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| MET > SEC Filings for MET > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
For purposes of this discussion, "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation incorporated in 1999 (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("MLIC"). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with MetLife, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 ("2007 Annual Report") filed with the U.S. Securities and Exchange Commission ("SEC"), the forward-looking statement information included below and the Company's interim condensed consolidated financial statements included elsewhere herein.
This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining MetLife's
actual future results. These statements are based on current expectations and
the current economic environment. They involve a number of risks and
uncertainties that are difficult to predict. These statements are not guarantees
of future performance. Actual results could differ materially from those
expressed or implied in the forward-looking statements. Risks, uncertainties,
and other factors that might cause such differences include the risks,
uncertainties and other factors identified in MetLife, Inc.'s filings with the
SEC. These factors include: (i) difficult and adverse conditions in the global
and domestic capital and credit markets; (ii) continued volatility and further
deterioration of the capital and credit markets; (iii) uncertainty about the
effectiveness of the U.S. government's plan to purchase large amounts of
illiquid, mortgage-backed and other securities from financial institutions;
(iv) the impairment of other financial institutions; (v) potential liquidity and
other risks resulting from MetLife's participation in a securities lending
program and other transactions; (vi) exposure to financial and capital market
risk; (vii) changes in general economic conditions, including the performance of
financial markets and interest rates, which may affect the Company's ability to
raise capital and generate fee income and market-related revenue;
(viii) defaults on the Company's mortgage and consumer loans; (ix) investment
losses and defaults, and changes to investment valuations; (x) market value
impairments to illiquid assets; (xi) unanticipated changes in industry trends;
(xii) heightened competition, including with respect to pricing, entry of new
competitors, the development of new products by new and existing competitors and
for personnel; (xiii) discrepancies between actual claims experience and
assumptions used in setting prices for the Company's products and establishing
the liabilities for the Company's obligations for future policy benefits and
claims; (xiv) discrepancies between actual experience and assumptions used in
establishing liabilities related to other contingencies or obligations;
(xv) ineffectiveness of risk management policies and procedures;
(xvi) catastrophe losses; (xvii) changes in assumptions related to deferred
policy acquisition costs ("DAC"), value of business acquired ("VOBA") or
goodwill; (xviii) downgrades in MetLife's and its affiliates' claims paying
ability, financial strength or credit ratings; (xix) economic, political,
currency and other risks relating to the Company's international operations;
(xx) regulatory, legislative or tax changes that may affect the cost of, or
demand for, the Company's products or services; (xxi) changes in accounting
standards, practices and/or policies; (xxii) adverse results or other
consequences from litigation, arbitration or regulatory investigations;
(xxiii) deterioration in the experience of the "closed block" established in
connection with the reorganization of MLIC; (xxiv) the effects of business
disruption or economic contraction due to terrorism or other hostilities;
(xxv) MetLife's ability to identify and consummate on successful terms any
future acquisitions, and to successfully integrate acquired businesses with
minimal disruption; (xxvi) MetLife, Inc.'s primary reliance, as a holding
company, on dividends from its subsidiaries to meet debt payment obligations and
the applicable regulatory restrictions on the ability of the subsidiaries to pay
such
dividends; and (xxvii) other risks and uncertainties described from time to time in MetLife, Inc.'s filings with the SEC.
MetLife, Inc. does not undertake any obligation to publicly correct or update any forward-looking statement if MetLife, Inc. later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife, Inc. makes on related subjects in reports to the SEC.
Executive Summary
MetLife is a leading provider of insurance and other financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. Through its domestic and international subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowners insurance, retail banking and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. Subsequent to the disposition of Reinsurance Group of America, Incorporated ("RGA") and the elimination of the Reinsurance Segment as described in "- Acquisitions and Dispositions," MetLife is organized into four operating segments: Institutional, Individual, International and Auto & Home, as well as Corporate & Other.
Since mid-September, the global financial markets have experienced unprecedented disruption, adversely affecting the business environment in general, as well as financial services companies in particular. The U.S. Government, as well as governments in many foreign markets in which the Company operates, have responded to address market imbalances and taken meaningful steps intended to eventually restore market confidence. The Company continues to assess the conditions in the financial markets and the unprecedented responses by the U.S. Government. For example, MetLife Funding Inc. has been accepted in the Federal Reserve's Commercial Paper Funding Facility. In this environment, the Company benefits from the strength of its franchise, diversification of its businesses and strong financial fundamentals. The Company's Individual and Institutional segments tend to behave differently under these extraordinary market conditions. In the Company's Individual segment, which includes individual life and annuity products, lapses and surrenders occur in the normal course of business in many product areas. These lapses and surrenders have not deviated materially from management expectations during the financial crisis. Within the Institutional segment, the retirement & savings business includes pension closeouts, other fixed annuity contracts without surrender or withdrawal options, as well as global guaranteed interest contracts ("GICs") that have stated maturities and cannot be put back to the Company prior to maturity. As a result, the surrenders or withdrawals are fairly predictable and even during this difficult environment they have not deviated materially from management's expectations. In addition, management continues to control the liquidity exposure that can arise from the various features contained in funding agreements related to retirement & savings. While the Company's securities lending business has been affected by the extraordinary market environment, management plans to continue to lend securities and has appropriate policies and guidelines in place to manage this activity at a reduced level. During this extraordinary market environment, management is continuously monitoring and adjusting its liquidity and capital plans for the Holding Company and its subsidiaries in light of changing needs and opportunities. On October 8, 2008, the Company issued common stock, the proceeds of which are to be used for general corporate purposes and potential strategic initiatives. Processes for monitoring and managing liquidity risk, including liquidity stress models, have been enhanced to take into account the extraordinary market conditions, including the impact on policyholder and counterparty behavior, the ability to sell various investment assets and the ability to raise incremental funding from various sources. Management has taken steps to strengthen liquidity in light of its assessment of the impact of market conditions and will continue to monitor the situation closely. The public equity markets continue to decline and credit spreads continue to widen across asset sectors worldwide. These deteriorating market conditions continue to impact the market value of the Company's investment portfolio, resulting in increased unrealized losses. See also "- Liquidity and Capital Resources - Extraordinary Market Conditions."
The summary results of operations presented below, as well as the more detailed discussion of results of operations for the Company and its four operating segments as presented within "- Results of Operations - Discussion of Results," should be read in conjunction with the foregoing description of the unprecedented market conditions and "- Liquidity and Capital Resources - Extraordinary Market Conditions."
Three Months Ended September 30, 2008 compared with the Three Months Ended September 30, 2007
The Company reported $600 million in net income available to common shareholders and earnings per diluted common share of $0.83 for the three months ended September 30, 2008 compared to $985 million in net income available to common shareholders and earnings per diluted common share of $1.29 for the three months ended September 30, 2007. Net income available to common shareholders decreased by $385 million, or 39%, for the three months ended September 30, 2008 compared to the 2007 period.
The decrease in net income available to common shareholders was principally due to an increase in losses from discontinued operations of $507 million. This was primarily the result of the split-off of substantially all of the Company's interest in RGA in September 2008 whereby stockholders of the Company were offered the opportunity to exchange their MetLife shares for shares of RGA Class B common stock.
The decrease in net income available to common shareholders was also driven by an increase in other expenses of $291 million, net of income tax. The increase in other expenses was due to:
- Higher DAC amortization in the Individual segment primarily related to changes in management's assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance and net investment gains, both in the current period, and business growth. This increase in DAC was partially offset by higher DAC amortization in the Institutional segment in the prior period due to the adoption of SOP 05-1.
- An increase in corporate expenses primarily related to an enterprise-wide cost reduction and revenue enhancement initiative. As a result of a strategic review the Company began in 2007, it launched an enterprise initiative called Operational Excellence. This initiative began in April 2008 and management expects the initiative to be fully implemented by December 31, 2010. This initiative is focused on reducing complexity, leveraging scale, increasing productivity, improving the effectiveness of the Company's operations and providing a foundation for future growth. The Company recognized within Corporate & Other during the current period an initial accrual for post-employment related expenses.
- Higher legal costs in Corporate & Other principally driven by costs associated with the commutation of three asbestos insurance policies as well as higher expenses in the Institutional and International segments as well as Corporate & Other associate with business growth and higher corporate support expenses.
Premiums, fees and other revenues increased by $785 million, net of income tax, principally driven by increases resulting from business growth in the Institutional and International segments as well as Corporate & Other, while increases in policyholder benefits and claims and policyholder dividends of $831 million, net of income tax, were driven by increases in Institutional and International segments as a result of this business growth as well as an increase in policyholder benefits and claims within the Institutional segment resulting from a charge due to a liability adjustment in the group annuity business and unfavorable mortality in the current period. In addition, policyholder benefits and claims increased in the International segment due to an increase in certain policyholder liabilities caused by an increase in the unrealized investment gains on the invested assets supporting those liabilities. Policyholder benefits and claims were also slightly adversely impacted by an increase in catastrophe losses in the Auto & Home segment.
The decrease in net income available to common shareholders was offset by a decrease in net investment losses of $620 million, net of income tax, partially offset by a decrease in net investment income of $300 million, net of income tax. The decrease in net investment losses is due to an increase in losses on fixed maturity and equity securities which were more than offset by gains on derivatives. The losses on fixed maturity and equity securities are principally attributable to an increase in impairments mainly related to financial services industry holdings which experienced losses as a result of bankruptcies, Federal Deposit Insurance Corporation ("FDIC") receivership, and federal government assisted capital market infusion transactions in the third quarter 2008 as well as other credit related impairments in conjunction with overall market declines. Derivative gains were driven by gains on freestanding derivatives and on embedded derivatives associated with variable annuity riders. Gains on freestanding derivatives were driven by gains on credit default swaps which were economic hedges of certain of the aforementioned impairments, gains from foreign currency derivatives due to U.S. dollar strengthening as well as gains on equity options and futures hedging embedded derivatives. The gains on the equity options and futures more than offset losses on the portion of the underlying embedded derivative liability that is hedged by these equity
derivatives. Losses on the embedded derivative liability were driven by poor equity market performance in the third quarter; however, such losses were more than offset by gains on the valuation of the embedded derivative liability resulting from the effect of the widening of the Company's own credit spread which is required to be used in the valuation of these variable annuity rider embedded derivatives. Overall, the poor equity performance was more than offset by gains from the Company's own credit spread in the valuation of such embedded derivatives liabilities.
The decrease in net investment income was due to a decrease in yields, partially offset by an increase due to growth in the average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, fixed maturity securities, real estate joint ventures, mortgage loans, and short-term investments partially offset by improved securities lending results. Management anticipates that net investment income and the related yields on other limited partnerships and real estate joint ventures will decline further, and could reduce net investment income during the remainder of 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by increased net investment income attributable to growth in average invested assets, primarily within short-term investments, mortgage loans, other invested assets including derivatives, other limited partnership interests, and real estate joint ventures. The average asset base attributable to fixed maturity securities decreased slightly.
A decrease in interest credited to policyholder account balances of $190 million, net of income tax, resulted from a decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, partially offset by an increase from growth in the average policyholder account balance, primarily the result of continued growth in the global GIC and funding agreement products, all of which occurred within the Institutional segment. There was also a decrease in interest credited in the International segment as a result of a reduction in unit-linked policyholder liabilities reflecting the losses of the trading portfolio backing these liabilities.
The remainder of the variance is due to the change in effective tax rates between periods.
Nine Months Ended September 30, 2008 compared with the Nine Months Ended September 30, 2007
The Company reported $2.1 billion in net income available to common shareholders and earnings per diluted common share of $2.92 for the nine months ended September 30, 2008 compared to $3.1 billion in net income available to common shareholders and earnings per diluted common share of $4.05 for the nine months ended September 30, 2007. Net income available to common shareholders decreased by $967 million, or 31%, for the nine months ended September 30, 2008 compared to the 2007 period.
The decrease in net income available to common shareholders was principally due to an increase in losses from discontinued operations of $501 million. This was primarily the result of the split-off of substantially all of the Company's interest in RGA in September 2008 whereby stockholders of the Company were offered the opportunity to exchange their shares of MetLife, Inc. common stock for shares of RGA Class B common stock.
There was a decrease in net investment income of $452 million, net of income tax, partially offset by a decrease in net investment losses of $81 million, net of income tax. The decrease in net investment income was due to a decrease in yields, partially offset by an increase due to growth in average invested assets. The decrease in net investment income attributable to lower yields was primarily due to lower returns on other limited partnership interests, real estate joint ventures, other invested assets including derivatives, and short-term investments, partially offset by improved securities lending results. Management anticipates that net investment income and the related yields on other limited partnerships and real estate joint ventures will decline further, and could reduce net investment income, during the remainder of 2008 due to increased volatility in equity and credit markets. The decrease in net investment income attributable to lower yields was partially offset by increased net investment income attributable to growth in average invested assets, primarily within other limited partnership interests, mortgage loans, short-term investments, and other invested assets including derivatives.
The decrease in net investment losses is due to an increase in losses on fixed maturity and equity securities which were more than offset by gains on derivatives. The losses on fixed maturity and equity securities are principally attributable to an increase in impairments mainly related to financial services industry holdings which
experienced losses as a result of bankruptcies, FDIC receivership, and federal government assisted capital market infusion transactions in the third quarter 2008 as well as other credit related impairments in conjunction with overall market declines occurring throughout the year. Derivative gains were driven by gains on freestanding derivatives offset by losses on embedded derivatives associated with variable annuity riders. Gains on freestanding derivatives were driven by gains on credit default swaps which were economic hedges of certain of the aforementioned impairments as well as gains on equity options and futures hedging embedded derivatives. The gains on the equity options and futures partially offset losses on the portion of the underlying embedded derivative liability that is hedged by these equity derivatives. Losses on the embedded derivative liability were driven by poor equity market performance throughout the year; however, such losses were more than offset by gains on the valuation of the embedded derivative liability resulting from the effect of the widening of the Company's own credit spread which is required to be used in the valuation of these variable annuity rider embedded derivatives. Overall, the poor equity performance was more than offset by gains from the Company's own credit spread in the valuation of such embedded derivatives liabilities.
An increase in other expenses of $342 million, net of income tax, contributed to the decrease in net income. This was principally driven by higher interest expense, higher DAC amortization, higher corporate expenses and business growth. Higher DAC amortization in the Individual segment was primarily due to changes in management's assumptions used to determine estimated gross profits and margins associated with unfavorable equity market performance during the current period, lower net investment losses in the current period and business growth. This increase in DAC was partially offset by higher DAC amortization in the Institutional segment in the prior period due to the adoption of SOP 05-1. The increase in corporate expenses was primarily in connection with an enterprise-wide cost reduction and revenue enhancement initiative and business growth which occurred during the third quarter as described above. The increase in other expenses was also driven by business growth in the International segment.
Premiums, fees and other revenues increased by $1.8 billion, net of income tax, across all of the Company's operating segments but most notably within the Institutional and International segments due to business growth. Policyholder benefits and claims and policyholder dividends increased commensurately by $1.8 billion, net of income tax however; policyholder benefits and claims were also adversely impacted by an increase in catastrophe losses in the Auto & Home segment as well as from a charge within the Institutional segment resulting from a liability adjustment in the group annuity business. These increases were partially offset by a decrease in certain policyholder liabilities in the International segment resulting from a increase in unrealized investment losses on the invested assets supporting those liabilities.
A decrease in interest credited to policyholder account balances of $331 million, net of income tax, resulted from a decline in average crediting rates, which was largely due to the impact of lower short-term interest rates in the current period, offset by an increase from growth in the average policyholder account balance, primarily the result of continued growth in the global GIC and funding agreement products all of which occurred within the Institutional segment. There was also a decrease in interest credited in the International segment as a result of a reduction in unit-linked policyholder liabilities reflecting the losses of the trading portfolio backing these liabilities.
The remainder of the variance is due to the change in effective tax rates between periods.
Acquisitions and Dispositions
The Company has completed acquisitions in the first three quarters of 2008. All were accounted for using the purchase method of accounting. As a result of these acquisitions, goodwill and other intangible assets have been impacted as follows:
• In the first quarter of 2008, goodwill and other intangible assets increased by $169 million and $149 million, respectively, in the Institutional and International segments.
• In the second quarter of 2008, goodwill and other intangible assets increased by $68 million and $5 million, respectively, in Corporate & Other.
• In the third quarter of 2008, negative goodwill of approximately $6 million was allocated against long-lived assets acquired in Corporate & Other.
On September 12, 2008, the Company completed a tax-free split-off of its majority-owned subsidiary, RGA. The Company and RGA entered into a recapitalization and distribution agreement, pursuant to which the Company agreed to divest substantially all of its 52% interest in RGA to the Company's stockholders. The split-off was effected through the following:
• A recapitalization of RGA common stock into two classes of common stock - RGA Class A common stock and RGA Class B common stock. Pursuant to the terms of the recapitalization, each outstanding share of RGA common stock, including the 32,243,539 shares of RGA common stock beneficially owned by the Company and its subsidiaries, was reclassified as one share of RGA Class A common stock. Immediately thereafter, the Company and its subsidiaries exchanged 29,243,539 shares of its RGA Class A common stock - which represented all of the RGA Class A common stock beneficially owned by the Company and its subsidiaries other than 3,000,000 shares of RGA Class A common stock - with RGA for 29,243,539 shares of RGA Class B common stock.
• An exchange offer, pursuant to which the Company offered to acquire MetLife common stock from its stockholders in exchange for all of its 29,243,539 shares of RGA Class B common stock. The exchange ratio was determined based upon a ratio - as more specifically described in the exchange offering document - of the value of the MetLife and RGA shares during the three-day period prior to the closing of the exchange offer. The 3,000,000 shares of the RGA Class A common stock were not subject to the tax-free exchange.
As a result of completion of the recapitalization and exchange offer, the Company received from MetLife stockholders 23,093,689 shares of the Company's common stock with a fair market value of $1,318 million and, in exchange, delivered 29,243,539 shares of RGA Class B common stock with a net book value of $1,716 million. The resulting loss on disposition, inclusive of transaction costs of $60 million, was $458 million. The 3,000,000 shares of RGA Class A common stock retained by the Company are marketable equity securities which do not constitute significant continuing involvement in the operations of RGA; . . .
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