METLIFE INC quarterly report, Q3 FY2011

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MetLife, Inc. — Third-Quarter 2011 Form 10-Q

Reporting period: Quarter ended September 30, 2011; interim financial statements are unaudited. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.

Business context and reporting period

MetLife is a global insurer and financial-services company operating through U.S. and international businesses, including life insurance, annuities, employee benefits, auto and home insurance, and banking. The comparison with 2010 is affected by MetLife’s November 2010 acquisition of ALICO: its results are included in 2011, but not in the comparable 2010 periods. ALICO’s results are reported through August 31, 2011 because of its different fiscal year-end.

Financial performance and condition

  • Third-quarter GAAP results: Total revenue was $20.46 billion, up from $12.34 billion; income from continuing operations after tax was $3.57 billion, versus $317 million; and net income available to common shareholders was $3.55 billion, versus $286 million. Diluted earnings per common share were $3.33, versus $0.32.
  • Nine-month GAAP results: Revenue was $53.52 billion, versus $39.58 billion; income from continuing operations after tax was $5.83 billion, versus $2.68 billion; and net income available to common shareholders was $5.59 billion, versus $2.62 billion. Diluted earnings per common share were $5.23, versus $3.09.
  • Earnings quality and operating measure: Third-quarter net derivative gains were $4.20 billion, compared with a $244 million loss a year earlier; nine-month derivative gains were $4.23 billion, versus $1.28 billion. These volatile GAAP gains were a major contributor to reported earnings. Management’s non-GAAP operating earnings were $1.21 billion for the quarter and $4.02 billion for nine months, up from $988 million and $2.83 billion, respectively. Operating earnings available to common shareholders were $1.18 billion and $3.93 billion. Management cautions that operating earnings are not a substitute for GAAP results.
  • Revenue and investment income: Third-quarter premiums rose to $9.34 billion from $6.48 billion, and policy fees rose to $2.00 billion from $1.45 billion, largely reflecting ALICO. Net investment income declined to $4.26 billion from $4.36 billion for the quarter, but increased to $14.67 billion from $12.75 billion for nine months.
  • Cash flow: For nine months, operating activities provided $9.04 billion, investing activities used $23.35 billion, and financing activities provided $11.18 billion. Cash and cash equivalents decreased by $2.99 billion to $10.05 billion, including held-for-sale subsidiaries; continuing-operations cash was $10.00 billion.
  • Balance sheet and debt: At September 30, total assets were $785.23 billion, total liabilities $724.36 billion, and total equity $60.75 billion, compared with $730.91 billion, $681.79 billion, and $49.00 billion at year-end 2010. Total investments were $504.41 billion. Consolidated short-term debt was $451 million and long-term debt $24.75 billion, including $3.16 billion of CSE debt. Cash and short-term investments were $25.91 billion in total.
  • Liquidity: Management reported short-term liquidity of $14.1 billion at quarter-end, excluding specified collateral balances, and $260.1 billion of liquid assets under its broader definition. The company had $4.0 billion of unsecured credit facilities, with $1.9 billion unused, and $12.4 billion of committed facilities, with $3.6 billion unused.

Material changes versus the prior comparable period

  • Reported earnings rose sharply, driven principally by derivative gains and, to a lesser extent, lower investment losses and higher operating earnings. ALICO’s inclusion materially increased premiums, policy fees, assets and expenses and limits direct year-over-year comparability.
  • Management said falling interest rates, equity-market movements and volatility, currency movements, and wider financial-sector credit spreads drove favorable changes in freestanding derivatives. These gains were partly offset by losses on embedded derivatives, including variable-annuity guarantees.
  • MetLife issued 68.57 million common shares in March 2011 for gross proceeds of $3.0 billion and used the proceeds to repurchase and cancel convertible preferred stock for $2.95 billion, including a $146 million redemption premium. Common shares outstanding increased to approximately 1.06 billion from approximately 986 million at year-end 2010.
  • MetLife sold its 50% interest in MSI MetLife in April 2011 for approximately $269 million before specified expenses and recorded a $57 million after-tax sale loss. The sale of MetLife Taiwan, announced earlier in 2011, closed November 1, 2011; a $74 million after-tax impairment was recorded in discontinued operations during the first nine months.

Outlook, management commentary, risks and unusual items

  • Outlook: Management expected significant improvement in 2011 operating earnings versus 2010 and forecast 33% growth in premiums, fees and other revenues, mainly from ALICO. It cited international organic growth, variable-annuity fee income and pension closeouts; it also expected investment portfolio income and realized gains and losses generally to exceed 2010 results. Management emphasized disciplined underwriting and expense control, including ALICO integration costs. These are forward-looking expectations, not guarantees.
  • Market and valuation risk: Management warned that relatively small market movements can materially change derivative values and GAAP income. Variable-annuity guarantees are sensitive to equity markets, interest rates, volatility, currency rates and policyholder behavior; their valuation includes a nonperformance-risk adjustment. The filing’s hypothetical 10% market sensitivity analysis estimated potential fair-value losses of $3.43 billion for interest-rate risk and $4.45 billion for foreign-exchange risk, and a $45 million gain for equity risk; these estimates are not forecasts.
  • Investment and credit exposure: The company recorded a $217 million nine-month impairment on Greek sovereign debt, including $206 million in the third quarter. Europe perimeter sovereign holdings had an estimated fair value of $629 million before purchased credit protection. Fixed-maturity gross unrealized losses were $5.5 billion. Further impairments may arise if economic fundamentals, credit ratings, collateral values, rates or spreads deteriorate.
  • Unusual charges and operating pressures: MetLife recorded a $117 million after-tax reserve charge tied to use of the Social Security Death Master File and similar databases; it said additional payments, penalties or procedural costs could be substantial but were not estimable. Severe U.S. storms, including Hurricane Irene, contributed to Auto & Home losses; its third-quarter combined ratio was 105.7%, versus 93.6% a year earlier. The company also incurred $40 million of expenses related to the ELNY liquidation plan and $65 million of goodwill impairment at MetLife Bank.
  • Banking and regulatory matters: MetLife was exploring sales of MetLife Bank’s depository and forward mortgage origination businesses and planned to relinquish its bank charter subject to regulatory approval. Mortgage-servicing consent decrees and related investigations could lead to fines, legal costs or reduced profitability; the company could not estimate the possible loss. The filing also cites uncertainty around Dodd-Frank, Basel III, possible systemically important financial institution oversight, and the effects of low rates and Operation Twist.
  • Legal contingencies: For matters where a range could be estimated, reasonably possible losses in excess of accruals were estimated at $0–$355 million. Some matters, including retained-asset-account litigation and certain international litigation, could not be estimated. Management said pending matters were not likely, based on information then known, to materially affect financial position, while acknowledging possible material effects on quarterly or annual income or cash flows.
  • Capital returns: The board approved a 2011 annual dividend of $0.74 per common share, estimated at $787 million in aggregate. The filing says the Federal Reserve declined to act on MetLife’s request to increase its common dividend and resume repurchases. No shares were repurchased under the announced program during the quarter; reported purchases were affiliate transactions to rebalance index funds.

Important facts for investors to verify

  • How much of reported earnings and future results depends on derivative fair-value changes, especially nonperformance-risk adjustments and variable-annuity guarantee assumptions.
  • ALICO’s contribution to premiums, operating earnings, investment yields, integration costs and goodwill, and the comparability of reported periods.
  • The development of Death Master File-related claims and reserves, ELNY costs, and mortgage-servicing investigations or penalties.
  • Investment portfolio credit quality, Greek and broader European exposures, unrealized losses, and any additional impairments.
  • Liquidity and collateral needs, securities-lending exposures, debt maturities, subsidiary dividend capacity and any regulatory limits on dividends or repurchases.
  • Whether the MetLife Bank business sales and bank-charter exit proceed, and the resulting capital, regulatory and earnings effects.