MetLife, Inc. — Q1 2013 Form 10-Q
Business context and period. MetLife is a global insurer and provider of annuities, employee benefits and related financial services. This unaudited quarterly filing covers the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Unless noted, financial amounts are in millions of dollars.
Key financial results
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenues | $17,683 | $15,916 |
| Income (loss) from continuing operations, after tax | $995 | $(134) |
| Net income (loss) attributable to MetLife common shareholders | $956 | $(174) |
| Diluted EPS available to common shareholders | $0.87 | $(0.16) |
| Operating earnings, a non-GAAP measure | $1,665 | $1,494 |
| Operating earnings available to common shareholders, non-GAAP | $1,635 | $1,464 |
| Cash from operating activities | $2,733 | $5,758 |
| Net cash from investing activities | $(9,719) | $2,167 |
| Cash and cash equivalents at period end | $9,983 | $18,667 at March 31, 2012 |
Operating earnings increased about 11% year over year. The filing does not present a single consolidated profit-margin measure; GAAP and operating earnings have different definitions, and operating earnings is not a substitute for GAAP income.
Financial position, liquidity and debt
- Total assets were $841.7 billion at March 31, up from $836.8 billion at year-end 2012. Total equity was $64.9 billion, essentially unchanged.
- Investments totaled $512.5 billion, down from $517.1 billion. Fixed-maturity securities were $374.3 billion; mortgage loans, net, were $55.6 billion.
- Reported short-term debt was $100 million and long-term debt was $18.7 billion, including $2.3 billion related to consolidated securitization entities. Collateral financing arrangements were $4.2 billion and junior subordinated debt securities were $3.2 billion.
- Management-defined short-term liquidity was $15.7 billion, versus $24.1 billion at December 31; liquid assets were $283.5 billion, versus $292.2 billion. MetLife said it believed available liquidity was ample under current conditions and reasonably possible stress scenarios.
- The cash decrease included a $6.4 billion cash outflow associated with the sale of MetLife Bank deposits, alongside investment and other cash movements. Cash from operations was also lower than in Q1 2012.
Material changes and operating performance
- The GAAP earnings swing chiefly reflected net derivative losses narrowing to $630 million from $2.0 billion, and net investment gains of $314 million versus losses of $110 million. Management attributed much of the derivative comparison to changes in interest rates, credit spreads and the nonperformance-risk adjustment on embedded variable-annuity guarantees; these fair-value movements can be volatile and do not necessarily represent economic gains or losses.
- Operating earnings growth was supported by investment-portfolio growth and higher asset-based fees, partly offset by less favorable mortality and claims experience. The prior-year period included a $52 million after-tax charge for unclaimed-property matters and accelerated policyholder benefit payments.
- Segment operating earnings were: Retail $626 million (prior year $469 million); Group, Voluntary & Worksite Benefits $230 million ($243 million); Corporate Benefit Funding $299 million ($298 million); Latin America $143 million ($148 million); Asia $333 million ($301 million); EMEA $87 million ($72 million); and Corporate & Other loss of $53 million (loss of $37 million). Segment realignments affect comparability for certain prior-period figures.
- Variable-annuity sales declined 30% after changes to guarantee features and risk-management actions. Management also reported growth in several other businesses, while low interest rates continued to pressure investment yields and some product demand.
Outlook, transactions and risks
- Outlook: Management expected 2013 operating earnings to be in line with 2012 despite low-rate pressure. By 2016, it targeted operating return on common equity, excluding AOCI, at the low end of 12%–14%, assuming its stated conditions; absent share buybacks, the estimated target would be about 100 basis points lower. The company targeted $1 billion in efficiencies, including $600 million of pretax expense savings and $400 million to be reinvested, and expected more than 20% of operating earnings to come from emerging markets by 2016.
- Provida: MetLife agreed to acquire Chilean pension administrator Provida and planned a public cash tender offer. The purchase price would be about $2 billion if all public shares were tendered; closing was anticipated in Q3 2013, subject to approvals and other conditions.
- MetLife Bank exit: The bank sold $6.4 billion of deposits to GE Capital Retail Bank and received approvals to deregister as a bank holding company. MetLife expected additional exit-related charges of $80–$105 million after tax, excluding incremental legal settlements.
- Litigation and contingencies: For matters where a reasonable-loss range could be estimated, the aggregate reasonably possible loss above accruals was approximately $0–$315 million. Other matters, including asbestos litigation, could not be reliably estimated. A Florida False Claims Act relator alleged $767 million in damages in an unclaimed-property case; MetLife disputed the allegations and amount. Management cautioned that adverse outcomes could affect particular quarters or years.
- Other risks: The filing highlights sustained low interest rates, market and investment volatility, variable-annuity guarantees and policyholder behavior, credit and counterparty risk, regulatory changes, litigation, and catastrophe and claims experience. MetLife had deregistered as a bank holding company but noted possible future designation as a non-bank systemically important financial institution.
- Capital return: MetLife declared a $0.185 common dividend per share for Q1 and announced a $0.275-per-share Q2 dividend, estimated at $302 million in aggregate. It transitioned to quarterly common dividends in 2013.
Important facts for investors to verify
- Reconcile the $1.7 billion increase in GAAP pretax continuing income with derivative valuation changes, realized investment gains and the related tax effects; compare these with non-GAAP operating earnings.
- Review the causes and sustainability of the decline in operating cash flow and the $5.8 billion reduction in cash and cash equivalents, including the bank-deposit sale and investment cash flows.
- Assess the sensitivity of earnings, capital and collateral needs to interest rates, equity markets, credit spreads and variable-annuity guarantee assumptions, including the nonperformance-risk adjustment.
- Track the Provida tender offer, regulatory approvals, funding and closing; assess the remaining MetLife Bank exit costs and related investigations.
- Monitor claims and mortality trends, mortgage-servicing and unclaimed-property litigation, asbestos exposure, and the impact of low rates on yields, crediting costs and product sales.