of Primary Sources and Uses of Liquidity and Capital Our primary sources and uses of liquidity and capital are summarized as follows: Nine Months Ended September 30, 2014 2013 (In millions) Sources: Operating activities, net $ 10,950 $ 9,984 Changes in policyholder account balances, net 2,554 - Changes in payables for collateral under securities loaned 3,481 - and other transactions, net Changes in bank deposits, net - 8 Long-term debt issued 1,000 - Common stock issued, net of issuance costs - 1,000 Total sources 17,985 10,992 Uses: Investing activities, net 11,669 6,575 Changes in policyholder account balances, net - 4,973 Changes in payables for collateral under securities loaned - 1,821 and other transactions, net Short-term debt repayments, net 75 - Long-term debt repaid 2,802 765 Treasury stock acquired in connection with share 443 - repurchases Dividends on preferred stock 91 91 Dividends on common stock 1,101 808 Other, net 546 134 Effect of change in foreign currency exchange rates on 60 187 cash and cash equivalents Total uses 16,787 15,354 Net increase (decrease) in cash and cash equivalents $ 1,198 $ (4,362 ) Cash Flows from Operations The principal cash inflows from our insurance activities come from insurance premiums, annuity considerations and deposit funds. The principal cash outflows relate to the liabilities associated with various life insurance, property & casualty, annuity and pension products, operating expenses and income tax, as well as interest on debt obligations. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal. Cash Flows from Investments The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, settlements of freestanding derivatives and net investment income. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. Additional cash outflows include those related to our securities lending activities and purchases of businesses. We typically have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. Financing Cash Flows The principal cash inflows from our financing activities come from issuances of debt and other securities and deposits of funds associated with PABs. The principal cash outflows come from repayments of debt, payments of dividends on and repurchase of MetLife, Inc.'s securities and withdrawals associated with PABs. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early contractholder and policyholder withdrawal. Liquidity and Capital Sources In addition to the general description of liquidity and capital sources in "- Summary of Primary Sources and Uses of Liquidity and Capital," the following additional information is provided regarding our primary sources of liquidity and capital: 169-------------------------------------------------------------------------------- Table of Contents Global Funding Sources Liquidity is provided by a variety of global funding sources, including funding agreements, credit facilities and commercial paper. Capital is provided by a variety of global funding sources, including short-term and long-term debt, collateral financing arrangements, junior subordinated debt securities, preferred securities, equity securities and equity-linked securities. The diversity of our global funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary global funding sources include: Common Stock During the nine months ended September 30, 2014 and 2013, MetLife, Inc. issued 5,225,340 and 6,478,671 new shares of its common stock for $196 million and $209 million, respectively, to satisfy various stock option exercises and other stock-based awards. See "- Remarketing of Senior Debt Securities and Settlement of Stock Purchase Contracts" for information regarding the issuance of common stock in October 2014 in connection with the remarketing of the senior debt securities underlying MetLife, Inc.'s common equity units issued in November 2010. Commercial Paper, Reported in Short-term Debt MetLife, Inc. and MetLife Funding, Inc. ("MetLife Funding") each have commercial paper programs supported by a $4.0 billion general corporate credit facility (see "- Credit and Committed Facilities"). MetLife Funding, a subsidiary of Metropolitan Life Insurance Company ("MLIC"), serves as our centralized finance unit. MetLife Funding raises cash from its commercial paper program and uses the proceeds to extend loans, through MetLife Credit Corp., another subsidiary of MLIC, to MetLife, Inc., MLIC and other affiliates in order to enhance the financial flexibility and liquidity of these companies. Outstanding balances for the commercial paper programs fluctuate in line with changes to affiliates' financing arrangements. Federal Home Loan Bank Funding Agreements, Reported in PABs Certain of our domestic insurance subsidiaries are members of a regional Federal Home Loan Bank ("FHLB"). During the nine months ended September 30, 2014 and 2013, we issued $9.3 billion and $10.5 billion, respectively, and repaid $9.3 billion and $10.9 billion, respectively, under funding agreements with certain regional FHLBs. At both September 30, 2014 and December 31, 2013, total obligations outstanding under these funding agreements were $15.0 billion. See Note 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Special Purpose Entity Funding Agreements, Reported in PABs We issue fixed and floating rate funding agreements, which are denominated in either U.S. dollars or foreign currencies, to certain special purpose entities ("SPEs") that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. During the nine months ended September 30, 2014 and 2013, we issued $38.4 billion and $27.4 billion, respectively, and repaid $35.0 billion and $27.3 billion, respectively, under such funding agreements. At September 30, 2014 and December 31, 2013, total obligations outstanding under these funding agreements were $34.5 billion and $31.2 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Federal Agricultural Mortgage Corporation Funding Agreements, Reported in PABs We have issued funding agreements to the Federal Agricultural Mortgage Corporation ("Farmer Mac"), as well as to certain SPEs that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by Farmer Mac. The obligations under all such funding agreements are secured by a pledge of certain eligible agricultural real estate mortgage loans. During the nine months ended September 30, 2014 and 2013, we issued $200 million and $0, respectively, and repaid $200 million and $0, respectively, under such funding agreements. At both September 30, 2014 and December 31, 2013, total obligations outstanding under these funding agreements were $2.8 billion. See Note 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Debt Issuance In April 2014, MetLife, Inc. issued $1.0 billion of senior notes due in April 2024 which bear interest at a fixed rate of 3.60%, payable semi-annually. 170-------------------------------------------------------------------------------- Table of Contents Remarketing of Senior Debt Securities and Settlement of Stock Purchase Contracts In October 2014, MetLife, Inc. closed the successful remarketing of the Series E portion of the senior debt securities underlying common equity units issued in November 2010 in connection with the acquisition of ALICO. The Series E senior debt securities were remarketed as 1.903% Series E senior debt securities Tranche 1 and 4.721% Series E senior debt securities Tranche 2, which are due December 2017 and 2044, respectively. MetLife, Inc. did not receive any proceeds from the remarketing. Most common equity unit holders used the remarketing proceeds to settle their payment obligations under the applicable stock purchase contracts. The subsequent settlement of the stock purchase contracts provided proceeds to MetLife, Inc. of $1.0 billion in exchange for shares of MetLife, Inc.'s common stock. MetLife, Inc. delivered 22,907,960 shares of its newly issued common stock to settle the stock purchase contracts. See Notes 12 and 15 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for additional information. Credit and Committed Facilities At September 30, 2014, we maintained a $4.0 billion unsecured credit facility and certain committed facilities aggregating $12.1 billion. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. In May 2014, MetLife, Inc. and MetLife Funding entered into a $4.0 billion five-year unsecured credit agreement, which amended and restated both the five-year $3.0 billion and the five-year $1.0 billion unsecured credit agreements in their entireties into a single agreement (the "2014 Five-Year Credit Agreement"). The facility made available by the 2014 Five-Year Credit Agreement may be used for general corporate purposes (including, in the case of loans, to back up commercial paper and, in the case of letters of credit, to support variable annuity policy and reinsurance reserve requirements). All borrowings under the 2014 Five-Year Credit Agreement must be repaid by May 30, 2019, except that letters of credit outstanding on that date may remain outstanding until no later than May 30, 2020. MetLife, Inc. incurred costs of $6 million related to the 2014 Five-Year Credit Agreement, which were capitalized and included in other assets. These costs are being amortized over the remaining term of the 2014 Five-Year Credit Agreement. At September 30, 2014, we had outstanding $364 million in letters of credit and no drawdowns against this facility. Remaining availability was $3.6 billion at September 30, 2014. The committed facilities are used for collateral for certain of our affiliated reinsurance liabilities. At September 30, 2014, $6.6 billion in letters of credit and $2.8 billion in aggregate drawdowns under collateral financing arrangements were outstanding against these facilities. Remaining availability was $2.7 billion at September 30, 2014. See Note 12 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for further information about these facilities. We have no reason to believe that our lending counterparties will be unable to fulfill their respective contractual obligations under these facilities. As commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements. Outstanding Debt Under Global Funding Sources The following table summarizes our outstanding debt at: September 30, 2014 December 31, 2013 (In millions) Short-term debt $ 100 $ 175 Long-term debt (1) $ 16,203 $ 17,198 Collateral financing arrangements $ 4,196 $ 4,196 Junior subordinated debt securities $ 3,193 $ 3,193 __________________ (1) Excludes $186 million and $1.5 billion at September 30, 2014 and December 31, 2013, respectively, of long-term debt relating to CSEs - FVO (see Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements). 171-------------------------------------------------------------------------------- Table of Contents Dispositions Cash proceeds from dispositions during the nine months ended September 30, 2014 and 2013 were $714 million and $399 million, respectively. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding the disposition of MAL. During the nine months ended September 30, 2013, the sale of MetLife Bank's depository business resulted in cash outflows of $6.4 billion as a result of the buyer's assumption of the bank deposits liability in exchange for our cash payment. See Note 3 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for information regarding the sale of MetLife Bank's depository business. Liquidity and Capital Uses In addition to the general description of liquidity and capital uses in "- Summary of Primary Sources and Uses of Liquidity and Capital" the following additional information is provided regarding our primary uses of liquidity and capital: Common Stock Repurchases In June 2014, MetLife, Inc. announced its plans to resume common stock repurchases and repurchase up to $1.0 billion of MetLife, Inc. common stock. It is utilizing existing authorizations from the MetLife, Inc. Board of Directors to repurchase its common stock. Under these authorizations, MetLife, Inc. may purchase its common stock from the MetLife Policyholder Trust, in the open market (including pursuant to the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 ("Exchange Act")) and in privately negotiated transactions. See "Unregistered Sales of Equity Securities and Use of Proceeds - Issuer Purchases of Equity Securities." During the nine months ended September 30, 2014, MetLife, Inc. repurchased 8,168,318 shares through open market purchases for $443 million. MetLife, Inc. did not repurchase shares during the nine months ended September 30, 2013. At September 30, 2014, MetLife, Inc. had $818 million remaining under its common stock repurchase authorization. Future common stock repurchases will be dependent upon several factors, including our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of MetLife, Inc.'s common stock compared to management's assessment of the stock's underlying value and applicable regulatory approvals, as well as other legal and accounting factors. Preferred Stock Dividends Information on the declaration, record and payment dates, as well as per share and aggregate dividend amounts, for MetLife, Inc.'s preferred stock was as follows for the nine months ended September 30, 2014 and 2013: Preferred Stock Dividend Series A Series A Series B Series B Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate (In millions, except per share data) August 15, 2014 August 31, 2014 September 15, 2014 $ 0.256 $ 6 $ 0.406 $ 24 May 15, 2014 May 31, 2014 June 16, 2014 $ 0.256 7 $ 0.406 24 March 5, 2014 February 28, 2014 March 17, 2014 $ 0.250 6 $ 0.406 24 $ 19 $ 72 August 15, 2013 August 31, 2013 September 16, 2013 $ 0.256 $ 6 $ 0.406 $ 24 May 15, 2013 May 31, 2013 June 17, 2013 $ 0.256 7 $ 0.406 24 March 5, 2013 February 28, 2013 March 15, 2013 $ 0.250 6 $ 0.406 24 $ 19 $ 72 Preferred stock dividends are paid quarterly in accordance with the terms of MetLife, Inc.'s Floating Rate Non-Cumulative Preferred Stock, Series A, and 6.50% Non-Cumulative Preferred Stock, Series B. 172-------------------------------------------------------------------------------- Table of Contents Common Stock Dividends Information on the declaration, record and payment dates, as well as per share and aggregate dividend amounts, for MetLife, Inc.'s common stock was as follows for the nine months ended September 30, 2014 and 2013: Common Stock Dividend Declaration Date Record Date Payment Date Per Share Aggregate (In millions, except per share data) July 7, 2014 August 8, 2014 September 12, 2014 $ 0.350 $ 395 April 22, 2014 May 9, 2014 June 13, 2014 $ 0.350 395 January 6, 2014 February 6, 2014 March 13, 2014 $ 0.275 311 $ 1,101 June 25, 2013 August 9, 2013 September 13, 2013 $ 0.275 $ 303 April 23, 2013 May 9, 2013 June 13, 2013 $ 0.275 302 January 4, 2013 February 6, 2013 March 13, 2013 $ 0.185 203 $ 808 The declaration and payment of common stock dividends are subject to the discretion of MetLife, Inc.'s Board of Directors, and will depend on MetLife, Inc.'s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends to MetLife, Inc. by its insurance subsidiaries and other factors deemed relevant by the Board. On October 28, 2014, MetLife, Inc.'s Board of Directors declared a fourth quarter 2014 common stock dividend of $0.35 per share payable on December 12, 2014 to shareholders of record as of November 7, 2014. The Company estimates the aggregate dividend payment to be $399 million. Dividend Restrictions The payment of dividends and other distributions by MetLife, Inc. to its security holders may be subject to regulation by the Federal Reserve Board, if, in the future, MetLife, Inc. is designated as a non-bank SIFI. See "- Industry Trends - Regulatory Developments - U.S. Regulatory Developments - Potential Regulation as a Non-Bank SIFI." In addition, if additional capital requirements are imposed on MetLife, Inc. as a G-SII, its ability to pay dividends could be reduced by any such additional capital requirements that might be imposed. See "- Industry Trends - Regulatory Developments - International Regulatory Developments - Global Systemically Important Insurers." The payment of dividends is also subject to restrictions under the terms of our preferred stock and junior subordinated debentures in situations where we may be experiencing financial stress. See "Risk Factors - Capital-Related Risks - Regulatory Restrictions and Uncertainty and Restrictions Under the Terms of Certain of Our Securities May Prevent Us from Repurchasing Our Stock and Paying Dividends at the Level We Wish" included in MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and Note 16 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Debt Repayments In June 2014, MetLife, Inc. repaid at maturity its $350 million 5.50% senior notes. In May 2014, MetLife, Inc. redeemed $200 million aggregate principal amount of its 5.875% senior notes due in November 2033 at par. In February 2014, MetLife, Inc. repaid at maturity its $1.0 billion 2.375% senior notes. Debt and Facility Covenants Certain of our debt instruments, committed facilities and our credit facility contain various administrative, reporting, legal and financial covenants. We believe we were in compliance with all such covenants at September 30, 2014. Debt Repurchases We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Any such repurchases or exchanges will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, and applicable regulatory, legal and accounting factors. Whether or not to repurchase any debt and the size and timing of any such repurchases will be determined at our discretion. 173-------------------------------------------------------------------------------- Table of Contents Support Agreements MetLife, Inc. and several of its subsidiaries (each, an "Obligor") are parties to various capital support commitments, guarantees and contingent reinsurance agreements with certain subsidiaries of MetLife, Inc. Under these arrangements, each Obligor, with respect to the applicable entity, has agreed to cause such entity to meet specified capital and surplus levels, has guaranteed certain contractual obligations or has agreed to provide, upon the occurrence of certain contingencies, reinsurance for such entity's insurance liabilities. We anticipate that in the event that these arrangements place demands upon us, there will be sufficient liquidity and capital to enable us to meet anticipated demands. In November 2014, certain foreign risks reinsured by Exeter were recaptured and then reinsured to a new insurance affiliate in Bermuda. At that time, MetLife, Inc.'s guarantee of Exeter's former reinsurance obligations was replaced by a guarantee of the Bermuda insurance affiliate's reinsurance obligations. Further, MetLife, Inc. now also guarantees obligations of the new Bermuda insurance affiliate arising from derivatives. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - MetLife, Inc. - Liquidity and Capital Uses - Support Agreements" included in the 2013 Annual Report. Insurance Liabilities Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, property & casualty, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse behavior differs somewhat by segment. In the Retail segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. During the nine months ended September 30, 2014 and 2013, general account surrenders and withdrawals from annuity products were $3.0 billion and $2.9 billion, respectively. In the Corporate Benefit Funding segment, which includes pension closeouts, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals. With regard to the Corporate Benefit Funding segment liabilities that provide customers with limited rights to accelerate payments, there were $1.2 billion at September 30, 2014 of funding agreements and other capital market products that could be put back to the Company after a period of notice. Of these liabilities, $135 million were subject to a notice period of 90 days. The remaining liabilities are subject to a notice period of five months or greater. Pledged Collateral We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At September 30, 2014 and December 31, 2013, we were obligated to return cash collateral under our control of $3.0 billion and $2.0 billion, respectively. At September 30, 2014 and December 31, 2013, we had pledged cash collateral of $97 million and $3 million, respectively, for OTC bilateral derivative contracts between two counterparties in a net liability position. With respect to OTC-bilateral derivatives in a net liability position that have credit contingent provisions, a one-notch downgrade in the Company's credit rating would require $12 million of additional collateral be provided to our counterparties as of September 30, 2014. See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for additional information about collateral pledged to us, collateral we pledge and derivatives subject to credit contingent provisions. In addition, we have pledged collateral and have had collateral pledged to us, and may be required from time to time to pledge additional collateral or be entitled to have additional collateral pledged to us, in connection with collateral financing arrangements related to the reinsurance of closed block liabilities and universal life secondary guarantee liabilities. Securities Lending We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $30.9 billion and $28.3 billion at September 30, 2014 and December 31, 2013, respectively. Of these amounts, $7.7 billion and $6.0 billion at September 30, 2014 and December 31, 2013, respectively, were on open, meaning that the related loaned security could be returned to us on the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on loan related to the cash collateral on open at September 30, 2014 was $7.5 billion, of which $6.9 billion were U.S. Treasury and agency securities which, if put to us, could be immediately sold to satisfy the cash requirements to immediately return the cash collateral. See "- Investments - Securities Lending" for further information. 174-------------------------------------------------------------------------------- Table of Contents Litigation Putative or certified class action litigation and other litigation, and claims and assessments against us, in addition to those discussed elsewhere herein and those otherwise provided for in the consolidated financial statements, have arisen in the course of our business, including, but not limited to, in connection with our activities as an insurer, employer, investor, investment advisor, taxpayer and, formerly, a mortgage lending bank. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning our compliance with applicable insurance and other laws and regulations. See Note 14 of the Notes to the Interim Condensed Consolidated Financial Statements. We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict or determine the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it is possible that an adverse outcome in certain cases could have a material adverse effect upon our financial position, based on information currently known by us, in our opinion, the outcome of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated net income or cash flows in particular quarterly or annual periods. Acquisitions During the nine months ended September 30, 2014 and 2013, there were $277 million and $0 cash outflows for acquisitions, respectively. Contractual Obligations See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - The Company - Contractual Obligations" included in the 2013 Annual Report for additional information on the Company's contractual obligations. MetLife, Inc. Liquidity Management and Capital Management Liquidity and capital are managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and are 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 credit and committed facilities. Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and debt transactions and exposure to contingent draws on MetLife, Inc.'s liquidity. MetLife, Inc. 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 MetLife, Inc.'s liquidity and capital management. Decisions to access these markets are based upon relative costs, prospective views of balance sheet growth and a targeted liquidity profile and capital structure. A disruption in the financial markets could limit MetLife, Inc.'s access to liquidity. MetLife, Inc.'s ability to maintain regular access to competitively priced wholesale funds is fostered by its current credit ratings from the major credit rating agencies. We view our capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and our liquidity monitoring procedures as critical to retaining such credit ratings. Liquid Assets At September 30, 2014 and December 31, 2013, MetLife, Inc. and other MetLife holding companies had $6.0 billion and $5.9 billion, respectively, in liquid assets. Of these amounts, $5.6 billion and $5.5 billion were held by MetLife, Inc. and $422 million and $453 million were held by other MetLife holding companies, at September 30, 2014 and December 31, 2013, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding: (i) amounts related to cash collateral received from counterparties in connection with derivatives; (ii) investments held in trust in support of collateral financing arrangements; and (iii) investments pledged in support of derivatives. 175-------------------------------------------------------------------------------- Table of Contents Liquid assets held in non-U.S. holding companies are generated in part through dividends from non-U.S. insurance operations determined to be available after application of local insurance regulatory requirements, as discussed in "- MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries." The cumulative earnings of certain active non-U.S. operations have been reinvested indefinitely in such non-U.S. operations, as described in Note 19 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Under current tax laws, should we repatriate such earnings, we may be subject to additional U.S. income taxes and foreign withholding taxes. Liquidity For a summary of MetLife, Inc.'s liquidity, see "- The Company - Liquidity." Capital Potential Restrictions and Limitations on Non-Bank SIFIs and Global Systemically Important Insurers MetLife Bank terminated its FDIC insurance and MetLife, Inc. de-registered as a bank holding company. As a result, MetLife, Inc. is no longer subject to enhanced supervision and prudential standards as a bank holding company with assets of $50 billion or more. However, if, in the future, MetLife, Inc. is designated by the FSOC as a non-bank SIFI, it could once again be subject to regulation by the Federal Reserve Board and enhanced supervision and prudential standards. In addition, if MetLife, Inc. is designated as a non-bank SIFI or if additional capital requirements are imposed on MetLife, Inc. as a G-SII, its ability to pay dividends, repurchase common stock or other securities or engage in other transactions that could affect its capital or need for capital could be reduced by any such additional capital requirements that might be imposed. See "- Industry Trends - Regulatory Developments - U.S. Regulatory Developments - Potential Regulation as a Non-Bank SIFI" and "- Industry Trends - Regulatory Developments - International Regulatory Developments - Global Systemically Important Insurers." See also "- The Company - Liquidity and Capital Uses - Common Stock Repurchases" for information regarding the resumption of our common stock repurchase program. Liquidity and Capital Sources In addition to the description of liquidity and capital sources in "- The Company - Summary of Primary Sources and Uses of Liquidity and Capital" and "- The Company - Liquidity and Capital Sources," the following additional information is provided regarding MetLife, Inc.'s primary sources of liquidity and capital: Dividends from Subsidiaries MetLife, Inc. relies, in part, on dividends from its subsidiaries to meet its cash requirements. MetLife, Inc.'s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. The dividend limitation for U.S. insurance subsidiaries is generally based on the surplus to policyholders at the end of the immediately preceding calendar year and statutory net gain from operations for the immediately preceding calendar year. Statutory accounting practices, as prescribed by insurance regulators of various states in which we conduct business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of DAC, certain deferred income tax, required investment liabilities, statutory reserve calculation assumptions, goodwill and surplus notes. 176-------------------------------------------------------------------------------- Table of Contents The table below sets forth the dividends permitted to be paid in 2014 by the respective insurance subsidiary without insurance regulatory approval and the respective dividends paid during the nine months ended September 30, 2014: 2014 Permitted w/o Company Paid Approval (1) (In millions) Metropolitan Life Insurance Company $ 558 $ 1,163 MetLife Insurance Company of Connecticut (2) $ - $ 1,013 Metropolitan Property and Casualty Insurance Company $ - $ 218 MetLife Investors Insurance Company $ - $ 120 Metropolitan Tower Life Insurance Company $ - $ 73 Delaware American Life Insurance Company $ - $ 16 American Life Insurance Company $ - $ - __________________ (1) Reflects dividend amounts that may be paid during 2014 without prior regulatory approval. However, because dividend tests may be based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2014, some or all of such dividends may require regulatory approval. (2) We do not expect MICC to pay any dividends during 2014. See "- Liquidity and Capital Uses - Affiliated Capital Transactions" for information regarding MICC's redemption and retirement of its common stock formerly held by MetLife Investors Group, LLC ("MLIG") and MLIG's $1.4 billion dividend to MetLife, Inc. in connection with the Mergers. The dividend capacity of our non-U.S. operations is subject to similar restrictions established by the local regulators. The non-U.S. regulatory regimes also commonly limit the dividend payments to the parent to a portion of the prior year's statutory income, as determined by the local accounting principles. The regulators of our non-U.S. operations, including Japan's Financial Services Agency, may also limit or not permit profit repatriations or other transfers of funds to the U.S. if such transfers are deemed to be detrimental to the solvency or financial strength of the non-U.S. operations, or for other reasons. Most of the non-U.S. subsidiaries are second tier subsidiaries which are owned by various non-U.S. holding companies. The capital and rating considerations applicable to the first tier subsidiaries may also impact the dividend flow into MetLife, Inc. In 2013, MetLife, Inc. announced its plans for the Mergers. As a result, the aggregate amount of dividends permitted to be paid without insurance regulatory approval may be impacted. See "- Executive Summary" for further information on the Mergers. We actively manage target and excess capital levels and dividend flows on a proactive basis and forecast local capital positions as part of the financial planning cycle. The dividend capacity of certain U.S. and non-U.S. subsidiaries is also subject to business targets in excess of the minimum capital necessary to maintain the desired rating or level of financial strength in the relevant market. We cannot provide assurance that MetLife, Inc.'s subsidiaries will have statutory earnings to support payment of dividends to MetLife, Inc. in an amount sufficient to fund its cash requirements and pay cash dividends, and that the applicable regulators will not disapprove any dividends that such subsidiaries must submit for approval. See "Risk Factors - Capital-Related Risks - As a Holding Company, MetLife, Inc. Depends on the Ability of Its Subsidiaries to Transfer Funds to It to Meet Its Obligations and Pay Dividends" and Note 16 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report. Short-term Debt MetLife, Inc. maintains a commercial paper program, the proceeds of which can be used to finance the general liquidity needs of MetLife, Inc. and its subsidiaries. MetLife, Inc. had no short-term debt outstanding at both September 30, 2014 and December 31, 2013. Credit and Committed Facilities At September 30, 2014, MetLife, Inc., along with MetLife Funding, maintained a $4.0 billion unsecured credit facility, the proceeds of which are available for general corporate purposes (including, in the case of loans, to back up commercial paper and, in the case of letters of credit, to support variable annuity policy and reinsurance reserve requirements). At September 30, 2014, MetLife, Inc. had outstanding $364 million in letters of credit and no drawdowns against this facility. Remaining availability was $3.6 billion at September 30, 2014. 177-------------------------------------------------------------------------------- Table of Contents In addition, MetLife, Inc. is a party and/or guarantor to committed facilities of certain of its subsidiaries, which aggregated $12.1 billion at September 30, 2014. The committed facilities are used as collateral for certain of the Company's affiliated reinsurance liabilities. See "- The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities," as well as Note 12 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for further information regarding these facilities. Long-term Debt Outstanding The following table summarizes the outstanding long-term debt of MetLife, Inc. at: September 30, 2014 December 31, 2013 (In millions) Long-term debt - unaffiliated $ 15,363 $ 15,938 Long-term debt - affiliated (1) $ 3,600 $ 3,600 Collateral financing arrangements $ 2,797 $ 2,797 Junior subordinated debt securities $ 1,748 $ 1,748 __________________ (1) In June 2014, a $500 million senior note issued by MetLife, Inc. to MLIC matured and a new $500 million senior note was issued by MetLife, Inc. to MLIC. The new senior note matures in June 2019 and bears interest at a fixed rate of 3.54%, payable semi-annually. Dispositions Cash proceeds from dispositions during the nine months ended September 30, 2014 and 2013, were $0 and $17 million, respectively. Liquidity and Capital Uses The primary uses of liquidity of MetLife, Inc. include debt service, cash dividends on common and preferred stock, capital contributions to subsidiaries, common stock repurchases, payment of general operating expenses and acquisitions. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable MetLife, Inc. to make payments on debt, pay cash dividends on its common and preferred stock, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs. In addition to the description of liquidity and capital uses in "- The Company - Liquidity and Capital Uses," the following additional information is provided regarding MetLife, Inc.'s primary uses of liquidity and capital: Affiliated Capital Transactions During the nine months ended September 30, 2014 and 2013, MetLife, Inc. invested an aggregate of $520 million and $835 million, respectively, in various subsidiaries. MetLife, Inc. lends funds, as necessary, to its subsidiaries and affiliates, some of which are regulated, to meet their capital requirements. MetLife, Inc. had loans to subsidiaries outstanding of $2.2 billion and $2.3 billion at September 30, 2014 and December 31, 2013, respectively. In anticipation of the Mergers, in August 2014, MICC paid to MLIG $1.4 billion to redeem and retire MICC's common stock owned by MLIG; as a result, all of the outstanding shares of common stock of MICC are now directly held by MetLife, Inc. Following the redemption, in August 2014, MLIG paid a dividend of $1.4 billion to MetLife, Inc., and MetLife, Inc. made a capital contribution to MICC of $231 million. In August 2014, American Life issued a $120 million short-term note to MetLife, Inc. The short-term note bears interest at six-month LIBOR plus 0.875% and matures in June 2015. In June 2014, MetLife Ireland Treasury Limited made a payment of the Chilean peso equivalent of $69 million on a loan issued by MetLife, Inc. which bears interest at a fixed rate of 8.5%. At September 30, 2014, the remaining balance on the loan was $1.0 billion. 178-------------------------------------------------------------------------------- Table of Contents In February 2014, American Life issued a $150 million short-term note to MetLife, Inc. which was repaid in June 2014. The short-term note bore interest at six-month LIBOR plus 0.875%. Debt and Facility Covenants Certain of MetLife, Inc.'s debt instruments, committed facilities and our credit facility contain various administrative, reporting, legal and financial covenants. MetLife, Inc. believes it was in compliance with all such covenants at September 30, 2014. Support Agreements MetLife, Inc. is party to various capital support commitments and guarantees with certain of its subsidiaries. Under these arrangements, MetLife, Inc. has agreed to cause each such entity to meet specified capital and surplus levels or has guaranteed certain contractual obligations. See "- The Company - Liquidity and Capital Uses - Support Agreements." Acquisitions During each of the nine months ended September 30, 2014 and 2013, there were no cash outflows from MetLife, Inc. for acquisitions. Adoption of New Accounting Pronouncements See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements. Future Adoption of New Accounting Pronouncements See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements. Non-GAAP and Other Financial Disclosures Operating earnings is defined as operating revenues less operating expenses, both net of income tax. Operating earnings available to common shareholders is defined as operating earnings less preferred stock dividends. Operating revenues and operating expenses exclude results of discontinued operations and other businesses that have been or will be sold or exited by MetLife and are referred to as divested businesses. Operating revenues also excludes net investment gains (losses) and net derivative gains (losses). Operating expenses also excludes goodwill impairments. The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues: • Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees ("GMIB Fees"); • Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (ii) includes income from discontinued real estate operations, (iii) excludes post-tax operating earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iv) excludes certain amounts related to contractholder-directed unit-linked investments, and (v) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and • Other revenues are adjusted for settlements of foreign currency earnings hedges. 179-------------------------------------------------------------------------------- Table of Contents The following additional adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses: • Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass through adjustments ("Inflation and Pass Through Adjustments") (iii) benefits and hedging costs related to GMIBs ("GMIB Costs"), and (iv) market value adjustments associated with surrenders or terminations of contracts ("Market Value Adjustments"); • Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of PABs but do not qualify for hedge accounting treatment and excludes amounts related to net investment income earned on contractholder-directed unit-linked investments; • Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; • Amortization of negative VOBA excludes amounts related to Market Value Adjustments; • Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and • Other expenses excludes costs related to: (i) noncontrolling interests, (ii) implementation of new insurance regulatory requirements, and (iii) acquisition and integration costs. Operating earnings also excludes the recognition of certain contingent assets and liabilities that could not be recognized at acquisition or adjusted for during the measurement period under GAAP business combination accounting guidance. In addition to the tax impact of the adjustments mentioned above, provision for income tax expense (benefit) also includes the impact related to the timing of certain tax credits, as well as certain tax reforms. We believe the presentation of operating earnings and operating earnings available to common shareholders as we measure it for management purposes enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business. Operating revenues, operating expenses, operating earnings, and operating earnings available to common shareholders should not be viewed as substitutes for the following financial measures calculated in accordance with GAAP: GAAP revenues, GAAP expenses, income (loss) from continuing operations, net of income tax, and net income (loss) available to MetLife, Inc.'s common shareholders, respectively. Reconciliations of these measures to the most directly comparable GAAP measures are included in "- Results of Operations." In this discussion, we sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity. In addition, operating return on common equity is defined as operating earnings available to common shareholders, divided by average GAAP common equity. Additionally, the impact of changes in our foreign currency exchange rates is calculated using the average foreign currency exchange rates for the current year and is applied to each of the comparable years. Further, asymmetrical GAAP accounting treatment for insurance contracts refers to Inflation and Pass Through Adjustments as noted above within the definition of operating expenses. In this discussion, we also provide forward-looking guidance on an operating, or non-GAAP, basis. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is not accessible on a forward-looking basis because we believe it is not possible to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a significant impact on GAAP net income. Subsequent Events See Note 15 of the Notes to the Interim Condensed Consolidated Financial Statements. 180-------------------------------------------------------------------------------- Table of Contents |