01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
MetLife's 2018 Form 10-K, filed February 22, 2019, shows a company with a $452.0 billiona general account portfolio and leading positions across the U.S., Japan, Latin America, Asia, Europe and the Middle East.
Net income attributable to MetLife rose to $5.1 billionb in 2018 from $4.0 billion in 2017, and net income available to common shareholders reached $4.98 billion. Adjusted earnings available to common shareholders increased $1.2 billion to $5.5 billion, the company's preferred non-GAAP measure for segment performance. Much of the improvement reflects a favorable $1.4 billion swing in net derivative gains and higher net investment income, partly offset by a lower 2017 tax benefit, an unfavorable annual actuarial assumption review ($358 million charge), and higher interest credited expense.
The filing also carries significant governance and control risk. MetLife disclosed material weaknesses as of December 31, 2017 in RIS group annuity reserves and in MetLife Holdings assumed variable annuity guarantee reserves, and reported that both had been remediated by year-end 2018. Several related matters remain open, including SEC investigations, a New York DFS consent order with a $19.75 millionc fine, class-action securities suits, shareholder derivative litigation, and stockholder demand letters.
Management reports the company returned $5.7 billiond to common shareholders in 2018 through dividends and buybacks, and it maintains an adjusted ROE target of 12% to 14% over the near term. Investors should weigh the strong earnings and capital return against the reserve-accounting issues, regulatory exposure, and sensitivity to low interest rates and derivative valuations. Results also depend on the company's free cash flow conversion, which management projects at 65% to 75% for 2019–2020.
02—Key points
Key Highlights
- Net income attributable to MetLife, Inc. rose to $5.1 billion in 2018 from $4.0 billion in 2017; net income available to common shareholders was $4.98 billion, or $4.91 diluted EPS.
- Adjusted earnings available to common shareholders increased $1.2 billion to $5.5 billion, driven by higher net investment income, favorable U.S. tax reform effects, and lower expenses.
- Net derivative gains swung to $851 million from a $590 million loss in 2017, largely from foreign currency and interest rate movements.
- Returned $5.7 billion to common shareholders in 2018 through $4.0 billion of buybacks and $1.7 billion of dividends; $1.3 billion of repurchase authorization remained at year-end.
- Disclosed material weaknesses in RIS group annuity reserves and MetLife Holdings assumed variable annuity guarantee reserves (identified for 2017), which management says were remediated as of December 31, 2018.
- Faces open regulatory and legal matters, including an SEC investigation, a NYDFS consent order ($19.75 million fine plus $1.5 million restitution), securities class actions, and shareholder derivative suits.
- The general account portfolio totals $452.0 billion, with over 80% in fixed maturities and mortgage loans; the company targets a 12%–14% adjusted ROE excluding AOCI other than FCTA over the near term.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $67.94B$62.31B | +9.0% |
| Operating Expenses | $13.71B$13.62B | +0.7% |
| Operating Income | $4.98B$4.89B | +1.8% |
| Interest Expense | $827.00M$841.00M | −1.7% |
| Net Income | $5.13B$4.01B | +27.9% |
| EPS (Basic) | $4.95$3.65 | +35.6% |
| EPS (Diluted) | $4.91$3.62 | +35.6% |
| Shares Outstanding (Basic) | 1.01B1.07B | −6.0% |
| Shares Outstanding (Diluted) | 1.01B1.08B | −6.0% |
05—Questions
Frequently Asked Questions
How did MetLife's 2018 earnings change compared with 2017?
Net income attributable to MetLife rose to $5.1 billion from $4.0 billion, and net income available to common shareholders rose to $4.98 billion from $3.91 billion. Adjusted earnings available to common shareholders increased $1.2 billion to $5.5 billion. The 2017 results included a $1.3 billion net tax benefit from U.S. tax reform, so the comparison is partly flattered by a larger 2017 tax benefit than 2018 items.
What were the material weaknesses, and were they fixed?
MetLife identified material weaknesses as of December 31, 2017 related to RIS group annuity reserves (processes for locating unresponsive annuitants and beneficiaries, plus escalation controls) and to MetLife Holdings assumed variable annuity guarantee reserves from a former Japan joint venture (data validation and monitoring). Management says it implemented enhanced controls and tested them, concluding both weaknesses were remediated as of December 31, 2018.
What regulatory and legal exposures could affect investors?
Open matters include SEC Division of Enforcement inquiries, a NYDFS consent order with a $19.75 million fine plus $1.5 million restitution, a multistate market conduct re-examination on unclaimed property, securities class actions (Parchmann, City of Westland), a derivative suit (Kates), and stockholder demand letters. The company states it cannot estimate the reasonably possible loss for several matters, and it estimates aggregate reasonably possible losses in excess of accruals of $0 to $550 million for matters where a range can be estimated.
How much capital did MetLife return to shareholders, and what is its outlook?
In 2018 MetLife returned $5.7 billion through $4.0 billion of common stock repurchases and $1.7 billion of common dividends. Management targets a 12%–14% adjusted ROE over the near term and expects the average ratio of free cash flow to adjusted earnings over 2019–2020 to be 65%–75%, assuming a 10-year Treasury rate between 2.0% and 4.5%. Future buybacks and dividends remain subject to board discretion, capital position, and regulatory limits.
How sensitive is MetLife to interest rates and derivative valuations?
Under a Low Interest Rate Scenario (100 basis points lower), management estimates an unfavorable adjusted earnings impact of about $15 million in 2019, $140 million in 2020 and $265 million in 2021. Its derivative positions not designated as accounting hedges could add $719 million to net income in 2019 under that scenario, but they produce losses in 2020 and 2021. Net derivative gains and losses, along with variable annuity guarantee reserves, can add significant volatility to GAAP net income.
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