MetLife has agreed to pay $10 million to settle SEC charges that it violated federal securities laws relating to its accounting for reserves associated with its annuity businesses.
According to a cease-and-desist order from the SEC, MetLife failed to keep accurate books and records and create and maintain an adequate system of internal accounting controls with respect to its accounting for reserves associated with certain annuity products.
The regulator said that for more than 25 years, it was MetLife’s policy to presume annuitants had died or would never be found if they didn’t respond to only two mailing attempts made approximately five and half years apart. It also said the company didn’t take enough steps to verify annuitants’ address information, which could be years or even decades old, before sending the letter. This resulted in a reduction of liability for future policy benefits, with a corresponding increase in income.
MetLife determined eventually that its processes for locating and contacting unresponsive annuitants were inadequate to justify the release of reserves. To correct the error, the company increased reserves by $510 million pre-tax as of the end of 2017 to reinstate reserves previously released, and to reflect accrued interest and other related liabilities accumulated over the 25-year period.
Of the $510 million adjustment, $372 million was considered an “error,” or a revision of prior period results. The remaining $138 million reflected a change in estimate for fiscal year 2017.
“MetLife’s historical practices were insufficient to justify that presumption and the release of reserves,” said the order, “as was later confirmed when MetLife employed enhanced outreach procedures.”
The SEC’s order said that MetLife also overstated reserves and understated income relating to variable annuity guarantees assumed by one of its subsidiaries. MetLife disclosed this error was caused by data mistakes, including a failure to properly incorporate policyholder withdrawals into MetLife’s valuation model.
To correct the second error, MetLife reduced reserves by $896 million pre-tax as of the end of 2017 and recognized the same amount as income. Of the $896 million adjustment, $682 million represented a correction of prior-period errors going back more than a decade, while the remaining $214 million was recognized as a change estimate for fiscal year 2017.
MetLife attributed the second error to a material weakness in its internal control over financial reporting relating to data validation and monitoring of reserves for the variable annuity guarantees issued by its former joint venture in Japan.
Without admitting or denying the SEC’s findings, MetLife has agreed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $10 million.
“Investors are entitled to the reliability and accuracy of financial information,” said Marc Berger, Director of the SEC’s New York Regional Office. “The Commission found that MetLife’s insufficient internal controls caused longstanding accounting errors.”