MetLife, Inc. — Q2 2010 Form 10-Q
Business context and reporting period. MetLife is a global insurer and financial-services company. This unaudited filing covers the quarter and six months ended June 30, 2010; comparisons are to the corresponding 2009 periods unless otherwise stated. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $14,246 | $8,265 | $27,436 | $18,479 |
| Net investment income | $4,087 | $3,730 | $8,431 | $6,991 |
| Net investment gains (losses) | $1,468 | $(3,829) | $1,540 | $(4,735) |
| Income (loss) from continuing operations, after tax | $1,541 | $(1,419) | $2,374 | $(2,004) |
| Net income (loss) available to common shareholders | $1,526 | $(1,433) | $2,331 | $(2,007) |
| Diluted EPS, continuing operations | $1.83 | $(1.74) | $2.80 | $(2.51) |
| Operating earnings available to common shareholders (non-GAAP) | $1,022 | $723 | $1,856 | $854 |
- Drivers and comparability: GAAP earnings recovery was dominated by the swing in investment gains, especially freestanding derivatives, alongside lower impairments and mortgage-loan valuation allowance additions. Management said improved markets supported investment income and policy fees and reduced variable-annuity guarantee benefit costs; the Q2 market decline also increased DAC/VOBA/DSI amortization. Operating earnings is management’s non-GAAP segment measure and should not be treated as a substitute for GAAP results.
- Cash flow: First-half operating cash flow was $3,928 versus $(1,227) in 2009; investing cash flow was $(10,120) and financing cash flow $6,861. Cash and cash equivalents were $10,702 at June 30, up from $10,112 at year-end 2009.
- Balance sheet and debt: Total assets were $573,907, liabilities $534,183 and total equity $39,724 at June 30, 2010. Cash, cash equivalents and short-term investments totaled $20,448. Balance-sheet debt included $879 short-term debt, $20,647 long-term debt, $5,297 collateral financing arrangements and $3,191 junior subordinated debt. Long-term debt includes $7,187 associated with newly consolidated securitization entities.
- Liquidity: Management reported $11.4 billion of short-term liquidity and $170.6 billion of liquid assets under its stated definitions. The Company reported $24.3 billion of cash collateral payable under securities lending at June 30, up from $21.5 billion at year-end.
- Investment portfolio: Total investments were $358.7 billion, including $246.3 billion of fixed maturities and $58.3 billion of mortgage loans. The net unrealized position on fixed-maturity and equity securities improved from a $2.2 billion loss at year-end to a $7.3 billion gain at June 30. Below-investment-grade or non-rated fixed maturities had estimated fair value of $20.8 billion.
Material changes and unusual items
- Effective January 1, 2010, new VIE guidance led MetLife to consolidate certain securitization entities, recording $6.8 billion of commercial mortgage loans and $6.8 billion of long-term debt at adoption; the resulting June 30 entity balances included $7.1 billion of debt. The assets are restricted to settling the entities’ liabilities, and MetLife stated its exposure is limited to its remaining investment.
- Q2 GAAP results included a refinement to the nonperformance-risk method used to value certain insurance liabilities and embedded derivatives. The refinement reduced Q2 common-shareholder earnings by $577 million after DAC and tax, or $0.70 per basic and diluted share; management said it did not affect operating earnings.
- First-half other-than-temporary impairment losses recognized in earnings were $240 million, versus $1.215 billion in 2009. Despite improvement, management cautioned that future impairments depend on economic fundamentals, issuer performance, collateral values, rates and credit spreads.
- Other expenses included $42 million of Alico transaction costs and $42 million of integration-related expenses in the first half. The continuing cost-reduction initiative had incurred $192 million of restructuring charges since inception; additional 2010 charges were anticipated but not estimable at June 30.
Outlook, risks and contingencies
- Outlook: Management expected meaningful earnings recovery in 2010 and forecast full-year premiums, fees and other revenues to grow approximately 5% over 2009. It cited potential investment-portfolio returns, international and pension-closeout growth, disciplined underwriting and expense control, while noting unemployment-related pressure and lower expected MetLife Bank revenue. No specific GAAP EPS guidance is provided in the supplied filing text.
- Alico acquisition: Announced as expected to close by year-end 2010, subject to approvals and other conditions. Consideration included $6.8 billion cash, common and preferred stock, and $3.0 billion of equity units; expected total common shares issued were 214.6–231.5 million. A committed facility of up to $5.0 billion could fund part of the cash purchase price and would be repayable within 364 days after closing. Management did not expect a material 2010 earnings impact. Risks include approvals, integration, dilution, currency exposure and execution of the related tax plan.
- Other strategic item: MetLife agreed to sell MetLife Taiwan for approximately $113 million cash; regulatory approval was pending, and the business was not classified as held for sale or discontinued operations in this filing.
- Principal risks: Market and credit volatility; interest-rate, equity, currency and real-estate exposures; variable-annuity guarantees and hedge effectiveness; mortgage-credit and valuation risk; securities-lending liquidity; counterparty performance; regulatory change, including Dodd-Frank; ratings downgrades; and restrictions on subsidiary dividends. A 10% adverse market sensitivity indicated potential estimated-fair-value losses of $3.9 billion for non-trading interest-rate risk, $827 million for non-trading foreign-exchange risk and $35 million for non-trading equity-price risk; the filing cautions these are model estimates, not forecasts.
- Contingencies: The Company faces asbestos claims, sales-practice and other litigation, and regulatory inquiries. It said certain loss ranges cannot be reasonably estimated and that adverse outcomes could materially affect individual periods. A New York Attorney General subpoena concerning retained-asset accounts was received July 30, 2010, after quarter-end; MetLife said it believed the matter would not materially affect the financial statements as a whole. A $13.5 million payment resolved a federal investigation concerning historical broker payments.
- Reporting controls: Management concluded disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring operating performance from the large, market-sensitive investment and derivative gains, and review the non-GAAP operating-earnings reconciliation.
- Assess the assumptions and sensitivity behind variable-annuity guarantees, the nonperformance-risk adjustment and accelerated DAC/VOBA/DSI amortization.
- Track Alico closing conditions, final financing and share issuance, integration costs, rating-agency treatment and the IRS-related plan.
- Review liquidity needs from securities lending, collateral calls, debt maturities and policyholder withdrawals, alongside the restrictions on subsidiary dividends.
- Monitor credit quality, valuation and loss trends in commercial mortgages, RMBS/ABS/CMBS, Level 3 assets, and the outcome of material litigation and regulatory matters.