MetLife, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Global insurer and financial-services provider reporting the quarter and six months ended June 30, 2013; financial statements are unaudited. The company operates across the Americas, Asia and EMEA. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. “Operating earnings” is a company-defined non-GAAP measure and is not a substitute for GAAP income.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $15,721 | $18,398 | $33,404 | $34,314 |
| Income from continuing operations, net of tax | $508 | $2,300 | $1,503 | $2,166 |
| Net income available to common shareholders | $471 | $2,264 | $1,427 | $2,090 |
| Diluted common EPS | $0.43 | $2.12 | $1.29 | $1.95 |
| Operating earnings available to common shareholders | $1,593 | $1,432 | $3,228 | $2,896 |
| Operating cash flow | Not separately provided | Not separately provided | $7,314 | $12,102 |
Premiums were essentially flat year over year in Q2 ($9,158 vs. $9,161); policy fees and net investment income increased to $2,371 and $5,282, respectively. Reported net derivative losses were $1,690 in Q2 and $2,320 for the first half, versus gains of $2,092 and $114 in the comparable 2012 periods. Net investment gains were $110 in Q2 and $424 in the first half. Conventional operating margin is not presented; operating earnings is the company’s principal segment-performance measure.
At June 30, total assets were $815.7 billion, down from $836.8 billion at year-end 2012; stockholders’ equity was $60.0 billion, down from $64.5 billion. Cash and cash equivalents were $9.2 billion, versus $15.7 billion at year-end; short-term investments were $13.0 billion. Management reported short-term liquidity of $15.9 billion and liquid assets of $267.8 billion. Consolidated liabilities included $18.6 billion long-term debt, $100 million short-term debt, $4.2 billion collateral financing arrangements and $3.2 billion junior subordinated debt.
Material changes and drivers
- GAAP Q2 income from continuing operations fell $1.8 billion year over year, chiefly because derivative results swung adversely by $3.8 billion before tax. Management attributed volatility to interest-rate and foreign-exchange movements and the nonperformance-risk adjustment on variable-annuity guarantees. Operating earnings available to common shareholders nevertheless rose $161 million, supported by asset-based fees and portfolio growth.
- For the first half, GAAP income from continuing operations declined $663 million, while operating earnings available to common shareholders rose $332 million. The prior period included a $52 million after-tax charge related to unclaimed-property matters.
- Comprehensive loss was $3.9 billion in Q2, compared with comprehensive income of $3.8 billion a year earlier. AOCI fell to $6.2 billion from $11.4 billion at year-end, primarily reflecting lower unrealized investment gains. Management cited rising interest rates and wider credit spreads; gross unrealized losses on fixed-maturity securities increased about $2.0 billion during the first half.
- Operating earnings increased in Retail, Group, Corporate Benefit Funding and Asia in Q2; they declined in Latin America and EMEA, while Corporate & Other posted a larger loss. Segment reporting was realigned, so prior-period comparisons were adjusted.
- Operating cash flow was $7.3 billion for the first half versus $12.1 billion. Investing outflows were $7.9 billion; financing outflows were $5.8 billion. Cash declined $6.6 billion, including cash paid in the MetLife Bank deposit-business sale.
Outlook, management commentary and risks
- Management expected “solid improvement” in 2013 operating earnings over 2012 despite low interest rates, citing premium and fee growth, international expansion, disciplined underwriting and expense management. It expected only modest investment losses but cautioned that derivative fair values can move substantially with market variables.
- By 2016, management targeted operating return on common equity, excluding AOCI, at the low end of a 12%–14% range, assuming share repurchases; without buybacks, the estimated range would be about 100 basis points lower. A strategic initiative targeted $1 billion of efficiencies: $600 million of pretax expense savings and $400 million reinvested in technology and capabilities. Management aimed for emerging markets to generate more than 20% of operating earnings by 2016.
- MetLife announced plans to merge three U.S. life insurers and an offshore reinsurer into one U.S.-based regulated insurer, expected toward the end of 2014 subject to approvals. It also agreed to acquire Chilean pension administrator Provida for approximately $2.1 billion, with closing anticipated in Q4 2013 subject to customary conditions.
- MetLife Bank sold $6.4 billion of deposits and exited or committed to exit substantially all operations. The company expected another $65–$90 million of after-tax divestiture charges, excluding incremental legal settlements. The sale did not eliminate potential regulatory or litigation exposure.
- Key risks include low or sharply changing interest rates, equity and currency movements, credit losses, variable-annuity guarantee costs, counterparty and collateral demands, reinsurance performance, regulatory changes and litigation. MetLife reached Stage 3 of the FSOC review for possible non-bank SIFI designation and was included on the FSB’s July 2013 initial G-SII list.
- For specified litigation matters where an estimate was possible, reasonably possible losses above accrued amounts were estimated at $0–$315 million; other matters could not be reasonably estimated. The filing says adverse outcomes could affect particular quarters or years. It also reports ongoing asbestos claims, mortgage-related investigations, unclaimed-property disputes and other proceedings.
Important facts for investors to verify
- How much of the GAAP earnings decline reflects derivative accounting and nonperformance-risk adjustments versus underlying operating performance, and how sensitive are those amounts to rate, equity and currency changes?
- Whether operating-earnings growth and the 2013 outlook are sustained, particularly given claims experience, lower investment yields and variable-annuity sales changes.
- Liquidity and collateral needs under stressed markets, including securities-lending exposures, derivative downgrade triggers and the reduction in cash during the first half.
- Progress, cost and regulatory approvals for the Provida acquisition and proposed insurer mergers; confirm the expected additional MetLife Bank exit charges.
- Developments in SIFI/G-SII regulation, captive-reinsurance rules and mortgage, asbestos, unclaimed-property and other legal matters, including potential losses not currently estimable.