MetLife, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are included where reported. MetLife provides insurance, annuities, employee benefits and asset management through U.S., Asia, Latin America, EMEA and MetLife Holdings segments.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $67.9 billion | $62.3 billion |
| Income from continuing operations, after tax | $5.1 billion | $5.0 billion |
| Net income available to common shareholders | $5.0 billion; diluted EPS $4.91 | $3.9 billion; diluted EPS $3.62 |
| Adjusted earnings available to common shareholders (non-GAAP) | $5.5 billion | $4.2 billion |
| Net cash from operating activities | $11.7 billion | $12.3 billion |
| Free cash flow of all holding companies (non-GAAP) | $3.4 billion; 62% of adjusted earnings | $5.7 billion; 134% |
| Total assets | $687.5 billion | $719.9 billion |
| MetLife stockholders’ equity | $52.7 billion | $58.7 billion |
| Debt, collateral financing and junior subordinated debt | $17.3 billion | $20.4 billion |
Fourth-quarter 2018 revenue was $15.7 billion and net income available to common shareholders was $2.0 billion, or diluted EPS of $2.04. The filing does not present a conventional operating margin as a headline performance measure.
- Premiums rose to $43.8 billion from $39.0 billion, largely reflecting increased pension risk-transfer activity. FedEx generated $6.0 billion from a single pension risk-transfer premium, equal to 12% of premiums, policy fees and other revenues.
- Net investment income was $16.2 billion, down from $17.4 billion. Adjusted investment income increased to $17.4 billion from $16.5 billion, reflecting a larger asset base and improved yields on some investments.
- Net investment losses were $298 million; net derivative gains were $851 million, versus a $590 million derivative loss in 2017. Derivative results are market-sensitive and can create earnings volatility.
- Cash and cash equivalents were $15.8 billion. Short-term liquidity, as defined by the company, was $11.1 billion; liquid assets at MetLife and other holding companies were $3.0 billion, down from $5.7 billion.
- Fixed-maturity securities were $298.3 billion; 94.5% were investment grade. Mortgage loans totaled $75.8 billion, with a $342 million valuation allowance.
- MetLife returned $5.7 billion to common shareholders through dividends and repurchases. It repurchased $4.0 billion of stock and paid $1.7 billion in common dividends.
Material changes versus 2017
- Common-shareholder net income increased approximately $1.1 billion; adjusted earnings available to common shareholders increased $1.2 billion. Drivers included improved derivative results, higher adjusted investment income, favorable tax effects and lower expenses, partly offset by higher interest credited and a less favorable actuarial review.
- The 2017 comparison included a $1.3 billion net tax benefit from U.S. Tax Reform and a $986 million after-tax loss from discontinued operations related to Brighthouse. Brighthouse results were not included in 2018 continuing operations.
- Stockholders’ equity declined $5.9 billion, and accumulated other comprehensive income fell to $1.7 billion from $7.4 billion, mainly reflecting a large decline in unrealized investment gains as market rates and spreads changed.
- Holding-company free cash flow fell to $3.4 billion from $5.7 billion. The 2017 figure included $2.1 billion of Separation-related inflows; the company reported 2018 free cash flow of $3.1 billion excluding $268 million of Separation-related items.
- Sales increased overall, particularly in U.S. Retirement and Income Solutions and Japan. MetLife Holdings revenue continued to decline as the segment runs off businesses no longer actively marketed.
Outlook, commentary and key risks
- Management targets a 12%–14% adjusted return on common equity, excluding AOCI other than foreign-currency translation adjustments, over the near term. It expects a 65%–75% average free-cash-flow-to-adjusted-earnings ratio for 2019–2020, assuming a 10-year U.S. Treasury rate between 2.0% and 4.5% and the forward yield curves at year-end 2018.
- The company plans to invest $1.0 billion by 2020 in its unit-cost initiative, targeting $800 million of pretax profit-margin improvement and an approximately 200-basis-point reduction in its defined direct expense ratio versus its 2015 baseline. It also targets $3.0–$4.0 billion of liquid assets at holding companies.
- Management reported $284 million of 2018 after-tax unit-cost initiative expenses. Other notable items included a $349 million benefit from an IRS audit settlement, a $60 million increase in litigation reserves, and a $63 million charge for increased incurred-but-not-reported life reserves.
- Interest-rate, equity, credit-spread and foreign-exchange movements can affect investment income, guarantees, reserves, capital and liquidity. Under a modeled 100-basis-point lower-rate scenario, management estimated adjusted-earnings impacts of approximately negative $15 million in 2019, $140 million in 2020 and $265 million in 2021; the modeled derivative mark-to-market effect was different and volatile.
- Regulatory and legal matters include inquiries and litigation concerning unclaimed group-annuity benefits and reserve estimation. A New York regulator’s January 2019 consent order required a $19.75 million fine, $1.5 million in customer restitution and remediation plans. The filing estimates reasonably possible losses in excess of accrued amounts of $0–$550 million for certain matters, while other matters cannot be reasonably estimated.
- The company disclosed material weaknesses identified in 2017 in controls over certain group-annuity reserves and assumed Japanese variable-annuity guarantees. It reported that remediation was implemented and tested by year-end 2018; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018. Separate SEC and regulatory inquiries related to reserve matters remained ongoing.
- Other risks include policyholder behavior and claims differing from assumptions, reinsurance recoverability, concentrated pension-risk-transfer activity, restricted subsidiary dividends, securities-lending liquidity, cybersecurity, and regulatory or tax changes. MetLife’s NAIC-based combined RBC ratio was reported above 380% at year-end 2018, down from above 400% in 2017, primarily following U.S. Tax Reform-related formula changes.
Most important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings and assess how much 2018 improvement came from derivative gains, tax items and other nonrecurring effects.
- Review holding-company free cash flow, its definition and the effect of Separation-related items; compare it with the $3.0–$4.0 billion holding-company liquidity target.
- Track reserve-control remediation and the outcomes of regulatory inquiries, lawsuits and the New York consent-order remediation.
- Assess pension-risk-transfer concentration, including the $6.0 billion single-premium FedEx transaction, and the sustainability of sales and earnings as that business changes.
- Monitor investment-portfolio credit quality, unrealized losses, mortgage-loan performance, guarantee exposures and sensitivity to interest rates and market volatility.
- Confirm statutory capital and dividend capacity at insurance subsidiaries, as well as the company’s progress toward its return, expense and cash-flow targets.