MetLife, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Global insurer and asset manager reporting for the fiscal year ended December 31, 2016, with comparisons to 2015. Results include U.S., Asia, Latin America, EMEA, MetLife Holdings, Brighthouse Financial, and Corporate & Other. Japan operations moved to calendar-year reporting in 2016; the filing says the effect on comparability was not material. Amounts below are U.S. dollars.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $63.476 billion | $69.951 billion |
| GAAP income from continuing operations, net of tax | $804 million | $5.322 billion |
| Net income available to common shareholders | $697 million; diluted EPS $0.63 | $5.152 billion; diluted EPS $4.57 |
| Operating earnings available to common shareholders (non-GAAP) | $5.089 billion | $5.484 billion |
| Net cash provided by operating activities | $14.827 billion | $14.129 billion |
| Total assets | $898.764 billion | $877.933 billion |
| Stockholders’ equity | $67.309 billion | $67.949 billion |
| Short-term and long-term debt | $16.744 billion | $18.123 billion |
| Short-term liquidity; liquid assets (company-wide) | $14.2 billion; $230.7 billion | $11.1 billion; $229.4 billion |
Premiums rose to $39.153 billion from $38.545 billion; net investment income increased to $19.947 billion from $19.281 billion. Investment yield, as presented in the filing’s management yield table, fell to 4.50% from 4.70%. Fixed-maturity securities were $350.9 billion, of which 94.1% were investment grade. The internally calculated U.S. subsidiary combined RBC ratios declined year over year: NAIC-based 465% from 537%, and statement-based 446% from 513%.
Material changes versus 2015
- GAAP income from continuing operations fell $4.5 billion after tax. Net derivative losses were $6.760 billion, versus $38 million of gains in 2015; the unfavorable year-over-year change was primarily linked to variable-annuity assumption updates and accounting mismatches on non-qualifying hedges.
- Operating earnings available to common shareholders declined $395 million, or about 7%, reflecting lower investment yields, less favorable underwriting, lower asset-based fees, actuarial updates, and reserve and DAC refinements. Higher portfolio income and lower tax and related interest expense partly offset the decline.
- 2016 included $3.2 billion of non-cash, after-tax charges associated with the annual actuarial assumption review, including reserve and DAC impacts; a $340 million after-tax charge from business re-segmentation and loss-recognition testing; $257 million after-tax of unfavorable reserve adjustments from modeling improvements; and $260 million of goodwill impairment ($223 million after tax).
- The income-tax benefit was $999 million in 2016, compared with $2.148 billion of tax expense in 2015. The 2015 comparison included a $557 million charge for an uncertain tax position and $235 million of related interest expense, after tax.
- Operating cash flow increased to $14.827 billion. Cash and cash equivalents rose to $17.877 billion from $12.752 billion; the filing reports a $5.125 billion increase in cash and cash equivalents during 2016.
Outlook, management commentary, risks and unusual items
- Management expected 2017 Separation execution and efficiency investments to put downward pressure on operating earnings, with post-Separation operating earnings expected to grow in 2018 through business growth and expense discipline. These are expectations, not guarantees.
- The proposed Brighthouse Financial separation was subject to board approval, tax rulings and opinions, regulatory approvals, and SEC effectiveness of its Form 10. MetLife intended to distribute at least 80.1% of Brighthouse shares pro rata to MetLife shareholders. The filing estimated 2016 Separation-related items reduced holding-company liquid assets and free cash flow by about $2.3 billion. It expected $3.3–$3.8 billion of 2017 dividends from Brighthouse and an affiliated reinsurer, $1–$2 billion of liability-management cash commitments over 2017–2018, and a post-Separation holding-company liquidity buffer of $3–$4 billion.
- Excluding Separation impacts, management forecast a 65%–75% average free-cash-flow-to-operating-earnings ratio for 2017–2018, assuming the forward yield curve as of December 31, 2016. It also cited a plan to invest $1 billion by 2020 to achieve $800 million of annual pre-tax run-rate savings, net of stranded overhead.
- In a modeled constant low-rate scenario (10-year Treasury at 1.50%; three-month LIBOR at 0.65%), management estimated adverse operating-earnings impacts of $65 million in 2017, $120 million in 2018, and $210 million in 2019. The estimates are scenario-based and exclude some market and behavioral risks.
- The 2016 annual assumption review changed variable-annuity policyholder behavior and economic assumptions, including lowering the long-term separate-account return assumption from 7.25% to 7.00% and the projected ultimate 10-year Treasury rate from 4.50% to 4.25%. Guaranteed annuity benefits, policyholder behavior, interest rates, equity markets, foreign exchange, and hedge effectiveness remain significant sources of earnings and capital volatility.
- Other material uncertainties include litigation and regulatory investigations; reinsurance and derivative counterparty performance; investment valuation, credit and liquidity risks; catastrophe claims; rating changes; foreign currency and international regulatory risks; and potential changes to U.S. capital rules. The FSOC’s SIFI designation had been rescinded by a district court, but the FSOC appeal remained pending. MetLife remained designated a global systemically important insurer.
- For specified litigation and regulatory matters, the company estimated a reasonably possible loss range of $0–$425 million above amounts accrued; other matters could not be reasonably estimated. Asbestos claims remained difficult to estimate: 67,223 were pending at year-end, and 2016 settlement payments were $50.2 million. The company said it believed its recorded provision adequate, while acknowledging future charges could be material in particular periods.
- The U.S. retail advisor force sale to MassMutual closed in July 2016 for $291 million. Fourth-quarter 2016 GAAP results included a net loss of $2.086 billion and diluted loss per share of $1.94; the filing attributes the annual deterioration primarily to derivatives and other stated items.
Important facts for investors to verify
- Reconcile the $6.760 billion GAAP derivative loss with operating earnings and the actuarial-assumption-review disclosures; assess the role of non-qualifying hedge accounting.
- Review Brighthouse separation terms, timing, approvals, transaction costs, expected dividends, capital needs, and any impact on MetLife’s liquidity, earnings, ratings, and shareholder distributions.
- Check statutory capital and dividend capacity at insurance subsidiaries, especially given the decline in combined RBC ratios and regulatory limits on upstream dividends.
- Evaluate variable-annuity guarantees, policyholder behavior assumptions, reserves, hedging effectiveness, and potential changes to reserve and capital requirements.
- Assess the sustainability of operating earnings and free cash flow, including the effect of investment yields, reserve updates, and management’s 2017–2018 outlook assumptions.
- Review pending litigation, asbestos exposure, reinsurance recoverables, and other contingencies; the filing does not quantify a complete loss range for all matters.