MetLife, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited. Amounts below are in U.S. dollars. MetLife is a global insurer and provider of annuities, employee benefits and related financial services. The company reorganized reporting segments in Q1 2012; prior-period segment results were revised. It also retrospectively adopted new deferred acquisition cost accounting, which reduced reported 2011 comparative earnings.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $18.398 billion | $17.146 billion | $34.314 billion | $33.053 billion |
| Income from continuing operations, after tax | $2.300 billion | $1.062 billion | $2.166 billion | $1.986 billion |
| Net income available to common shareholders | $2.264 billion | $1.069 billion | $2.090 billion | $1.770 billion |
| Diluted GAAP earnings per share | $2.12 | $1.00 | $1.95 | $1.65 |
| Operating earnings available to common shareholders | $1.426 billion | $1.207 billion | $2.889 billion | $2.525 billion |
| Net cash provided by operating activities | Not presented for quarter | Not presented for quarter | $12.102 billion | $6.788 billion |
Key driver and earnings quality: Q2 GAAP net income benefited substantially from $2.092 billion of net derivative gains, versus $352 million a year earlier. Management attributed the period-to-period swing largely to interest-rate movements and changes in the nonperformance-risk adjustment on variable-annuity guarantees. For the first half, net derivative gains were $114 million versus $37 million. Operating earnings, which exclude net investment and derivative gains or losses and other specified items, rose 17.7% in Q2 and 14.1% in the first half.
Q2 net investment income was $4.719 billion, down 7.4% year over year on a GAAP basis; first-half net investment income was $10.919 billion, up 4.9%. Net investment losses narrowed to $64 million in Q2 from $155 million, and to $174 million for the first half from $254 million. Q2 total expenses fell 3.7% to $15.060 billion; first-half expenses rose 3.7% to $31.385 billion. Management cited stronger investment results, higher asset-based fees and lower catastrophe losses as operating-earnings supports.
Balance sheet and liquidity: At June 30, 2012, total assets were $825.2 billion, total liabilities $762.4 billion, and MetLife stockholders’ equity $62.4 billion. Cash and cash equivalents were $16.0 billion, up from $10.5 billion at year-end 2011. Consolidated long-term debt was $18.9 billion, down from $23.7 billion; short-term debt was $101 million. MetLife reported a $20.4 billion short-term liquidity position and $284.2 billion in liquid assets under its stated definitions. First-half cash from investing activities was a $12.8 billion outflow; financing activities provided $6.3 billion.
Material changes and notable items
- Operating earnings available to common shareholders rose to $1.426 billion in Q2 and $2.889 billion for the first half. Asia operating earnings increased 60.8% in Q2, while Corporate Benefit Funding declined 2.2%; segment results also reflect foreign-exchange movements and the revised segment structure.
- Fixed maturity securities at fair value increased to $366.3 billion from $350.3 billion at year-end. Net unrealized investment gains attributable to MetLife increased to $11.5 billion from $8.7 billion. Gross unrealized losses on fixed maturity and equity securities declined to $3.7 billion from $5.8 billion.
- MetLife is exiting MetLife Bank’s depository and forward- and reverse-mortgage origination businesses. It sold most reverse-mortgage servicing rights on June 29, derecognizing $8.7 billion of related loans and liabilities. The sale generated a reported $67 million after-tax disposal loss for the first half; additional after-tax exit charges of $5 million to $50 million were expected in the remainder of 2012. The sale of most of the depository business remained subject to FDIC approval.
- American Life’s Japan branch was transferred to a wholly owned Japanese subsidiary. A U.S. deferred-tax-asset valuation allowance related to branch restructuring fell from $720 million at year-end to $118 million at June 30. The filing attributes the change to revised realizability assessments and the restructuring; investors should assess its tax and earnings effects.
- MetLife paid a $1.0 billion extraordinary dividend from American Life in May. The company reported first-half operating cash flow of $12.1 billion, but cash generation should be viewed in the context of insurance flows, collateral movements and portfolio transactions.
Outlook, risks and contingencies
Management expected solid improvement in 2012 operating earnings versus 2011, citing growth in premiums and fees, international expansion, disciplined underwriting and expense management. It cautioned that catastrophes could drive claims higher and that market movements can cause substantial derivative and guarantee-valuation volatility. The company’s 2016 objectives include a 12%–14% operating return on common equity, $1 billion in efficiencies (including $600 million of net pretax expense savings and $400 million to be reinvested), and more than 20% of operating earnings from emerging markets. These are targets, not guarantees.
Key exposures include persistently low interest rates, equity-market declines and volatility affecting variable-annuity guarantees, credit and real-estate investment risk, foreign-exchange movements, European sovereign-debt stress, U.S. fiscal uncertainty, and counterparty and collateral risks. The filing says sustained low rates could pressure spreads and increase guarantee costs, although management cited hedging, asset-liability management and product actions as mitigants. MetLife also remained subject to bank-holding-company requirements while seeking to exit that status; the Federal Reserve had objected to proposed incremental capital actions and granted an extension to resubmit its capital plan by September 30, 2012. Possible future designation as a non-bank SIFI or global systemically important insurer could bring additional requirements.
Legal and regulatory matters include asbestos claims, unclaimed-property audits and litigation, retained-asset-account litigation, and mortgage-servicing and FHA-related inquiries. The company estimated reasonably possible litigation losses in excess of accruals at approximately $0–$125 million for matters it could estimate; it could not estimate losses for certain other matters. A Federal Reserve consent order issued August 6, 2012 imposed a penalty of up to $3.2 million related to mortgage servicing and foreclosure deficiencies. Management did not expect the MetLife Bank regulatory matters to materially affect the consolidated financial statements as a whole, but acknowledged potential fines, legal costs and reputational effects. The filing states that adverse outcomes could affect particular periods.
Most important facts for investors to verify
- How much of reported GAAP earnings growth came from volatile derivatives and nonperformance-risk adjustments, versus recurring operating earnings?
- Whether MetLife achieves the projected 2012 operating-earnings improvement and its longer-term efficiency and return targets.
- Progress and final costs of the MetLife Bank exits, including FDIC approval of the depository-business sale and expected additional exit charges.
- Whether lower interest rates, equity-market stress or credit deterioration materially increase guarantee liabilities, impairments or collateral demands.
- Developments in unclaimed-property, asbestos, retained-asset-account and mortgage-related proceedings, including losses not currently estimable.
- Whether capital-plan resubmission and the planned bank-holding-company deregistration proceed, and what restrictions or additional capital requirements may apply.