MetLife, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited GAAP results; dollars in millions except per-share data. MetLife provides insurance, annuities, employee benefits and asset management through U.S., Asia, Latin America, EMEA and MetLife Holdings segments.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $16,289 | $16,171 | $52,279 | $46,468 |
| Income from continuing operations, after tax | $915 | $883 | $3,066 | $2,691 |
| Net income (loss) available to common shareholders | $880 | $(97) | $2,972 | $1,635 |
| Diluted earnings per common share | $0.88 | $(0.09) | $2.91 | $1.51 |
| Adjusted earnings available to common shareholders (non-GAAP) | $1,376 | $1,115 | $4,125 | $3,557 |
| Net cash provided by operating activities | — | $10,437 | $10,233 |
At September 30, 2018, total assets were $698,451, total equity $51,809, cash and cash equivalents $12,490, and investments $439,941. Stockholders’ equity was $51,625, down from $58,676 at year-end 2017; accumulated other comprehensive income fell to $1,000 from $7,427, largely reflecting market-related investment and currency movements. Debt and financing balances included $290 short-term debt, $13,408 long-term debt, $1,073 collateral financing and $3,146 junior subordinated debt.
Management reported $10.2 billion of short-term liquidity and $205.7 billion of liquid assets, excluding pledged or otherwise committed assets. Nine-month investing cash outflow was $10,992 and financing cash inflow was $531; cash declined $211 over the period. MetLife repurchased $2,792 of common stock and paid $1,263 in common dividends during the nine months.
Material changes versus comparable periods
- Q3 adjusted earnings available to common shareholders rose $261, to $1,376. Management attributed improvement primarily to higher investment income from a larger asset base and higher yields, favorable underwriting and U.S. tax reform, partly offset by higher credited interest and less favorable actuarial assumption changes.
- Q3 GAAP common income improved by $977 from the prior-year loss, but the comparison is substantially affected by the prior period’s $968 after-tax loss from discontinued Brighthouse operations and a prior-period Separation-related tax benefit. Continuing-operations income increased only $32.
- Nine-month revenue rose to $52,279 from $46,468, primarily reflecting higher premiums. Adjusted earnings available to common shareholders increased $568. Prior-year discontinued-operation losses and Separation-related items also materially affect the GAAP comparison.
- Net investment gains were $117 in Q3 versus losses of $606 a year earlier; nine-month investment losses were $443 versus $414. Q3 net derivative losses widened to $378 from $123, while nine-month derivative losses narrowed to $88 from $535. Derivative results are sensitive to market movements and hedge-accounting mismatches.
- Fixed-maturity securities’ gross unrealized losses increased $3.3 billion during the first nine months to $5.2 billion, primarily due to higher interest rates, wider credit spreads and weaker foreign currencies. Management concluded these securities were not other-than-temporarily impaired at quarter-end.
Outlook, commentary and notable items
- Management expected the 2018 effective tax rate to be 18%–20%. The filing provides no specific consolidated earnings guidance.
- Sales overall declined in Q3, including lower U.S. Retirement and Income Solutions sales of stable-value products and pension risk transfers and fewer funding-agreement issuances. Asia sales improved, including in Japan and emerging markets; Latin America sales increased, while EMEA sales declined.
- The 2018 annual actuarial assumption review reduced Q3 results by $358 pretax ($272 after tax); the portion included in adjusted earnings was $53 after tax. A $79 pretax ($63 after-tax) increase in incurred-but-not-reported life reserves was also recorded. Management cited modeling improvements that produced a $37 after-tax favorable individual disability insurance adjustment.
- MetLife sold its remaining Brighthouse shares in June in exchange for $944 of MetLife senior notes, which were canceled. The company recorded a $327 loss related to the Brighthouse investment and disposition during the nine months.
- U.S. tax reform contributed a stated $70 increase to Q3 adjusted earnings and $235 for the nine-month period versus the prior-year periods; these comparisons include effects of prior-period tax items. Argentina was treated as highly inflationary from July 1, 2018; the Q3 impact was not material.
- Hurricane Florence produced a $15 pretax loss recognized by September 30. After quarter-end, MetLife estimated Hurricane Michael could produce a $10–$13 pretax loss, not recorded in the quarter; further storm-related claims could affect later periods.
- MetLife disclosed material weaknesses in controls over certain group annuity reserves and assumed Japanese variable-annuity guarantee reserves. Remediation was ongoing, and management concluded disclosure controls were ineffective as of September 30. Related regulatory investigations and litigation are pending. For matters with an estimable range, reasonably possible losses in excess of accruals were estimated at $0–$600; other matters could not be reasonably estimated.
- Subsequent events: the board authorized an additional $2.0 billion of common-stock repurchases on November 1, 2018 and declared a $0.42-per-share fourth-quarter dividend. The company was evaluating the potential impact of a New York insurance regulator’s year-end asset-adequacy letter.
Most important facts for investors to verify
- How much of reported earnings growth is recurring adjusted performance versus discontinued-operation, tax, investment and derivative effects.
- Progress and independent validation of remediation for the reserve-related material weaknesses, including outcomes of regulatory inquiries and related lawsuits.
- Exposure to rising rates, credit-spread widening, currency movements and equity volatility, including the effect on unrealized investment losses, derivative earnings and variable-annuity guarantees.
- Whether liquidity, subsidiary dividend capacity and capital remain sufficient to support repurchases, dividends and debt obligations under stress; insurance subsidiary dividends are regulator-restricted.
- Potential litigation and catastrophe losses, including claims not yet estimable and the unrecorded Hurricane Michael estimate.
- Assumptions behind the 18%–20% tax-rate outlook and the future effects of long-duration insurance accounting changes, which management expected to materially affect the financial statements.