MetLife 2008 Annual Report Download - page 54

method over the period from the issuance date of the 2007 Trust Securities until their scheduled redemption. Interest expense on the 2007
Trust Securities was $55 million and $3 million, for the years ended December 31, 2008 and 2007, respectively.
In December 2007, MLIC reinsured a portion of its closed block liabilities to MetLife Reinsurance Company of Charleston, a wholly-
owned subsidiary of the Company. In connection with this transaction, MRC issued, to investors placed by an unaffiliated financial
institution, $2.5 billion of 35 year surplus notes to provide statutory reserve support for the assumed closed block liabilities. Interest on the
surplus notes accrues at an annual rate of 3-month LIBOR plus 0.55%, payable quarterly. The ability of MRC to make interest and principal
payments on the surplus notes is contingent upon South Carolina regulatory approval. At both December 31, 2008 and 2007, surplus
notes outstanding were $2.5 billion. 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 the 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. See “The Holding Company — Liquidity and Capital Uses — Support Agreements” for a description of the support arrange-
ment entered into in connection with this transaction.
In May 2007, the Holding Company and MetLife Reinsurance Company of South Carolina (“MRSC”), 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
anestimatedfairvalueof$2.4billionand$2.3billion,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. See “The Holding Company — Liquidity and Capital Uses — Support Agreements” for a description of the
support arrangement entered into in connection with this transaction.
In December 2006, the Holding Company issued junior subordinated debentures with a face amount of $1.25 billion. The debentures
are scheduled for redemption on December 15, 2036; the final maturity of the debentures is December 15, 2066. The Holding Company
may redeem the debentures (i) in whole or in part, at any time on or after December 15, 2031 at their principal amount plus accrued and
unpaid interest to the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to December 15, 2031 at their principal
amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price. Interest is payable semi-annually at a
fixed rate of 6.40% up to, but not including, December 15, 2036, the scheduled redemption date. In the event the debentures are not
redeemed on or before the scheduled redemption date, interest will accrue at an annual rate of 3-month LIBOR plus a margin equal to
2.205%, payable quarterly in arrears. The Holding Company has the right to, and in certain circumstances the requirement to, defer interest
payments on the debentures for a period up to ten years. Interest compounds during such periods of deferral. If interest is deferred for
more than five consecutive years, the Holding Company may be required to use proceeds from the sale of its common stock or warrants on
51MetLife, Inc.