Business context and reporting period
MetLife, Inc. is a global insurer and financial-services company. This unaudited Form 10-Q covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010; balance-sheet comparisons are with December 31, 2010. Results include ALICO, acquired November 1, 2010. Because ALICO’s quarter ended February 28, its operating results are included through that date. The acquisition substantially limits year-over-year comparability, particularly for international results.
MetLife reports six operating segments: Insurance Products, Retirement Products, Corporate Benefit Funding, Auto & Home, Japan, and Other International Regions. Banking, Corporate & Other is reported separately.
Financial results and position
| Metric | Q1 2011 | Q1 2010 / prior balance date |
|---|---|---|
| Total revenues | $15.912 billion | $13.100 billion |
| Income from continuing operations, net of tax | $1.055 billion | $829 million |
| Net income attributable to MetLife | $1.006 billion | $835 million |
| Net income available to common shareholders | $830 million; diluted EPS $0.78 | $805 million; diluted EPS $0.97 |
| Operating earnings (non-GAAP) | $1.448 billion | $894 million |
| Net cash from operating activities | $3.501 billion | $2.871 billion |
| Cash from investing activities | $(8.094) billion | $(7.598) billion |
| Cash from financing activities | $2.262 billion | $3.845 billion |
| Total assets | $751.341 billion | $730.906 billion at Dec. 31, 2010 |
| Total equity | $50.221 billion | $48.996 billion at Dec. 31, 2010 |
Revenue rose 21.5%; premiums increased 26.0%, policy fees 34.4%, and net investment income 23.1%. Total expenses rose 21.1%. Operating earnings available to common shareholders were $1.418 billion versus $864 million. The filing’s calculated operating-earnings margin on operating revenues was approximately 9.1% versus 6.9%; operating earnings is a non-GAAP measure and the company changed its definition in Q1 2011.
GAAP net investment gains were a loss of $99 million, versus a gain of $32 million; net derivative results were a loss of $315 million, versus a gain of $41 million. Continuing-operations pre-tax income was $1.483 billion and income tax expense was $428 million, a 29% effective rate versus 30% in Q1 2010. Discontinued operations recorded a $42 million loss, including a $67 million after-tax impairment loss on MetLife Taiwan, partly offset by operating income.
At March 31, cash and cash equivalents were $10.692 billion. Company-defined short-term liquidity was $14.1 billion, down from $17.6 billion at year-end; total liquid assets were $248.0 billion, up from $245.7 billion. The company reported short-term debt of $572 million, long-term debt of $20.920 billion excluding consolidated securitization-entity debt, collateral financing arrangements of $5.297 billion, and junior subordinated debt of $3.191 billion. Long-term debt of consolidated securitization entities was an additional $6.684 billion.
Fixed-maturity securities were $333.664 billion at fair value; net unrealized investment gains attributable to MetLife were $2.661 billion, down from $2.990 billion at year-end. Mortgage loans totaled $61.832 billion, including $59.397 billion held for investment; valuation allowances were $621 million. Approximately 99% of mortgage loans were classified as performing. Cash declined by $2.238 billion during the quarter, including the effect of the common-stock issuance and convertible-preferred-stock redemption.
Material changes versus the prior comparable period
- The ALICO acquisition contributed substantially to higher premiums, assets, and operating earnings; Q1 2010 did not include ALICO’s results. The company recorded $7.0 billion of acquisition goodwill.
- Common-shareholder net income increased only 3.1%, while diluted EPS declined from $0.97 to $0.78. The quarter included a $146 million preferred-stock redemption premium and a much larger average common-share count following acquisition-related equity issuance.
- Operating earnings increased $554 million, with management attributing most of the increase to ALICO and also citing higher policy fees as separate-account balances and sales grew.
- Derivative results deteriorated materially. Management attributed the losses principally to foreign-currency movements, higher long- and mid-term interest rates, and narrower corporate credit spreads; embedded-derivative gains partly offset losses on freestanding derivatives.
- Q1 2010 included a $75 million charge related to the Health Care Act, affecting the year-over-year tax comparison. Segment presentation and the definition of operating earnings also changed; prior-period figures were adjusted as described in the filing.
- Auto & Home operating earnings fell 20.8% to $57 million. Its combined ratio rose to 98.5% including catastrophes, from 94.1%.
Outlook, commentary, risks and unusual items
Management expected significant improvement in 2011 operating earnings over 2010. It forecast 29% growth in premiums, fees, and other revenues, approximately 26 percentage points of which it attributed directly to ALICO. The outlook cited disciplined underwriting, expense control, expected cost synergies later in 2011, and investment-portfolio performance generally above 2010. Management cautioned that derivative fair values and earnings can respond materially to relatively small market movements. Interim results are not necessarily indicative of full-year performance.
- Japan earthquake and tsunami: The filing estimated additional Q2 2011 claims and operating expenses of $70–$100 million before tax, or $45–$65 million after tax. The impact was not included in Q1 consolidated results because of ALICO’s reporting calendar.
- Acquisition and dispositions: MetLife issued 68.57 million common shares for gross proceeds of $3.0 billion and used the proceeds to redeem the acquisition-related convertible preferred stock for $2.951 billion. It sold its 50% MSI MetLife interest on April 1 for $267 million cash; Q1 results included an $80 million pre-tax loss related to the sale. MetLife Taiwan was classified as held for sale under a $180 million sale agreement expected to close by December 31, 2011.
- Integration and restructuring: ALICO integration expenses were $68 million in Q1 2011. MetLife recorded $17 million of severance restructuring charges and anticipated further restructuring charges during 2011; the amount was not estimable at March 31.
- Investment and market exposure: Risks include credit and mortgage losses, spread and interest-rate changes, foreign-exchange movements, illiquid or hard-to-value assets, and securities-lending liquidity needs. The company reported $25.9 billion fair value of securities on loan and $26.5 billion of related cash-collateral liabilities. A 10% modeled market move produced estimated losses of $5.749 billion for non-trading interest-rate risk and $4.080 billion for non-trading foreign-exchange risk; the filing cautions that these sensitivities are not forecasts.
- Regulatory and legal matters: MetLife Bank and MetLife were subject to April 2011 mortgage-servicing consent decrees requiring reviews and new servicing standards. The decrees imposed no monetary penalties, but regulators had not ruled out penalties. Other matters include asbestos claims, retained-asset-account litigation and inquiries, and environmental and other proceedings. Management said outcomes are not expected to materially affect the company’s financial position, but adverse outcomes could affect quarterly or annual earnings or cash flows.
- Capital and liquidity constraints: MetLife depends in part on regulated subsidiary dividends. Dodd-Frank and potential Basel III rules could increase capital, liquidity, and compliance requirements. The filing reported consolidated bank-holding-company total risk-based and Tier 1 capital ratios of 8.69% and 8.39%, respectively, and discussed future requirements and possible restrictions.
- Contingencies and estimates: ALICO tax balances were provisional pending tax elections and filings. The company recorded a $127 million contingent-consideration liability related to certain U.K. unit-linked contracts acquired with ALICO.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance, and confirm the effect of ALICO’s February 28 reporting cutoff and the company’s segment and non-GAAP presentation changes.
- Reconcile the rise in operating earnings with GAAP earnings, derivative losses, the preferred-stock redemption premium, and the enlarged share count.
- Review the assumptions and sensitivity of variable-annuity guarantees, derivative valuations, investment impairments, and Level 3 assets to market changes.
- Track post-quarter Japan catastrophe costs, ALICO integration and restructuring charges, and expected cost synergies.
- Monitor MetLife Bank servicing reviews and potential penalties, significant litigation, subsidiary dividend capacity, capital requirements, and available liquidity.
- Confirm the closing and final proceeds of the MetLife Taiwan sale, the completed MSI MetLife disposition, and resolution of provisional ALICO tax accounting.