METLIFE INC quarterly report, Q2 FY2018

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MetLife, Inc. — Q2 2018 Form 10-Q

Business context and reporting period

MetLife provides insurance, annuities, employee benefits and asset management through its U.S., Asia, Latin America, EMEA and MetLife Holdings segments. This unaudited filing covers the quarter and six months ended June 30, 2018. Brighthouse results are reported as discontinued operations; prior-year periods were revised accordingly, so comparisons reflect a changed business perimeter.

Financial results and key metrics

  • Q2 revenue: $21.185 billion, up from $15.333 billion. Premiums were $15.153 billion versus $9.580 billion; a $6.0 billion single-premium pension risk-transfer transaction materially affected the comparison.
  • Q2 earnings: Continuing-operations net income was $894 million versus $856 million; net income available to common shareholders was $845 million versus $865 million. Diluted EPS was $0.83 versus $0.80. Adjusted earnings available to common shareholders, a non-GAAP measure, rose to $1.326 billion from $1.121 billion.
  • Six-month results: Revenue was $35.990 billion versus $30.297 billion; continuing-operations net income was $2.151 billion versus $1.808 billion; common-shareholder net income was $2.092 billion versus $1.732 billion. Diluted EPS was $2.02 versus $1.59. Adjusted earnings available to common shareholders were $2.749 billion versus $2.442 billion.
  • Investment and derivative results: Q2 net investment losses were $227 million, compared with gains of $104 million; derivative losses narrowed to $59 million from $200 million. For six months, investment losses were $560 million versus gains of $192 million, while derivative gains were $290 million versus losses of $412 million. The Brighthouse share disposition contributed $327 million of investment losses for the six months.
  • Cash flow: For the six months, operating cash flow was $6.904 billion, investing cash outflow was $4.764 billion and financing cash inflow was $1.612 billion. Cash and cash equivalents ended at $16.312 billion, up from $12.701 billion at year-end 2017.
  • Balance sheet and capital: Total assets were $706.333 billion and total equity $53.832 billion at June 30, versus $719.892 billion and $58.870 billion at year-end. Long-term debt was $14.536 billion, short-term debt $479 million, collateral financing arrangements $1.085 billion and junior subordinated debt $3.146 billion.
  • Liquidity and shareholder returns: Management reported $11.4 billion of short-term liquidity and $208.6 billion of liquid assets. The company repurchased $2.156 billion of common stock and paid $844 million of common dividends in the first half. Q2 common dividend declared was $0.42 per share.
  • Portfolio and margins: Fixed-maturity securities were $306.331 billion, with $4.832 billion of gross unrealized losses; management attributed the increase in losses to widening credit spreads, higher interest rates and, to a lesser extent, weaker foreign currencies. The filing does not provide a single consolidated operating-margin measure.

Material changes versus prior comparable periods

  • Adjusted earnings available to common shareholders increased $205 million in Q2 and $307 million for the first half. Management cited higher investment income and asset growth, U.S. tax reform, favorable underwriting and lower expenses, partly offset by higher interest credited and, for the first half, lower investment yields.
  • GAAP earnings were more volatile than adjusted earnings because of investment and derivative marks, including the Brighthouse share sale. Comparisons also reflect Brighthouse being presented as discontinued operations and the absence of its 2017 results from continuing operations.
  • MetLife issued Series D and Series E preferred stock for aggregate net proceeds of $1.274 billion. It exchanged Brighthouse shares for $944 million principal amount of its own notes, which it canceled, and separately canceled $160 million of notes for cash.

Outlook, commentary, risks and unusual items

  • Management expected a 2018 effective tax rate of 18%–20%. No specific consolidated earnings guidance was provided in the supplied filing text.
  • Management said Argentina would be treated as a highly inflationary economy for accounting purposes beginning in Q3 2018, potentially increasing earnings volatility. It also described sensitivity to interest rates, equity markets, foreign exchange, credit spreads, policyholder behavior and investment performance.
  • Material internal-control weakness: Weaknesses remained unremediated at June 30 in controls over certain U.S. group-annuity reserves and assumed Japanese variable-annuity guarantee reserves. Management concluded disclosure controls were not effective. The filing describes regulatory investigations and related litigation; possible losses relating to these reserve matters could not be estimated.
  • For other litigation matters where a range could be estimated, reasonably possible losses above recorded accruals were estimated at $0–$700 million. The company also disclosed asbestos exposure and other proceedings whose outcomes or loss ranges could not be estimated clearly.
  • Other notable items included a $62 million favorable adjusted-earnings reserve adjustment for assumed Japanese variable-annuity guarantees for the first half, $96 million of after-tax unit-cost initiative expenses, and a $510 million pretax increase to group-annuity reserves recorded in connection with the previously disclosed reserve review.
  • Management stated it believed liquidity was sufficient under current conditions and reasonably possible stress scenarios. Risks include market disruption, credit losses, collateral calls, policyholder withdrawals, restrictions on subsidiary dividends, regulatory change and the possibility that remediation or reserve assumptions prove inadequate.

Important facts for investors to verify

  • How much of premium and revenue growth reflects the one-time $6.0 billion pension risk-transfer transaction, and whether related benefits and claims offset it as expected.
  • Progress and independent validation of remediation for both material weaknesses, and the status and potential financial consequences of related regulatory inquiries and lawsuits.
  • Drivers of unrealized fixed-income losses, investment impairments, and the sensitivity of variable-annuity guarantees and earnings to market movements and assumptions.
  • Whether the stated liquidity resources, subsidiary dividend capacity and capital position remain adequate after repurchases, dividends, debt actions and potential collateral requirements.
  • Updates to the 2018 tax-rate outlook, the Argentina accounting treatment and any other material changes in assumptions or contingencies.