SEC Company Response from METLIFE (MET) — Jun 25, 2012
METLIFE INC
Date: June 25, 2012 · CIK: 0001099219 · Accession: 0001193125-12-282649
AI Filing Summary & Sentiment
File numbers found in text: 001-15787
Referenced dates: June 7, 2012
Letter
Division of Corporation Finance United States Securities and Exchange Commission Filed February 28, 2012 Form 10-Q for the Quarterly Period Ended March 31, 2012 Filed May 8, 2012 File Number: 001-15787
Dear Mr. Rosenberg:
This letter sets forth the response of MetLife, Inc. (the “Company”) to the comments contained in your letter dated June 7, 2012, regarding the Company’s Report on Form 10-K filed on February 28, 2012 and the Company’s Report on Form 10-Q filed on May 8, 2012.
In response to your comments, we have reproduced your comments below in boldface, italic type and set forth our response immediately below each comment.
Form 10-K for the Year Ended December 31, 2011
Item 1A. Risk Factors
Change in market interest rates may significantly affect our profitability, page 45
1. You state that sustained periods of low or declining interest rates may adversely affect your results of operations, financial position and cash flows. Please provide us proposed disclosure to be included, in MD&A, in future periodic reports that discloses the expected effects of this known trend or uncertainty on your future financial position, results of operations and cash flows. To the extent that information about the amount you expect to have to reinvest new cash flows or to reinvest at lower rates, or information about the amount of products you are committed at guaranteed rates is necessary to understand these effects, please include these amounts and their effects in your proposed disclosure to the extent known.
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
Management Response:
Commencing with the Company’s Form 10-Q filing for the quarter ending June 30, 2012, we will include substantially the following disclosure in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends.
Impact of a Sustained Period of a Low Interest Rate Environment
In January 2012, the Federal Reserve Board announced its plans to keep interest rates low until at least through late 2014, 18 months longer than previously planned. Some of our products expose us to the risk that changes in interest rates will reduce our investment margin or “spread,” or the difference between the amounts that we are required to fund under contracts in our general account liabilities and the rate of return we are able to earn on general account investments intended to support obligations under the contracts. Our spread is a key component of our net income.
In periods of declining interest rates, we may have to invest insurance cash flows and to reinvest the cash flows we receive as interest or return of principal on our investments in lower yielding instruments. Moreover, borrowers may prepay or redeem the fixed income securities, commercial or agricultural mortgage loans and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates. In periods of changing interest rates net derivative gains (losses) will also be impacted, particularly when changes in interest rates are highly volatile. Our expectation for future spreads is an important component in the amortization of DAC and VOBA, and significantly lower spreads may cause us to accelerate amortization, thereby reducing net income in the affected reporting period. Lower net income and operating earnings may also impact the carrying value of certain assets such as goodwill or potentially result in loss recognition on certain policy liabilities.
Mitigating Actions
The Company has been and continues to be proactive in its investment strategies, product designs, and crediting rate strategies to mitigate the risk of unfavorable consequences in this type of environment. Lowering interest crediting rates can help offset decreases in investment margins on some products. Our ability to lower interest crediting rates could be limited by competition, regulatory approval, or contractual guarantees of minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. The Company applies disciplined asset-liability management strategies, including the use of derivatives, to protect spreads on products subject to these risks as part of its investment strategy in mitigating the risk of sustained low interest rates in the U.S. In
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
addition, business actions, such as shifting the sales focus to less interest rate sensitive products can also mitigate this risk. As a result of these actions, the Company expects to be able to substantially mitigate the negative impact of a sustained low interest rate environment in the U.S. on the Company’s profitability. Based on a near to intermediate term analysis of a sustained low interest rate environment in the U.S., the Company anticipates operating earnings will continue to increase, although at a slower growth rate.
In addition, the Company is well diversified across product, distribution, and geography. Our non-U.S. based businesses, which account for approximately [X%] of our operating earnings, are not significantly interest rate or market sensitive. The Company’s primary exposure for non-U.S. based businesses is insurance risk. We expect our non-U.S. based businesses to grow faster than our U.S. based businesses and over time to become a larger percentage of our total business.
The products that have significant sensitivity to U.S. interest rates are concentrated in the Company’s Retail and Group, Voluntary & Worksite Benefits segments.
Commencing with the Company’s Form 10-K filing for the year ending December 31, 2012, and each year end following as long as a sustained period of low or declining interest rates in the U.S. continues, we will expand the disclosure to include substantially the discussion below.
Interest Rate Stress Scenario
The following summarizes the impact of a hypothetical stress scenario related to the effect of continued U.S. low interest rates on operating earnings and net income. The scenario includes several macro-economic assumptions including the following:
[ ]
Overall
Based on the above assumptions, the impact on the Company’s operating earnings and net income is estimated as follows:
Year Ending December 31,
(in millions)
Operating earnings
Net income
Segment Discussion
The following discussion summarizes the impact of the above hypothetical stress scenario on operating earnings on the Company’s segments that are particularly sensitive to U.S. interest rates.
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
Retail
Annuities – The impact on operating earnings from spread compression is concentrated in our deferred annuities where [X%] of the in-force block of business has a [X%] minimum interest rate guarantee. Under low U.S. interest rate scenarios, we assume that a larger percentage of customers will maintain their funds with the Company to take advantage of the attractive minimum guaranteed rates and we expect to experience spread compression as we reinvest cash flows at lower interest rates. Partially offsetting this spread compression, we assume we will lower crediting rates for the portion of business that is not currently at minimum crediting rates. As of December 31, 2012, approximately [X%] of the in-force block is at the minimum guaranteed crediting rate. See “— Policyholder Liabilities — Policyholder Account Balances” for information regarding the value of accounts subject to minimum guaranteed credited rates for Retail products. In addition, we assume that we will receive income from our hedging contracts. The cost of our derivative instruments that we use to hedge our variable annuity products may increase as a result of the low interest rate environment in the U.S. For the deferred annuities business, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014, respectively.
Life and Other – We expect to experience spread compression in our Life business as lower reinvestment income occurs without a corresponding reduction in crediting rates in the in-force business of our traditional insurance products. The majority of our Retail life insurance business is participating. As a result, adjustments to the applicable dividend scale will enable us to mitigate the spread compression on these products. We manage interest rate risk on our Universal Life products with secondary guarantees through a combination of product design features, reinsurance, and hedging. We have issued our Universal Life products with conservative minimum interest rate guarantees. As of December 31, 2012, only approximately [X%] of the in-force block is at the minimum guaranteed crediting rate. See “— Policyholder Liabilities — Policyholder Account Balances” for information regarding the value of accounts subject to minimum guaranteed credited rates for Retail products. For this reason, and because of our asset/liability management strategy, the potential adverse impact of a low interest rate environment in the U.S. is mitigated.
The Company estimates an unfavorable operating earnings impact in our Retail segment from the hypothetical stress scenario noted above in a range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Group, Voluntary & Worksite Benefits
Group – In general, most of our group life insurance products in this segment are renewable term insurance and, therefore, have significant repricing flexibility. Interest rate risk in these products mainly arises from minimum interest rates guarantees on retained asset accounts. These accounts have minimum interest crediting rate guarantees which range from [X%] to [X%]. See
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
“— Policyholder Liabilities — Policyholder Account Balances” for information regarding the value of accounts subject to minimum guaranteed credited rates for Group, Voluntary & Worksite Benefits. Given the existing low interest rate environment in the U.S., all of these account balances are currently at their respective minimum interest crediting rates and we would expect to experience spread compression as we reinvest at lower interest rates. However, the Company enters into significant hedging activity, which will partially offset the decline in reinvestment income. We also have exposure to interest rate risk in this business arising from our group disability policy claim reserves. For these products lower reinvestment rates cannot be offset by a reduction in liability crediting rates for established claim reserves. Group disability policies are generally renewable term policies. Rates may be adjusted on in-force policies at renewal based on the retrospective experience rating and current interest rate assumptions. We review the discount rate assumptions and other assumptions associated with our long-term disability claim reserves no less frequently than annually. Our most recent review at the end of 2012 resulted in no change to the applicable discount rates.
Voluntary & Worksite Benefits – We have exposure to interest rate risk in this business arising mainly from our long term care policy reserves. For these products lower reinvestment rates cannot be offset by a reduction in liability crediting rates for established claim reserves. Long term care policies are generally guaranteed renewable, and rates may be adjusted on a class basis with regulatory approval to reflect emerging experience.
Our long term care block is closed to new business. The Company makes significant use of derivative instruments to more closely match asset and liability duration and immunize the portfolio against changes in interest rates. For the long term care portfolio, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014, respectively.
The Company estimates an unfavorable operating earnings impact in its Group, Voluntary & Worksite Benefits segment from the hypothetical stress scenario noted above in a range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Corporate Benefit Funding
This segment contains both short and long duration products. The majority of short duration products are managed on a floating rate basis, which mitigates the impact of the low interest rate environment in the U.S. The long duration products have very predictable cash flows and we have matched these cash flows through our asset/liability management practices. We also use significant hedging/derivative contracts to help protect income in this segment against a low interest rate environment in the U.S. This segment consists of capital market products, pension closeouts, structured settlements, and other benefit funding products. Based on the cash flow estimates, only a small component is subject to reinvestment risk. For the long duration business, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014, respectively. The Company estimates an unfavorable earnings impact from the
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
hypothetical stress scenario noted above in a range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Year Ended December 31, 2011 compared with the Year Ended December 31, 2010, page 80
2. You state that all amounts discussed in this section are net of income tax. Tell us why you believe analyzing revenues and expenses net of income taxes complies with Item 303 of Regulation S-K. For example, you discuss a change of $3.3 billion of net derivative gains (losses) from 2010 to 2011 when the statement of operations shows a change of $5.1 billion.
Management Response:
The Company’s approach to providing disclosure of the reasons for material changes in its Executive Summary section of Management’s Discussion and Analysis of Financial Condition and Results of Operations has been to first state the year to year variance in income (loss) from continuing operations, net of income tax, followed by an explanation of the key drivers of the variance on a net of tax basis (unless otherwise stated). Instruction 4 to Item 303(a) states that where the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the registrant’s businesses as a whole. In our judgment, an explanation of the key drivers of the variances on a net of tax basis provides investors and other users with information relevant to an assessment of the results of operations of the Company.
In order to further enhance a reader’s understanding of the Company’s results of operations, commencing with the Company’s Form 10-Q filing for the quarter ending June 30, 2012, disclosure of the reasons for material changes on both a pre-tax and a post-tax basis will be included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results o
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filename1.htm
Correspondence
Peter M. Carlson
Executive Vice President and
Chief Accounting
Officer
pcarlson@metlife.com
June 25, 2012
Mr. James B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
United States
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re:
MetLife, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2011
Filed February 28, 2012
Form 10-Q for the Quarterly Period Ended March 31, 2012
Filed May 8, 2012
File Number: 001-15787
Dear
Mr. Rosenberg:
This letter sets forth the response of MetLife, Inc. (the “Company”) to the comments contained
in your letter dated June 7, 2012, regarding the Company’s Report on Form 10-K filed on February 28, 2012 and the Company’s Report on Form 10-Q filed on May 8, 2012.
In response to your comments, we have reproduced your comments below in boldface, italic type and set forth our response immediately
below each comment.
Form 10-K for the Year Ended December 31, 2011
Item 1A. Risk Factors
Change in market interest rates may significantly affect our
profitability, page 45
1.
You state that sustained periods of low or declining interest rates may adversely affect your results of operations, financial position and cash flows. Please
provide us proposed disclosure to be included, in MD&A, in future periodic reports that discloses the expected effects of this known trend or uncertainty on your future financial position, results of operations and cash flows. To the extent that
information about the amount you expect to have to reinvest new cash flows or to reinvest at lower rates, or information about the amount of products you are committed at guaranteed rates is necessary to understand these effects, please include
these amounts and their effects in your proposed disclosure to the extent known.
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
2
Management Response:
Commencing with the Company’s Form 10-Q filing for the quarter ending June 30, 2012, we will include substantially the following disclosure in Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Industry Trends.
Impact of a Sustained Period of a Low Interest Rate
Environment
In January 2012, the Federal Reserve Board announced its plans to keep interest rates low until at least through late
2014, 18 months longer than previously planned. Some of our products expose us to the risk that changes in interest rates will reduce our investment margin or “spread,” or the difference between the amounts that we are required to fund
under contracts in our general account liabilities and the rate of return we are able to earn on general account investments intended to support obligations under the contracts. Our spread is a key component of our net income.
In periods of declining interest rates, we may have to invest insurance cash flows and to reinvest the cash flows we receive as interest or return of
principal on our investments in lower yielding instruments. Moreover, borrowers may prepay or redeem the fixed income securities, commercial or agricultural mortgage loans and mortgage-backed securities in our investment portfolio with greater
frequency in order to borrow at lower market rates. In periods of changing interest rates net derivative gains (losses) will also be impacted, particularly when changes in interest rates are highly volatile. Our expectation for future spreads is an
important component in the amortization of DAC and VOBA, and significantly lower spreads may cause us to accelerate amortization, thereby reducing net income in the affected reporting period. Lower net income and operating earnings may also impact
the carrying value of certain assets such as goodwill or potentially result in loss recognition on certain policy liabilities.
Mitigating Actions
The Company
has been and continues to be proactive in its investment strategies, product designs, and crediting rate strategies to mitigate the risk of unfavorable consequences in this type of environment. Lowering interest crediting rates can help offset
decreases in investment margins on some products. Our ability to lower interest crediting rates could be limited by competition, regulatory approval, or contractual guarantees of minimum rates and may not match the timing or magnitude of changes in
asset yields. As a result, our spread could decrease or potentially become negative. The Company applies disciplined asset-liability management strategies, including the use of derivatives, to protect spreads on products subject to these risks as
part of its investment strategy in mitigating the risk of sustained low interest rates in the U.S. In
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
3
addition, business actions, such as shifting the sales focus to less interest rate sensitive products can also mitigate this risk. As a result of these actions, the Company expects to be able to
substantially mitigate the negative impact of a sustained low interest rate environment in the U.S. on the Company’s profitability. Based on a near to intermediate term analysis of a sustained low interest rate environment in the U.S., the
Company anticipates operating earnings will continue to increase, although at a slower growth rate.
In addition, the Company is well
diversified across product, distribution, and geography. Our non-U.S. based businesses, which account for approximately [X%] of our operating earnings, are not significantly interest rate or market sensitive. The Company’s primary exposure for
non-U.S. based businesses is insurance risk. We expect our non-U.S. based businesses to grow faster than our U.S. based businesses and over time to become a larger percentage of our total business.
The products that have significant sensitivity to U.S. interest rates are concentrated in the Company’s Retail and Group, Voluntary &
Worksite Benefits segments.
Commencing with the Company’s Form 10-K filing for the year ending December 31, 2012, and each year end
following as long as a sustained period of low or declining interest rates in the U.S. continues, we will expand the disclosure to include substantially the discussion below.
Interest Rate Stress Scenario
The following summarizes the impact of a hypothetical
stress scenario related to the effect of continued U.S. low interest rates on operating earnings and net income. The scenario includes several macro-economic assumptions including the following:
[
]
Overall
Based on the above assumptions, the impact on the Company’s operating earnings and net income is estimated as follows:
Year Ending December 31,
2013
2014
(in millions)
Operating earnings
Net income
Segment Discussion
The following discussion summarizes the impact of the above hypothetical stress scenario on operating earnings on the Company’s segments that are particularly sensitive to U.S. interest rates.
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
4
Retail
Annuities – The impact on operating earnings from spread compression is concentrated in our deferred annuities where [X%] of the in-force block of business has a [X%] minimum interest rate guarantee.
Under low U.S. interest rate scenarios, we assume that a larger percentage of customers will maintain their funds with the Company to take advantage of the attractive minimum guaranteed rates and we expect to experience spread compression as we
reinvest cash flows at lower interest rates. Partially offsetting this spread compression, we assume we will lower crediting rates for the portion of business that is not currently at minimum crediting rates. As of December 31, 2012,
approximately [X%] of the in-force block is at the minimum guaranteed crediting rate. See “— Policyholder Liabilities — Policyholder Account Balances” for information regarding the value of accounts subject to minimum guaranteed
credited rates for Retail products. In addition, we assume that we will receive income from our hedging contracts. The cost of our derivative instruments that we use to hedge our variable annuity products may increase as a result of the low interest
rate environment in the U.S. For the deferred annuities business, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014, respectively.
Life and Other – We expect to experience spread compression in our Life business as lower reinvestment income occurs without a corresponding reduction in crediting rates in the in-force
business of our traditional insurance products. The majority of our Retail life insurance business is participating. As a result, adjustments to the applicable dividend scale will enable us to mitigate the spread compression on these products. We
manage interest rate risk on our Universal Life products with secondary guarantees through a combination of product design features, reinsurance, and hedging. We have issued our Universal Life products with conservative minimum interest rate
guarantees. As of December 31, 2012, only approximately [X%] of the in-force block is at the minimum guaranteed crediting rate. See “— Policyholder Liabilities — Policyholder Account Balances” for information regarding the
value of accounts subject to minimum guaranteed credited rates for Retail products. For this reason, and because of our asset/liability management strategy, the potential adverse impact of a low interest rate environment in the U.S. is mitigated.
The Company estimates an unfavorable operating earnings impact in our Retail segment from the hypothetical stress scenario noted above in a
range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Group, Voluntary & Worksite Benefits
Group – In general, most of our group life insurance products in this segment are renewable term insurance and, therefore, have
significant repricing flexibility. Interest rate risk in these products mainly arises from minimum interest rates guarantees on retained asset accounts. These accounts have minimum interest crediting rate guarantees which range from [X%] to [X%].
See
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
5
“— Policyholder Liabilities — Policyholder Account Balances” for information regarding the value of accounts subject to minimum guaranteed credited rates for Group,
Voluntary & Worksite Benefits. Given the existing low interest rate environment in the U.S., all of these account balances are currently at their respective minimum interest crediting rates and we would expect to experience spread
compression as we reinvest at lower interest rates. However, the Company enters into significant hedging activity, which will partially offset the decline in reinvestment income. We also have exposure to interest rate risk in this business arising
from our group disability policy claim reserves. For these products lower reinvestment rates cannot be offset by a reduction in liability crediting rates for established claim reserves. Group disability policies are generally renewable term
policies. Rates may be adjusted on in-force policies at renewal based on the retrospective experience rating and current interest rate assumptions. We review the discount rate assumptions and other assumptions associated with our long-term
disability claim reserves no less frequently than annually. Our most recent review at the end of 2012 resulted in no change to the applicable discount rates.
Voluntary & Worksite Benefits – We have exposure to interest rate risk in this business arising mainly from our long term care policy reserves. For these products lower reinvestment rates
cannot be offset by a reduction in liability crediting rates for established claim reserves. Long term care policies are generally guaranteed renewable, and rates may be adjusted on a class basis with regulatory approval to reflect emerging
experience.
Our long term care block is closed to new business. The Company makes significant use of derivative instruments to more closely
match asset and liability duration and immunize the portfolio against changes in interest rates. For the long term care portfolio, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014,
respectively.
The Company estimates an unfavorable operating earnings impact in its Group, Voluntary & Worksite Benefits segment
from the hypothetical stress scenario noted above in a range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Corporate Benefit Funding
This segment
contains both short and long duration products. The majority of short duration products are managed on a floating rate basis, which mitigates the impact of the low interest rate environment in the U.S. The long duration products have very
predictable cash flows and we have matched these cash flows through our asset/liability management practices. We also use significant hedging/derivative contracts to help protect income in this segment against a low interest rate environment in the
U.S. This segment consists of capital market products, pension closeouts, structured settlements, and other benefit funding products. Based on the cash flow estimates, only a small component is subject to reinvestment risk. For the long duration
business, [X%] and [X%], respectively, of average invested assets will be subject to reinvestment risk in 2013 and 2014, respectively. The Company estimates an unfavorable earnings impact from the
Mr. James B. Rosenberg
Securities and Exchange Commission
June 25, 2012
Page
6
hypothetical stress scenario noted above in a range of [$X] million to [$X] million in 2013, and [$X] million to [$X] million in 2014.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Year Ended December 31, 2011 compared with the Year Ended
December 31, 2010, page 80
2.
You state that all amounts discussed in this section are net of income tax. Tell us why you believe analyzing revenues and expenses net of income taxes complies
with Item 303 of Regulation S-K. For example, you discuss a change of $3.3 billion of net derivative gains (losses) from 2010 to 2011 when the statement of operations shows a change of $5.1 billion.
Management Response:
The
Company’s approach to providing disclosure of the reasons for material changes in its Executive Summary section of Management’s Discussion and Analysis of Financial Condition and Results of Operations has been to first state the year to
year variance in income (loss) from continuing operations, net of income tax, followed by an explanation of the key drivers of the variance on a net of tax basis (unless otherwise stated). Instruction 4 to Item 303(a) states that where the
consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the registrant’s businesses as a whole. In our
judgment, an explanation of the key drivers of the variances on a net of tax basis provides investors and other users with information relevant to an assessment of the results of operations of the Company.
In order to further enhance a reader’s understanding of the Company’s results of operations, commencing with the Company’s Form 10-Q
filing for the quarter ending June 30, 2012, disclosure of the reasons for material changes on both a pre-tax and a post-tax basis will be included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results o