MetLife Q4 Earnings: Lower Profits, Moratorium On Share Buybacks
MetLife (NYSE:MET) announced disappointing fourth quarter and full year 2015 results Thursday, February 4, with low interest rates and weak global economic conditions pressuring the company’s total revenues and operating profit. In Q4, total operating revenues fell 6% year-over-year (y-o-y) to $17.1 billion and operating earnings declined 11% to $1.23 per share. The company attributed this decline in operating earnings per share (EPS) to the sharp fall in its Variable Investment Income (VII), down from $0.18 per share in Q4 2014 to $0.06 per share in Q4 2015. MetLife’s VII is driven by returns of alternative asset classes including hedge funds and private equity. In addition to the aforementioned factors, the company also attributed its lackluster results to the strong U.S. dollar, which hurt operating EPS by $0.05 per share in the quarter. [1]
MetLife repurchased $822 million of shares in the fourth quarter and completed its latest $1 billion repurchase program. However, the company announced that it will not repurchase shares in the immediate future until it discloses details of its plan to divest a chunk of its U.S. Retail business into a new entity. There was no word from management on how long that could take. Investors were understandably disappointed with the news and the company’s stock was down over 5% following the announcement through Thursday. [2] ((NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY, 2015))
We have a price estimate of $57 for MetLife’s stock, which is significantly higher than the current market price. We are in the process of updating MetLife’s model in light of the latest results.
See our full analysis of MetLife
FX Headwinds, Macro Economic Situation Weigh On Business Growth
In the U.S., where MetLife is the largest life insurance group with a market share of over 8% in terms of premiums earned, the company operates four different product lines. Operating earnings in the Retail segment declined 19% y-o-y to $582 million owing to lower underwriting margins and lower variable investment income. These factors also led earnings in the Group, Voluntary and Worksite Benefits business to decline by 10% y-o-y to $214 million and in the Corporate Benefit Funding business to decline by 21% to $286 million in the fourth quarter. The Latin America segment was the only silver lining in the division with earnings up 24% on a constant currency basis to $150 million on account of growing direct marketing sales across the region. However, foreign exchange (FX) fluctuations provided headwinds, and the company’s reported earnings were actually down 1% y-o-y.
In Asia, MetLife’s operating earnings increased 6% y-o-y on a constant currency basis after adjusting for FX and certain one-time gains in Q4 2014. Premiums, fees & other revenues fell 3% on a constant currency basis to $2 billion due to withdrawal of certain Yen products in Japan.
Low Interest Rates Pressure Earnings
Net investment income was down 7% y-o-y to $4.8 billion in Q4 2015 due to a more than 66% drop in Variable Investment Income (VII), which was impacted by weak private equity and hedge fund performance.
MetLife’s net investment income yields improved from 4.74% in Q1 2015 to 4.93% in Q2 2015 but declined to 4.62% in Q3 2015. This further fell to 4.52% in the fourth quarter. The yield on fixed maturity securities, which account for most of MetLife’s investments, dropped from 4.84% in Q4 2014 to 4.55% in Q4 2015 as a consequence of the persistent low interest rate environment. The Federal Reserve is being cautious with respect to increasing interest rates and we expect a steady but gradual increase in investment yields going forward. ((Q4 2015 Quarterly Financial Supplement, MetLife Investor Relations))
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- Press Release MetLife Q4 2015 Earnings, MetLife, Feb 4 2016 [↩]
- Earnings Call Transcript Q4 2015, Seeking Alpha, Feb 4 2016 [↩]