MetLife, Inc. — Q1 2010 Form 10-Q
Business context and reporting period
MetLife is a diversified insurer and financial-services company operating in the U.S. and internationally. This unaudited filing covers the three months ended March 31, 2010, with comparisons to Q1 2009; balance-sheet comparisons are to December 31, 2009. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2010 / March 31, 2010 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $13.190 billion | $10.214 billion, Q1 2009 |
| Net income (loss) attributable to MetLife | $835 million | $(544) million, Q1 2009 |
| Net income (loss) available to common shareholders | $805 million; diluted EPS $0.97 | $(574) million; diluted EPS $(0.71) |
| Income (loss) from continuing operations, net of tax | $833 million | $(585) million, Q1 2009 |
| Operating earnings / available to common shareholders | $864 million / $834 million | $161 million / $131 million, Q1 2009 |
| Operating cash flow | $2.871 billion | $(985) million, Q1 2009 |
| Cash and cash equivalents | $9.202 billion | $10.112 billion, December 31, 2009 |
| Total assets / total equity | $565.566 billion / $36.179 billion | $539.314 billion / $33.498 billion, December 31, 2009 |
| Debt and related financing at balance-sheet carrying value | Short-term debt $318 million; long-term debt $20.177 billion; collateral financing $5.297 billion; junior subordinated debt $3.191 billion | Short-term debt $912 million; long-term debt $13.220 billion; other listed balances unchanged |
Net investment income rose 33% to $4.344 billion. Net investment gains were $72 million, versus losses of $906 million in Q1 2009; these figures include the effects of the newly consolidated securitization entities. The company’s MD&A reports operating earnings of $864 million and operating earnings available to common shareholders of $834 million, both non-GAAP measures.
Net cash used in investing activities was $7.598 billion and net cash provided by financing activities was $3.845 billion. The company reported short-term liquidity of $11.3 billion, excluding specified collateral-related cash and investments, and total liquid assets of $166.8 billion. These liquidity measures are not the same as balance-sheet cash.
Material changes versus the prior comparable period
- Revenue increased 29%; continuing-operations income improved by $1.418 billion, from a loss to a profit. Management attributed the turnaround chiefly to improved investment markets, higher net investment income and substantially lower investment impairments.
- Investment impairments recognized in earnings fell to $93 million from $811 million. The net unrealized position on fixed maturity and equity securities improved from a $2.2 billion loss at year-end to a $1.5 billion gain at quarter-end, largely reflecting narrower credit spreads and improved liquidity.
- Policy fees increased 19%, while policyholder benefits and claims and dividends rose 13%. Total expenses increased 7%; interest expense rose 51%, including $106 million of expense associated with newly consolidated securitization entities.
- Net income includes significant market-sensitive investment and derivative effects. Management stated that lower market volatility reduced both gross derivative gains and losses; changes in the company’s own credit spread also affect fair-valued guarantees.
Outlook, management commentary and risks
- Management expected meaningful earnings recovery in 2010 and approximately 6% full-year growth in premiums, fees and other revenues versus 2009. It cited expected growth in separate-account fees, pension closeouts and international operations, partly offset by expected declines at MetLife Bank and economic pressure on some insurance products.
- Management expected improvement in investment gains and reduced volatility in guarantee-related liabilities, while noting that derivative fair values can move materially with interest rates, equity markets, volatility and MetLife’s credit spread. It also cited expense control and disciplined underwriting as priorities. The filing cautions that interim results are not necessarily indicative of full-year performance.
- MetLife agreed to acquire Alico, expected to close by year-end 2010 subject to approvals and customary conditions. Consideration includes $6.8 billion cash and securities; the company estimated 214.6 million to 231.5 million potential common shares to be issued over time. A committed senior credit facility of up to $5.0 billion may fund any cash shortfall; any borrowing is due within 364 days after closing. Management did not expect a material 2010 earnings effect.
- Effective January 1, 2010, new VIE guidance led to consolidation of securitization entities, adding $7.416 billion of assets and $7.181 billion of liabilities at quarter-end. Management stated that the company’s exposure to those entities is limited to its remaining investment, reported at $181 million.
- The Health Care Act required a $75 million charge for the reduced tax deductibility of retiree health costs related to the Medicare Part D subsidy. The quarter also included $27 million of Alico transaction costs and $13 million of restructuring charges.
- Risks include investment and mortgage credit losses, interest-rate and equity-market movements, liquidity needs from securities lending and collateral arrangements, credit-rating downgrades, foreign currency and emerging-market exposures, and uncertainty in litigation and regulation. Asbestos claims received were approximately 1,180 in Q1 2010 versus 981 in Q1 2009; management said future exposure could exceed the accrued liability.
- After quarter-end, MetLife agreed to sell MetLife Taiwan for approximately $113 million cash, subject to approvals; its reported equity at March 31 was $218 million. On April 15, the company also agreed to pay $13.5 million to resolve a U.S. Attorney investigation regarding pre-2005 broker payments.
Important facts for investors to verify
- Reconcile GAAP net income to non-GAAP operating earnings, including the effects of investment gains, derivatives, VIE consolidation and tax items.
- Review Alico’s final approvals, funding mix, credit-facility use and resulting share dilution; assess the Taiwan sale’s closing terms and accounting impact.
- Assess investment credit quality and valuation uncertainty, especially mortgage-related securities, commercial mortgage loans, Level 3 assets and future impairment exposure.
- Monitor liquidity and collateral requirements, including securities lending, derivative downgrade triggers, subsidiary dividend restrictions and debt repayment needs.
- Track developments in asbestos and other litigation, broker-payment investigations, and any changes to regulatory or rating-agency assessments.