01—Abstract
Summary
Summary of the 10-K filed March 1, 2017. Cited figures are marked; the original filing is the authoritative source.
MetLife's 2016 Form 10-K (filed March 1, 2017) reports a year of heavy charges and a major corporate restructuring.
Consolidated net income available to common shareholders fell to $697 milliona ($0.63 per diluted share) from $5.15 billion ($4.57) in 2015, driven mainly by a $6.8 billion unfavorable swing in net derivative results, largely from an annual actuarial assumption review on U.S. variable annuity guarantees, plus a $260 million goodwill impairment at Brighthouse Financial and a $340 million after-tax re-segmentation charge. Operating earnings available to common shareholders declined to $5.09 billion from $5.48 billion, reflecting lower investment yields in a sustained low-rate environment and unfavorable underwriting. Total revenues were $63.5 billion and the balance sheet stood at $898.8 billion in total assets with $67.5 billion of total equity.
The central strategic event is the proposed separation of Brighthouse Financial, a spin-off of at least 80.1% of Brighthouse common stock to MetLife shareholders, which MetLife says it is still pursuing subject to regulatory approvals, an IRS ruling and SEC effectiveness of the Form 10. Management expects 2017 operating earnings to face downward pressure from separation execution, with growth resuming in 2018, and projects that over 40% of operating earnings will come from outside the U.S. after the separation. Holding-company liquidity was strained by $2.3 billionb of separation-related outflows in 2016, though management expects dividends of $3.3 to $3.8 billion from Brighthouse in 2017 and targets a free cash flow ratio of 65% to 75% for 2017 to 2018.
Investors should also weigh ongoing regulatory risk. The FSOC's designation of MetLife as a non-bank systemically important financial institution was rescinded by a district court in March 2016, but the government's appeal was argued in October 2016 and remains pending.
Re-designation could impose enhanced capital and dividend constraints. Combined NAIC-based RBC ratios declined to 465%c from 537%, and the separation could trigger dividend-stopper provisions on preferred stock and junior subordinated debt if GAAP net income is zero or negative while stockholders' equity drops at least 10%.
02—Key points
Key Highlights
- Net income available to common shareholders was $697 million, or $0.63 per diluted share, versus $5.15 billion ($4.57) in 2015, driven by a $6.8 billion unfavorable change in net derivative results.
- Operating earnings available to common shareholders were $5.09 billion, down $395 million year over year, reflecting lower investment yields, unfavorable underwriting, and a $340 million after-tax re-segmentation charge.
- A $3.2 billion pre-tax charge from the annual actuarial assumption review, mostly on U.S. variable annuity guarantees, weighed heavily on 2016 results.
- Brighthouse Financial separation is pending: MetLife plans to distribute at least 80.1% of Brighthouse stock to shareholders, subject to board approval, an IRS ruling and SEC effectiveness, with 2017 dividends from Brighthouse expected at $3.3 to $3.8 billion.
- General account portfolio of $518.3 billion, with 94% of fixed maturities rated investment grade and total cash and invested assets of about $500 billion.
- Combined NAIC-based RBC ratio fell to 465% from 537%, still well above regulatory action levels.
- Non-bank SIFI designation remains under appeal, creating potential future capital, dividend and buyback constraints.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed March 1, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $60.79B$61.34B | −0.9% |
| Operating Expenses | $13.75B$14.78B | −7.0% |
| Operating Income | $3.48B$3.89B | −10.5% |
| Interest Expense | $874.00M$890.00M | −1.8% |
| Net Income | $850.00M$5.37B | −84.2% |
| EPS (Basic) | $0.68$4.67 | −85.4% |
| EPS (Diluted) | $0.67$4.62 | −85.5% |
| Shares Outstanding (Basic) | 1.10B1.12B | −1.5% |
| Shares Outstanding (Diluted) | 1.11B1.13B | −1.8% |
05—Questions
Frequently Asked Questions
Why did MetLife's GAAP earnings fall so sharply in 2016?
The main driver was a $6.8 billion unfavorable swing in net derivative gains and losses, mostly from the annual actuarial assumption review on variable annuity guarantees and from losses on non-qualifying hedges as interest rates and equity markets moved. The year also included a $260 million goodwill impairment at Brighthouse Financial, a $340 million after-tax charge from re-segmenting the business, and lower investment yields.
What is the Brighthouse Financial separation and what does it mean for shareholders?
MetLife plans to spin off at least 80.1% of Brighthouse Financial's common stock to its shareholders on a pro rata basis, separating its former Retail segment. The company says the separation should let both businesses compete more effectively, and it expects some near-term pressure on 2017 operating earnings. The transaction still requires final board approval, an IRS ruling, regulatory approvals and SEC effectiveness of the Form 10, so timing and form remain uncertain.
Could MetLife face new regulatory constraints?
Yes. The FSOC's non-bank SIFI designation was rescinded by a district court in March 2016, but the FSOC appealed and oral argument was heard in October 2016. If the designation is reinstated, MetLife could face enhanced Federal Reserve supervision, capital requirements and limits on dividends and share repurchases. The 2016 10-K also notes that the NAIC is studying variable annuity reserve rules for 2017, which could materially change capital needs.
Are there constraints on dividends and buybacks?
Yes. Dividends depend on board discretion and regulatory limits on insurance subsidiaries. Preferred stock and junior subordinated debentures contain dividend-stopper provisions that can block common dividends and repurchases if preferred dividends are unpaid, or if a Trigger Event occurs, such as GAAP net income of zero or less alongside a 10% or greater decline in adjusted stockholders' equity. MetLife expects the Brighthouse separation to reduce equity enough to meet that second test, so the company has said it is considering mitigating actions. At December 31, 2016, $2.7 billion remained under the repurchase authorization.
How strong is MetLife's liquidity and capital position?
Liquidity appears ample at the consolidated level, with $230.7 billion of liquid assets and $14.2 billion of short-term liquidity at year-end. At the holding-company level, liquid assets fell to $5.8 billion from $6.4 billion after $2.3 billion of separation-related outflows. Management plans to maintain a $3.0 to $4.0 billion holding-company liquidity buffer after the separation and expects a 65% to 75% ratio of free cash flow to operating earnings over 2017 and 2018, excluding separation effects.
06—Continue