MetLife, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. MetLife provides insurance, annuities, employee benefits and asset management across U.S., Asia, Latin America, EMEA and MetLife Holdings. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / December 31, 2019 |
|---|---|---|
| Total revenue | $18.310 billion | $16.302 billion |
| Net income attributable to MetLife | $4.398 billion; diluted EPS $4.75 | $1.381 billion; diluted EPS $1.40 |
| Net income available to common shareholders | $4.366 billion | $1.349 billion |
| Adjusted earnings available to common shareholders | $1.449 billion | $1.424 billion |
| Net cash from operating activities | $1.847 billion | $2.072 billion |
| Cash and cash equivalents | $24.094 billion | $16.598 billion |
| Total assets | $737.741 billion | $740.463 billion |
| Total equity | $70.463 billion | $66.382 billion |
- GAAP net income included $4.201 billion in net derivative gains, versus $115 million in Q1 2019. Management attributed much of the favorable change to falling interest rates and equity-market movements; some economic hedges do not qualify for hedge accounting, creating earnings volatility.
- Net investment income was $3.061 billion, down from $4.908 billion, including a $1.1 billion decline in unit-linked investment values recorded in that line. Net investment gains were a loss of $288 million, versus a gain of $15 million, mainly reflecting equity-security mark-to-market losses.
- Premiums were $9.466 billion versus $9.405 billion. Management reported adjusted premiums, fees and other revenues of $11.216 billion, up slightly from $11.167 billion; adjusted earnings available to common shareholders rose $25 million.
- Total expenses were $12.667 billion versus $14.558 billion. The comparison includes sharply different market-related policyholder-account crediting effects; it should not be read as a comparable improvement in underlying costs alone. The filing does not provide a single consolidated operating-margin measure.
- At March 31, debt balances included $298 million short-term debt, $14.510 billion long-term debt, $981 million collateral financing arrangement and $3.151 billion junior subordinated debt. MetLife issued $1.0 billion of 4.55% senior notes due 2030 and $1.0 billion of Series F preferred stock during the quarter.
- Company-wide short-term liquidity was $13.7 billion, and liquid assets were $219.8 billion. MetLife and other holding companies held $5.3 billion in liquid assets. The $24.094 billion consolidated cash balance is not equivalent to holding-company cash available for distributions.
Material changes versus Q1 2019
- Common-shareholder GAAP income increased by about $3.0 billion, principally because of the derivative-gain swing; adjusted earnings available to common shareholders increased only about 2%.
- Adjusted earnings improved in the U.S. ($780 million versus $724 million) and Corporate & Other losses narrowed ($131 million versus $193 million). Asia was $350 million versus $356 million; Latin America $95 million versus $134 million; EMEA $78 million versus $86 million; and MetLife Holdings $277 million versus $317 million.
- Management cited higher investment income from a larger asset base, lower expenses and higher asset-based fees as favorable, offset by lower investment yields, higher DAC amortization and unfavorable underwriting. Underwriting weakness included U.S. and MetLife Holdings mortality, higher claims and lapses in Asia, and EMEA morbidity.
- Cash from operations declined to $1.847 billion from $2.072 billion. Cash rose substantially during the quarter, with financing cash flows supported by policyholder balances, collateral-related payables and new debt and preferred issuance.
Outlook, risks and notable items
- COVID-19: Management said the pandemic’s duration and financial effects were highly uncertain. It reported business continuity measures were operating and did not expect material liquidity deficiencies, but warned of potential effects on claims, premiums, policyholder behavior, investments, credit losses, capital and operations. Management expected low rates and market volatility to persist and could maintain higher-than-normal short-term liquidity.
- Outlook revisions: Under stated assumptions, management expected the average annual free-cash-flow-to-adjusted-earnings ratio for 2020–2021 could be 40%–60%, reflecting regulatory cash-flow testing and pandemic-related investment credit losses. It retained a 12%–14% near-term adjusted ROE target under non-recessionary conditions, but expected to fall below the low end in 2020 under its pandemic and market assumptions. The previously stated approximately $20 billion five-year free-cash-flow expectation could be challenged.
- Capital and dividends: New York’s revised principle-based reserving rules were estimated to increase statutory reserves by about $1.6 billion and statutory capital requirements by $600 million, with effects expected to be phased in over at least three years. The board declared a second-quarter common dividend of $0.46 per share after quarter-end. Repurchases remain subject to board discretion, market conditions and regulatory constraints.
- Investment and valuation risk: Net unrealized gains on fixed-maturity securities fell from $30.1 billion to $24.2 billion; gross unrealized losses increased amid widening credit spreads and foreign-exchange movements. Investment-credit-loss allowances and unfunded mortgage commitment liabilities totaled $717 million at quarter-end. MetLife’s portfolio was 95.4% investment grade by fair value, but pandemic-sensitive exposures include energy, airports, airlines, leisure, restaurants, lodging and commercial real estate.
- Accounting and unusual items: Adoption of the expected-credit-loss standard reduced opening retained earnings by $121 million, net of tax. COVID-related interim goodwill tests found no impairment, although valuation cushions declined significantly, particularly in Asia and EMEA. The filing expects the 2022 long-duration insurance-contract accounting standard to have a material impact.
- Contingencies: The estimated range of reasonably possible litigation losses in excess of accruals was $0–$250 million for matters where an estimate could be made; some matters could not be estimated. MetLife also disclosed asbestos claims and litigation and regulatory matters relating to previously identified reserve-estimation and internal-control issues. It said adverse outcomes could materially affect particular quarterly or annual results.
- Other developments: MetLife completed its PetFirst acquisition in January 2020. The sale of MetLife Hong Kong remained pending regulatory approval and other closing conditions, with closing expected in 2020.
Key facts investors should verify
- Whether subsequent results separate recurring operating performance from derivative and other market-driven GAAP gains or losses.
- How pandemic-related claims, premium payment accommodations, lapses and withdrawals, investment credit losses, and mortgage borrower deferrals evolved after Q1.
- Whether MetLife achieved its revised free-cash-flow and 2020 ROE expectations, and the effect of New York reserving rules on statutory capital and subsidiary dividend capacity.
- Changes in liquidity available at the holding companies, debt and collateral obligations, and the pace of share repurchases and dividends.
- Progress and financial consequences of the MetLife Hong Kong disposition, and developments in reserve-related litigation and asbestos contingencies.