MetLife, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. MetLife is a global provider of life insurance, annuities, employee benefits and asset management. This unaudited quarterly report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $18.846B | $16.337B | $54.197B | $49.741B |
| Net income from continuing operations | $2.094B | $0.973B | $4.812B | $2.476B |
| Net income available to common shareholders | $2.064B | $0.942B | $4.697B | $2.369B |
| Diluted earnings per common share | $1.81 | $0.84 | $4.12 | $2.14 |
| Operating earnings, non-GAAP | $1.855B | $1.525B | $5.068B | $4.798B |
| Operating earnings available to common shareholders, non-GAAP | $1.825B | $1.495B | $4.977B | $4.707B |
| Operating cash flow | — | $10.950B | $9.984B |
Operating earnings is management’s non-GAAP performance measure and is not a substitute for GAAP earnings. The filing does not present a single conventional consolidated operating-margin measure.
- Revenue mix: Q3 premiums were $9.703B (up from $9.094B); policy fees were $2.628B (up from $2.372B); net investment income was $5.410B (up from $5.026B). For nine months, net investment income declined to $15.704B from $16.385B.
- Cash flow and liquidity: Nine-month investing cash outflow was $11.669B and financing cash inflow was $1.977B. Cash and equivalents were $8.783B at September 30, up from $7.585B at year-end. Management reported short-term liquidity of $15.4B and liquid assets of $239.4B.
- Balance sheet and debt: Total assets were $908.627B, liabilities $837.226B and total equity $71.299B. Consolidated short-term debt was $100M and long-term debt $16.389B; collateral financing arrangements were $4.196B and junior subordinated debt $3.193B.
- Capital returns: MetLife repurchased 8.17M shares for $443M during the first nine months, with $818M remaining under authorization at September 30. Common dividends declared were $0.975 per share for the nine-month period; a $0.35 fourth-quarter dividend was declared after quarter-end.
Material changes versus prior periods
- Q3 GAAP continuing-operations income rose to $2.094B from $973M. Management attributed much of the improvement to a $1.0B favorable year-over-year change in derivative gains, associated with currency and interest-rate movements; reported Q3 derivative gains were $478M versus losses of $546M.
- Nine-month GAAP income improved substantially, with derivative gains of $1.132B versus losses of $2.866B in 2013. The swings reflect market movements and accounting asymmetries; management cautions that some economic hedges do not qualify for hedge accounting, producing earnings volatility.
- Nine-month net investment gains were a loss of $427M versus a gain of $339M. This included a $633M pretax loss on the May 2014 sale of MetLife Assurance Limited (MAL), for $702M net cash consideration.
- Operating earnings available to common shareholders rose $330M in Q3 and $270M for the nine months. Management cited portfolio growth, higher asset-based fees and lower credited interest expense, partly offset over nine months by unfavorable claims experience and lower investment yields.
- Q3 operating earnings included a $41M Chile tax-reform charge, a $32M one-time U.S. tax benefit, and the $15M quarterly impact of the health-insurer fee. Nine-month results also included $57M of New York licensing-related settlement charges and a $56M after-tax favorable disability premium-waiver reserve adjustment.
Outlook, management commentary and risks
- Management’s 2016 target is a 12%–14% operating return on common equity excluding AOCI, assuming sufficient share repurchases; without sufficient repurchases, the target range is 11%–13%. The company also described a $1B efficiency goal, including $600M of net pretax expense savings and approximately $400M expected to be reinvested. These are forward-looking targets, not assurances.
- Management continues to shift toward protection products and away from more capital-intensive products, while emphasizing disciplined pricing, underwriting, asset-liability management and expense control. It noted lower variable-annuity and Japan life and accident-and-health sales, alongside growth in several group and international businesses.
- Persistently low interest rates may pressure reinvestment yields and margins. Equity, interest-rate and currency movements, policyholder behavior, mortality and morbidity, catastrophe claims, investment credit quality, reinsurance performance and fair-value estimates can materially affect results and capital.
- The FSOC had preliminarily designated MetLife as a non-bank SIFI. MetLife contested the proposed determination; the final regulatory and capital consequences remained uncertain in the filing. MetLife was also listed as a global systemically important insurer, with future capital standards still developing.
- Management reported an aggregate reasonably possible litigation loss range of $0–$390M above accrued amounts for matters where it could estimate a range; other matters, including asbestos claims, could not be reliably estimated. The filing says adverse outcomes could affect particular periods. A separate FHA/foreclosure investigation could settle above current accruals.
- After quarter-end, stock purchase contracts settled for $1.0B of proceeds in exchange for 22.9M newly issued shares. The filing also describes planned fourth-quarter mergers of U.S. insurance entities, subject to the disclosed regulatory and capital considerations.
Important facts for investors to verify
- How much of the reported earnings increase reflects recurring operating performance versus derivatives, assumption updates, tax items and other market-sensitive effects; also review the company’s non-GAAP reconciliation.
- The expected timing and consequences of the FSOC’s SIFI determination, including any effects on capital requirements, dividends, buybacks and product competitiveness.
- The status and potential exposure from asbestos, FHA/foreclosure, ERISA and other litigation or regulatory matters, including losses not captured in the estimable range.
- Whether the 2016 return-on-equity and efficiency targets remain achievable, given the stated dependence on regulatory clarity, share repurchases and market conditions.
- The post-quarter share issuance and the insurance-entity mergers’ effects on share dilution, liquidity, capital allocation and subsidiary dividend capacity.