MetLife, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Global insurer and financial-services provider reporting the three months ended March 31, 2012, compared with Q1 2011. MetLife reorganized its segments into six businesses across the Americas, Asia and EMEA; comparative segment results were revised. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / Dec. 31, 2011 |
|---|---|---|
| GAAP revenue | $15.916 billion | $15.908 billion in Q1 2011 |
| GAAP continuing operations | Loss of $134 million; common-shareholder continuing loss per diluted share of $0.17 | Income of $924 million; diluted earnings per share of $0.70 |
| Net income attributable to MetLife | Loss of $144 million; common-shareholder net loss of $174 million, or $0.16 per diluted share | Income of $877 million; common-shareholder income of $701 million, or $0.66 per diluted share |
| Operating earnings (non-GAAP) | $1.493 billion; $1.463 billion available to common shareholders | $1.348 billion; $1.318 billion available to common shareholders |
| Operating revenues / expenses (non-GAAP) | $16.690 billion / $14.601 billion | $15.615 billion / $13.703 billion |
| Operating cash flow | $5.758 billion | $3.499 billion in Q1 2011 |
| Cash and cash equivalents | $18.667 billion | $10.461 billion at Dec. 31, 2011 |
| Total assets / total equity | $819.604 billion / $59.010 billion | $796.226 billion / $57.889 billion at Dec. 31, 2011 |
| Liquidity | Short-term liquidity position $21.1 billion; liquid assets $268.0 billion | $16.2 billion / $258.9 billion, respectively, at Dec. 31, 2011 |
Operating earnings are management’s non-GAAP measure and exclude investment and derivative gains or losses and other items. The filing does not provide a directly comparable consolidated GAAP operating margin.
Balance-sheet debt included $101 million of short-term debt, $23.389 billion of long-term debt (including $2.916 billion related to consolidated securitization entities), $4.647 billion of collateral financing arrangements and $3.192 billion of junior subordinated debt securities. Unused credit and committed facilities totaled $5.4 billion. Fixed maturity securities were $354.5 billion at fair value; mortgage loans, net, were $68.6 billion.
Material changes versus Q1 2011
- Operating earnings available to common shareholders rose 11% to $1.463 billion, supported by favorable mortality and claims experience, higher investment yields and lower average crediting rates.
- Despite nearly flat GAAP revenue, GAAP continuing results swung to a $134 million loss. Net derivative losses worsened to $1.978 billion from $315 million. Management attributed the deterioration chiefly to market movements affecting freestanding derivatives and the nonperformance-risk adjustment on embedded guarantee liabilities.
- Total expenses rose 11.6% to $16.325 billion. Policyholder benefits and claims increased to $9.104 billion, and interest credited to policyholder account balances rose to $2.557 billion.
- Net investment income increased 16.7% to $6.200 billion. Net investment losses were $110 million, compared with $99 million a year earlier.
- Cash from investing activities was $2.167 billion, versus $8.092 billion used in Q1 2011; the current-period cash increase included a $5.522 billion net reduction in short-term investments. Financing cash flow was $240 million, versus $2.262 billion in Q1 2011.
Outlook, management commentary and key risks
- Management expected a solid improvement in 2012 operating earnings over 2011, citing anticipated revenue growth, disciplined underwriting and expense management. It expected only modest investment losses but warned that market-variable changes can cause substantial derivative earnings volatility.
- The 2012 accounting change limiting DAC capitalization is expected to reduce operating earnings, primarily in Asia, but management expected no impact on future cash flows. The change was applied retrospectively; it reduced Dec. 31, 2011 retained earnings by $2.475 billion and reduced Q1 2011 common-shareholder earnings by $129 million.
- MetLife was exiting forward and reverse mortgage origination and agreed to sell its reverse mortgage servicing portfolio; it also had a pending agreement to sell most of its bank deposit business. The company expected additional after-tax charges of $77–$115 million during the remainder of 2012, with no expected operating-earnings impact. Transactions required regulatory approvals.
- In March 2012, the Federal Reserve objected to MetLife’s proposed incremental capital actions, including a stock repurchase and dividend increase. MetLife planned to deregister as a bank holding company after its bank exit, but remained exposed to possible FSOC designation as a systemically important non-bank financial institution.
- Unclaimed-property settlements resulted in a $52 million after-tax Q1 charge, including a $40 million multi-state examination payment and expected accelerated benefit payments. The company said further costs from other jurisdictions could not yet be estimated. Separately, it disclosed an aggregate reasonably possible litigation-loss range of $0–$125 million above accruals for matters where a range could be estimated; other matters were not estimable.
- Other material exposures include variable-annuity guarantees, low interest rates, volatile capital markets and European sovereign-credit concerns. Management reported $3.712 billion of net investment exposure across selected European perimeter-region countries and Cyprus after purchased credit protection; it said exposure to perimeter-region sovereign debt was not significant.
Most important facts for investors to verify
- How much of the GAAP loss reflects derivative valuation and nonperformance-risk changes, and how those items affect capital and future earnings.
- Whether operating-earnings growth persists after considering its non-GAAP exclusions and the retrospective DAC accounting change.
- Progress, regulatory approvals, final costs and liquidity effects of the MetLife Bank and mortgage-business exits.
- Developments in unclaimed-property and mortgage-servicing investigations, Total Control Account litigation, asbestos claims and other contingencies, including exposures not currently estimable.
- Federal Reserve capital-plan restrictions, MetLife’s bank-holding-company status and potential FSOC designation, as well as available liquidity and subsidiary dividend capacity.