01—Abstract
Summary
Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.
MetLife's 2006 Form 10-K reports a strong year: net income available to common shareholders rose 32% to $6,159 milliona, and diluted EPS reached $7.99 versus $6.16 in 2005.
Much of the jump is one-time: income from discontinued operations hit $3,188 millionb, driven mainly by a roughly $3.0 billion after-tax gain on the sale of Peter Cooper Village and Stuyvesant Town for $5.4 billion. Income from continuing operations was essentially flat at $3,105 million, and excluding Travelers and certain items it declined, with weaker interest margins, $1,350 million of net investment losses (largely derivative mark-to-market and FX), and higher expenses. The balance sheet grew to $527.7 billion in total assets, with stockholders' equity up to $33.8 billion and book value supported by retained earnings.
The 2005 acquisition of Travelers (for $12.1 billionc) remains a major driver of scale, adding goodwill of $4.9 billion and DAC/VOBA of $20.9 billion, and it is also the source of significant integration and financing costs. Management resumed share buybacks in Q4 2006 and authorized an additional $1 billion program in February 2007.
Key risks for investors include interest rate sensitivity (spread compression in low-rate environments such as Taiwan), equity-market exposure on variable annuity guarantees, a large asbestos and sales-practices litigation overhang, and a 36.3%d stake in the company's shares held by the MetLife Policyholder Trust, which gives the board substantial influence over stockholder votes. Also disclosed are upcoming accounting changes (SOP 05-1, FIN 48) expected to reduce retained earnings by several hundred million dollars in 2007.
02—Key points
Key Highlights
- Net income available to common shareholders: $6,159M (2006) vs. $4,651M (2005), up 32%; diluted EPS $7.99 vs. $6.16.
- Income from continuing operations was nearly flat at $3,105M, while discontinued operations contributed $3,188M, mostly from the ~$3.0B after-tax gain on the Stuyvesant Town/Peter Cooper Village sale.
- Net investment losses widened to $(1,350)M from $(93)M, driven by derivative mark-to-market losses and FX losses as U.S. rates rose and the dollar weakened.
- Total revenues grew 8% to $48.4B; premiums rose to $26.4B and net investment income to $17.2B.
- Total stockholders' equity rose to $33.8B; return on common equity was 21.9%, up from 18.5%.
- Common dividends increased to $0.59 per share from $0.52; $1B buyback authorized in February 2007 with ~$1.2B total capacity.
- Travelers acquisition (July 2005) drove scale, but a $50M Taiwan loss recognition charge and a potential further $250M hit flag interest-rate and emerging-market risk.
03—Questions
Frequently Asked Questions
How much of 2006's earnings growth was recurring?
Very little of the headline growth is recurring. Income from continuing operations was roughly flat ($3,105M vs. $3,078M), and excluding Travelers and certain items it fell about $219M. The bulk of the increase in net income came from discontinued real estate gains, particularly the Manhattan apartment sale, which is non-recurring.
What are the biggest risks to MetLife's profitability?
The 10-K highlights interest-rate risk to spreads on whole life, fixed annuities and GICs, equity-market declines affecting variable annuity guarantees, catastrophe exposure in Auto & Home, possible further DAC/VOBA and goodwill impairments tied to Travelers, and litigation including asbestos claims and sales-practices suits, plus the Taiwan operation's sensitivity to low interest rates.
Does the MetLife Policyholder Trust affect shareholder control?
Yes. The Trust held about 274.3 million shares, or 36.3% of outstanding common stock, as of February 26, 2007. On most matters the trustee votes in line with board recommendations, which gives the board significant influence over routine votes. On fundamental actions such as contested director elections, mergers, and certain rights-plan changes, the Trust votes in proportion to beneficiary instructions.
What capital return and balance sheet actions did management take?
MetLife resumed share repurchases in Q4 2006, buying back 8.6 million shares for about $500M, and authorized another $1B program in February 2007. It issued $1.25B of junior subordinated debentures in December 2006, and its leverage ratio returned to pre-Travelers levels by year-end. The company also holds about $7.7B in liquidity and $186.5B in liquid assets.
What accounting changes could affect 2007 results?
Adoption of SOP 05-1 on January 1, 2007 is expected to reduce retained earnings by $275M to $310M, net of tax, and cut 2007 net income by about $25M to $35M through accelerated DAC/VOBA amortization. FIN 48 is also expected to reduce retained earnings by $35M to $60M. Adoption of SFAS 158 already reduced equity by $744M in 2006.
04—Continue