MetLife, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Unaudited. Amounts are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Business context
MetLife provides insurance, annuities, employee benefits and asset management through its U.S., Asia, Latin America, EMEA and MetLife Holdings segments, with additional results in Corporate & Other.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $16,302 | $14,805 |
| Net income | $1,385 | $1,257 |
| Net income attributable to MetLife | $1,381 | $1,253 |
| Net income available to common shareholders | $1,349 | $1,247 |
| Diluted EPS | $1.40 | $1.19 |
| Comprehensive income (loss) | $6,555 | $(1,448) |
| Operating cash flow | $2,072 | $1,296 |
| Cash and cash equivalents at period end | $14,506 | $15,821 at Dec. 31, 2018 |
| Total assets | $713,188 | $687,538 at Dec. 31, 2018 |
| Total equity | $58,738 | $52,958 at Dec. 31, 2018 |
Revenue growth reflected, among other things, higher net investment income and improved net investment gains; net derivative gains were lower. Total expenses were $14,558, including $9,072 of policyholder benefits and claims and $1,961 of interest credited to policyholder account balances. The filing does not present a company-wide operating margin as a primary performance measure. Net income was about 8.5% of revenue in both periods, calculated from reported figures.
GAAP net investment income rose to $4,908 from $3,745. Management noted that unit-linked investment returns, which are generally passed through to policyholders, contributed materially to the year-over-year movement; adjusted-basis net investment income was $4,281 versus $4,219. Adjusted earnings available to common shareholders, a non-GAAP measure, was essentially unchanged at $1,424 versus $1,423.
Cash used in investing activities was $5,699, while financing activities provided $2,316; cash declined by $1,315 during the quarter. Management reported short-term liquidity of $10.6 billion and liquid assets of $208.2 billion at March 31, 2019. Balance-sheet debt categories included $289 of short-term debt, $12,850 of long-term debt, $1,048 of collateral financing arrangements and $3,148 of junior subordinated debt securities.
Material changes versus the prior comparable period
- Revenue increased about 10%, and net income increased about 10%; common diluted EPS rose from $1.19 to $1.40. The weighted-average diluted share count fell to 963.3 million from 1,044.4 million.
- Net investment gains improved by $348, from a $333 loss to a $15 gain, principally because Q1 2018 included a fair-value loss on Brighthouse Financial shares and greater equity-security mark-to-market losses.
- Net derivative gains declined by $234, to $115. Management attributed the unfavorable change mainly to market movements affecting variable-annuity guarantees and their hedges.
- Adjusted earnings available to common shareholders remained essentially flat. U.S., Asia and EMEA adjusted earnings improved; MetLife Holdings fell to $317 from $425, including the absence of a favorable prior-year reserve adjustment on assumed Japan variable-annuity guarantees.
- Operating cash flow increased to $2,072 from $1,296, while cash and cash equivalents ended lower than at year-end. Stock repurchases were $500, versus $1,041 in Q1 2018.
- Comprehensive income swung to $6,555 from a loss, largely reflecting higher investment-related other comprehensive income. AOCI was $6,911 at quarter-end versus $1,722 at year-end.
Outlook, management commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management expects MetLife Holdings premiums, fees and other revenues to decline by approximately 5% annually as the segment runs off.
- Management reported higher overall sales, led by U.S. Retirement and Income Solutions and Japan; positive net flows increased invested assets. Investment yields declined and interest credited rates were higher, while underwriting experience was favorable versus the prior period.
- The company expected further charges through 2019 under its unit-cost restructuring program but said the plans were not developed enough to estimate the amount. Q1 restructuring charges were $7; cumulative charges since program inception were $143.
- Important market exposures include interest rates, credit spreads, equity markets, foreign exchange, investment defaults and liquidity. Sustained low interest rates could compress investment spreads, increase guarantee liabilities and affect earnings. Management also cited geopolitical and economic uncertainty, including Brexit, trade measures and conditions in Mexico.
- Variable-annuity guarantee valuations depend on market conditions and assumptions about policyholder behavior, mortality and volatility; management cautions that guarantees may become more costly in volatile or declining markets and that hedging may be ineffective.
- The filing describes previously identified material weaknesses in controls relating to reserves for certain group annuity benefits and assumed Japan variable-annuity guarantees, with SEC and other regulatory inquiries and related lawsuits or potential actions. Management stated current disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
- For specified matters where a loss was reasonably possible and estimable, the aggregate reasonably possible loss in excess of accrued amounts was estimated at $0–$550 million. Other matters, including asbestos-related claims and certain litigation, could not be estimated clearly; adverse outcomes could materially affect results or cash flows in particular periods.
- Q1 included $78 of tax-credit and renewable-energy partnership impairment losses and $46 of renewable-energy partnership disposal gains. The filing says the 2021 long-duration insurance accounting standard is expected to have a material impact; the company was assessing its effects.
Most important facts for investors to verify
- Whether adjusted earnings remain stable when excluding market-sensitive and pass-through effects, and how management reconciles this non-GAAP measure to GAAP results.
- Progress and potential financial consequences of the group-annuity and Japan variable-annuity reserve-control issues, including regulatory investigations and related litigation.
- How the $0–$550 million reasonably possible loss range, asbestos exposure and unquantified legal contingencies evolve.
- Whether liquidity remains adequate under stress, considering securities-lending collateral that may be returnable on short notice, committed facilities and regulatory limits on subsidiary dividends.
- Credit quality and valuation of the investment portfolio, including mortgage loans, structured securities, below-investment-grade holdings and written credit default swaps.
- The impact of lower investment yields, higher credited rates and variable-annuity guarantees on future earnings, as well as the effects of upcoming insurance and credit-loss accounting standards.