METLIFE INC quarterly report, Q2 FY2020

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MetLife, Inc. — Q2 2020 Form 10-Q

Business context and reporting period. MetLife is a global insurer and financial-services company offering insurance, annuities, employee benefits and asset management. This unaudited filing covers the three and six months ended June 30, 2020, compared with the same 2019 periods. Results reflect the COVID-19 pandemic, market volatility and unusually low interest rates.

Financial results and position

  • Q2 revenue and earnings: Total revenue was $14.1 billion, down from $17.5 billion. Net income attributable to MetLife was $145 million; income available to common shareholders was $68 million, or $0.07 per diluted share, versus $1.741 billion and $1.77 per diluted share a year earlier.
  • First-half results: Total revenue was $32.4 billion versus $33.8 billion. Net income attributable to MetLife was $4.543 billion, and income available to common shareholders was $4.434 billion, or $4.84 per diluted share, compared with $3.122 billion and $3.17 per diluted share in 2019.
  • Adjusted earnings: Adjusted earnings available to common shareholders, a non-GAAP measure, were $758 million in Q2, down $561 million, and $2.207 billion for the first half, down $536 million. Management cited lower investment yields as the principal drag.
  • Cash flow: First-half operating cash flow was $2.693 billion, down from $4.459 billion. Cash and cash equivalents were $24.289 billion at June 30, versus $16.598 billion at year-end 2019.
  • Balance sheet and capital: Total assets were $767.6 billion and total equity was $75.9 billion, up from $740.5 billion and $66.4 billion at year-end. AOCI increased to $18.6 billion from $13.1 billion, primarily reflecting investment and derivative valuation changes.
  • Investments and credit: Total investments were $494.9 billion. Fixed-maturity securities had $340.0 billion fair value; 95.4% were investment grade. Investment-related credit allowances and unfunded commitment liabilities totaled $809 million at June 30, following pandemic-related deterioration and adoption of expected-credit-loss accounting.
  • Debt and liquidity: The balance sheet reported $303 million of short-term debt, $14.5 billion of long-term debt, $3.2 billion of junior subordinated debt and a $968 million collateral financing arrangement. Holding-company liquid assets were $6.6 billion; company-wide short-term liquidity was $14.4 billion and liquid assets were $227.3 billion. MetLife reported no revolving-facility drawdowns and compliance with financial covenants.

Material changes versus prior period

  • Q2 GAAP common earnings fell sharply, chiefly because net derivative results shifted from a $724 million gain in Q2 2019 to a $710 million loss in Q2 2020. First-half derivative gains were $3.491 billion versus $839 million in 2019, helping lift first-half GAAP earnings despite lower adjusted earnings.
  • Net investment income declined to $4.087 billion in Q2 from $4.693 billion and to $7.148 billion for the first half from $9.601 billion. Management attributed weaker underlying returns to lower fixed-income yields and reduced private-equity and real-estate returns.
  • Adjusted premiums, fees and other revenues declined 13% in Q2. COVID-related restrictions, lower U.S. premiums and reduced Chilean annuity sales were among the factors; positive flows in many businesses supported a larger investment base.
  • The company completed the sale of MetLife Hong Kong in June 2020, recording an $11 million after-tax gain in the first half; the transaction’s cumulative after-tax loss was $129 million.

Outlook, risks and unusual items

  • MetLife said its outlook remained subject to revision as the duration and effects of COVID-19 were uncertain. It expected low interest rates to persist through 2020 and potentially longer; management warned that pandemic effects and the rate environment could continue to affect investments, claims, operations and results.
  • The company maintained a 12%–14% near-term adjusted ROE target, excluding most AOCI, but expected to fall below the target’s low end under its stated market assumptions. It remained committed to a 2020 direct expense ratio of approximately 12.3% and to its Next Horizon strategy, including more than $1 billion of incremental technology and innovation investment over five years.
  • Free-cash-flow guidance was conditional: under specified assumptions, the average annual free-cash-flow-to-adjusted-earnings ratio for 2019–2020 was expected at 65%–75%; if equity markets and credit spreads reverted to March 2020 levels, the 2020–2021 average could be 40%–60%. The previously stated approximately $20 billion five-year free-cash-flow objective could be challenged.
  • COVID-19 accommodations included premium credits and grace periods, mortgage-payment deferrals and lease concessions. Deferred mortgage payments totaled $91 million at June 30; deferred lease payments totaled $11 million. The company also cited higher U.S. life mortality claims, while lower dental utilization and auto mileage reduced some claims.
  • New York’s revised principle-based reserving rules were estimated to increase statutory reserves by approximately $1.8 billion and capital requirements by $0.5 billion, with effects eligible to be phased in over up to five years. MetLife’s first-quarter goodwill testing found no impairment, but EMEA’s fair-value cushion remained limited.
  • Legal matters include asbestos litigation and claims concerning group-annuity benefit reserves and related internal controls. The estimated aggregate range of reasonably possible losses above accrued amounts was $0–$200 million for matters where an estimate could be made; other exposures could not be estimated. Management stated adverse outcomes could affect quarterly or annual earnings or cash flows.
  • Other notable developments: MetLife issued $1.0 billion of 4.55% senior notes due 2030 and $972 million net proceeds from Series F preferred stock. First-half common-stock repurchases were $500 million, versus $1.25 billion in 2019. A $0.46-per-share third-quarter common dividend was declared after quarter-end.

Important facts for investors to verify

  • How much of reported GAAP earnings and equity reflects volatile derivative and unrealized investment marks, versus recurring adjusted earnings?
  • Whether investment yields, private-equity returns and credit-loss allowances worsen, particularly for commercial real estate, stressed sectors and below-investment-grade holdings.
  • Actual COVID-related mortality, morbidity, policyholder behavior and the extent to which customer accommodations affect premiums, claims and cash flows.
  • Whether the stated free-cash-flow and ROE outlook assumptions remain achievable, and how regulatory reserve and capital changes affect subsidiary dividend capacity.
  • Developments in asbestos, group-annuity reserve and internal-control litigation, and any changes to estimated losses or required accruals.