MetLife, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, filed February 26, 2013. MetLife is a global insurer and provider of annuities and employee benefits, operating through U.S. and international segments. The filing reports full-year results; it also provides fourth-quarter data.
Financial results and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| GAAP total revenues | $68.2 billion | $70.2 billion |
| GAAP income from continuing operations, after tax | $1.3 billion | $6.4 billion |
| Net income available to common shareholders | $1.2 billion; $1.12 diluted EPS | $6.2 billion; $5.76 diluted EPS |
| Operating earnings (non-GAAP) | $5.8 billion | $4.8 billion |
| Operating earnings available to common shareholders (non-GAAP) | $5.7 billion | $4.7 billion |
| Net cash provided by operating activities | $17.2 billion | $10.3 billion |
| Cash and cash equivalents, year-end | $15.7 billion | $10.5 billion |
| Total assets / MetLife stockholders’ equity, year-end | $836.8 billion / $64.5 billion | $796.2 billion / $57.5 billion |
Operating earnings is management’s non-GAAP performance measure; it excludes, among other items, investment and derivative gains or losses, goodwill impairment and results of divested businesses. It is not a substitute for GAAP earnings. No conventional consolidated operating margin is presented in the filing.
- Operating revenues rose 5% to $68.4 billion, while GAAP total revenues fell about 3%, reflecting volatile derivative results.
- Net derivative losses were $1.9 billion in 2012, versus gains of $4.8 billion in 2011. Net investment losses narrowed to $352 million from $867 million.
- Policyholder benefits and claims were $38.0 billion; interest credited to policyholder accounts was $7.7 billion, up from $5.6 billion.
- Operating cash flow increased to $17.2 billion. Net cash increased $5.3 billion during the year; investing activities used $11.9 billion and financing activities provided $35 million.
- Short-term liquidity was $24.1 billion and liquid assets were $292.2 billion at year-end. The company reported $100 million of short-term debt, $19.1 billion of long-term debt, $4.2 billion of collateral financing arrangements and $3.2 billion of junior subordinated debt. Long-term debt includes $2.5 billion associated with consolidated securitization entities.
- Fixed maturity securities were $374.3 billion at estimated fair value; 93.2% were investment grade. Mortgage loans were $57.0 billion, down from $72.1 billion, primarily reflecting mortgage portfolio dispositions.
- MetLife stockholders’ equity increased to $64.5 billion from $57.5 billion. The company reported a company-defined combined RBC ratio above 400%; each U.S. insurance subsidiary subject to RBC requirements exceeded regulatory action levels.
- Fourth-quarter 2012 net income attributable to MetLife was $127 million and net income available to common shareholders was $96 million, or $0.09 per diluted share. Third-quarter results included a $984 million net loss, primarily associated with the annuity goodwill impairment.
Changes versus the prior year
GAAP net income available to common shareholders declined to $1.2 billion from $6.2 billion. The principal factors were an unfavorable $6.7 billion year-over-year swing in derivative gains and losses, a $1.9 billion pre-tax ($1.6 billion after-tax) non-cash impairment of U.S. retail annuity goodwill, and a $1.2 billion pre-tax ($752 million after-tax) charge from a global review of DAC, reserves and certain intangibles. These items were partly offset by operating earnings available to common shareholders increasing $1.0 billion, supported by improved investment results, higher asset-based fees and lower average crediting rates.
Operating earnings increased across the main reported segments: Retail to $2.0 billion from $1.3 billion; Group, Voluntary & Worksite Benefits to $960 million from $891 million; Corporate Benefit Funding to $1.2 billion from $1.1 billion; Latin America to $583 million from $514 million; Asia to $1.0 billion from $880 million; and EMEA to $271 million from $251 million. Corporate & Other operating losses widened to $269 million from $184 million.
Outlook, management commentary and risks
- Management expected 2013 operating earnings to be in line with 2012 despite continued low-interest-rate pressure. Its 2016 objectives included operating return on common equity at the low end of 12%–14%, $1 billion in efficiencies ($600 million of pre-tax expense savings and $400 million reinvested), and more than 20% of operating earnings from emerging markets. Management noted the return target would be about 100 basis points lower assuming no share repurchases, all else equal.
- A hypothetical sustained-low-rate scenario was estimated to reduce operating earnings by about $45 million in 2013 and $150 million in 2014. The filing cautions that changes in derivative fair values can materially affect GAAP earnings and are difficult to forecast.
- Management planned to shift the product mix toward protection products and away from capital-intensive products, maintain disciplined underwriting and expense control, and continue hedging and asset-liability management. Variable annuity sales fell 38% to $17.7 billion after pricing and guarantee changes.
- Superstorm Sandy generated approximately $150 million of gross property and casualty losses before tax; recognized net losses were $90 million after tax and reinsurance recoveries. Additional claims-related losses or recoveries could arise.
- MetLife was exiting substantially all MetLife Bank businesses. It recorded 2012 and 2011 after-tax divestiture-related losses of $163 million and $212 million, respectively, and expected another $60 million–$85 million after-tax in exit charges. Loan representation-and-warranty and servicing-defect reserves were $95 million and $54 million at year-end, respectively. Mortgage-related regulatory inquiries and litigation remain.
- Other material risks include sustained low rates, equity and credit-market volatility, variable annuity guarantees and hedge effectiveness, foreign exchange and international political or regulatory exposure, catastrophic claims, investment impairments and illiquidity, reinsurance and derivative counterparty performance, litigation, and potential additional regulation if designated a non-bank SIFI or global systemically important insurer.
- The filing estimates reasonably possible litigation losses in excess of accruals at $0–$285 million for certain matters where an estimate was possible; it cannot estimate losses for other matters. Asbestos claims remain particularly difficult to estimate. The IRS closing agreement concerning ALICO branch restructuring requires the planned restructuring to be completed by the end of 2013, subject to approvals.
Most important facts for investors to verify
- Review the reconciliation of non-GAAP operating earnings to GAAP results, especially the derivative effects, goodwill impairment and global assumption-review charges.
- Check the status and financial effect of 2013 and 2016 targets, including the $1 billion efficiency plan, product-mix changes and capital-return assumptions.
- Assess the assumptions, capital and liquidity effects associated with variable annuity guarantees, hedges, collateral calls and counterparty exposure.
- Monitor remaining MetLife Bank exit costs, mortgage representations and warranties, foreclosure and FHA investigations, and the adequacy of related reserves.
- Verify insurance-subsidiary dividend capacity, statutory capital and any regulatory limits on parent-company dividends or repurchases; MetLife is a holding company reliant on subsidiary distributions.
- Track the remaining common equity unit settlements, expected share issuance and dilution, and the effect of the Provida acquisition announced in February 2013.
- Review the full contingency disclosures and developments in asbestos, unclaimed-property, retained-asset-account and other litigation. The filing’s financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.