MetLife, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
MetLife is a global insurer and provider of annuities, employee benefits and related financial services. This unaudited filing covers the three months ended March 31, 2014, compared with Q1 2013; balance-sheet amounts are compared with December 31, 2013. Unless stated otherwise, figures are in U.S. dollars.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Total revenues | $17.085 billion | $17.683 billion in Q1 2013 |
| Income from continuing operations, net of tax | $1.342 billion | $995 million in Q1 2013 |
| Net income attributable to MetLife | $1.328 billion | $986 million in Q1 2013 |
| Net income available to common shareholders | $1.298 billion; diluted EPS $1.14 | $956 million; diluted EPS $0.87 |
| Operating earnings (non-GAAP) | $1.592 billion; $1.562 billion available to common shareholders | $1.657 billion; $1.627 billion available to common shareholders |
| Operating cash flow | $2.484 billion | $2.733 billion in Q1 2013 |
| Cash and cash equivalents | $8.573 billion | $7.585 billion at December 31, 2013 |
| Total assets / total equity | $890.903 billion / $66.332 billion | $885.296 billion / $62.096 billion at December 31, 2013 |
| Short-term and long-term debt | $100 million / $16.793 billion | $175 million / $18.653 billion at December 31, 2013 |
Net cash increased $988 million during the quarter. Investing activities provided $2.164 billion, while financing activities used $3.659 billion. The company reported short-term liquidity of $14.9 billion and liquid assets of $231.9 billion; these measures exclude specified pledged, restricted or collateral-related assets. No conventional operating margin is presented; operating earnings is a non-GAAP performance measure and is not a substitute for GAAP income.
Net investment income fell to $5.035 billion from $6.077 billion, while net investment gains (losses) moved to a $411 million loss from a $314 million gain. Net derivative gains were $343 million versus $630 million of losses in Q1 2013. Comprehensive income was $4.482 billion, including substantial unrealized investment gains recorded in other comprehensive income. Common dividends declared were $0.275 per share in Q1.
Material changes versus Q1 2013
- GAAP income from continuing operations increased $347 million after tax, principally because derivative results improved by $973 million before tax; this was partly offset by a $725 million unfavorable change in investment gains and losses.
- Operating earnings available to common shareholders declined $65 million, or about 4%. Management cited unfavorable mortality and morbidity experience and lower investment yields, partly offset by higher asset-based fees, portfolio growth and lower interest credited expense.
- The effective tax rate was 27%, compared with 20% in Q1 2013. The prior period included a $119 million Japanese tax refund; Q1 2014 included tax effects associated with the MAL disposition and nondeductible charges.
- Segment operating earnings were: Retail $612 million (from $626 million); Group, Voluntary & Worksite Benefits $188 million (from $230 million); Corporate Benefit Funding $355 million (from $294 million); Latin America $183 million (from $143 million); Asia $328 million (from $333 million); EMEA $88 million (from $87 million); and Corporate & Other a loss of $162 million (versus a $56 million loss).
- Stockholders’ equity rose to $65.758 billion from $61.553 billion, supported in part by higher accumulated other comprehensive income.
Outlook, commentary, risks and unusual items
- MetLife recorded an expected $495 million pretax loss ($343 million after tax), including a $60 million goodwill reduction, on the agreed sale of its U.K. subsidiary MetLife Assurance Limited (MAL). The expected gross cash consideration is $705 million; closing was expected in Q2 2014, subject to approvals and other conditions.
- Management’s 2016 target is operating return on common equity, excluding AOCI, of 12%–14%, assuming regulatory clarity permits meaningful share repurchases; without those repurchases, the target is 11%–13%. It also targets $1 billion in efficiencies, including $600 million of expected net pretax expense savings and $400 million primarily for reinvestment. Management expects emerging markets to contribute 20% or more of operating earnings by 2016. These are forward-looking targets, not guarantees.
- Management described sales as mixed. Variable-annuity sales declined amid pricing discipline and risk management; Group, Voluntary & Worksite and several international businesses showed growth. The low-rate environment pressured investment yields, while allowing lower crediting rates on some products. Severe winter weather increased non-catastrophe property-and-casualty claims.
- Q1 operating earnings included $57 million of charges connected with New York licensing settlements: $50 million paid to the New York Department of Financial Services and $10 million to the New York County District Attorney, with related effects and tax treatment described in the filing. The quarterly Patient Protection and Affordable Care Act health-insurer fee reduced operating earnings by $14 million.
- Management anticipates further restructuring charges through 2015 but could not estimate them at quarter-end. A declared Q2 2014 common dividend was $0.35 per share.
- Key risks include sustained low interest rates, market and foreign-exchange volatility, variable-annuity guarantees and hedging effectiveness, investment credit and valuation losses, policyholder behavior, regulatory changes to captive reinsurance, and restrictions on subsidiary dividends or share repurchases. The company disclosed aggregate reasonably possible litigation losses of $0–$460 million in excess of accrued amounts for matters where a range could be estimated; some matters could not be estimated. It stated that adverse outcomes could affect individual quarters or years.
Most important facts for investors to verify
- Track the MAL sale’s closing, proceeds and final loss against the estimates reported.
- Separate GAAP earnings from non-GAAP operating earnings and assess how much reported profit reflects derivatives, investment marks and one-time items.
- Monitor investment yields, mortality and morbidity experience, variable-annuity guarantee exposure, and the effectiveness and collateral demands of hedging.
- Review progress toward the 2016 return and efficiency targets, including assumptions about regulatory capital rules and share repurchases.
- Follow developments in captive-reinsurance regulation, subsidiary dividend capacity, and litigation and regulatory contingencies.