Business context and reporting period
MetLife, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. MetLife provides insurance, annuities, employee benefits and related financial services in the U.S. and international markets. The filing is annual; fourth-quarter figures are noted where provided.
On November 1, 2010, MetLife completed its $16.4 billion acquisition of ALICO, expanding its international scale. The 2010 results include ALICO’s operating results for one month; its assets and liabilities were included as of November 30. Comparisons with 2009 are therefore affected by the acquisition.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total GAAP revenue | $52.7 billion | $41.1 billion |
| Net income (loss) attributable to MetLife | $2.79 billion | ($2.25 billion) |
| Net income (loss) available to common shareholders | $2.67 billion | ($2.37 billion) |
| Diluted GAAP EPS | $3.00 | ($2.89) |
| Operating earnings available to common shareholders (non-GAAP) | $3.89 billion | $2.37 billion |
| Net cash provided by operating activities | $8.00 billion | $3.80 billion |
| Cash and cash equivalents at year-end | $13.05 billion | $10.11 billion |
| Total assets at year-end | $730.9 billion | $539.3 billion |
| Total equity at year-end | $49.0 billion | $33.5 billion |
Fourth-quarter 2010 continuing-operations income was $82 million; common-shareholder net income was $51 million and diluted EPS was $0.05. The filing does not provide a clear consolidated profit-margin measure.
GAAP revenue growth included higher premiums, policy fees and net investment income, as well as substantially smaller investment and derivative losses than in 2009. GAAP net investment losses were $392 million versus $2.91 billion; net derivative losses were $265 million versus $4.87 billion. These volatile items materially affect comparisons. Operating earnings, a non-GAAP management measure, rose to $4.01 billion from $2.49 billion before preferred dividends.
Operating cash flow improved, but investing activities used $18.31 billion and financing activities provided $13.38 billion. The company reported $17.6 billion of short-term liquidity, using its stated measure that excludes specified collateral, versus $11.7 billion in 2009; liquid assets were $245.7 billion versus $158.4 billion. At year-end, reported debt included $27.6 billion of long-term debt (including $6.9 billion relating to consolidated securitization entities), $306 million of short-term debt, $5.3 billion of collateral financing arrangements and $3.2 billion of junior subordinated debt.
The general account investment portfolio was approximately $476 billion. Gross unrealized losses on available-for-sale fixed maturity and equity securities were $6.9 billion, down from $10.8 billion. Mortgage loans delinquent or in foreclosure were less than 0.6% of mortgage loan investments.
Material changes versus the prior comparable period
- Reported earnings recovered from a 2009 GAAP loss, with improved financial markets, higher net investment income and lower investment impairments contributing; derivative accounting and market movements remained significant sources of volatility.
- ALICO added substantial international operations and drove much of the increase in assets, goodwill and policyholder liabilities. The acquisition added $6.96 billion of goodwill and $9.21 billion of VOBA at acquisition.
- MetLife issued $3.62 billion of common stock in August and issued ALICO Holdings common shares, convertible preferred stock and $3.0 billion of equity units at closing. The transaction is dilutive; total common shares expected to be issued to ALICO Holdings were estimated at 214.6 million to 231.5 million.
- Auto & Home operating earnings fell to $300 million from $322 million; the combined ratio including catastrophes worsened to 94.6% from 92.3%. Retirement Products and International operating earnings increased to $739 million and $792 million, respectively.
Outlook, management commentary, risks and unusual items
Management expected 2011 premiums, fees and other revenue to grow approximately 30%, with 27 percentage points attributable to ALICO. International operations were expected to contribute about 30% of premiums, fees and other revenue and 40% of operating earnings in 2011. Management anticipated improved operating earnings, disciplined underwriting and expense control, with ALICO cost synergies beginning later in 2011. It expected investment portfolio returns, including realized gains and losses, to be in line with 2010, while warning that derivative fair-value changes are difficult to predict.
- Key exposures include interest rates, credit spreads, equity and real estate markets, foreign exchange, illiquid investments, securities lending, collateral calls, variable-annuity guarantees and counterparty performance. Low rates may pressure investment spreads; sustained market declines could increase guarantee costs and DAC/VOBA amortization.
- Dodd-Frank, potential enhanced prudential standards, and Basel III could increase capital, liquidity, compliance and operating requirements. The effects were not yet clear.
- ALICO integration, foreign exchange and political risks, and uncertainty around the IRS closing agreement and planned Section 338 tax elections may affect results. Failure to obtain shareholder approval for conversion of ALICO’s convertible preferred stock by November 1, 2011 would require an approximately $300 million payment.
- MetLife discontinued new sales of individual and employer-group long-term care products in 2010 and intended to seek an in-force rate increase for employer-group coverage.
- Contingencies include asbestos litigation, retained-asset-account investigations and mortgage-servicing inquiries. Management said outcomes were uncertain; asbestos exposure could exceed recorded liabilities. The filing reports an unqualified audit opinion and effective controls, but the internal-control assessment excluded ALICO, representing 17% of assets and 2% of revenue, pending integration.
- A $75 million charge related to the 2010 Health Care Act was recorded. Acquisition-related transaction and integration costs were also significant; reported 2010 figures include $100 million of transaction costs and $176 million of integration-related expenses in the notes.
Important facts for investors to verify
- Separate recurring operating performance from GAAP investment, derivative and acquisition effects; confirm the definitions and reconciliation of non-GAAP operating earnings.
- Track ALICO integration, realized synergies, goodwill and VOBA assumptions, and the actual share issuance and dilution from preferred-stock conversion and equity-unit settlements.
- Review liquidity and capital at both the holding company and regulated subsidiaries, including dividend restrictions, collateral requirements and upcoming debt maturities.
- Monitor variable-annuity guarantee exposure, hedging effectiveness, reinsurance recoverability and the effect of interest-rate, equity and credit-spread changes.
- Follow the ALICO IRS agreement and tax elections, the conditional $300 million payment, and material developments in asbestos, retained-asset-account and mortgage-servicing matters.