01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
MetLife's 2015 Form 10-K reports a year of mixed results: income from continuing operations fell to $5.3 billiona from $6.3 billion, and operating earnings available to common shareholders declined about 16% to $5.5 billion from $6.6 billion.
The main drags were lower investment yields from the sustained low interest rate environment, a $557 millionb tax charge (plus $235 million after-tax interest charge) tied to uncertain tax positions on a U.K. subsidiary's foreign tax credits, less favorable underwriting in property & casualty, and an unfavorable annual assumption review. Sales grew in several product lines, including retail annuities and accident & health, but overall sales declined from 2014. The balance sheet remained large and liquid, with $495 billion of total investments and $878 billion of total assets, and the company reported strong statutory capital, with a NAIC-based combined RBC ratio of 537%.
Management returned significant capital to shareholders in 2015 through $1.9 billionc of share repurchases and $1.65 billion of common dividends, and repurchased or redeemed $1.5 billion of Series B preferred stock while issuing $1.5 billion of new Series C preferred stock. The most significant strategic development is the January 12, 2016 announcement of a plan to pursue the "Separation" of a substantial portion of the U.S. Retail segment, certain Corporate Benefit Funding businesses, and parts of Corporate & Other. Structural alternatives under evaluation include an IPO, spin-off, or sale, and the outcome remains uncertain.
Rating agencies responded in January 2016 with rating actions on several subsidiaries, including S&P's downgrade of GALIC and MetLife USA. MetLife also remains designated as a non-bank SIFI and G-SII, and it continues to litigate the non-bank SIFI designation.
02—Key points
Key Highlights
- Income from continuing operations, net of income tax, was $5.3 billion in 2015, down from $6.3 billion in 2014; net income available to common shareholders was $5.2 billion.
- Operating earnings available to common shareholders fell about 16% to $5.5 billion, driven by lower investment yields, a $557 million uncertain tax position charge, less favorable P&C underwriting, and unfavorable assumption reviews.
- Announced January 12, 2016 plan to pursue the Separation of a substantial portion of the U.S. Retail segment and parts of Corporate Benefit Funding and Corporate & Other via IPO, spin-off, or sale; outcome and timing are uncertain.
- Rating agencies took action after the Separation announcement: S&P downgraded GALIC and MetLife USA, Fitch and A.M. Best placed ratings on watch, and Moody's placed most operating subsidiaries on review for downgrade.
- Strong statutory capital position with a NAIC-based combined RBC ratio of 537% at December 31, 2015, up from 437%, and a $1.5 billion capital contribution to MetLife USA made in February 2016.
- Returned capital to shareholders through $1.9 billion of common stock repurchases and $1.65 billion of common dividends, while refinancing preferred stock with $1.5 billion of new Series C preferred issued and Series B preferred repurchased/redeemed.
- Investment portfolio of $508.2 billion general account, with fixed maturities 71% rated Aaa/Aa/A and an ongoing exposure to low interest rates, with management projecting a $65M-$375M annual operating earnings impact from a Low Interest Rate Scenario over 2016–2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $61.34B$73.32B | −16.3% |
| Operating Expenses | $14.78B$17.09B | −13.5% |
| Operating Income | $3.89B$4.80B | −18.9% |
| Interest Expense | $890.00M$874.00M | +1.8% |
| Net Income | $5.37B$6.31B | −14.8% |
| EPS (Basic) | $4.67$5.48 | −14.8% |
| EPS (Diluted) | $4.62$5.42 | −14.8% |
| Shares Outstanding (Basic) | 1.12B1.13B | −1.0% |
| Shares Outstanding (Diluted) | 1.13B1.14B | −1.2% |
05—Questions
Frequently Asked Questions
Why did MetLife's operating earnings decline in 2015?
Operating earnings available to common shareholders declined about $1.1 billion to $5.5 billion. Management cites lower investment yields from the sustained low interest rate environment, a $235 million after-tax charge for interest on uncertain tax positions and a $557 million tax charge, less favorable underwriting in property & casualty (higher non-catastrophe claims and catastrophe losses), and a $98 million net unfavorable impact from annual assumption reviews. These were partly offset by higher net investment income from portfolio growth and business growth in several segments.
What is the proposed Separation and why does it matter to investors?
On January 12, 2016, MetLife announced a plan to separate a substantial portion of its U.S. Retail segment (Life & Other and Annuities), certain Corporate Benefit Funding businesses, and parts of Corporate & Other. Options under evaluation include a public offering in an independent company, a spin-off, or a sale. Completion depends on SEC review, market conditions, board approval, and regulatory approvals, and no assurance is given that it will occur. It matters because it could change the company's size, risk profile, ratings, capital structure, and shareholder base, and it has already prompted rating agency actions.
How strong is MetLife's capital and liquidity position?
At December 31, 2015, the NAIC-based combined RBC ratio was 537% and the statement-based ratio was 513%, both well above regulatory action levels. Short-term liquidity was $11.1 billion and liquid assets were $229.4 billion. The company also made a $1.5 billion capital contribution to MetLife USA in February 2016 to support the anticipated standalone ratings of the Separation entity. Holding company liquid assets were $6.4 billion. Management believes it has ample liquidity under current and reasonably possible stress scenarios.
What are the key risks from the low interest rate environment?
Sustained low rates compress investment margins on fixed annuities, guaranteed interest contracts, and whole life products, and may accelerate DAC and VOBA amortization. Management estimates an unfavorable combined operating earnings impact of approximately $65 million in 2016, $210 million in 2017, and $375 million in 2018 under its Low Interest Rate Scenario, with partial offsets from derivatives and business mix. Variable annuity guarantees (GMIBs with about $90 billion of account value) also create exposure to market and rate movements.
What regulatory and legal matters could affect MetLife?
MetLife is designated a non-bank systemically important financial institution by the FSOC and a global systemically important insurer by the FSB, which could bring enhanced capital, leverage, and stress-testing requirements that have not yet been finalized. The company is litigating the FSOC designation. Additional matters include a FINRA disciplinary matter over variable annuity sales and replacements, asbestos-related claims (about 67,800 pending claims at year end), unclaimed property suits, and several securities and reinsurance-related class actions. Management believes adverse outcomes are not likely to have a material effect, though some could be significant in particular periods.
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