Business context and reporting period
MetLife, Inc. filed this Form 10-K for the fiscal year ended December 31, 2009. It is a global insurance, employee-benefits and financial-services group with more than 70 million customers. In December 2009, it reorganized U.S. reporting into Insurance Products, Retirement Products, Corporate Benefit Funding and Auto & Home; International is reported separately, with MetLife Bank and other activities in Banking, Corporate & Other. The figures below are annual unless specifically identified as fourth-quarter results.
Financial performance and position
| Metric | 2009 | 2008 |
|---|---|---|
| Total GAAP revenue | $41.1 billion | $51.0 billion |
| Premiums | $26.5 billion | $25.9 billion |
| Net investment income | $14.8 billion | $16.3 billion |
| Net investment gains (losses) | $(7.8) billion | $1.8 billion |
| Income (loss) from continuing operations, after tax | $(2.3) billion | $3.5 billion |
| Net income (loss) available to common shareholders | $(2.4) billion; $(2.89) per diluted share | $3.1 billion; $4.14 per diluted share |
| Operating earnings available to common shareholders (non-GAAP) | $2.4 billion | $2.7 billion |
| Net cash provided by operating activities | $3.8 billion | $10.7 billion |
| Total assets | $539.3 billion | $501.7 billion |
| Total equity | $33.5 billion | $24.0 billion |
Operating earnings is management’s non-GAAP segment measure and is not a substitute for GAAP results. Operating return on common equity was reported as negative 9.0% on the selected-data basis; management cited 6.7% operating return on common equity in its discussion of 2009 performance. The filing does not provide a single directly comparable consolidated GAAP operating-margin figure.
At year-end, cash and cash equivalents were $10.1 billion, down from $24.2 billion. Management’s short-term liquidity measure was $11.7 billion, versus $26.7 billion a year earlier; broader liquid assets were $139.2 billion versus $141.7 billion. Balance-sheet debt included $13.2 billion of long-term debt and $0.9 billion of short-term debt, alongside $3.2 billion of junior subordinated debt and $5.3 billion of collateral financing arrangements. Policyholder liabilities were $283.8 billion. Separate-account assets and liabilities were each $149.0 billion.
Fourth-quarter 2009 revenue was $12.3 billion, continuing-operations income after tax was $310 million, and net income available to common shareholders was $289 million. The common dividend remained $0.74 per share for 2009.
Material changes versus the prior comparable period
- GAAP continuing-operations results swung from $3.5 billion of income in 2008 to a $2.3 billion loss in 2009. The main driver was the $7.8 billion net investment loss, including substantial derivative losses and investment impairments.
- Net investment income fell 8.9%, reflecting lower yields and MetLife’s shift toward higher-quality, more liquid, lower-yielding assets during market stress. Premiums increased 2.1%.
- Non-GAAP operating earnings available to common shareholders fell $329 million, or about 12%, to $2.4 billion. Lower investment income, higher guaranteed-annuity benefit costs and a closed-block charge outweighed business growth and favorable mortality in several businesses.
- Operating cash flow declined $6.9 billion. Investing cash use increased to $13.9 billion, mainly as MetLife redeployed cash into fixed-maturity securities; financing activities used $4.1 billion, including reduced securities-lending collateral and other funding flows.
- Common equity increased, while accumulated other comprehensive loss improved to $3.1 billion from $14.3 billion, reflecting a substantial recovery in unrealized investment values. This recovery did not prevent the GAAP net loss.
- Segment results varied: Retirement Products operating earnings rose to $337 million from $193 million, while Corporate Benefit Funding fell to $551 million from $913 million. Auto & Home operating earnings declined to $322 million from $363 million; its combined ratio including catastrophes worsened to 92.3% from 91.2%.
Outlook, commentary, risks and unusual items
- Management expected meaningful earnings recovery in 2010 and approximately 6% top-line growth over 2009, supported by higher separate-account fees, pension closeout demand, International growth and modest Insurance Products growth. MetLife Bank revenue was expected to decline from 2009’s refinancing-driven level. These are expectations, not guarantees.
- Management anticipated improved investment returns and lower volatility in guarantee-related liabilities, while noting that future investment gains and derivative valuations are difficult to predict. It also expected continued expense control and more normal pension-related costs, subject to market recovery.
- Unusual investment items were material: gross unrealized losses on fixed-maturity and equity securities were $10.8 billion at year-end, down from $29.8 billion. Other-than-temporary impairments recognized in earnings on fixed-maturity and equity securities totaled $1.9 billion. A change in impairment accounting adopted April 1, 2009 increased reported pre-tax earnings by $857 million relative to the prior method, with noncredit losses recorded in other comprehensive income.
- Variable-annuity guarantees create market and hedging exposure; reported fair values also incorporate MetLife’s own credit spread, which is not hedged and can increase earnings volatility. Mortgage valuation allowances rose to $721 million from $304 million. Delinquent or foreclosed mortgage loans remained below 0.5% of mortgage investments, but management noted potential further deterioration.
- Rating pressure remained important: Moody’s and Fitch downgraded MetLife and its subsidiaries by one notch, while S&P placed ratings on CreditWatch negative and A.M. Best placed them under review with negative implications following disclosure of a potential acquisition. A two-notch downgrade would have affected derivative collateral requirements by $146 million; $480 million of certain liabilities had downgrade-related early-termination provisions.
- On February 2, 2010, MetLife said it was in discussions with AIG about a possible acquisition of American Life Insurance Company. No agreement had been reached and there was no assurance one would be reached.
- Risks include capital-market and credit deterioration, low or rising interest rates, illiquid investments, securities-lending collateral demands, policyholder surrenders, reinsurance-counterparty performance, regulatory change, foreign exchange and political risks, catastrophe claims, and uncertain litigation. Asbestos litigation exposure is difficult to estimate and could require future material charges; the filing says recorded liabilities may be exceeded.
- MetLife reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the $2.4 billion GAAP common-shareholder loss with $2.4 billion of non-GAAP operating earnings, including the derivative, impairment and accounting-method effects.
- Assess whether the projected 2010 revenue growth and earnings recovery materialized, particularly given investment-yield, guarantee-hedging and employment sensitivities.
- Review updated rating actions, the possible AIG/ALICO transaction and any resulting capital, funding, collateral or integration consequences.
- Verify statutory capital and dividend capacity at regulated subsidiaries, and the holding company’s ability to meet debt and dividend needs from subsidiary distributions.
- Track mortgage allowances and delinquencies, securities-lending and collateral exposure, and changes in unrealized losses or Level 3 investment valuations.
- Review subsequent developments in asbestos claims, other litigation and regulatory inquiries, where loss estimates may be uncertain or unavailable.