MetLife, Inc. — Q2 2017 Form 10-Q
Business context and period: MetLife is a global life insurer and provider of annuities, employee benefits and asset management. This unaudited filing covers the quarter and six months ended June 30, 2017, with comparisons to 2016. The company reported six segments and Corporate & Other while preparing to spin off Brighthouse Financial.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $17.245bn | $15.244bn | $33.514bn | $33.677bn |
| Net income attributable to MetLife | $884m | $110m | $1.710bn | $2.311bn |
| Net income available to common shareholders | $838m | $64m | $1.658bn | $2.259bn |
| Diluted EPS | $0.77 | $0.06 | $1.52 | $2.04 |
| Operating earnings available to common shareholders* | $1.407bn | $924m | $2.953bn | $2.253bn |
| Operating cash flow | Six months: $5.499bn | Prior-year six months: $6.204bn |
Balance sheet and liquidity at June 30: Total assets were $925.2bn, including $514.0bn of investments and $17.3bn of cash and cash equivalents. Total liabilities were $855.5bn and total equity was $69.7bn. Debt included $19.5bn of long-term debt, $3.2bn of junior subordinated debt and $235m of short-term debt; collateral financing arrangements were $1.2bn. Management reported $11.5bn of short-term liquidity and $242.3bn of liquid assets for the company overall. MetLife and other holding companies had $4.6bn in liquid assets.
Margins: The filing does not provide a clear consolidated margin measure; operating earnings is a non-GAAP measure and is not directly comparable to a conventional operating margin.
Material changes and management commentary
- Q2 common-shareholder net income rose $774m year over year, substantially reflecting a $1.7bn favorable change in net derivative results, largely due to the comparison with the 2016 variable-annuity actuarial assumption review. For the first half, common-shareholder net income fell $601m, while operating earnings available to common shareholders increased $700m.
- Six-month revenue was nearly flat year over year. Premiums increased, but other revenues and derivative results were lower. Q2 operating earnings improved from the prior-period actuarial review impact and lower taxes; management also cited prior-period refinements to DAC and insurance liabilities.
- Investment yields were pressured in Q2 by lower prepayment fees and securities-lending margins; improved private-equity returns partly offset the decline. For the first half, management cited portfolio growth and improved equity-market performance as operating-earnings supports.
- Business trends were mixed: U.S. Retirement and Income Solutions and Group Benefits sales strengthened, while sales abroad and in run-off businesses were weaker. MetLife Holdings premiums, fees and other revenues were expected to decline about 5% annually through run-off.
Outlook, separation and risks
- Brighthouse separation: MetLife planned a distribution of one Brighthouse share for every 11 MetLife shares, with an announced distribution date of August 4, 2017. The filing said the separation remained subject to continued validity of an IRS ruling and a tax-advisor opinion. Brighthouse paid MetLife a $1.8bn dividend on August 3; the company expected total separation-related dividends of about $3.0bn, of which $2.7bn had been received by the filing date.
- Outlook: Management expected separation and efficiency investments to weigh on 2017 operating earnings, with post-separation operating-earnings growth in 2018 from business growth and expense discipline. It expected 2017–2018 average free cash flow to operating earnings of 65%–75%, excluding separation impacts, assuming interest rates followed the December 31, 2016 forward curves. Management targeted $1bn of investment by 2020 to produce $800m of annual pretax run-rate savings, net of stranded overhead.
- Management anticipated approximately $900m of after-tax realized investment losses related to the separation and an approximately $200m operating-earnings tax charge associated with planned cash repatriation. It also expected $1bn–$2bn of liability-management cash commitments over 2017–2018 and targeted $3bn–$4bn of holding-company liquidity after separation.
- Key exposures include variable-annuity guarantees, low interest rates, market and currency volatility, credit and investment losses, counterparty performance, regulatory change and policyholder behavior. The filing also identifies separation execution, tax treatment, transition arrangements and MetLife’s retained Brighthouse stake as risks. A Brighthouse stock distribution event not completed by December 31, 2017 would require redemption of its $3bn senior notes, with MetLife’s initial guarantee relevant.
- Litigation remains uncertain. The estimated reasonably possible loss range in excess of accruals for matters where an estimate could be made was $0–$400m; other matters, including asbestos claims, could not be reliably estimated. Management said adverse outcomes could affect particular periods.
Most important facts for investors to verify
- Whether the Brighthouse distribution closed on the announced terms and retained intended tax-free treatment, and the final cash and share distributions to MetLife.
- How much of reported earnings reflected recurring operating performance versus derivative valuation changes, prior-year actuarial-review effects, DAC/VOBA amortization and separation costs.
- Whether management’s 2018 operating-earnings growth, 65%–75% free-cash-flow ratio and cost-savings targets are achieved; these are forward-looking and assumption-dependent.
- Holding-company liquidity after separation, debt and guarantee obligations, subsidiary dividend capacity, and remaining share-repurchase authorization.
- Developments in variable-annuity guarantee exposure, investment-credit quality, litigation and regulatory matters. *Operating earnings is management’s non-GAAP performance measure; the filing cautions it is not a substitute for GAAP net income.