MetLife, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. MetLife provides insurance, annuities, employee benefits and asset management through U.S., Asia, Latin America, EMEA and MetLife Holdings segments, with Corporate & Other reported separately. Brighthouse results are presented as discontinued operations following its 2017 separation.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $14.805 billion | $14.964 billion, down about 1% |
| Income from continuing operations, before tax | $1.656 billion | $1.072 billion |
| Income from continuing operations, net of tax | $1.257 billion | $952 million |
| Net income attributable to MetLife common shareholders | $1.247 billion; diluted EPS $1.19 | $867 million; diluted EPS $0.79 |
| Adjusted earnings | $1.429 billion; $1.423 billion available to common shareholders | $1.327 billion; $1.321 billion available to common shareholders |
| Net cash from operating activities | $1.296 billion | $2.098 billion |
| Cash and cash equivalents, March 31 | $13.927 billion | $12.701 billion at Dec. 31, 2017 |
| Total assets / total equity, March 31 | $712.584 billion / $56.508 billion | $719.892 billion / $58.870 billion at Dec. 31, 2017 |
| Debt and related obligations, March 31 | $526 million short-term debt; $15.707 billion long-term debt; $1.108 billion collateral financing; $3.145 billion junior subordinated debt | Long-term debt $15.686 billion at Dec. 31, 2017 |
Calculated from reported GAAP figures, continuing-operations pretax income was about 11.2% of revenue and after-tax income about 8.5%; these simple ratios are not company-reported operating margins. MetLife reported short-term liquidity of $11.3 billion and liquid assets of $205.6 billion at quarter-end; the short-term liquidity measure excludes pledged or otherwise committed assets. Common dividends declared were $0.40 per share for Q1.
Changes versus the prior comparable period
- Common-shareholder net income rose $380 million as improved derivative results and divested-business results more than offset weaker investment gains and the reported unfavorable effect of U.S. tax reform.
- Net derivative gains were $349 million versus a $212 million loss, a favorable $561 million change. Management attributed this primarily to market movements and hedge accounting effects.
- Net investment losses were $333 million versus gains of $88 million. The current-period loss included a $168 million mark-to-market loss on retained Brighthouse shares and a leveraged-lease impairment.
- Net investment income fell to $3.745 billion from $4.421 billion, partly reflecting lower unit-linked investment results. Interest credited to policyholder balances declined to $769 million from $1.451 billion.
- Adjusted earnings available to common shareholders increased $102 million. Management cited tax reform, higher investment income from a larger asset base, favorable underwriting and lower expenses, partly offset by lower investment yields and higher interest-crediting costs.
- Operating cash flow declined by $802 million. Cash increased by $1.226 billion during the quarter, supported in part by financing flows, including $494 million net proceeds from a new preferred-stock issuance.
Outlook, commentary and risks
- Management expected a 2018 effective tax rate of 18% to 20%. Q1’s reported effective tax rate was 24%; the filing says U.S. tax reform reduced Q1 earnings by $54 million versus the prior period but increased adjusted earnings by $101 million.
- MetLife intended to divest its remaining Brighthouse shares as soon as practicable and expected completion before year-end 2018. The retained stake was valued at $1.2 billion at March 31.
- Management reported slightly lower overall sales, favorable underwriting versus Q1 2017, and declining investment yields. MetLife Holdings premiums, fees and other revenues were expected to decline about 5% annually as the business runs off.
- Two material weaknesses in internal control over financial reporting remained unremediated: controls over certain U.S. group annuity reserves and assumed Japanese variable-annuity guarantee reserves. The CEO and CFO concluded disclosure controls and procedures were not effective at quarter-end. The company had recorded a $510 million pretax increase to group-annuity reserves and a $896 million pretax decrease to assumed variable-annuity reserves at December 31, 2017.
- Legal and regulatory matters include investigations and litigation related to pension-benefit practices, reserve estimates and internal controls. The company could not estimate possible losses for certain matters; aggregate reasonably possible losses above accruals for matters with estimable ranges were $0 to $700 million.
- Other exposures include market, interest-rate, credit, currency, liquidity and counterparty risks; variable-annuity guarantees; potentially adverse investment valuation changes; and litigation. Gross unrealized losses on fixed maturities increased $1.5 billion during Q1, primarily due to wider credit spreads and higher interest rates; management did not consider the securities other-than-temporarily impaired at quarter-end.
- Subsequent to quarter-end, MetLife repurchased $350 million of common stock through April 30 and declared a Q2 dividend of $0.42 per share. The company had $720 million remaining under its $2.0 billion repurchase authorization at March 31.
Important facts for investors to verify
- Remediation progress and independent review findings for the two material weaknesses, including any further reserve changes or restatements.
- Whether the 18%–20% tax-rate expectation and expected Brighthouse divestiture before year-end were achieved, and the financial effects of the transaction.
- Underlying earnings quality: adjusted earnings exclude investment and derivative gains or losses and other specified items; compare reconciliations with GAAP results.
- Liquidity and capital available at the holding company, subsidiary dividend restrictions, and the sustainability of buybacks and dividends amid regulatory and capital needs.
- Developments in reserve-related investigations and litigation, including potential losses not currently estimable, and changes in the disclosed $0–$700 million reasonably possible loss range.