MetLife, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2011, with comparisons to the same 2010 periods. MetLife provides insurance, annuities, employee benefits and related financial services. The November 2010 ALICO acquisition materially expanded international operations; 2011 includes ALICO results, so year-over-year comparisons are not fully like-for-like. ALICO’s reported results use a May 31, 2011 measurement date.
Key financial metrics
Amounts are in U.S. dollars; unless noted, figures are in millions.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $17,150 | $14,138 | $33,061 | $27,237 |
| Income from continuing operations, net of tax | $1,201 | $1,536 | $2,255 | $2,364 |
| Net income available to common shareholders | $1,206 | $1,526 | $2,036 | $2,331 |
| Diluted GAAP EPS | $1.13 | $1.84 | $1.90 | $2.81 |
| Operating earnings available to common shareholders (non-GAAP) | $1,329 | $914 | $2,747 | $1,778 |
| Net cash provided by operating activities | Not stated for quarter | Not stated for quarter | $6,793 | $3,928 |
Balance sheet and liquidity: At June 30, total assets were $771,483, total liabilities $717,650, and total equity $53,709, compared with $730,906, $681,793 and $48,996, respectively, at December 31, 2010. Cash and cash equivalents were $9,628; short-term investments were $12,419. Management reported short-term liquidity of $16.6 billion under its stated definition, excluding specified collateral and restricted assets. The cash flow statement reports ending cash and cash equivalents of $9,673 including $45 related to subsidiaries held for sale.
Debt: The balance sheet reports long-term debt of $28,269, including $6,569 related to variable interest entities, short-term debt of $102, collateral financing arrangements of $5,297, and junior subordinated debt of $3,192. MD&A separately reports $21,722 of long-term debt excluding consolidated securitization-entity debt. Total debt and liquidity should be assessed with these differing presentations in mind.
Investment and insurance indicators: Net investment income was $5,098 in Q2 and $10,414 for six months. Net investment gains (losses) were negative $155 and negative $254, respectively; net derivative gains were $352 and $37. The six-month net investment yield reported in the investment analysis was 4.76%, versus 5.25% in 2010. Auto & Home’s Q2 combined ratio was 121.5% including catastrophes and 85.7% excluding them; first-half ratios were 110.0% and 89.0%, respectively.
Material changes versus prior periods
- Revenue rose 21.3% in Q2 and 21.4% for the first half, while net income available to common shareholders fell 21.0% and 12.7%, respectively. ALICO’s inclusion and higher premiums, policy fees and investment income contributed to revenue growth.
- Operating earnings available to common shareholders increased to $1.329 billion in Q2 from $914 million and to $2.747 billion for six months from $1.778 billion. Management attributed most of the improvement to ALICO and also cited stronger policy fees and investment income in some businesses. This non-GAAP measure excludes investment and derivative gains and losses and other adjustments.
- GAAP continuing income declined as derivative gains were substantially lower than in 2010 and investment results weakened. Q2 net derivative gains fell to $352 million from $1.481 billion; first-half gains fell to $37 million from $1.522 billion. Management cited equity-market movements, lower volatility, interest rates and currency movements, alongside changes in embedded derivatives.
- Expenses increased 31.0% in Q2 and 26.0% for six months, reflecting acquisition-related growth, higher benefits and claims, interest credited, and operating costs. Q2 other expenses included $102 million of ALICO integration costs; first-half integration costs were $170 million. The filing reports $24 million of restructuring charges for the first half.
- Operating cash flow increased to $6.793 billion from $3.928 billion for the first half, while investing cash use rose to $16.898 billion from $10.120 billion. Financing cash provided was $6.586 billion versus $6.861 billion; ending cash and cash equivalents were $9.673 billion versus $10.702 billion.
- MetLife issued $3.0 billion of common stock in March and used the proceeds to repurchase and cancel convertible preferred stock for $2.951 billion, including a $146 million redemption premium. Shares outstanding rose to approximately 1.057 billion at June 30 from 986 million at year-end.
Outlook, commentary, risks and unusual items
- Outlook: Management expected significant improvement in 2011 operating earnings over 2010 and projected 31% growth in premiums, fees and other revenues, mainly from ALICO. It expected cost synergies to begin later in 2011 and anticipated generally higher investment portfolio income and realized results than in 2010. This is management’s outlook, not a guarantee; the filing provides no specific full-year EPS guidance.
- Operating conditions: Management cited improving financial markets, higher separate-account balances and growth in several businesses. It also noted continued low interest rates, unemployment-related pressure on group products, severe U.S. storms and the March 2011 Japan earthquake and tsunami. Japan-related Q2 impacts included $26 million of insurance claims and $18 million of increased operating expenses.
- Acquisitions and dispositions: ALICO was acquired for $16.4 billion in November 2010, with $7.0 billion of acquisition goodwill. MetLife sold its 50% interest in MSI MetLife on April 1, 2011 for approximately $269 million cash and recorded a $57 million first-half net-of-tax loss. MetLife Taiwan was classified as held for sale under a $180 million sale agreement; the first-half discontinued-operations loss was $60 million, including a $74 million impairment loss partly offset by operating income.
- Market and portfolio risks: The filing highlights interest-rate, equity, currency, credit-spread, real-estate and liquidity risks; variable-annuity guarantees; securities lending; and sensitivity of derivative fair values to market movements and assumptions. A hypothetical 10% market move was estimated to produce potential fair-value losses of $5.105 billion for interest-rate risk, $4.485 billion for foreign-currency risk and $11 million for equity-market risk in non-trading exposures; the filing cautions these estimates are not forecasts.
- Credit and liquidity: Europe-perimeter sovereign holdings had estimated fair value of $761 million before purchased credit-default-swap protection at June 30. The filing also discusses U.S. debt-limit uncertainty and possible rating effects. A one-notch credit downgrade could require an additional $93 million of derivative collateral under specified arrangements; a two-notch downgrade was estimated to increase collateral requirements by $155 million.
- Contingencies: Management estimated aggregate reasonably possible litigation losses above accruals at $0–$355 million for matters where a range could be estimated; losses in other matters, including certain mortgage-servicing, asbestos and unclaimed-property matters, could not be estimated. Mortgage-servicing consent decrees required independent foreclosure reviews and new servicing standards; potential penalties were not yet assessed and the company could not estimate a loss range. More than 30 jurisdictions were auditing unclaimed-property compliance.
- Other unusual items: Q2 net investment gains included ongoing impairment activity; first-half OTTI losses recognized in earnings on fixed-maturity and equity securities totaled $299 million. The company also recorded a $146 million preferred-stock redemption premium in the first half.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with non-GAAP operating earnings, including the adjustments and the effects of acquisition-related accounting and derivative valuations.
- Assess the sustainability of operating earnings growth excluding ALICO, and the timing, cost and realization of expected ALICO synergies and restructuring.
- Review variable-annuity guarantee exposures, hedging effectiveness, own-credit/nonperformance-risk assumptions and sensitivity to interest rates, equity markets and volatility.
- Evaluate investment credit quality and impairment risk, including Level 3 valuations, structured securities, mortgage loans and sovereign exposures.
- Monitor liquidity and collateral needs, securities-lending exposures, debt maturities, credit facilities and restrictions on subsidiary dividends.
- Track developments in mortgage-servicing investigations, unclaimed-property audits, asbestos claims and other litigation, including matters for which loss estimates are unavailable.
- Confirm the status and final terms of the MetLife Taiwan sale, the depository-business review, and announced international transactions subject to approvals.