MetLife, Inc. 2014 Form 10-K Summary
Business context and reporting period
MetLife is a global life insurance, annuities, employee benefits and asset management company operating through six segments: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; Latin America; Asia; and Europe, the Middle East and Africa (EMEA). This annual report covers the fiscal year ended December 31, 2014, compared primarily with 2013. Certain international subsidiaries report on a November 30 year-end, a calendar-year conversion expected to be substantially complete by 2016.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total GAAP revenue | $73.316 billion | $68.199 billion |
| Net investment income (GAAP) | $21.153 billion | $22.232 billion |
| Net derivative gains (losses) | $1.317 billion | $(3.239) billion |
| Income from continuing operations, after tax | $6.339 billion | $3.391 billion |
| Net income attributable to MetLife, Inc. | $6.309 billion | $3.368 billion |
| Net income available to common shareholders | $6.187 billion | $3.246 billion |
| Diluted EPS | $5.42 | $2.91 |
| Operating earnings available to common shareholders (non-GAAP) | $6.560 billion | $6.261 billion |
| Cash flow from operating activities | $16.376 billion | $16.131 billion |
Operating earnings, a non-GAAP management measure, increased 4.8%. GAAP revenue rose 7.5%, while GAAP net investment income declined 4.9%. Reported GAAP results were strongly affected by derivatives: the year-over-year improvement in derivative gains and losses was $4.6 billion before tax. The 2014 income tax provision was $2.465 billion, or 28% of pretax continuing income, compared with $661 million, or 16%, in 2013.
Net cash used in investing activities was $15.055 billion; financing activities provided $2.256 billion. Cash and cash equivalents increased $3.223 billion to $10.808 billion. At year-end, total assets were $902.337 billion, total liabilities $829.678 billion and total equity $72.560 billion. Stockholders’ equity attributable to MetLife, Inc. was $72.053 billion.
Debt at December 31 included $100 million of short-term debt, $16.286 billion of long-term debt, $4.196 billion of collateral financing arrangements and $3.193 billion of junior subordinated debt securities. Short-term liquidity was $14.0 billion and liquid assets were $237.4 billion. MetLife’s general account investment portfolio was $516.8 billion. Fixed maturity securities were $365.4 billion, of which 93.2% were investment grade.
Material changes versus 2013
- GAAP net income increased to $6.336 billion from $3.393 billion, primarily reflecting a sharp swing in derivative results. Operating earnings available to common shareholders rose more modestly, by $299 million.
- Operating earnings benefited from portfolio growth, higher asset-based fee income and lower interest credited expense; these were partly offset by lower investment yields and less favorable mortality, morbidity and claims experience.
- Segment operating earnings increased in Retail ($2.646 billion versus $2.524 billion), Corporate Benefit Funding ($1.511 billion versus $1.295 billion), Latin America ($682 million versus $574 million), Asia ($1.288 billion versus $1.244 billion) and EMEA ($362 million versus $329 million). Group, Voluntary & Worksite Benefits declined to $865 million from $962 million; Corporate & Other loss widened to $672 million from $545 million.
- Total assets increased to $902.337 billion from $885.296 billion, and MetLife, Inc. stockholders’ equity rose to $72.053 billion from $61.553 billion. Long-term debt declined to $16.286 billion from $18.653 billion.
- MetLife repurchased $1.0 billion of common stock in 2014 and paid $1.499 billion in common dividends, up from $1.119 billion in 2013. Declared common dividends were $1.33 per share versus $1.01.
Outlook, management commentary, risks and unusual items
Management’s target was to reach a 12%–14% operating return on common stockholders’ equity by 2016. It expected results toward the lower end of that range, citing reduced share repurchases, uncertainty following the non-bank SIFI designation, lower U.S. investment margins and the stronger U.S. dollar. The target depended in part on regulatory capital rules appropriately reflecting the insurance business model and allowing meaningful share repurchases before 2016. Management also expected 20% or more of operating earnings to come from emerging markets by 2016, while noting foreign exchange and equity-market effects could influence that measure.
Management described 2014 as a year of solid sales growth across regions, with growth in group life, dental, disability and new voluntary-benefit products. Sales of variable annuities fell as the company emphasized pricing discipline and risk management. New variable annuity products or enhancements were introduced in late 2014 and early 2015; management anticipated profitable annuity growth in 2015 and beyond. The company pursued $1 billion in annual efficiencies, with up to $400 million intended for reinvestment in technology and operating capabilities.
- Non-bank SIFI: The Financial Stability Oversight Council designated MetLife a non-bank SIFI on December 18, 2014. MetLife sued in January 2015 seeking to overturn the designation. Federal Reserve capital, liquidity and other enhanced requirements were not yet settled, creating uncertainty around competitiveness, guarantees, dividends and repurchases.
- Low interest rates and markets: Sustained low rates pressure investment spreads and could require reserve strengthening or accelerated DAC/VOBA amortization. Equity, credit, real estate and foreign exchange movements can affect earnings, capital and liquidity. A hypothetical constant-low-rate scenario estimated a modest operating-earnings impact, but derivative mark-to-market gains were also estimated; these are scenario estimates, not forecasts.
- Variable annuity guarantees: Market declines, volatility, interest rates, policyholder behavior, mortality and counterparty performance could increase guarantee costs. Hedging and reinsurance may not fully offset losses.
- Capital and funding: Insurer subsidiary dividends are regulated, and the holding company depends primarily on subsidiary distributions. Collateral calls, securities lending, counterparty defaults and limited market liquidity could increase cash needs or force asset sales.
- Regulatory and legal matters: The filing identifies evolving captive-reinsurance, solvency, derivatives and international capital rules. Litigation includes asbestos, unclaimed property, retained-asset-account and sales-practices matters. The company estimated reasonably possible losses in excess of accruals of $0–$390 million for matters where a range could be estimated; other matters could not be quantified.
- Unusual items: The May 2014 sale of MetLife Assurance Limited generated a $633 million pretax loss ($442 million after tax). Other disclosed 2014 items included a $41 million Chilean tax charge, a $117 million after-tax increase in asbestos litigation reserves, $57 million after-tax in licensing-settlement charges, a $58 million non-deductible health-insurer fee, and a $57 million after-tax charge related to delayed settlement interest on unclaimed funds. Annual reserve and DAC assumption reviews provided a $174 million after-tax benefit.
Most important facts for investors to verify
- Reconcile reported GAAP earnings with operating earnings, especially the impact of derivative valuation changes and nonperformance-risk adjustments.
- Track the Federal Reserve’s eventual capital and liquidity standards for non-bank SIFIs, the outcome of MetLife’s court challenge, and any resulting restrictions on capital returns.
- Assess the sustainability of operating earnings amid low investment yields, claims experience, variable-annuity guarantee exposure and foreign exchange movements.
- Review the adequacy and sensitivity of insurance reserves, DAC/VOBA, asbestos accruals and other litigation provisions; confirm subsequent developments on the FHA settlement and other legal matters.
- Monitor liquidity and collateral exposure, including securities lending obligations, derivative collateral requirements, subsidiary dividend capacity and debt maturities.
- Compare actual progress toward the 2016 operating ROE and efficiency targets with management’s stated assumptions; these targets are non-GAAP and conditional.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2014.