01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
MetLife, Inc. (NYSE: MET) reported its FY2005 results in this 10-K, filed February 28, 2006, showing a transformational year defined by the $12.0 billiona acquisition of Travelers (The Travelers Insurance Company, excluding Primerica, plus most of Citigroup's international insurance operations), which closed July 1, 2005.
Net income available to common shareholders rose to $4,651 millionb (diluted EPS $6.16) from $2,758 million ($3.65) in 2004. Much of the jump was driven by discontinued operations, which contributed $1,575 million after the sales of One Madison Avenue and 200 Park Avenue real estate (a combined $1,193 million after-tax gain), SSRM, and MetLife Indonesia. Income from continuing operations grew 19% to $3,139 million, and Travelers contributed only $233 million of that after integration, financing, and reserve charges, so the underlying organic improvement was more modest.
The balance sheet expanded sharply: total assets reached $481.6 billionc (from $356.8 billion) and stockholders' equity rose to $29.1 billion, while long-term debt nearly doubled to $9.9 billion and the company issued preferred stock, common equity units, and senior notes to fund the deal. Goodwill rose to $4.8 billion, including $4.2 billion from Travelers, which creates future impairment risk if the acquired business underperforms. Ratings agencies placed many MetLife entities on negative outlook after the deal and leverage increased, which management says it expects to reduce over time through retained earnings.
Key investor considerations are leverage and integration execution, interest rate sensitivity (fixed maturities are about 75% of invested assets and a 10% rate rise implies a roughly $5.6 billiond non-trading fair value loss), and ongoing legal exposure, notably asbestos claims (about 100,250 pending), sales practices litigation, and industry-wide broker compensation investigations. The company also suspended its $1 billion share repurchase program after the acquisition and raised its 2005 common dividend to $0.52 per share.
02—Key points
Key Highlights
- Net income available to common shareholders of $4,651 million (diluted EPS $6.16), up from $2,758 million ($3.65) in 2004, though boosted by $1,575 million from discontinued operations, largely real estate sales.
- Income from continuing operations rose 19% to $3,139 million; Travelers contributed $233 million, with a $20 million after-tax excess mortality reserve charge in Q4 2005.
- Total revenues increased 15% to $44.8 billion, with premiums of $24.9 billion and net investment income of $14.9 billion.
- Total assets grew to $481.6 billion and stockholders' equity to $29.1 billion; goodwill reached $4.8 billion, including $4.2 billion from the Travelers acquisition.
- Long-term debt rose to $9.9 billion (from $7.4 billion) and the company issued $2.1 billion of preferred stock and $2.1 billion of common equity units to finance the $12.0 billion Travelers purchase.
- Several MetLife insurance and credit ratings carry negative outlooks following the Travelers deal, and management expects leverage to decline only gradually.
- Dividend increased 13% to $0.52 per common share for 2005; the $1 billion buyback program is suspended, with $716 million remaining authorized.
03—Questions
Frequently Asked Questions
Why did net income rise so sharply in 2005?
Most of the increase came from discontinued operations, which contributed $1,575 million versus $207 million in 2004. The gains were mainly from selling the One Madison Avenue and 200 Park Avenue office properties in Manhattan (about $1.19 billion after tax), plus gains on the SSRM and MetLife Indonesia sales. Income from continuing operations grew a more modest 19%, to $3,139 million.
How significant is the Travelers acquisition to MetLife's future results?
It substantially enlarges the company: Travelers added roughly $102 billion of assets and $90 billion of liabilities at fair value, and the purchase created $4.2 billion of goodwill. Travelers contributed only $233 million to 2005 net income after integration costs, financing expenses, and reserve charges. Future results depend on integrating the business, retaining distribution agreements with Citigroup, and avoiding goodwill impairment charges.
What are the main balance sheet and credit risks?
Leverage increased after the deal, with long-term debt up to $9.9 billion and more securities issued, and several ratings carry negative outlooks. Fixed maturity securities make up about 75% of invested assets, so rising interest rates reduce fair values, with management estimating a $5.6 billion non-trading interest rate loss from a 10% rate increase. The company also faces credit default risk in its $37 billion mortgage and consumer loan book, though less than 1% of those loans were delinquent or in foreclosure.
What legal exposures should investors monitor?
MetLife faces large numbers of sales practices lawsuits (about 338 pending against Metropolitan Life), roughly 100,250 pending asbestos personal injury claims, demutualization class actions, and numerous regulatory investigations into broker compensation, market timing, and finite reinsurance. Management believes adequate reserves exist for probable losses, but acknowledges that adverse outcomes in particular periods could be material.
How did the company return capital to shareholders in 2005?
MetLife paid common dividends of $394 million ($0.52 per share), up from $0.46 in 2004, and paid $63 million in preferred dividends on the Series A and B shares issued to finance Travelers. Share repurchases were suspended after the acquisition, and the company did not buy back any shares during 2005, leaving about $716 million available under the existing authorization.
04—Continue