MetLife, Inc. — Q2 2009 Form 10-Q
Business context and reporting period. MetLife is a U.S. and international insurance, employee benefits and financial-services company. This unaudited filing covers the quarter and six months ended June 30, 2009; balance-sheet comparisons are with December 31, 2008. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $8,266 | $12,049 | $18,482 | $23,673 |
| Net investment income | $3,731 | $4,319 | $6,994 | $8,616 |
| Net investment gains (losses) | $(3,829) | $(357) | $(4,735) | $(1,087) |
| Continuing operations, after tax | $(1,418) | $879 | $(2,002) | $1,504 |
| Net income (loss) available to common shareholders | $(1,433) | $915 | $(2,007) | $1,530 |
| Diluted earnings (loss) per common share | $(1.74) | $1.26 | $(2.46) | $2.10 |
| Operating cash flow | Not separately reported by quarter | $(1,227) | $5,418 |
- Material year-over-year change: Q2 revenue fell $3.8 billion and first-half revenue fell $5.2 billion. Management attributed the losses primarily to derivatives, investment impairments and reduced investment income amid volatile markets. Derivative results were affected by rising interest rates, improving equity markets and the narrowing of MetLife’s own credit spread.
- Policyholder benefits and claims were $6.9 billion in Q2 and $13.5 billion for the first half, up from $6.6 billion and $13.2 billion, respectively. Total expenses were $10.6 billion in Q2, down 2%; first-half expenses were $21.8 billion, up less than 1%.
- At June 30, total assets were $509.5 billion, total liabilities $481.8 billion and total equity $27.6 billion, compared with $501.7 billion, $477.7 billion and $24.0 billion at year-end. Cash and cash equivalents were $13.2 billion, down from $24.2 billion.
- Debt and financing balances included $4.8 billion of short-term debt, $12.9 billion of long-term debt, $5.3 billion of collateral financing arrangements and $2.7 billion of junior subordinated debt. Short- and long-term debt increased from $2.7 billion and $9.7 billion at year-end. The company issued $1.25 billion of 6.75% senior notes due 2016 and $397 million of floating-rate senior notes due 2012 during the period.
- Management reported $14.4 billion of short-term liquidity, excluding specified collateral, versus $26.7 billion at year-end, and $144.5 billion of liquid assets under its broader definition. It said liquidity and capital were sufficient under current conditions, while noting that higher-than-normal liquidity reduces investment income. Holding-company liquid assets were $4.7 billion.
Outlook, commentary, risks and unusual items
- Management expected financial-market volatility to persist through the rest of 2009. It forecast a modest increase in premiums, fees and other revenues on a constant-exchange-rate basis, with mixed results across businesses, and anticipated continued downward pressure on net income, particularly investment income. No numerical earnings guidance was provided.
- Management cited recession-related risks to fee income, payroll-linked group premiums, demand for retirement products and Auto & Home premiums. It also warned that deteriorating markets could require additional guarantee or other insurance liabilities, DAC amortization, investment impairments or goodwill impairment.
- Investment risks remained significant: below-investment-grade or unrated fixed maturities had fair value of $18.3 billion and net unrealized losses of $5.6 billion, versus $12.4 billion and $5.1 billion at year-end. The company reported $0.9 billion of sub-prime-backed asset-backed securities with $821 million of unrealized losses. Management said further impairments could occur if economic or issuer conditions deteriorated.
- Adopting new fixed-maturity impairment guidance on April 1 shifted qualifying noncredit impairment losses to other comprehensive income. Adoption increased retained earnings by $76 million; the company said Q2 pre-tax earnings were $216 million higher, offset by increased other comprehensive loss.
- MetLife sold Texas Life’s parent, Cova, for $134 million cash in March, recording a $32 million after-tax disposal gain and $36 million of first-half discontinued-operation income. The company also reported a $95 million after-tax reduction in an Argentine contingent liability in Q1, partly offset by a $13 million liability for a contract-conversion program.
- An enterprise-wide cost and revenue initiative begun in 2008 had incurred $138 million of restructuring charges through June 30. Further 2009–2010 charges were expected, but could not yet be estimated. Management expected the initiative to be fully implemented by December 31, 2010.
- Legal and regulatory contingencies include a demutualization class action set for trial beginning September 8, 2009; asbestos claims, with 1,726 new claims in the first half; and approximately 130 pending sales-practices matters. Management said probable and reasonably estimable losses were provided for, but adverse outcomes could affect results or cash flows in particular periods.
- Domestic life financial-strength ratings were AA-/Aa2/AA/A+; long-term senior-debt ratings were A-/A2/A/a-. S&P, Moody’s and Fitch outlooks were negative; A.M. Best’s was stable. A downgrade could raise funding costs or trigger collateral demands. Management said it was in compliance with debt and facility covenants.
- Subsequent events: MetLife issued $500 million of junior subordinated debt on July 8, 2009. On July 14 it announced a planned combination of its U.S. institutional, individual and Auto & Home businesses into one organization beginning in August.
Most important facts for investors to verify
- Whether the large investment and derivative losses, including the effect of changes in MetLife’s own credit spread, persist or reverse, and how much reflects underlying credit deterioration.
- The quality, valuation and future impairment risk of mortgage-related, below-investment-grade, financial-services and Level 3 assets, including the assumptions supporting management’s recovery estimates.
- Whether liquidity remains adequate as cash balances decline, collateral and securities-lending obligations fluctuate, and MetLife Bank relies on Federal Reserve and FHLB borrowing.
- How guarantee liabilities, hedging effectiveness, DAC amortization and goodwill valuations respond to market movements and policyholder behavior.
- The outcomes and potential financial exposure from the demutualization trial, asbestos claims and other litigation or regulatory inquiries.
- Actual progress, costs and benefits of the restructuring initiative, and whether the stated revenue outlook is achieved amid recession and currency effects.