MetLife, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. MetLife is a global insurer and provider of annuities, employee benefits and related financial services. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. Interim results are unaudited.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $16.34bn | $16.50bn | $49.74bn | $50.82bn |
| Net income (loss) attributable to MetLife | $972m | ($954m) | $2.46bn | $1.20bn |
| Common-shareholder net income (loss) | $942m | ($984m) | $2.37bn | $1.11bn |
| Diluted EPS | $0.84 | ($0.92) | $2.14 | $1.03 |
| Operating earnings (non-GAAP) | $1.53bn | $1.45bn | $4.82bn | $4.40bn |
| Operating earnings available to common shareholders (non-GAAP) | $1.50bn | $1.42bn | $4.73bn | $4.31bn |
| Operating cash flow | — | $9.98bn | $15.29bn |
Quarterly revenue fell about 1%; nine-month revenue fell about 2%. Operating earnings rose about 6% for the quarter and 9% year to date. GAAP results improved sharply from the prior-year periods, principally because 2012 included a $1.87bn goodwill impairment charge ($1.6bn after tax) for U.S. Retail annuities. Operating earnings exclude goodwill impairments, investment gains and losses, derivative gains and losses, and other defined adjustments; they are not a substitute for GAAP earnings.
- Drivers and pressure points: Higher asset-based fees from increased separate-account balances and lower credited interest supported operating earnings. Unfavorable mortality and claims, increased expenses and lower investment yields were offsets. Variable-annuity sales declined following product changes made for pricing discipline and risk management.
- Market-sensitive results: Net derivative losses were $546m in Q3 2013 versus $718m in Q3 2012, but $2.87bn for the first nine months of 2013 versus $604m in the prior-year period. Nine-month investment gains were $339m versus losses of $152m; Q3 recorded investment losses of $85m. Derivative results were affected by interest and foreign-exchange movements, variable-annuity guarantee valuations and the nonperformance-risk adjustment.
- Margins and claims: Management cited declining investment yields in the low-rate environment. The Retail property-and-casualty combined ratio, including catastrophe losses, was 92.6% for Q3 versus 94.6%; for nine months it was 98.2% versus 97.1%. Group Benefits’ corresponding combined ratio was 90.2% versus 87.8% for Q3 and 93.6% versus 92.9% for nine months.
- Balance sheet at September 30: Total assets were $822.6bn versus $836.8bn at year-end; total liabilities were $761.3bn versus $771.8bn. Total equity was $61.3bn versus $64.8bn; MetLife stockholders’ equity was $60.9bn versus $64.5bn. AOCI fell to $5.1bn from $11.4bn, reflecting a substantial decline in unrealized investment gains.
- Investments: Total investments were $484.9bn versus $517.1bn. Available-for-sale fixed maturities were $348.8bn versus $374.3bn. Management attributed the rise in gross unrealized fixed-maturity losses during the first nine months—$2.5bn, to $4.2bn—primarily to higher interest rates; it concluded the securities in unrealized-loss positions were not other-than-temporarily impaired at quarter-end.
- Debt and liquidity: GAAP balance-sheet debt included $18.25bn of long-term debt, $100m of short-term debt, $3.19bn of junior subordinated debt and $4.20bn of collateral financing arrangements. Management-defined short-term liquidity was $17.8bn, down from $24.1bn; liquid assets were $265.7bn, down from $292.2bn. Cash and cash equivalents were $11.38bn versus $15.74bn. Operating cash flow declined about 35% year over year.
Material developments and unusual items
- MetLife completed the $1.9bn acquisition of Chilean pension administrator Provida on October 1, 2013, after quarter-end, acquiring 91.38%. Initial purchase accounting was incomplete at filing.
- MetLife completed the sale of $6.4bn of MetLife Bank deposits and later merged MetLife Bank into non-bank subsidiary MLHL. The company recorded after-tax divestiture-related losses of $96m for the first nine months and expected another $40m–$65m of after-tax charges, excluding incremental legal settlements.
- September’s settlement of common-stock purchase contracts generated $1.0bn of proceeds and issued 22.68m new shares. MetLife declared common dividends totaling $0.735 per share for the first nine months; a further $0.275-per-share dividend was declared in October, payable in December.
- The annual actuarial assumption review produced a $101m pre-tax net charge ($69m after tax), including reserve increases partly offset by DAC effects. Separately, Australian group disability reserve strengthening reduced operating earnings by $57m after tax; proposed Polish pension reforms prompted a $26m DAC and intangible-asset write-down in EMEA.
Outlook, risks and contingencies
- Management expected solid 2013 operating-earnings improvement over 2012 despite low interest rates, with growth from premiums and fees, higher equity-linked fee revenue, international business growth, disciplined underwriting and expense control. It expected only modest 2013 net investment gains and warned that derivative fair values can make GAAP results volatile.
- By 2016, management targeted more than 20% of operating earnings from emerging markets and an operating return on common equity, excluding AOCI, at the low end of 12%–14%. It also targeted $1bn of efficiencies: $600m in net pre-tax expense savings and $400m reinvested in technology and capabilities. These are goals, not guarantees.
- The company identified sustained low interest rates, market volatility, credit and investment losses, variable-annuity guarantees, policyholder behavior, foreign-exchange movements and reinsurance/counterparty performance as significant risks. It also cited regulatory uncertainty: MetLife was under FSOC review for possible non-bank SIFI designation and was named a global systemically important insurer (G-SII); resulting capital, liquidity or dividend restrictions remained uncertain.
- For litigation matters where a reasonably possible loss could be estimated, aggregate losses above accrued amounts were estimated at $0–$445m. Other matters could not be estimated. A Florida unclaimed-property relator alleged $767m in damages; the case was dismissed in August, and the relator appealed. Asbestos claims and mortgage-related investigations also remain risks. Management said adverse outcomes were not likely to materially affect financial position, but could materially affect earnings or cash flows in particular periods.
Most important facts for investors to verify
- Reconcile GAAP earnings with operating earnings, especially the effects of derivative valuation, the prior-year goodwill impairment and the nonperformance-risk adjustment.
- Assess whether operating cash generation and management-defined liquidity remain adequate given lower cash, liquidity measures and investment values, and review collateral calls and securities-lending exposure.
- Track variable-annuity guarantee exposure, hedge effectiveness, policyholder behavior assumptions and any further actuarial reserve or DAC revisions.
- Confirm final Provida purchase accounting and subsequent acquisition effects; monitor remaining MetLife Bank exit charges and related investigations.
- Follow litigation outcomes, including the Florida appeal, asbestos claims and mortgage-related matters, and monitor SIFI/G-SII regulation and its possible implications for capital, dividends and repurchases.