MetLife, Inc. — Q2 2015 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Amounts are in U.S. dollars, generally millions, unless noted. MetLife is a global life insurance, annuity, employee benefits and asset management provider.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $16,166 | $18,266 | $34,876 | $35,351 |
| Income from continuing operations, net of tax | $1,119 | $1,376 | $3,282 | $2,718 |
| Net income available to common shareholders | $1,042 | $1,335 | $3,170 | $2,633 |
| Diluted earnings per common share | $0.92 | $1.17 | $2.80 | $2.31 |
| Operating earnings (non-GAAP) | $1,796 | $1,621 | $3,464 | $3,213 |
| Operating earnings available to common shareholders (non-GAAP) | $1,765 | $1,590 | $3,403 | $3,152 |
| Net cash from operating activities | — | — | $6,888 | $6,921 |
Q2 operating earnings rose about 11%, while common GAAP earnings fell about 22%. The principal reason for the divergence was a $1.2 billion unfavorable year-over-year change in net derivative results: a $912 million loss in Q2 2015 versus a $311 million gain in Q2 2014. First-half GAAP income increased, helped by improved investment gains versus the prior-year period, which included a loss on the sale of MetLife Assurance Limited (MAL). Operating earnings are management’s non-GAAP measure and should not be treated as a substitute for GAAP income.
Q2 operating results benefited from general-account portfolio growth, improved investment yields, favorable mortality and morbidity, and a Japan tax benefit. These were partly offset by liability refinements and higher expenses. Q2 premiums declined to $9.3 billion from $9.9 billion; net investment income declined to $4.9 billion from $5.3 billion. For the first half, premiums declined to $18.6 billion from $19.1 billion, while net investment income rose to $10.4 billion from $10.3 billion.
Segments and balance sheet
| Operating earnings | Q2 2015 | Q2 2014 |
|---|---|---|
| Retail | $690 | $677 |
| Group, Voluntary & Worksite Benefits | $231 | $209 |
| Corporate Benefit Funding | $406 | $363 |
| Latin America | $116 | $136 |
| Asia | $425 | $324 |
| EMEA | $50 | $72 |
| Corporate & Other | $(122) | $(160) |
- At June 30, 2015, total assets were $898.4 billion, total liabilities $828.4 billion and total equity $69.9 billion, compared with $902.3 billion, $829.7 billion and $72.6 billion, respectively, at December 31, 2014.
- Cash and cash equivalents were $8.1 billion, down from $10.8 billion at year-end. Total investments were $500.4 billion, versus $506.0 billion.
- Debt balances included $16.8 billion long-term debt, $100 million short-term debt, $4.2 billion collateral financing arrangements and $3.2 billion junior subordinated debt securities. MetLife issued $1.5 billion of senior notes in March and repaid $1.0 billion of senior notes at maturity in June.
- Management reported $12.8 billion of short-term liquidity and $227.6 billion of liquid assets, excluding pledged or otherwise committed assets. These were down from $14.0 billion and $237.4 billion, respectively, at year-end.
- Common dividends declared were $0.375 per share in Q2, compared with $0.350 a year earlier. First-half operating cash flow was $6.9 billion; cash declined $2.7 billion over the period.
Material changes, outlook and risk factors
- Q2 results included a $174 million one-time Japanese tax benefit; management identified $61 million of it in Asia operating earnings. Management expects the Japanese tax-law change to improve the 2015 effective tax rate by about 0.3 percentage points versus 2014.
- Management now expects 2016 operating ROE of approximately 11% when excluding AOCI other than foreign currency translation adjustments, below its earlier 12%–14% target. Cited factors include limited share repurchases, regulatory uncertainty, low U.S. investment margins, lower-than-anticipated M&A and U.S. dollar strength. The company also expects to fall short of its prior goal for at least 20% of operating earnings from emerging markets.
- Management cited profitable annuity sales growth in 2015 and beyond, continued growth in premiums and fees, disciplined underwriting and expense control. Its efficiency initiative targets $1 billion in annual efficiencies, with up to $400 million to be reinvested in technology and capabilities.
- Market and accounting volatility remains material. Gross unrealized losses on fixed maturity securities increased $1.5 billion in the first half to $3.5 billion, principally due to higher interest rates and, to a lesser extent, wider credit spreads. The company reported no other-than-temporary impairment conclusion for securities in an unrealized loss position at June 30, but said future impairments depend on economic and issuer conditions. AOCI fell to $6.4 billion from $10.6 billion at year-end.
- Residential mortgage loans classified as nonperforming rose to 6.3% of the portfolio from 2.7% at year-end; management said 99% of all mortgage loans were performing. Variable-annuity guarantees, sustained low interest rates, foreign exchange, credit and equity-market movements, and derivative valuation and hedge effectiveness are key exposures.
- Litigation and regulatory matters include asbestos claims, unclaimed-property cases, reinsurance-disclosure class actions and an ongoing tax inquiry. The reasonably possible loss range in excess of accruals was estimated at $0–$410 million for matters where an estimate could be made; other matters could not be estimated. Management said particular-period earnings or cash flows could be materially affected by adverse outcomes.
- The company settled an FHA-related investigation for $123.5 million in February 2015; the full amount had previously been accrued. Unresolved mortgage representation-and-warranty and servicing reserves were $82 million and $36 million, respectively, at June 30.
- MetLife remains designated a non-bank SIFI and a global systemically important insurer. Potential additional capital, liquidity and supervisory requirements, and restrictions on dividends or repurchases, remain uncertain. The company’s lawsuit challenging its SIFI designation was pending.
Most important facts for investors to verify
- Reconcile reported GAAP earnings to operating earnings, with particular attention to derivative results, the Japan tax benefit and the $42 million preferred-stock repurchase premium.
- Assess the assumptions, hedge effectiveness and potential earnings volatility tied to variable-annuity guarantees and non-qualifying derivatives.
- Track interest-rate and credit-spread effects on the investment portfolio, unrealized losses, impairment exposure and future investment yields.
- Review residential mortgage delinquency trends and the adequacy of reserves for mortgage representations, servicing and litigation.
- Confirm that liquidity, subsidiary dividend capacity and capital remain sufficient for debt service, dividends, repurchases and collateral calls, especially under regulatory or market stress.
- Monitor progress against the revised 2016 operating ROE outlook and the stated efficiency, growth and annuity-sales objectives.