MetLife, Inc. — Q3 2012 Form 10-Q
Business context and period. MetLife is a global insurer and provider of annuities, employee benefits and related financial services. This unaudited filing covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods; balance-sheet comparisons are with December 31, 2011. Amounts below are in U.S. dollars unless indicated. Segment results were reorganized and prior periods recast, and 2011 results were retrospectively adjusted for new deferred acquisition cost (DAC) accounting guidance.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $16.503bn | $20.453bn | $50.817bn | $53.506bn |
| Income (loss) from continuing operations, net of tax | $(957)m | $3.442bn | $1.209bn | $5.428bn |
| Net income (loss) available to common shareholders | $(984)m | $3.426bn | $1.106bn | $5.196bn |
| Basic EPS | $(0.92) | $3.23 | $1.04 | $4.91 |
| Operating earnings, non-GAAP | $1.447bn | $995m | $4.404bn | $3.524bn |
| Operating earnings available to common shareholders, non-GAAP | $1.417bn | $965m | $4.313bn | $3.433bn |
Interpretation. GAAP results were sharply lower, while operating earnings increased 45% in Q3 and 25% year to date. The largest drivers of the GAAP comparison were a $4.914bn unfavorable year-over-year change in Q3 net derivative gains and losses, and a $1.868bn non-cash goodwill impairment charge ($1.6bn after tax) related to the Retail Annuities reporting unit. MetLife attributed derivative volatility to market movements and changes in the nonperformance-risk adjustment on variable-annuity guarantees; the company said that adjustment does not have an economic impact, but it affects reported earnings.
- Q3 net investment income increased to $5.517bn from $4.252bn; nine-month income rose to $16.436bn from $14.658bn. Premiums were $9.096bn in Q3 and $27.386bn year to date. The filing does not present a single consolidated operating margin.
- Operating earnings growth reflected stronger investment results, higher asset-based fee income and lower catastrophe losses. Management also cited lower interest-crediting costs, partly offset by lower investment yields in the low-rate environment.
- Comprehensive income attributable to MetLife was $1.636bn in Q3 and $6.439bn for nine months, including substantial other comprehensive income from unrealized investment gains.
Balance sheet, cash flow and liquidity
- At September 30, total assets were $846.285bn, up from $796.226bn at year-end 2011; total investments were $521.556bn. Fixed maturity securities at fair value were $378.005bn.
- MetLife stockholders’ equity was $64.049bn, compared with $57.519bn at December 31, 2011. The increase included a $5.242bn increase in accumulated other comprehensive income.
- Cash and cash equivalents were $16.950bn, versus $10.461bn at year-end. Nine-month operating cash flow was $15.288bn (prior year $9.034bn); investing activities used $14.075bn (prior year $23.343bn), and financing activities provided $5.252bn (prior year $11.182bn).
- Reported debt and financing balances included $100m short-term debt, $19.621bn long-term debt, $4.196bn collateral financing arrangements and $3.192bn junior subordinated debt. Long-term debt includes $2.733bn relating to consolidated securitization entities. The filing reports short-term liquidity of $20.4bn under its defined measure, which excludes specified collateral; separately defined liquid assets were $291.1bn.
- MetLife said its bank holding company and MetLife Bank met regulators’ “well capitalized” standards, but the filing does not provide the ratios. Its $1.0bn five-year credit facility was amended in September; no borrowings were outstanding under the unsecured facilities at quarter-end. A $750m senior note due 2042 was issued at a 4.125% fixed rate.
Material changes, outlook and risks
- Business exits and transactions: MetLife continued exiting mortgage origination and servicing and pursuing the sale of most of MetLife Bank’s depository business, involving about $7bn of deposits and subject to OCC approval. Reverse mortgage servicing rights were sold; the transaction also removed $9.1bn of associated securitized loans and liabilities from the balance sheet. On November 2, 2012, after quarter-end, MetLife agreed to sell its forward mortgage servicing portfolio, subject to approvals and customary conditions. The company recorded $155m of after-tax losses and charges in the first nine months for these exits and expected a further $10m–$40m after tax through 2013.
- Management outlook: MetLife expected solid improvement in 2012 operating earnings over 2011, supported by premium and fee growth, international business and expense discipline. It expected strong variable-annuity net flows through year-end, while noting that sales actions were being used to manage annuity volume and risk. By 2016, it targeted a 12%–14% operating return on common equity, versus 10.3% at December 31, 2011, and $1bn of efficiencies: $600m in net pre-tax expense savings and $400m reinvested in technology and capabilities. These are management targets, not guarantees.
- Capital distributions: The Federal Reserve objected to MetLife’s 2012 capital plan. While still subject to the capital-plans rule, MetLife could not repurchase common stock or raise its aggregate annual common dividend above $0.74 per share without an approved plan or no longer being subject to the rule. Resubmission was extended to January 5, 2013. The board later approved a $0.74 annual dividend for 2012, estimated at $812m in total.
- Key risks and contingencies: Management highlighted sustained low interest rates, market and derivative volatility, variable-annuity guarantee costs, credit and investment losses, European sovereign and U.S. fiscal-policy uncertainty, regulatory change and foreign-exchange exposure. The Federal Reserve’s low-rate guidance extended at least through mid-2015. MetLife could not reasonably estimate Hurricane Sandy’s impact on property-and-casualty or other operations. The filing estimated reasonably possible litigation losses in excess of accruals at $0–$145m for matters where a range could be estimated; other matters, including mortgage-related regulatory investigations and some litigation, could not be estimated clearly. The filing also describes asbestos claims and ongoing unclaimed-property disputes.
- Other unusual items: A $52m after-tax charge was recorded in Q1 2012 for a multistate examination payment and expected accelerated benefit payments related to unclaimed property settlements. A broad enterprise-wide restructuring initiative had incurred $101m of charges through September 30; additional costs through 2014 were anticipated but not estimable at quarter-end.
Important facts for investors to verify
- Reconcile GAAP losses and earnings with non-GAAP operating earnings, particularly the derivative mark-to-market effects, nonperformance-risk adjustment and Retail Annuities goodwill impairment.
- Track the outcome and timing of the MetLife Bank depository and mortgage-servicing divestitures, regulatory approvals, remaining exit costs and the company’s ability to deregister as a bank holding company.
- Monitor the capital-plan resubmission, dividend and share-repurchase restrictions, and the effect of subsidiary dividend limits on MetLife, Inc.’s holding-company liquidity.
- Review variable-annuity guarantees, hedging effectiveness, policyholder behavior assumptions and the company’s sensitivity to interest rates and equity markets.
- Follow the unclaimed-property and mortgage-related investigations, asbestos claims, other litigation, and the uncertain effect of Hurricane Sandy.