MetLife, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. MetLife is a global provider of life insurance, annuities, employee benefits and asset management. Financial statements are unaudited; interim results are not necessarily indicative of full-year performance. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $18.0 billion | $18.8 billion | $52.9 billion | $54.2 billion |
| Net income attributable to MetLife | $1.203 billion | $2.094 billion | $4.476 billion | $4.788 billion |
| Net income available to common shareholders | $1.197 billion | $2.064 billion | $4.367 billion | $4.697 billion |
| Diluted EPS | $1.06 | $1.81 | $3.86 | $4.12 |
| Operating earnings available to common shareholders (non-GAAP) | $705 million | $1.825 billion | $4.108 billion | $4.977 billion |
| Net cash provided by operating activities | — | — | $9.527 billion | $10.950 billion |
Q3 operating earnings available to common shareholders fell $1.1 billion year over year, reflecting the tax and related interest charges, lower investment yields, unfavorable actuarial assumption updates and underwriting experience. Nine-month operating earnings available to common shareholders declined $869 million. Q3 GAAP results also included $382 million of net investment gains and $485 million of net derivative gains; these items are excluded from operating earnings.
Q3 income from continuing operations before tax was $2.163 billion, and income tax expense was $965 million, a 45% effective rate versus 29% a year earlier. The nine-month effective tax rate was 29%, versus 28%.
Balance sheet, debt and liquidity
- At September 30, 2015, total assets were $882.5 billion and total liabilities were $811.4 billion; MetLife stockholders’ equity was $70.5 billion. At December 31, 2014, these were $902.3 billion, $829.7 billion and $72.1 billion, respectively.
- Cash and cash equivalents were $10.2 billion, versus $10.8 billion at year-end 2014. Management reported short-term liquidity of $13.2 billion and liquid assets of $225.6 billion, down from $14.0 billion and $237.4 billion, respectively.
- Balance-sheet debt included $100 million of short-term debt, $16.755 billion of long-term debt and $3.194 billion of junior subordinated debt securities. Collateral financing arrangements were a further $4.152 billion.
- Operating cash flow for the first nine months was $9.527 billion. Cash decreased $592 million after investing and financing activities and foreign-exchange effects.
Material changes and unusual items
- GAAP revenue declined about 4% in Q3 and 2% for the first nine months. Net investment income fell to $3.959 billion from $5.410 billion in Q3 and to $14.367 billion from $15.704 billion for the nine months, with management citing low rates and other investment-return factors.
- The third quarter included a $792 million non-cash net-income charge related to an uncertain foreign tax-credit position: $557 million in income tax expense and $362 million of interest expense ($235 million net of tax). MetLife continues to contest the IRS position. It paid $444 million of assessed tax and interest for 2000–2002 and intends to seek a refund.
- The annual actuarial assumption review reduced current-period earnings by $313 million pretax ($203 million after tax), primarily through reserve and deferred acquisition cost updates. The 2014 review had produced a benefit.
- Gross unrealized losses on fixed-maturity securities rose $2.4 billion during the first nine months to $4.4 billion, primarily due to wider credit spreads and, to a lesser extent, foreign-currency weakness. Management concluded the securities were not other-than-temporarily impaired at quarter-end.
- MetLife issued $1.5 billion of senior notes in March and $1.5 billion of Series C preferred stock in June, and repurchased or redeemed all Series B preferred stock for approximately $1.5 billion. It repurchased $1.1 billion of common stock in the first nine months. The declared common dividend was $0.375 per share for Q3; a fourth-quarter dividend at the same rate was declared after quarter-end.
Outlook, management commentary and risks
- MetLife no longer expected to achieve its former 12%–14% operating return on common equity target for 2016. It forecast approximately 11% operating ROE for 2016 when excluding AOCI other than foreign-currency translation adjustments. Management cited lower investment margins, reduced share repurchases, regulatory uncertainty, currency effects and lower-than-anticipated M&A activity.
- Management reported sales growth across most regions, including retail annuities and accident and health products, and expected profitable annuity sales growth. Its stated priorities included growing group benefits and fee income, disciplined underwriting and investing, and expense management.
- Key exposures include sustained low interest rates, market volatility, foreign-exchange movements, credit and investment losses, and variable-annuity guarantees. Variable-annuity fair values can shift materially with equity markets, interest rates, volatility, policyholder behavior and assumptions; some hedges do not qualify for hedge accounting and can create earnings volatility.
- MetLife remained designated a non-bank SIFI and was challenging that designation in court; oral argument was scheduled for February 2016. Potential enhanced capital, liquidity and supervisory requirements could affect capital deployment, guarantees and distributions.
- For litigation and regulatory matters with estimable losses, the company reported an aggregate reasonably possible loss range of $0–$425 million in excess of accruals; other matters could not be estimated. FINRA indicated it would seek a significant fine over alleged variable-annuity sales and supervision violations. Management said adverse outcomes could affect particular periods, while not believing pending matters were likely to materially affect financial position.
- Management stated it believed liquidity was ample under current conditions and reasonably possible stress scenarios. However, securities lending involved $30.4 billion of cash collateral liabilities, including $10.2 billion on open arrangements that could require next-business-day return of collateral.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects recurring operating pressures versus the one-time tax and interest charges, and whether the tax-credit dispute generates further assessments or cash payments.
- Whether investment yields and operating earnings stabilize, particularly given low rates, widening credit spreads and the 2015 actuarial assumption changes.
- How variable-annuity guarantee exposures, hedge effectiveness, policyholder behavior and nonperformance-risk adjustments may affect future earnings and capital.
- Developments in the FINRA inquiry, asbestos claims and other litigation, and the company’s $0–$425 million estimate of reasonably possible losses beyond accruals.
- Whether capital and distributions are affected by SIFI or G-SII regulation, subsidiary dividend restrictions, liquidity needs, or continued share repurchases.