MetLife, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
For the quarter and nine months ended September 30, 2017. MetLife provides insurance, annuities, employee benefits and asset management across the U.S., Asia, Latin America, EMEA and MetLife Holdings. On August 4, 2017, it completed the separation of Brighthouse Financial; Brighthouse results are presented as discontinued operations, and prior periods were recast accordingly.
Financial performance and position
- Revenue: Q3 revenue was $16.1 billion, up from $15.8 billion a year earlier. Nine-month revenue was $46.3 billion, down from $48.0 billion.
- Profit: Q3 income from continuing operations was $893 million, versus $1.024 billion. Common shareholders’ net loss was $87 million, compared with income of $571 million, largely reflecting the $968 million discontinued-operations loss associated with the separation. For nine months, continuing-operations income was $2.630 billion versus $4.269 billion; common shareholders’ net income was $1.571 billion versus $2.830 billion.
- Operating earnings (non-GAAP): Available to common shareholders, $1.168 billion in Q3 versus $1.355 billion; $3.595 billion for nine months versus $2.983 billion. Management cites higher taxes and lower investment yields as Q3 headwinds; nine-month improvement included actuarial reviews and Brighthouse-related reinsurance effects.
- Investment and derivative results: Q3 net investment losses were $606 million, including Brighthouse-related losses, versus gains of $231 million. Net derivative losses improved to $190 million from $543 million. Nine-month investment losses were $439 million versus gains of $598 million; derivative losses were $663 million versus gains of $1.438 billion.
- Cash flow and liquidity: Nine-month operating cash flow was $10.233 billion, versus $9.131 billion; investing cash outflow was $17.158 billion and financing cash inflow was $1.689 billion. Cash and equivalents from continuing operations ended at $13.023 billion. Company-wide short-term liquidity was $10.8 billion, and liquid assets were $210.3 billion at September 30.
- Assets, equity and debt: Total assets were $720.5 billion and total equity $56.9 billion, compared with $898.8 billion and $67.5 billion at year-end 2016; much of the decline reflects Brighthouse’s removal from the consolidated balance sheet. Reported debt included $214 million short-term debt, $16.688 billion long-term debt, $3.144 billion junior subordinated debt and a $1.220 billion collateral financing arrangement.
- Capital returns: MetLife repurchased $2.305 billion of shares during the first nine months and declared $1.20 per common share in dividends. A further $2.0 billion repurchase authorization was announced November 1, 2017.
Material changes and unusual items
- The separation generated a $1.084 billion after-tax loss in Q3 and a $1.347 billion after-tax loss for the first nine months. MetLife retained 19.2% of Brighthouse, valued at $1.4 billion at September 30, with subsequent fair-value changes recognized in investment gains and losses.
- A $180 million net tax charge related to planned repatriation of approximately $3.0 billion of pre-2017 foreign earnings was partly offset by tax benefits. Q3’s reported tax benefit also reflected separation-related tax effects.
- Hurricanes Harvey and Irma produced $42 million of net after-tax losses recognized by September 30; additional claims-related losses could follow.
- Other noted items included a $44 million after-tax Penn Treaty guaranty-fund assessment and litigation-reserve increase for the nine months, and a $36 million after-tax lease-impairment charge.
Outlook, commentary and risks
- Management expects post-separation operating earnings to grow in 2018 through business growth and expense discipline, with reduced interest-rate sensitivity; it expects over 40% of 2018 operating earnings to come from outside the U.S.
- For 2017–2018, the company expects $1.0–$2.0 billion of cash commitments for liability-management transactions, including debt maturities, and targets $3.0–$4.0 billion of liquid assets at holding companies. It expects a 65%–75% average free-cash-flow-to-operating-earnings ratio over that period, excluding separation effects.
- The cost initiative envisages $1.0 billion of investment by 2020 to generate $800 million in annual pre-tax run-rate savings, net of stranded overhead. Management expects further restructuring charges through 2019, but had not estimated their amount.
- Key exposures include low interest rates and investment yields, market and currency volatility, credit and real-estate losses, variable-annuity guarantees, reinsurance/counterparty performance, policyholder behavior, catastrophe claims, regulation and litigation. A renewed non-bank SIFI designation remains possible; the related appeal was held in abeyance pending a Treasury review.
- For litigation where a range could be estimated, reasonably possible losses above recorded accruals were estimated at $0–$450 million. Other matters, including asbestos claims, could not be reliably quantified. Management said adverse outcomes could affect results or cash flows in particular periods.
Important facts for investors to verify
- Reconcile reported GAAP earnings with operating earnings, especially the separation, derivative and investment effects and related tax treatment.
- Track the value and planned 2018 exchange-offer disposition of MetLife’s retained Brighthouse shares, subject to market conditions and regulatory approval.
- Assess whether projected 2018 operating-earnings growth, free-cash-flow conversion and cost savings are achieved, and whether the holding-company liquidity target is maintained.
- Monitor claims and reserve experience, variable-annuity guarantee exposures, catastrophe losses, investment credit quality and litigation developments.
- Review actual repurchases and dividends against capital needs and regulatory, subsidiary-dividend and debt-instrument restrictions.