MetLife, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 1, 2018. This is an annual report, not a standalone fourth-quarter filing. MetLife provides insurance, annuities, employee benefits and asset management across the U.S. and international markets. Its segments were U.S., Asia, Latin America, EMEA and MetLife Holdings, plus Corporate & Other.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $62.3 billion | $60.8 billion |
| Income from continuing operations, net of tax | $5.0 billion | $3.6 billion |
| Net income attributable to MetLife | $4.0 billion | $850 million |
| Net income available to common shareholders | $3.9 billion; diluted EPS $3.62 | $747 million; diluted EPS $0.67 |
| Adjusted earnings available to common shareholders (non-GAAP) | $4.2 billion | $4.0 billion |
| Cash provided by operating activities | $12.3 billion | $14.8 billion |
| Common dividends declared per share | $1.60 | $1.575 |
Revenue growth reflected higher premiums and net investment income; total expenses also increased, to $58.8 billion from $56.5 billion. Net investment income was $17.4 billion. Net investment losses were $308 million, versus gains of $317 million in 2016; net derivative losses were $590 million, versus losses of $690 million. The filing does not provide a single consolidated operating-margin figure.
At year-end, total assets were $719.9 billion, down from $898.8 billion, primarily reflecting the Brighthouse separation and removal of its assets and liabilities from the consolidated balance sheet. MetLife reported $58.7 billion of stockholders’ equity, versus $67.5 billion. Debt-related balance-sheet items included $477 million of short-term debt, $15.7 billion of long-term debt, $1.1 billion of collateral financing arrangements and $3.1 billion of junior subordinated debt. Short-term liquidity was $10.0 billion and liquid assets were $209.1 billion; these consolidated measures differ from holding-company liquidity. Holding companies had $5.7 billion of liquid assets. The $3.0 billion revolving credit facility had no borrowings and $2.9 billion of remaining availability.
Fixed-maturity securities totaled $308.9 billion at fair value; 94.2% were investment grade. Mortgage loans totaled $68.7 billion net of valuation allowances.
Material changes versus 2016
- Common-shareholder net income rose by $3.2 billion, driven substantially by lower discontinued-operation losses and U.S. tax reform—not solely by improvement in ongoing operations. Continuing-operation income rose to $5.0 billion from $3.6 billion.
- U.S. tax reform produced a reported $1.3 billion net benefit in 2017, including a $1.5 billion one-time deferred-tax revaluation benefit and a $170 million deemed-repatriation charge. The filing says amounts remained provisional and could change.
- MetLife completed the Brighthouse Financial separation on August 4, 2017, distributing 80.8% of Brighthouse shares and retaining 19.2% at year-end. Brighthouse results are reported as discontinued operations. The separation generated a $1.3 billion after-tax loss, including a mark-to-market loss on retained shares and transaction-related items.
- Adjusted earnings available to common shareholders increased $202 million to $4.2 billion. U.S. segment adjusted earnings were $2.0 billion; Asia $1.2 billion; Latin America $585 million; EMEA $297 million; MetLife Holdings $1.2 billion. Corporate & Other recorded an adjusted loss of $1.1 billion.
- Operating cash flow declined by $2.5 billion. Reported free cash flow of all holding companies increased to $5.7 billion from $2.4 billion, but included $2.1 billion of separation-related net inflows; excluding those items, adjusted free cash flow was $3.6 billion.
- MetLife repurchased $2.9 billion of common stock in 2017 and paid $1.7 billion in common dividends. Year-end common stockholders’ equity fell in part because of the separation, repurchases and dividends.
Outlook, risks and unusual items
- Capital returns and targets: Management expected to complete the remaining $1.8 billion under the November 2017 repurchase authorization during 2018 and anticipated returning approximately $5.0 billion to common shareholders through dividends, repurchases and a proposed Brighthouse share exchange offer, subject to market, regulatory and other conditions. Management targeted a two-year 2018–2019 free-cash-flow-to-adjusted-earnings ratio at the lower end of 65%–75%, assuming specified market conditions; this is a non-GAAP measure. It projected an 18%–20% 2018 effective tax rate and targeted adjusted ROE, excluding specified AOCI items, 800–900 basis points above the 10-year Treasury rate, with a longer-term target of 1,000 basis points.
- Expense program: Management planned to invest $1.0 billion by 2020 to achieve $800 million of annual pre-tax run-rate savings, net of stranded overhead. Execution and savings realization are uncertain.
- Reserve corrections and control weaknesses: MetLife increased RIS group-annuity reserves by $510 million pre-tax ($331 million after tax), including $372 million pre-tax identified as an error. It also reduced assumed Japanese variable-annuity guarantee reserves by $896 million pre-tax ($582 million after tax), including $682 million identified as an error. The company said recording the identified errors in fourth-quarter 2017 would have materially affected 2017 results; prior-period amounts were described as immaterially restated. Management identified material weaknesses in controls over both reserve areas. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; Deloitte issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements.
- Market and insurance exposure: Low interest rates, credit and equity market movements, foreign exchange, policyholder behavior, variable-annuity guarantees, investment valuations, catastrophe losses and counterparty performance may affect earnings, reserves, liquidity and capital. Under a specified low-rate scenario, management estimated adjusted-earnings reductions of $55 million in 2018, $50 million in 2019 and $260 million in 2020.
- Legal and regulatory matters: NYDFS and SEC investigations or inquiries include pension-benefit payment practices and assumed variable-annuity reserves. The company reported a reasonably possible loss range of $0–$425 million in excess of accruals for matters where it could estimate a range; it could not estimate a loss range for certain other matters. Asbestos-related liabilities were $551 million at year-end. The filing states that additional costs, penalties or claims related to investigations and control issues are possible and are not included in the reserve adjustments.
- Other unusual items: Hurricanes Harvey and Irma resulted in $42 million of recognized net after-tax losses through year-end, with potential further claims. 2017 also included a $73 million after-tax charge for a Penn Treaty guaranty-fund assessment and asbestos/litigation reserve increases, and a $90 million after-tax charge for certain RIS policy reserves.
- Holding-company and regulatory constraints: MetLife, Inc. depends principally on subsidiary dividends for cash; insurance regulation, ratings, debt terms and capital requirements can constrain dividends and repurchases. The SIFI designation had been rescinded, but the filing noted the possibility of future designation. The Brighthouse shareholding, separation agreements and intended tax treatment create additional market, indemnification and tax risks.
Most important facts for investors to verify
- Whether MetLife remediates the reserve-related material weaknesses promptly, and whether subsequent reviews identify further adjustments or restatements.
- How much of 2017 earnings and holding-company free cash flow reflects one-time tax and separation effects, and how the company reconciles its non-GAAP measures to GAAP results.
- Whether projected 2018 capital returns, the Brighthouse exchange offer, liquidity buffer and expense savings are achieved, and whether they remain consistent with subsidiary capital and dividend restrictions.
- The outcomes and potential financial effects of the NYDFS, SEC and other regulatory inquiries, pension-benefit matters, litigation, asbestos claims and guaranty-fund assessments.
- Whether investment yields, variable-annuity guarantee exposure, reserves, reinsurance recoverables and capital remain resilient to adverse interest-rate, market, currency and policyholder-behavior scenarios.