METLIFE INC quarterly report, Q3 FY2016

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MetLife, Inc. — Q3 2016 Form 10-Q

Business context and period: MetLife is a global provider of life insurance, annuities, employee benefits and asset management. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. In anticipation of separating a substantial U.S. retail business as Brighthouse Financial, MetLife reorganized its reporting into six segments, applied retrospectively. Segment reorganization did not change prior-period consolidated net income or operating earnings.

Key financial results

Amounts are U.S. dollars; financial-statement figures are in millions unless indicated. Operating earnings are a management measure and are not a substitute for GAAP net income.

  • Q3 revenue and earnings: Revenue was $17.723 billion, down from $18.031 billion a year earlier. Net income attributable to MetLife was $577 million versus $1.203 billion; common-shareholder net income was $571 million versus $1.197 billion. Diluted EPS was $0.51 versus $1.06.
  • Nine-month revenue and earnings: Revenue was $51.400 billion versus $52.907 billion. Common-shareholder net income was $2.830 billion versus $4.367 billion; diluted EPS was $2.55 versus $3.86.
  • Operating earnings available to common shareholders: Q3 increased to $1.421 billion from $705 million, while the nine-month total declined to $3.674 billion from $4.108 billion. Q3 improvement reflected, among other factors, lower prior-year tax and related interest charges; nine-month results were pressured by lower investment yields, underwriting, assumption updates and reserve adjustments.
  • Derivatives and comprehensive income: Net derivative losses were $1.051 billion in Q3, compared with gains of $485 million a year earlier; nine-month losses were $1.815 billion versus gains of $394 million. Q3 comprehensive loss was $463 million despite positive net income. Nine-month comprehensive income was $11.809 billion, versus $760 million, mainly reflecting changes in other comprehensive income.
  • Cash flow: For nine months, operating cash flow was $9.183 billion versus $9.527 billion. Investing activities used $14.586 billion versus $6.907 billion; financing provided $8.228 billion versus using $2.852 billion. Cash and cash equivalents ended at $15.883 billion, up from $12.752 billion at year-end 2015.
  • Balance sheet and debt: Assets were $952.904 billion and total equity $78.466 billion, compared with $877.933 billion and $68.419 billion at year-end. Long-term debt was $16.553 billion, short-term debt $201 million, junior subordinated debt $3.168 billion, and collateral financing arrangements $4.084 billion. The filing reports $24.006 billion across these debt and financing categories.
  • Liquidity and capital returns: Management reported $12.0 billion of short-term liquidity and $248.7 billion of liquid assets at September 30. MetLife holding companies had $5.6 billion of liquid assets. Nine-month common dividends paid were $1.295 billion; the board declared a fourth-quarter dividend of $0.40 per share. There was no remaining common-stock repurchase authorization at quarter-end.
  • Investment and insurance indicators: Net investment income was $5.464 billion in Q3 and $14.910 billion for nine months. At September 30, 94.3% of fixed-maturity securities were investment grade; management reported 99% of mortgage loans performing. Total insurance liabilities were $439.610 billion.

Material changes and unusual items

  • Q3 GAAP earnings included a $260 million goodwill impairment charge ($223 million net of tax) for Brighthouse Financial reporting units. The impairment eliminated their remaining goodwill.
  • The segment reorganization caused a $296 million after-tax charge in Brighthouse Financial from loss-recognition testing: $254 million was principally a DAC write-off and $42 million increased insurance liabilities. Management expected an ongoing after-tax impact of about $40 million per quarter, declining over time.
  • The nine-month results included a $3.2 billion pretax ($2.1 billion after-tax) noncash charge from the U.S. variable-annuity actuarial assumption review, primarily reflecting policyholder behavior, economic assumptions and risk margins. Separate reserve modeling adjustments also reduced operating earnings by $257 million after tax.
  • MetLife completed the sale of its U.S. retail advisor force and related assets to MassMutual for $291 million in July. It recorded a $103 million pretax gain ($58 million after tax).
  • In the nine-month comparison, 2016 included the effect of changing Japan operations to calendar-year reporting without retrospective application; management said the accounting change was not material to consolidated financial statements. Segment presentation was also reorganized retrospectively.
  • Investment unrealized gains increased materially as interest rates declined and credit spreads narrowed. Those gains affect equity and comprehensive income and should not be confused with realized operating performance.

Outlook, risks and contingencies

  • Outlook: Management expected 2016 operating ROE, excluding AOCI other than foreign-currency translation adjustments, to be below 11%. Excluding specified separation effects, it expected the 2016 free-cash-flow-to-operating-earnings ratio at or above the high end of its 55%–65% range, and a 65%–75% average for 2017–2018. These are management projections, not GAAP guidance.
  • Separation: MetLife expected the Brighthouse separation to begin in the first half of 2017, but timing and structure remained subject to board, regulatory, SEC and tax-related conditions, as well as economic conditions. Management anticipated approximately $1.5 billion of separation-related holding-company liquidity reductions in the second half of 2016, expected $3.3–$3.8 billion of pre-separation dividends from Brighthouse and an affiliated reinsurer, and planned a $3–$4 billion post-separation holding-company liquidity buffer. It also identified $1–$2 billion of cash commitments over 2017–2018 for liability management, including debt maturities.
  • Operating and market risks: Management cited sustained low interest rates, reinvestment at lower yields, equity-market and foreign-exchange volatility, policyholder behavior and mortality, credit deterioration, and potential derivative hedge mismatches. The variable-annuity guarantee valuations rely on actuarial assumptions and unobservable inputs and can fluctuate materially.
  • Regulatory and business risks: The FSOC appealed the court decision rescinding MetLife’s U.S. non-bank SIFI designation; MetLife remained designated a global systemically important insurer. New DOL fiduciary rules could raise compliance costs, change distribution and compensation practices, and affect annuity sales. The proposed Brighthouse separation could be delayed or not completed on planned terms.
  • Legal contingencies: For matters where a reasonably possible loss could be estimated, the aggregate range in excess of accruals was $0–$400 million. Other matters, including asbestos litigation, could not be reliably estimated; management said adverse outcomes could affect particular quarterly or annual results. A California trial returned a $15 million punitive-damages verdict, which MetLife intended to appeal.
  • Other exposures: Securities-lending cash collateral liabilities were $32.1 billion, including $8.4 billion on open arrangements that could require next-business-day return. Written credit-default swaps had $11.7 billion of gross notional exposure. Management said it believed liquidity was ample under current conditions, while noting market disruption, collateral calls and counterparty performance risks.

Important facts for investors to verify

  • Reconcile GAAP net income with operating earnings, especially the impact of derivative marks, the variable-annuity assumption review, DAC and reserve adjustments, and one-time tax items.
  • Review the separation’s final structure, timing, tax treatment, regulatory approvals, financing and actual cash flows versus management’s projections.
  • Assess variable-annuity guarantees, hedge effectiveness, policyholder behavior assumptions and the sensitivity of reported earnings to interest rates, equity markets and MetLife’s own credit spreads.
  • Monitor holding-company liquidity, subsidiary dividend capacity, debt maturities, collateral requirements and any changes to credit ratings or regulatory capital requirements.
  • Track investment credit quality, mortgage-loan performance, unrealized losses and exposures to energy, international markets and securities-lending counterparties.
  • Follow material litigation and regulatory developments, including asbestos claims, the SIFI appeal, ERISA fiduciary-rule implementation and the disclosed $0–$400 million reasonably possible loss range.