MetLife, Inc. — Q3 2010 Form 10-Q
Business context and reporting period. MetLife is a U.S. and international insurer and financial-services company. This unaudited report covers the quarter and nine months ended September 30, 2010; balance-sheet comparisons are with December 31, 2009. The November 1, 2010 ALICO and DelAm acquisition occurred after quarter-end and is not included in the reported financial position or results.
Key financial results
Amounts are in millions except per-share data. Operating earnings are non-GAAP measures and are not substitutes for GAAP results.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $12,444 | $10,238 | $39,880 | $28,717 |
| Net income (loss) | $320 | $(625) | $2,701 | $(2,591) |
| Net income (loss) available to common shareholders | $286 | $(650) | $2,617 | $(2,657) |
| Diluted GAAP EPS available to common shareholders | $0.32 | $(0.79) | $3.09 | $(3.25) |
| Operating earnings | $908 | $748 | $2,825 | $1,663 |
| Operating earnings available to common shareholders | $878 | $718 | $2,734 | $1,572 |
- Q3 premiums were $6.56 billion, down slightly from $6.60 billion; policy fees rose 16% to $1.45 billion and net investment income rose 12% to $4.39 billion.
- Q3 net investment losses were $342 million, versus $732 million a year earlier; net derivative losses narrowed to $244 million from $1.41 billion. For the nine months, investment losses were $324 million versus $2.79 billion, while derivatives recorded a $1.28 billion gain versus a $4.08 billion loss.
- Q3 expenses were $12.05 billion, up 6%; DAC and VOBA amortization rose to $579 million from $202 million. Nine-month expenses were $35.93 billion, up 8%. The filing does not provide a single consolidated operating margin measure.
- Net cash from operations was $5.19 billion for the nine months, versus $2.72 billion. Investing activities used $19.37 billion; financing activities provided $18.63 billion. Cash and cash equivalents ended at $14.56 billion, up from $10.11 billion at year-end 2009.
Financial position and liquidity
- At September 30, total assets were $617.3 billion, liabilities $570.5 billion and total equity $46.8 billion. MetLife stockholders’ equity was $46.4 billion, versus $33.1 billion at year-end; accumulated other comprehensive income was $4.03 billion, compared with a $3.06 billion loss.
- Total investments were $378.7 billion, including $260.6 billion of fixed-maturity securities and $59.9 billion of mortgage loans. Separate-account assets and matching liabilities were each $172.4 billion.
- Short-term debt was $2.06 billion and long-term debt $24.51 billion, including $7.13 billion relating to consolidated securitization entities. Collateral financing arrangements were $5.30 billion and junior subordinated debt securities $3.19 billion. Debt increased partly due to financing raised for the acquisition.
- Management reported short-term liquidity of $16.7 billion, using its stated exclusions, and liquid assets of $185.3 billion. These are management-defined measures, not cash alone. Cash collateral payable under securities lending was $25.3 billion; securities on loan had estimated fair value of $25.1 billion.
Changes, outlook and significant items
- Management attributed the improved GAAP results and operating earnings mainly to market recovery, higher investment income and policy fees, and lower investment impairments. Earnings remained sensitive to interest rates, equity markets, foreign exchange, credit spreads and fair-value changes in derivatives and variable-annuity guarantees.
- For 2010, management expected premiums, fees and other revenues to grow approximately 3% over 2009, with higher investment returns and improved investment gains, while noting continuing economic, market and underwriting uncertainty. Management expected the acquisition’s effect on 2010 earnings to be immaterial; it expected International to contribute 40% of operating earnings in 2011.
- MetLife refined its nonperformance-risk assumptions for certain fair-value liabilities in Q2 2010, recognizing a $577 million after-tax GAAP loss for the nine months, with no effect on operating earnings. Management stated this reduced diluted EPS by $0.68 for the period. The filing also reports a $955 million pre-tax loss associated with the refinement.
- The closed-block policyholder dividend obligation rose to $2.01 billion from zero at year-end, reflecting unrealized gains. Management noted that closed-block experience affects future earnings and DAC amortization.
- On November 1, MetLife completed the ALICO and DelAm acquisition for consideration valued at $16.40 billion: $7.20 billion cash, $3.20 billion common stock, $2.81 billion preferred stock and $3.19 billion equity units. Purchase accounting and pro forma results were incomplete at filing; MetLife said it would provide them in its 2010 Form 10-K. Before closing, it raised $3.62 billion gross through an August common-stock offering and issued $3.0 billion in senior notes.
- MetLife recorded a $141 million after-tax loss in Q3 to reduce its MSI MetLife investment to estimated recoverable value; in October it agreed to sell its 50% stake for about $275 million, subject to approvals. A proposed sale of MetLife Taiwan was rejected by the regulator, and the company continued to consider alternatives.
- Other risks include elevated unemployment and slow economic recovery, low interest rates, regulatory changes including Dodd-Frank and potential Basel III requirements, acquisition integration and dilution, mortgage-servicing and foreclosure inquiries, asbestos claims, retained-asset-account investigations and litigation. The filing says litigation losses may affect particular periods, though management did not expect pending matters to materially affect financial position based on information then known.
Important facts for investors to verify
- Reconcile GAAP earnings with non-GAAP operating earnings, including derivative and investment effects and the nonperformance-risk adjustment.
- Review acquisition purchase accounting, goodwill, actual ALICO contributions, integration costs, dilution and the conversion/settlement terms of preferred stock and equity units.
- Track liquidity and financing needs, including collateral calls, securities-lending exposures, debt maturities and restrictions on subsidiary dividends.
- Assess investment credit quality, mortgage-loan performance, Level 3 valuations and whether further impairment charges arise.
- Monitor variable-annuity guarantees, policyholder behavior, closed-block results, significant legal and regulatory matters, and the proposed MSI MetLife disposition.