MetLife, Inc. — Third-Quarter 2009 Form 10-Q
Business context and reporting period. MetLife is a diversified insurer and financial-services company operating in the U.S. and internationally. This unaudited filing covers the quarter and nine months ended September 30, 2009; balance-sheet comparisons are with December 31, 2008. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $10,238 | $13,351 | $28,717 | $37,022 |
| Net investment income | $3,923 | $4,047 | $10,914 | $12,661 |
| Net investment gains (losses) | $(2,139) | $746 | $(6,874) | $(341) |
| Net income (loss) available to common shareholders | $(650) | $600 | $(2,657) | $2,130 |
| GAAP diluted EPS | $(0.79) | $0.83 | $(3.25) | $2.92 |
| Operating earnings available to common shareholders | $718 | $608 | $1,572 | $2,562 |
Operating earnings is a non-GAAP measure; MetLife reconciles it to GAAP net income and excludes, among other items, investment gains and losses, certain related adjustments, acquisition costs, and most discontinued operations. Net investment income yield in the company’s portfolio presentation was 5.01% for Q3 2009 versus 5.48% in Q3 2008, and 4.66% for the first nine months versus 5.81%.
- Cash flow: Operating cash flow was $2.718 billion for the first nine months, down from $7.002 billion. Investing cash outflow was $7.357 billion versus $6.257 billion; financing cash outflow was $4.126 billion versus $9.208 billion of inflow. Cash and cash equivalents ended the period at $15.562 billion, down from $24.207 billion at year-end 2008.
- Balance sheet and capital: Total assets were $535.192 billion versus $501.678 billion; total equity was $34.593 billion versus $23.985 billion. MetLife stockholders’ equity was $34.268 billion. Accumulated other comprehensive loss improved to $2.234 billion from $14.253 billion, largely reflecting recovery in unrealized investment values.
- Debt: At September 30, short-term debt was $2.131 billion, long-term debt $13.202 billion, collateral financing arrangements $5.297 billion, and junior subordinated debt $3.191 billion. These categories totaled approximately $23.8 billion, compared with approximately $21.3 billion at year-end 2008. Nine-month debt issuance included $1.250 billion of senior notes, $397 million of FDIC-guaranteed senior notes, and $500 million of junior subordinated debt.
- Liquidity: Management reported $15.9 billion of short-term liquidity, excluding specified collateral, and $159.0 billion of liquid assets under its broader definition. It said liquidity was ample under current conditions. Unsecured credit facilities totaled $3.2 billion and committed facilities $11.3 billion; the company reported compliance with covenants.
- Margins and underwriting: The filing does not provide a single consolidated operating-margin measure. Auto & Home’s combined ratio including catastrophes was 91.1% in Q3 2009 versus 89.0%; excluding catastrophes it was 87.7% versus 79.6%. For the first nine months, those ratios were 92.4% versus 93.2% including catastrophes, and 88.0% versus 83.1% excluding them.
Material changes versus comparable periods
- GAAP common-shareholder results moved from profit to loss: Q3 net loss was $650 million versus $600 million of income; nine-month net loss was $2.657 billion versus $2.130 billion of income. Management attributed the deterioration principally to investment losses, especially derivative marks, impairments, and other credit-related losses.
- Operating earnings rose 18% in Q3 to $718 million, but fell 39% for the nine months to $1.572 billion. Q3 gains reflected business growth, MetLife Bank acquisitions, improved market conditions in some areas, and expense reductions. Nine-month declines reflected lower variable investment income, weak real-estate and partnership returns, higher pension costs, and other expenses.
- Revenue fell 23% in both the quarter and nine-month comparison. Net investment income also declined, while net investment losses were substantially larger, particularly for the nine-month period.
- Fixed-maturity securities at estimated fair value increased to $223.896 billion from $188.251 billion. Gross unrealized losses on fixed-maturity and equity securities, including noncredit OTTI losses in other comprehensive loss, declined to $11.8 billion from $29.8 billion.
- Mortgage-loan valuation allowances rose to $671 million from $304 million. The company cited deterioration in real-estate fundamentals and increased credit losses across multiple investment sectors.
- MetLife sold Cova, parent of Texas Life, in March 2009 for $134 million cash and recorded a $32 million after-tax disposal gain. In July, it announced plans to combine U.S. institutional, individual, and Auto & Home operations into one U.S. organization, with segment reporting expected to reflect the realignment in Q4.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected financial-market volatility to stabilize further in Q4 2009 and anticipated a modest increase in premiums, fees, and other revenues on a constant-exchange-rate basis, with mixed results by business. It expected continued downward pressure on net investment income, particularly from limited partnerships, real estate joint ventures, and securities lending. No numerical full-year earnings guidance is provided in the filing.
- Management priorities and risks: Management emphasized disciplined underwriting, pricing, hedging, and expense control. Risks include recession-related weakness in sales and fee income, investment defaults and valuation uncertainty, real-estate deterioration, interest-rate and currency movements, variable-annuity guarantees, pension costs, and dependence of the holding company on regulated subsidiary dividends. The domestic life financial-strength ratings were AA-/Aa2/AA/A+; the 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.
- Investment impairments and accounting: Effective April 1, MetLife adopted revised OTTI accounting. For fixed-maturity securities, certain noncredit impairment losses were recorded in other comprehensive loss rather than earnings. Adoption increased Q3 and nine-month 2009 pretax earnings by $225 million and $441 million, respectively, with corresponding noncredit losses reflected in other comprehensive loss. Fixed-maturity and equity OTTI losses recognized in earnings totaled $441 million for Q3 and $1.656 billion for nine months. Management warned further impairments could occur if economic and credit conditions deteriorate.
- Derivatives and guarantees: Q3 investment results included substantial derivative losses; management said a tightening in MetLife’s own credit spread contributed $582 million to the quarter’s derivative losses. The company’s own-credit adjustment on guaranteed-benefit liabilities is not hedged and can create significant earnings volatility. A 10% market sensitivity analysis estimated potential fair-value losses of $2.836 billion for interest-rate risk, $855 million for foreign-exchange risk, and $245 million for equity-price risk; management cautioned these are estimates, not forecasts.
- Contingencies and unusual items: Two demutualization class actions reached proposed settlements in principle on November 2, 2009, subject to notice and court approval. Asbestos claims remain difficult to estimate; management said future charges could be material in particular periods. Approximately 130 sales-practices cases were pending. MetLife received 2,800 new asbestos claims in the first nine months, versus 3,700 in the comparable period. In Argentina, a reassessment of pesification-related exposures increased nine-month 2009 net income by $95 million.
- Capital return: The board approved a 2009 annual common dividend of $0.74 per share, estimated at $606 million in aggregate, payable December 14, 2009. MetLife said it did not intend to repurchase shares under its repurchase programs in 2009.
Important facts for investors to verify
- How much of reported GAAP loss reflects recurring operating performance versus investment marks, OTTI accounting, derivative valuation, and MetLife’s own-credit adjustment.
- Whether investment impairments and mortgage-loan valuation allowances rise further, especially in commercial real estate, structured securities, and below-investment-grade holdings.
- Whether operating earnings, net investment income, and revenue trends support management’s Q4 outlook, and how results compare after the announced U.S. business reorganization.
- How liquidity, collateral calls, securities-lending obligations, and subsidiary dividend restrictions affect holding-company resources and debt service.
- Whether proposed demutualization settlements are approved and whether asbestos, sales-practices, regulatory, and other litigation exposures require additional accruals.