Business context and reporting period
MetLife, Inc. is a global provider of life insurance, annuities, employee benefits and asset management. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2016. Results reflect the company’s six-segment structure, including Brighthouse Financial, in anticipation of a proposed separation.
Key financial results
Unless stated otherwise, amounts are U.S. dollars. Income-statement and cash-flow amounts are for the quarter; balance-sheet amounts are as of the dates shown.
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenues | $16.269 billion | $18.433 billion |
| Net income attributable to MetLife | $826 million | $2.201 billion |
| Net income available to common shareholders | $820 million; $0.75 diluted EPS | $2.195 billion; $1.98 diluted EPS |
| Operating earnings available to common shareholders | $1.546 billion | $1.329 billion |
| Net investment income | $5.196 billion | $4.559 billion |
| Net derivative gains (losses) | $(926) million | $1.335 billion |
| Operating cash flow | $2.098 billion | $1.913 billion |
| Investing / financing cash flow | $(4.276) billion / $1.499 billion | $(5.739) billion / $4.291 billion |
| Cash and cash equivalents | $17.411 billion | $17.877 billion at Dec. 31, 2016 |
| Total assets / total equity | $914.687 billion / $68.108 billion | $898.764 billion / $67.480 billion at Dec. 31, 2016 |
Operating earnings is a management performance measure and should not be treated as a substitute for GAAP net income. The filing attributes the sharp GAAP earnings decline chiefly to an unfavorable $2.3 billion year-over-year change in derivative results, driven by market movements and accounting mismatches on certain non-qualifying hedges.
Segments and operating performance
Operating earnings were $1.552 billion, up from $1.335 billion. The filing cites higher investment income from portfolio growth and yields, improved equity markets and asset-based fees, and a higher tax benefit, partly offset by unfavorable underwriting and DAC and insurance-liability refinements.
| Segment | Q1 2017 operating earnings | Q1 2016 |
|---|---|---|
| U.S. | $503 million | $406 million |
| Asia | $295 million | $305 million |
| Latin America | $143 million | $151 million |
| EMEA | $75 million | $63 million |
| MetLife Holdings | $385 million | $267 million |
| Brighthouse Financial | $244 million | $327 million |
| Corporate & Other | $(93) million | $(184) million |
Overall sales increased, with stronger results in overseas markets and U.S. Group Benefits and Retirement and Income Solutions. Brighthouse sales were pressured by a major distributor’s sales suspension, discontinued products and the 2016 retail advisor-force divestiture.
Balance sheet, debt and liquidity
Total investments were $506.878 billion, including $355.528 billion of fixed-maturity securities and $76.541 billion of mortgage loans. Fixed-maturity securities were 94.2% investment grade by estimated fair value. The mortgage portfolio was 99% performing; its valuation allowance was $353 million, up from $344 million at year-end.
At March 31, 2017, the balance sheet reported $260 million of short-term debt, $16.511 billion of long-term debt, $4.059 billion of collateral financing arrangements and $3.169 billion of junior subordinated debt securities. MetLife reported consolidated short-term liquidity of $14.3 billion and liquid assets of $234.4 billion; holding companies had $3.8 billion in liquid assets. These liquidity measures exclude assets that are pledged or otherwise committed, and are distinct from reported cash.
MetLife repurchased $858 million of common stock during the quarter and paid $437 million in common dividends. The quarterly dividend declared was $0.40 per share, versus $0.375 a year earlier. The company reported $1.8 billion remaining under its repurchase authorization and compliance with applicable debt and facility covenants.
Outlook, risks and unusual items
- Separation and outlook: The proposed Brighthouse separation remained subject to board, tax, regulatory and SEC conditions. Management expected separation execution and investment spending to pressure 2017 operating earnings, while anticipating post-separation operating-earnings growth in 2018 from business growth and expense discipline. It expected more than 40% of post-separation MetLife operating earnings to come from outside the U.S.
- Cash-flow expectations: Assuming interest rates followed the December 31, 2016 forward curves, management expected a 65%–75% average free-cash-flow-to-operating-earnings ratio over 2017–2018, excluding separation impacts. It described a $1 billion investment through 2020 intended to produce $800 million of annual pretax run-rate savings, net of stranded overhead, and targeted a $3–$4 billion holding-company liquidity buffer after separation.
- Subsequent separation financing: On April 28, 2017, MetLife terminated a $2.8 billion collateral financing arrangement, using assets held in trust; it expected to expense $37 million in termination fees in Q2. It also terminated committed facilities totaling $7.8 billion, with $257 million of fees expected in Q2. Brighthouse entered a $7.8 billion reinsurance financing arrangement. MetLife expected $3.3–$3.8 billion of 2017 dividends from Brighthouse and an affiliated reinsurer before separation.
- Market and insurance risks: Results remain sensitive to interest rates, equity markets, foreign exchange, credit spreads, investment valuations, policyholder behavior, mortality, morbidity and claims experience. Variable-annuity guarantees and their hedges can produce substantial earnings volatility, including from nonperformance-risk adjustments and hedges that do not qualify for hedge accounting. The company noted sustained low rates could pressure investment margins and earnings.
- Legal and regulatory contingencies: The estimated aggregate range of reasonably possible litigation losses above accrued amounts was $0–$400 million; some matters could not be estimated. Management said adverse outcomes could materially affect particular periods’ earnings or cash flows. Asbestos exposure remains uncertain. The filing also describes a California verdict and a subsequent $6.5 million attorneys’ fee award that MetLife intended to appeal. Regulatory uncertainty included the DOL fiduciary rule, Brexit and the appeal of MetLife’s rescinded U.S. non-bank SIFI designation; MetLife remained on the global systemically important insurer list.
- Other items: Q1 operating results included a $44 million after-tax charge related to a Penn Treaty guaranty-fund assessment and increased litigation reserves, a $21 million after-tax increase in unit-cost initiative expenses, and a favorable $34 million after-tax reserve adjustment from modeling improvements. Management anticipated further restructuring charges through 2019 but could not estimate them at quarter-end. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Brighthouse separation met its remaining tax, regulatory, board and SEC conditions, and its ultimate timing, structure and financing.
- Whether operating-earnings growth is sustained and how much future GAAP earnings volatility remains attributable to derivatives and non-qualifying hedge accounting.
- Actual separation-related cash flows, holding-company liquidity, subsidiary dividends, debt repayments and the cost and delivery of the announced efficiency program.
- Developments in variable-annuity guarantee exposure, hedge effectiveness, investment-credit quality and mortgage-loan performance.
- Changes in litigation reserves and outcomes, including asbestos claims, the California verdict and other matters with uncertain loss estimates.