How did MetLife's profitability change in 2002?

Net income rose to $1,605 million from $473 million, and diluted EPS rose to $2.20 from $0.62. Income from continuing operations, which excludes real estate held for sale, more than doubled to $1,155 million. The improvement was partly offset by a $266 million net charge for asbestos-related claims and expenses for the resolution of federal investigations into General American's former Medicare business. Investors should note that the 2002 result includes $450 million of discontinued operations, mostly real estate sale gains, which may not recur.

What is the biggest legal and financial risk disclosed in the filing?

The asbestos litigation against Metropolitan Life is the largest identified exposure. Pending claims rose to roughly 106,500 from 89,000, and new claims in 2002 reached about 66,000. Management increased the recorded liability by $402 million to $1,225 million and says total exposure could exceed the amount recorded, which could require future charges. Metropolitan Life also faces numerous sales practices, demutualization, and race-conscious underwriting lawsuits, though management does not expect these to have a material adverse effect on consolidated financial position.

How dependent is the holding company on its subsidiaries for cash?

Heavily. The primary source of holding-company liquidity is dividends from Metropolitan Life, which New York law limits to the lesser of 10% of prior-year statutory surplus or prior-year statutory net gain from operations without prior regulatory clearance. In 2002, Metropolitan Life paid $535 million in ordinary dividends and $369 million in special dividends. Holding-company liquid assets declined to $1.3 billion from $3.0 billion, and the company does not expect share repurchases in the first half of 2003.

How did market conditions affect MetLife's fee income and investments?

Weak equity markets reduced average separate account assets, which lowered policy fees from annuity and investment-type products and reduced broker/dealer commission income. The company also recorded $929 million in gross investment losses, including $1,488 million of writedowns, with fixed-maturity writedowns of $1,264 million. Net unrealized investment gains nonetheless rose to $2.3 billion as interest rates fell. Management's 10% interest-rate sensitivity analysis shows a potential fair-value loss of $2.7 billion, down from $3.4 billion a year earlier.

What should investors watch for in 2003?

Key items include the timing and size of further asbestos charges, the outcome of the race-conscious underwriting and demutualization litigation, and the integration of Hidalgo and Genesis into MetLife Mexico. The company is switching to fair-value stock option expensing, which reduces 2003 EPS by an estimated $0.02, and is changing its capital allocation to an economic capital model that will shift segment earnings. Pension expense is expected to rise about $115M after tax. Investors should also monitor whether the company can rebuild its holding-company liquidity and whether equity-market recovery supports fee income.

METLIFE INC 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 19, 2003. Cited figures are marked; the original filing is the authoritative source.

MetLife's 2002 10-K shows a company in transition: net income rebounded to $1,605 million^a ($2.20 diluted EPS) from $473 million in 2001, though much of the improvement came from a $266 million net charge for asbestos claims, a $402 million increase in the asbestos liability, and the favorable effects of prior-year items.

Income from continuing operations rose to $1,155 million^b from $387 million, while $450 million came from discontinued operations, mainly gains on the sale of real estate (which fell from $1,676 million to $229 million in held-for-sale carrying value). Total revenues grew 6% to $33.1 billion, driven by premium growth of 11% to $19.1 billion, with the Institutional and International segments (including the Hidalgo acquisition in Mexico) contributing most of the increase. Return on equity recovered to 10.8% from 3.2%, and total assets reached $277.4 billion.

Balance sheet and liquidity positions warrant attention. Long-term debt increased to $4.4 billion and short-term debt to $1.2 billion^c, and the Holding Company's liquid assets fell to $1.3 billion from $3.0 billion. Investment-grade fixed maturities represented 91.5% of the general account's fixed maturity portfolio, and net unrealized gains on investments recovered to $2.3 billion.

The company repurchased $471 million^d of stock and paid a $0.21 annual dividend. Management notes that the holding company depends on dividends from Metropolitan Life, which is subject to New York regulatory limits.

Several litigation exposures remain significant, most notably asbestos claims (approximately 106,500 pending, up from 89,000) and a range of sales practices, demutualization, and race-conscious underwriting lawsuits. For investors, the key questions are whether the earnings recovery is sustainable given the asbestos reserve increase, the equity market's effect on separate account fees and deferred acquisition costs, and whether the company can keep its strong financial strength ratings (Moody's Aa2/A1, S&P AA/A+) while integrating recent acquisitions and funding growth with more debt.

02—Key points

Key Highlights

Net income of $1,605M ($2.20 diluted EPS) vs. $473M in 2001; income from continuing operations of $1,155M vs. $387M, with discontinued real estate operations adding $450M
Total revenues of $33.1B (+6%); premiums up 11% to $19.1B, led by Institutional (+13%) and International (+79%, including Hidalgo, Mexico's largest life insurer)
Asbestos liability increased $402M to $1,225M, with about 106,500 pending claims at year-end (up from 89,000), resulting in a $266M net expense
Return on equity improved to 10.8% from 3.2%; stockholders' equity rose to $17.4B; total assets were $277.4B
Holding company liquid assets fell to $1.3B from $3.0B, and long-term debt rose to $4.4B from $3.6B as the company issued $1.0B of senior notes in December 2002
Financial strength ratings remain strong (Moody's Aa2 for Metropolitan Life, S&P AA, A.M. Best A+), while investment-grade fixed maturities were 91.5% of the general account portfolio
Business realignment savings of about $95M after tax in 2002; the company is also adopting SFAS 123 expensing from 2003 and expects pension expense to rise about $115M after tax

03—Questions

Frequently Asked Questions

How did MetLife's profitability change in 2002?
Net income rose to $1,605 million from $473 million, and diluted EPS rose to $2.20 from $0.62. Income from continuing operations, which excludes real estate held for sale, more than doubled to $1,155 million. The improvement was partly offset by a $266 million net charge for asbestos-related claims and expenses for the resolution of federal investigations into General American's former Medicare business. Investors should note that the 2002 result includes $450 million of discontinued operations, mostly real estate sale gains, which may not recur.
What is the biggest legal and financial risk disclosed in the filing?
The asbestos litigation against Metropolitan Life is the largest identified exposure. Pending claims rose to roughly 106,500 from 89,000, and new claims in 2002 reached about 66,000. Management increased the recorded liability by $402 million to $1,225 million and says total exposure could exceed the amount recorded, which could require future charges. Metropolitan Life also faces numerous sales practices, demutualization, and race-conscious underwriting lawsuits, though management does not expect these to have a material adverse effect on consolidated financial position.
How dependent is the holding company on its subsidiaries for cash?
Heavily. The primary source of holding-company liquidity is dividends from Metropolitan Life, which New York law limits to the lesser of 10% of prior-year statutory surplus or prior-year statutory net gain from operations without prior regulatory clearance. In 2002, Metropolitan Life paid $535 million in ordinary dividends and $369 million in special dividends. Holding-company liquid assets declined to $1.3 billion from $3.0 billion, and the company does not expect share repurchases in the first half of 2003.
How did market conditions affect MetLife's fee income and investments?
Weak equity markets reduced average separate account assets, which lowered policy fees from annuity and investment-type products and reduced broker/dealer commission income. The company also recorded $929 million in gross investment losses, including $1,488 million of writedowns, with fixed-maturity writedowns of $1,264 million. Net unrealized investment gains nonetheless rose to $2.3 billion as interest rates fell. Management's 10% interest-rate sensitivity analysis shows a potential fair-value loss of $2.7 billion, down from $3.4 billion a year earlier.
What should investors watch for in 2003?
Key items include the timing and size of further asbestos charges, the outcome of the race-conscious underwriting and demutualization litigation, and the integration of Hidalgo and Genesis into MetLife Mexico. The company is switching to fair-value stock option expensing, which reduces 2003 EPS by an estimated $0.02, and is changing its capital allocation to an economic capital model that will shift segment earnings. Pension expense is expected to rise about $115M after tax. Investors should also monitor whether the company can rebuild its holding-company liquidity and whether equity-market recovery supports fee income.

04—Continue

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