MetLife 2008 Annual Report Download - page 188

Simultaneous with the issuance of the surplus notes, the Holding Company entered into an agreement with the unaffiliated financial
institution, under which the Holding Company is entitled to the interest paid by MRC on the surplus notes of 3-month LIBOR plus 0.55% in
exchange for the payment of 3-month LIBOR plus 1.12%, payable quarterly on such amount as adjusted, as described below. Under this
agreement, the Holding Company may also be required to pledge collateral or make payments to the unaffiliated financial institution related
to any decline in the estimated fair value of the surplus notes. Any such payments would be accounted for as a receivable and included
under other assets on the Company’s consolidated financial statements and would not reduce the principal amount outstanding of the
surplus notes. In addition, the Holding Company may also be required to make a payment to the unaffiliated financial institution in
connection with any early termination of this agreement. During the year ended December 31, 2008, the Holding Company paid
$800 million to the unaffiliated financial institution related to a decline in the estimated fair value of the surplus notes. This payment
reduced the amount under the agreement on which the Holding Company’s interest payment is due but did not reduce the outstanding
amount of the surplus notes. In addition, the Holding Company had pledged collateral of $230 million to the unaffiliated financial institution
at December 31, 2008. No collateral had been pledged at December 31, 2007.
A majority of the proceeds from the offering of the surplus notes were placed in trust, which is consolidated by the Company, to support
MRC’s statutory obligations associated with the assumed closed block liabilities.
During 2007 and 2008 the Company deposited $2.0 billion and $314 million, respectively, into the trust, from the proceeds of surplus
notes issued in 2007. At December 31, 2008 and 2007, the estimated fair value of assets held in trust by the Company was $2.1 billion
and $2.0 billion, respectively. The assets are principally invested in fixed maturity securities and are presented as such within the
Company’s consolidated balance sheet, with the related income included within net investment income in the Company’s consolidated
income statement. Interest on the collateral financing arrangement is included as a component of other expenses.
Total interest expense was $117 million and $5 million for the years ended December 31, 2008 and 2007, respectively.
Associated with Secondary Guarantees
In May 2007, the Holding Company and MetLife Reinsurance Company of South Carolina, a wholly-owned subsidiary of the Company,
entered into a 30-year collateral financing arrangement with an unaffiliated financial institution that provides up to $3.5 billion of statutory
reserve support for MRSC associated with reinsurance obligations under intercompany reinsurance agreements. Such statutory reserves
are associated with universal life secondary guarantees and are required under U.S. Valuation of Life Policies Model Regulation (commonly
referred to as Regulation A-XXX). At December 31, 2008 and 2007, $2.7 billion and $2.4 billion, respectively, had been drawn upon under
the collateral financing arrangement. The collateral financing arrangement may be extended by agreement of the Holding Company and the
unaffiliated financial institution on each anniversary of the closing.
Proceeds from the collateral financing arrangement were placed in trust to support MRSC’s statutory obligations associated with the
reinsurance of secondary guarantees. The trust is a VIE which is consolidated by the Company. The unaffiliated financial institution is
entitled to the return on the investment portfolio held by the trust.
In connection with the collateral financing arrangement, the Holding Company entered into an agreement with the same unaffiliated
financial institution under which the Holding Company is entitled to the return on the investment portfolio held by the trust established in
connection with this collateral financing arrangement in exchange for the payment of a stated rate of return to the unaffiliated financial
institution of 3-month LIBOR plus 0.70%, payable quarterly. The Holding Company may also be required to make payments to the
unaffiliated financial institution, for deposit into the trust, related to any decline in the estimated fair value of the assets held by the trust, as
well as amounts outstanding upon maturity or early termination of the collateral financing arrangement. For the year ended December 31,
2008, the Holding Company paid $320 million to the unaffiliated financial institution as a result of the decline in the estimated fair value of
the assets in the trust. All of the $320 million was deposited into the trust. In January 2009, the Holding Company paid an additional
$360 million to the unaffiliated financial institution as a result of the continued decline in the estimated fair value of the assets in trust which
was also deposited into the trust.
In addition, the Holding Company may be required to pledge collateral to the unaffiliated financial institution under this agreement. At
December 31, 2008, the Holding Company had pledged $86 million under the agreement. No collateral had been pledged under the
agreement at December 31, 2007.
At December 31, 2008 and 2007, the Company held assets in trust with a estimated fair value of $2.4 billion and $2.3 billion,
respectively, associated with this transaction. The assets are principally invested in fixed maturity securities and are presented as such
within the Company’s consolidated balance sheet, with the related income included within net investment income in the Company’s
consolidated income statement. Interest on the collateral financing arrangement is included as a component of other expenses.
Transaction costs associated with the collateral financing arrangement of $5 million have been capitalized, are included in other assets,
and are amortized using the effective interest method over the period from the issuance of the collateral financing arrangement to its
expiration. Total interest expense was $107 million and $84 million for the years ended December 31, 2008 and 2007, respectively.
12. Junior Subordinated Debentures
Junior Subordinated Debentures Underlying Common Equity Units
In June 2005, the Holding Company issued $1,067 million 4.82% Series A and $1,067 million 4.91% Series B junior subordinated
debentures due no later than February 15, 2039 and February 15, 2040, respectively, for a total of $2,134 million, in exchange for
$64 million in trust common securities of MetLife Capital Trust II (“Series A Trust”) and MetLife Capital Trust III (“Series B Trust and together
with the Series A Trust, the “Capital Trusts”), both subsidiary trusts of MetLife, Inc., and $2,070 million in aggregate cash proceeds from the
sale by the subsidiary trusts of trust preferred securities, constituting part of the common equity units more fully described in Note 13. The
subsidiary trusts each issued $1,035 million of trust preferred securities and $32 million of trust common securities. The trust common
securities were issued to the Holding Company.
F-65MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)