MetLife, Inc. — 2019 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. MetLife provides insurance, annuities, employee benefits and asset management through U.S., Asia, Latin America, EMEA and MetLife Holdings segments. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
- Second-quarter results: Revenue was $17.50 billion, down from $21.19 billion a year earlier. Net income attributable to MetLife was $1.74 billion; income available to common shareholders was $1.68 billion, or diluted EPS of $1.77, compared with $845 million and $0.83 per diluted share in Q2 2018.
- First-half results: Revenue was $33.80 billion versus $35.99 billion. Net income attributable to MetLife was $3.12 billion versus $2.14 billion; common-shareholder income was $3.03 billion versus $2.09 billion. Diluted EPS was $3.17 versus $2.02.
- Adjusted earnings: A non-GAAP measure used by management, adjusted earnings available to common shareholders was nearly flat: $1.319 billion in Q2 versus $1.326 billion, and $2.743 billion for the first half versus $2.749 billion. It is not a substitute for GAAP net income.
- Revenue and claims context: Premiums fell to $10.13 billion from $15.15 billion in Q2 and to $19.53 billion from $24.33 billion for the first half. Management attributed much of the comparison to a large prior-year U.S. pension risk-transfer transaction. Net investment income rose to $4.69 billion in Q2 and $9.60 billion in the first half. Derivative results improved to a $724 million gain in Q2 from a $59 million loss, and to an $839 million gain for the first half from $290 million. Investment gains were $61 million in Q2 versus a $227 million loss, and $76 million for the first half versus a $560 million loss.
- Cash flow: First-half operating cash flow was $4.46 billion, down from $6.90 billion. Investing activities used $5.14 billion; financing activities provided $3.25 billion. Cash and cash equivalents ended June at $18.44 billion, up from $15.82 billion at year-end 2018.
- Balance sheet and investments: Total assets were $732.17 billion versus $687.54 billion at year-end; total equity was $64.05 billion versus $52.96 billion. The increase in equity included substantial unrealized investment gains recorded in other comprehensive income. Total investments were $461.09 billion, including $318.69 billion of available-for-sale fixed maturities and $78.00 billion of mortgage loans.
- Debt and liquidity: At June 30, long-term debt was $13.35 billion, junior subordinated debt $3.15 billion, short-term debt $158 million and collateral financing arrangements $1.03 billion. MetLife reported short-term liquidity of $12.0 billion and liquid assets of $218.3 billion, using its stated definitions that exclude pledged or otherwise committed assets. It had $2.5 billion of remaining availability under its $3.0 billion revolving facility.
- Capital returns: MetLife repurchased $1.25 billion of common stock and paid $824 million in common dividends during the first half. It announced a further $2.0 billion repurchase authorization on July 31, 2019.
Material changes versus the prior comparable period
- GAAP earnings increased markedly, driven largely by year-over-year improvements in derivative and investment gains; management said adjusted earnings remained essentially flat.
- Management cited lower interest rates as a key factor in the favorable non-variable-annuity derivative comparison. Derivative accounting and hedges that do not qualify for hedge accounting can cause earnings volatility without an offsetting gain or loss on the economically hedged item.
- First-half net investment income increased, while operating cash flow declined. Interest credited to policyholder account balances rose to $3.48 billion from $2.19 billion for the first half.
- MetLife issued approximately $1.38 billion of long-term debt and repaid $895 million during the first half. In May it issued ¥151.7 billion of senior notes; in June it redeemed £400 million of notes and $368 million of notes, recording a $40 million redemption premium in expenses.
Outlook, commentary, risks and unusual items
- Outlook: The filing reported no material change to the prior annual outlook, apart from specifying expected average free cash flow to adjusted earnings of 65%–75% over 2019–2020, assuming a 10-year U.S. Treasury rate between 1.5% and 4.5% and the stated forward-curve assumptions. This is a company-defined measure, not GAAP operating cash flow.
- Management commentary: Positive net flows supported investment portfolio growth and yields, while higher credited rates offset some investment-income gains. Underwriting experience was mixed and overall unfavorable versus Q2 2018; first-half adjusted earnings benefited from business growth but faced pressure from market factors and some claims experience.
- Pending sale: In June, MetLife agreed to sell its Hong Kong subsidiaries. It recorded a $140 million after-tax loss, including an expected $100 million pretax loss and a $40 million tax charge. The subsidiaries had $2.9 billion of assets at June 30; closing was expected in 2020, subject to approvals and other conditions.
- Reserve-control investigations and litigation: The company disclosed investigations, litigation and shareholder derivative actions related to previously identified material weaknesses involving estimates for certain group annuity benefits and reserves for assumed Japanese variable-annuity guarantees. It said the SEC was investigating both matters. The filing does not quantify potential losses for these matters.
- Other contingencies: For certain litigation matters where a range could be estimated, reasonably possible losses above amounts accrued were estimated at $0–$300 million. MetLife noted asbestos exposure could exceed the accrued liability and future charges may be necessary. A proposed $80 million settlement in the TCA class action received preliminary court approval; the amount had been accrued in prior periods.
- Market and operating risks: The filing emphasizes sensitivity to interest rates, credit spreads, equity and currency markets, investment defaults and valuations, policyholder behavior, insurance claims, catastrophe losses, reinsurance and counterparties. Securities lending, derivative collateral requirements, regulatory limits on subsidiary dividends and global economic or political conditions may also affect liquidity and capital.
- Accounting and controls: Adoption of lease accounting added approximately $1.5 billion of right-of-use assets and $1.7 billion of lease liabilities at January 1, 2019, without a material net-income or cash-flow impact. The company expects the long-duration insurance accounting standard, scheduled for 2021 adoption, to materially affect its financial statements. Management concluded disclosure controls were effective at quarter-end and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of GAAP earnings growth reflects recurring operating performance versus derivative, investment and other market-related gains; compare with adjusted earnings and its reconciliation.
- The status, remediation and potential financial consequences of the group-annuity and assumed variable-annuity reserve-control matters, including regulatory investigations and related lawsuits.
- Progress, approvals, final proceeds and any additional costs or tax effects of the planned Hong Kong subsidiary sale.
- Whether operating cash generation, subsidiary dividend capacity and regulatory capital support the stated free-cash-flow outlook, dividends and repurchases.
- Exposure to low or changing interest rates, policyholder guarantees, investment credit quality and collateral or liquidity demands under securities lending and derivatives.
- Developments in asbestos litigation and other legal contingencies, including losses that are not currently estimable.