MetLife, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where reported. MetLife is a global insurer and provider of annuities, employee benefits and related financial products. Results are presented under U.S. GAAP and also include management’s non-GAAP operating earnings measure.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| GAAP total revenue | $68.2 billion | $68.2 billion |
| Income from continuing operations, net of tax | $3.4 billion | $1.3 billion |
| Net income available to common shareholders | $3.25 billion | $1.20 billion |
| Diluted EPS | $2.91 | $1.12 |
| Operating earnings | $6.41 billion | $5.81 billion |
| Operating earnings available to common shareholders | $6.29 billion | $5.69 billion |
| Net cash provided by operating activities | $16.1 billion | $17.2 billion |
| Cash and cash equivalents at year-end | $7.6 billion | $15.7 billion |
| Total assets | $885.3 billion | $836.8 billion |
| MetLife, Inc. stockholders’ equity | $61.6 billion | $64.5 billion |
GAAP revenue was nearly flat year over year, while operating earnings available to common shareholders rose about 11%. The GAAP improvement primarily reflected the absence of the 2012 $1.9 billion goodwill impairment charge (pre-tax), along with improved investment gains and operating earnings; these benefits were partly offset by larger derivative losses. GAAP net derivative losses were $3.2 billion in 2013 versus $1.9 billion in 2012. Net investment gains were $161 million, compared with a $352 million loss in 2012.
Fourth-quarter 2013 total revenue was $18.5 billion, income from continuing operations after tax was $915 million, and net income available to common shareholders was $877 million; diluted EPS was $0.77. In fourth-quarter 2012, those measures were $17.3 billion, $105 million, $96 million and $0.09, respectively.
Balance sheet, debt and liquidity
- Investments totaled $488.8 billion at year-end, including $350.2 billion of available-for-sale fixed maturity securities; 93.1% of fixed maturity securities were investment grade.
- Separate account assets and liabilities were each $317.2 billion. These amounts are substantially matched and should be distinguished from general-account assets and liabilities.
- Reported debt-related balances included $18.7 billion of long-term debt, $175 million of short-term debt, $4.2 billion of collateral financing arrangements and $3.2 billion of junior subordinated debt securities.
- Management reported short-term liquidity of $15.8 billion and liquid assets of $240.9 billion, both lower than in 2012. The company said it believed available funding sources were adequate under current conditions and reasonably possible stress scenarios.
- Operating cash flow declined about $1.0 billion from 2012. Cash and cash equivalents fell by $8.2 billion during 2013, reflecting total cash uses exceeding sources; the filing cites, among other items, investment activity, collateral movements, debt repayment and dividends.
Material changes and operating developments
- Operating earnings increased to $6.4 billion from $5.8 billion. Management cited higher asset-based fee revenue from larger average separate account balances, growth in the investment portfolio and lower credited rates; higher expenses and lower investment yields partly offset these factors.
- Asia operating earnings rose to $1.24 billion from $1.04 billion; Retail rose to $2.52 billion from $2.00 billion. Group, Voluntary & Worksite Benefits was broadly flat at $962 million, while Latin America declined slightly to $574 million and EMEA rose to $329 million.
- MetLife completed its $1.9 billion acquisition of Chilean pension administrator ProVida on October 1, 2013, acquiring 91.38% of its shares. ProVida contributed $48 million to 2013 operating earnings, net of tax, after closing; acquisition and integration costs were also recorded.
- MetLife completed the sale of MetLife Bank’s $6.4 billion deposit business and continued exiting substantially all bank operations. The bank deregistered its deposit insurance and MetLife, Inc. deregistered as a bank holding company.
- Variable annuity sales fell significantly after changes to guarantee features, pricing and risk management. Retail annuity sales declined $7.2 billion, or 38%, from 2012; management also reported lower sales of certain life products.
- Common dividends declared were $1.01 per share for 2013, up from $0.74 in 2012. MetLife issued shares in connection with settlement of common equity units and made no repurchases under its common-stock repurchase program during 2013.
Outlook, risks and unusual items
- Targets: Management targeted a 12%–14% operating return on common equity, excluding AOCI, by 2016, or 11%–13% if share repurchases were not possible. It also targeted $1 billion of efficiencies, including $600 million of pre-tax expense savings and approximately $400 million to be reinvested, and expected emerging markets to provide at least 20% of operating earnings by 2016. These are management targets, not guarantees.
- Interest rates: A hypothetical sustained-low-rate scenario estimated reductions in operating earnings of approximately $75 million in 2014 and $205 million in 2015, plus estimated reductions in net income from derivative mark-to-market effects of $50 million and $120 million, respectively. The scenario depends on stated assumptions and is not a forecast.
- Capital and regulation: MetLife had reached Stage 3 of the FSOC review process for possible U.S. non-bank SIFI designation and was included on the 2013 global systemically important insurer list. Potential additional capital, liquidity, stress-testing and other requirements remained uncertain. Regulators were also scrutinizing insurers’ use of captive reinsurers, which MetLife uses for reserve and risk management.
- Market and insurance risks: Low interest rates may pressure investment spreads and margins; equity-market declines, volatility, policyholder behavior and mortality can affect variable annuity guarantees and related hedges. Foreign-exchange exposure, counterparty performance, collateral calls, investment impairments, catastrophe losses and reserve-estimation risk are also significant.
- Legal and reserve items: MetLife increased its asbestos litigation reserve by $101 million in the fourth quarter and other litigation reserves by $46 million during 2013, as described in management’s operating discussion. The recorded asbestos liability rose from $417 million to $572 million. The company estimated reasonably possible litigation losses in excess of accruals at $0–$520 million for matters where a range could be estimated; some matters could not be estimated. It also reported strengthening Australian group disability reserves that reduced operating earnings by $57 million.
- Other items: 2013 results included a $101 million after-tax charge from a global review of reserve and DAC assumptions. Poland pension reforms prompted a $26 million write-down of DAC and VOBA in EMEA. MetLife expected a $350–$390 million after-tax loss in first-quarter 2014 from a subsequently announced sale of MetLife Assurance Limited.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls were effective as of year-end.
Investor verification checklist
- Reconcile GAAP net income and EPS with non-GAAP operating earnings, especially the treatment of derivative gains and losses, investment gains and excluded items.
- Review the drivers and sustainability of the $3.2 billion GAAP derivative loss and the sensitivity of variable annuity guarantees, hedges and collateral requirements to market changes.
- Verify statutory capital and dividend capacity at regulated subsidiaries, and assess the consequences of possible non-bank SIFI or global systemically important insurer requirements.
- Assess the development of asbestos and other litigation exposures, including the difference between accrued amounts and the disclosed reasonably possible loss range.
- Track execution and regulatory approval of the planned 2014 insurance-company mergers, the remaining common equity unit settlement and the announced MetLife Assurance Limited sale.