MetLife, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. MetLife provides life insurance, annuities, employee benefits and asset management. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $15.244bn | $16.166bn | $33.677bn | $34.876bn |
| Net income | $114m | $1.119bn | $2.317bn | $3.282bn |
| Net income available to common shareholders | $64m | $1.042bn | $2.259bn | $3.170bn |
| Diluted EPS | $0.06 | $0.92 | $2.04 | $2.80 |
| Operating earnings | $970m | $1.796bn | $2.305bn | $3.464bn |
| Operating earnings available to common shareholders | $924m | $1.765bn | $2.253bn | $3.403bn |
Operating earnings are a company-defined non-GAAP measure and are not a substitute for GAAP net income. The filing does not present a single consolidated operating margin as a key performance measure.
- Revenue and earnings: Q2 revenue fell about 6% year over year; first-half revenue fell about 3%. First-half premiums rose to $19.110bn from $18.565bn, but net investment income declined to $9.446bn from $10.408bn. Lower investment yields and weaker policy fees weighed on results.
- Derivative volatility: Net derivative losses were $2.099bn in Q2 versus $912m a year earlier, and $764m for the first half versus $91m. The Q2 loss reflected variable-annuity guarantee valuations, including actuarial assumption changes; favorable movements in other hedges and the nonperformance-risk adjustment partly offset it.
- Cash flow: First-half operating cash flow was $6.255bn versus $6.888bn. Investing activities used $9.908bn versus $6.760bn; financing provided $7.616bn versus using $2.564bn. Cash and cash equivalents ended June at $17.067bn, up from $12.752bn at year-end.
- Balance sheet and liquidity: Total assets were $942.567bn, versus $877.933bn at December 31, 2015; total equity was $79.373bn, versus $68.419bn. Accumulated other comprehensive income rose to $14.632bn from $4.771bn, substantially reflecting market-related unrealized gains. Management reported short-term liquidity of $10.6bn and liquid assets of $245.5bn, excluding pledged or otherwise committed assets.
- Debt: At June 30, reported balances included $103m short-term debt, $16.586bn long-term debt, $4.113bn collateral financing arrangements and $3.168bn junior subordinated debt. MetLife repaid $1.3bn of senior notes at maturity during June.
- Dividends and repurchases: Common dividends declared were $0.775 per share for the first half, compared with $0.725 a year earlier. The board declared a further $0.40 per share for Q3. MetLife repurchased $70m of common stock in the first half and had no remaining repurchase authorization at June 30.
Material changes and drivers
- GAAP net income available to common shareholders fell to $64m in Q2 from $1.042bn. Management attributed the decline primarily to weaker operating earnings and more unfavorable derivative results, partly offset by higher net investment gains.
- The accelerated Q2 review of Retail variable-annuity assumptions resulted in a $3.1bn noncash charge before tax effects ($2.0bn after tax), including $3.9bn of reserve increases partly offset by an $841m DAC benefit. The review included lower expected annuitization and changes to withdrawal, persistency and economic assumptions. Its net impact on operating earnings was a $161m decrease.
- Other Q2 items included $257m of unfavorable after-tax reserve adjustments from modeling improvements and a $44m after-tax charge related to Australian reinsurance receivables. First-half comparisons also reflect the non-retrospective conversion of Japan operations to calendar-year reporting.
- Segment operating earnings declined in Retail, Corporate Benefit Funding and Asia; Group, Voluntary & Worksite Benefits and Latin America also declined for the first half. Management cited low yields, unfavorable underwriting and actuarial/DAC changes, partly offset by portfolio growth and business growth in some lines.
Outlook, strategic actions and risks
- Management expected 2016 operating ROE, excluding AOCI other than foreign currency translation adjustments, to be below 11%, citing unfavorable markets, reserve adjustments, the variable-annuity assumption review and Separation-related activity. It said it could not provide a fuller outlook until the Separation structure became clearer.
- MetLife planned to separate a substantial portion of Retail and certain other businesses into Brighthouse Financial, while evaluating a public offering, spin-off or sale. Completion remained subject to board, regulatory and other conditions. A third-quarter segment reorganization was expected to produce an after-tax charge of less than $300m from universal-life loss recognition.
- In July, MetLife completed the sale of its U.S. Retail advisor force and related assets to MassMutual for $280m. It expected an approximately $45m after-tax gain in Q3, partly offset by charges recorded in Q2.
- The company announced a cost initiative targeting approximately $1bn of net pretax annual run-rate savings by the end of 2019; short-term implementation costs were expected.
- Key exposures include sustained low interest rates, market and currency volatility, variable-annuity guarantees and policyholder behavior, investment credit losses, reinsurance/counterparty performance, securities-lending liquidity, and international economic and regulatory conditions. Management noted uncertainty following the U.K. vote to leave the EU.
- The D.C. District Court rescinded MetLife’s non-bank SIFI designation in March 2016; the FSOC appealed in April. MetLife remained designated a global systemically important insurer, with related capital and regulatory requirements still developing.
- Litigation remains difficult to predict. The estimated aggregate range of reasonably possible losses above accruals was $0–$475m for matters where a range could be estimated; other matters, including asbestos claims, could not be reasonably estimated. Management did not expect pending matters, based on then-known information, to materially affect financial position, but acknowledged possible effects on quarterly or annual earnings and cash flows.
- Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Review the actuarial assumption changes, variable-annuity guarantee liability and hedge offsets, including the noncash charge and future sensitivity to rates, equity markets and policyholder behavior.
- Reconcile GAAP results with non-GAAP operating earnings and assess the contribution of market-driven derivative gains and losses.
- Confirm the planned Separation’s scope, structure, approvals, costs, segment effects and the expected timing and accounting for the MassMutual sale gain.
- Assess the quality and liquidity of investments, mortgage-loan valuation allowances, credit exposures and securities-lending collateral obligations.
- Track the FSOC appeal and G-SII capital developments, subsidiary dividend capacity, litigation and asbestos exposure, and progress toward the 2019 cost-savings target.