METLIFE INC quarterly report, Q3 FY2014

MetLife, Inc. — Q3 2014 Form 10-Q

Business context and reporting period. MetLife is a global provider of life insurance, annuities, employee benefits and asset management. This unaudited quarterly report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Amounts below are in U.S. dollars.

Key financial metrics

MetricQ3 2014Q3 2013Nine months 2014Nine months 2013
Total revenue$18.846B$16.337B$54.197B$49.741B
Net income from continuing operations$2.094B$0.973B$4.812B$2.476B
Net income available to common shareholders$2.064B$0.942B$4.697B$2.369B
Diluted earnings per common share$1.81$0.84$4.12$2.14
Operating earnings, non-GAAP$1.855B$1.525B$5.068B$4.798B
Operating earnings available to common shareholders, non-GAAP$1.825B$1.495B$4.977B$4.707B
Operating cash flow—$10.950B$9.984B

Operating earnings is management’s non-GAAP performance measure and is not a substitute for GAAP earnings. The filing does not present a single conventional consolidated operating-margin measure.

  • Revenue mix: Q3 premiums were $9.703B (up from $9.094B); policy fees were $2.628B (up from $2.372B); net investment income was $5.410B (up from $5.026B). For nine months, net investment income declined to $15.704B from $16.385B.
  • Cash flow and liquidity: Nine-month investing cash outflow was $11.669B and financing cash inflow was $1.977B. Cash and equivalents were $8.783B at September 30, up from $7.585B at year-end. Management reported short-term liquidity of $15.4B and liquid assets of $239.4B.
  • Balance sheet and debt: Total assets were $908.627B, liabilities $837.226B and total equity $71.299B. Consolidated short-term debt was $100M and long-term debt $16.389B; collateral financing arrangements were $4.196B and junior subordinated debt $3.193B.
  • Capital returns: MetLife repurchased 8.17M shares for $443M during the first nine months, with $818M remaining under authorization at September 30. Common dividends declared were $0.975 per share for the nine-month period; a $0.35 fourth-quarter dividend was declared after quarter-end.

Material changes versus prior periods

  • Q3 GAAP continuing-operations income rose to $2.094B from $973M. Management attributed much of the improvement to a $1.0B favorable year-over-year change in derivative gains, associated with currency and interest-rate movements; reported Q3 derivative gains were $478M versus losses of $546M.
  • Nine-month GAAP income improved substantially, with derivative gains of $1.132B versus losses of $2.866B in 2013. The swings reflect market movements and accounting asymmetries; management cautions that some economic hedges do not qualify for hedge accounting, producing earnings volatility.
  • Nine-month net investment gains were a loss of $427M versus a gain of $339M. This included a $633M pretax loss on the May 2014 sale of MetLife Assurance Limited (MAL), for $702M net cash consideration.
  • Operating earnings available to common shareholders rose $330M in Q3 and $270M for the nine months. Management cited portfolio growth, higher asset-based fees and lower credited interest expense, partly offset over nine months by unfavorable claims experience and lower investment yields.
  • Q3 operating earnings included a $41M Chile tax-reform charge, a $32M one-time U.S. tax benefit, and the $15M quarterly impact of the health-insurer fee. Nine-month results also included $57M of New York licensing-related settlement charges and a $56M after-tax favorable disability premium-waiver reserve adjustment.

Outlook, management commentary and risks

  • Management’s 2016 target is a 12%–14% operating return on common equity excluding AOCI, assuming sufficient share repurchases; without sufficient repurchases, the target range is 11%–13%. The company also described a $1B efficiency goal, including $600M of net pretax expense savings and approximately $400M expected to be reinvested. These are forward-looking targets, not assurances.
  • Management continues to shift toward protection products and away from more capital-intensive products, while emphasizing disciplined pricing, underwriting, asset-liability management and expense control. It noted lower variable-annuity and Japan life and accident-and-health sales, alongside growth in several group and international businesses.
  • Persistently low interest rates may pressure reinvestment yields and margins. Equity, interest-rate and currency movements, policyholder behavior, mortality and morbidity, catastrophe claims, investment credit quality, reinsurance performance and fair-value estimates can materially affect results and capital.
  • The FSOC had preliminarily designated MetLife as a non-bank SIFI. MetLife contested the proposed determination; the final regulatory and capital consequences remained uncertain in the filing. MetLife was also listed as a global systemically important insurer, with future capital standards still developing.
  • Management reported an aggregate reasonably possible litigation loss range of $0–$390M above accrued amounts for matters where it could estimate a range; other matters, including asbestos claims, could not be reliably estimated. The filing says adverse outcomes could affect particular periods. A separate FHA/foreclosure investigation could settle above current accruals.
  • After quarter-end, stock purchase contracts settled for $1.0B of proceeds in exchange for 22.9M newly issued shares. The filing also describes planned fourth-quarter mergers of U.S. insurance entities, subject to the disclosed regulatory and capital considerations.

Important facts for investors to verify

  • How much of the reported earnings increase reflects recurring operating performance versus derivatives, assumption updates, tax items and other market-sensitive effects; also review the company’s non-GAAP reconciliation.
  • The expected timing and consequences of the FSOC’s SIFI determination, including any effects on capital requirements, dividends, buybacks and product competitiveness.
  • The status and potential exposure from asbestos, FHA/foreclosure, ERISA and other litigation or regulatory matters, including losses not captured in the estimable range.
  • Whether the 2016 return-on-equity and efficiency targets remain achievable, given the stated dependence on regulatory clarity, share repurchases and market conditions.
  • The post-quarter share issuance and the insurance-entity mergers’ effects on share dilution, liquidity, capital allocation and subsidiary dividend capacity.