MetLife, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance sheet comparisons are with December 31, 2014. MetLife is a global provider of life insurance, annuities, employee benefits and asset management. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 or prior balance date |
|---|---|---|
| Total revenue | $18,710 | $17,085 |
| Income from continuing operations, net of tax | $2,163 | $1,342 |
| Net income attributable to MetLife | $2,158 | $1,328 |
| Net income available to common shareholders | $2,128 | $1,298 |
| Diluted earnings per common share | $1.87 | $1.14 |
| Operating earnings (non-GAAP) | $1,668 | $1,592 |
| Operating earnings available to common shareholders (non-GAAP) | $1,638 | $1,562 |
| Cash from operating activities | $2,686 | $2,484 |
| Cash and cash equivalents | $8,127 | $10,808 at Dec. 31, 2014 |
| Total assets / total equity | $919,790 / $74,314 | $902,337 / $72,560 at Dec. 31, 2014 |
Revenue and earnings: Revenue increased about 9.5%; common net income rose about 64%, while operating earnings available to common shareholders increased about 4.9%. The larger GAAP earnings increase primarily reflected better net investment gains and derivative gains, including the prior-year loss on the disposition of MetLife Assurance Limited. Q1 2015 included $286 million of net investment gains and $821 million of net derivative gains, versus a $411 million investment loss and $343 million of derivative gains in Q1 2014. Net investment income was $5,461 million, up from $5,035 million.
Cash flow, debt and liquidity: Investing activities used $6,900 million, compared with $2,164 million provided in Q1 2014; financing activities provided $1,723 million, compared with $3,659 million used. Cash declined by $2,681 million during the quarter, including the effects of investing and financing flows and foreign exchange. At March 31, total reported debt included $100 million of short-term debt, $17,714 million of long-term debt, $4,196 million of collateral financing arrangements and $3,193 million of junior subordinated debt. Management reported consolidated short-term liquidity of $13.2 billion and liquid assets of $241.6 billion, excluding pledged or otherwise committed assets. MetLife, Inc. and other holding companies reported $5.7 billion in liquid assets.
Margins and capital returns: The filing reports no single consolidated operating margin measure. The effective tax rate was 29%, versus 27% in the prior-year quarter. Common dividends declared were $0.35 per share for Q1, versus $0.275; in April the board declared a Q2 dividend of $0.375 per share. MetLife repurchased 19.9 million shares for $986 million during Q1; $275 million remained under the authorization at quarter end.
Material changes versus the prior comparable period
- Underlying operating earnings available to common shareholders improved modestly, supported by investment portfolio growth and business growth, partly offset by lower investment yields and foreign currency effects.
- Management cited sales growth across regions, particularly group life, dental, disability and voluntary benefits. Retail life and individual disability sales increased; annuity sales were essentially flat.
- Q1 GAAP earnings benefited from the year-over-year swing in investment and derivative gains. Management cautioned that market-related gains and losses can fluctuate significantly and may create earnings volatility.
- Operating earnings by segment were: Retail $653 million (prior $636 million); Group, Voluntary & Worksite Benefits $228 million (prior $190 million); Corporate Benefit Funding $369 million (prior $340 million); Latin America $131 million (prior $158 million); Asia $327 million (prior $333 million); EMEA $70 million (prior $71 million); and Corporate & Other loss of $110 million (prior loss of $136 million). Prior-year segment results were retrospectively adjusted for reporting changes that did not affect consolidated earnings.
- Gross unrealized losses on fixed maturity securities increased by $219 million during the quarter to $2.2 billion, primarily due to weakening foreign currencies. Management concluded the securities in unrealized loss positions were not other-than-temporarily impaired at March 31.
Outlook, commentary and risks
- Outlook: MetLife had previously targeted 12%–14% operating return on common equity by 2016. Management said it now expects to fall below that range, citing lower-than-planned share repurchases, regulatory uncertainty, low investment margins, limited M&A activity and U.S. dollar strength. Using a revised measure that includes foreign currency translation adjustments, management expects approximately 11% operating ROE in 2016. The filing does not provide a quarterly earnings or revenue forecast.
- Japan tax change: A Japanese tax rate reduction enacted March 31 is expected to produce a one-time $170–$180 million benefit in Q2 2015, including approximately $60 million in Asia operating earnings; management also expected a roughly 0.2 percentage-point favorable effect on the 2015 effective tax rate versus 2014.
- Key operating pressures: Management identified the sustained low interest rate environment as a constraint on investment yields and margins. Q1 results also reflected increased catastrophe losses from severe winter weather and less favorable mortality in Retail. Foreign currency movements reduced operating earnings in several international segments.
- Regulatory and capital risks: MetLife was designated a non-bank systemically important financial institution (SIFI); the application of enhanced capital, liquidity and other requirements remained uncertain. The company was also designated a global systemically important insurer, with potential additional capital requirements still under development. These regimes could affect dividends, buybacks, product offerings and capital needs.
- Insurance and market risks: Variable annuity guarantees are sensitive to equity markets, volatility, interest rates, policyholder behavior and mortality. Low rates may pressure returns on reinvested assets and products with minimum crediting guarantees. Derivative valuation and counterparty risks, foreign exchange, credit exposures and investment valuation judgments may also affect results and liquidity.
- Legal matters: The filing estimates reasonably possible losses, in excess of amounts accrued, of $0–$400 million for matters where a range could be estimated; other matters could not be reasonably quantified. The company reported an FHA-related settlement of $123.5 million, paid by MetLife Home Loans LLC, with the full amount previously accrued. Asbestos exposure remains uncertain and could require future charges. Other disclosed litigation includes unclaimed-property, total-control-account, reinsurance-disclosure and sales-practices matters.
- Other items: MetLife filed suit seeking to overturn its SIFI designation. A new U.S. Department of Labor proposal could expand fiduciary obligations for retirement investment advice and require changes to compensation or sales practices if finalized. Management stated disclosure controls were effective and reported no material change to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the GAAP earnings increase reflects recurring insurance and investment operations versus derivative and investment valuation gains, and how operating earnings reconcile to GAAP results.
- Whether investment yields, particularly on fixed maturities and mortgage loans, continue to decline, and the effect on operating earnings and policyholder obligations.
- MetLife’s capital and liquidity position after buybacks, dividends and debt issuance, including the distinction between consolidated liquidity and holding-company liquidity and the amount of assets pledged or otherwise committed.
- Developments in non-bank SIFI and global systemically important insurer requirements, including potential effects on capital, dividends and repurchases; also monitor the company’s litigation challenging the SIFI designation.
- Whether the expected Q2 Japan tax benefit is realized and whether variable annuity guarantee costs, foreign exchange movements, catastrophe claims or legal contingencies materially change subsequent results.