MetLife: 2016 In Review

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MetLife

MetLife‘s (NYSE:MET) stock is up 13% year-to-date (YTD) and 17% over the last year on strong third quarter results released last month. In Q3 2016, the insurer’s revenues declined 2% year-over-year (y-o-y) to $17.7 billion but beat market estimates of $17.2 billion. The lower-than-expected decline was attributed to a 38% rise in net investment income to about $5.5 billion. Aided by strong performances by the Retirement and Group Benefits businesses in the U.S., favorable underwriting in EMEA and a lower overall effective tax rate, the company’s operating earnings grew by a whopping 102% to over $1.4 billion or $1.28 per share, beating consensus estimates by 14 cents or 12%.met-14

However, MetLife reported mixed results for the first three quarters combined. Despite single-digit growth in premiums earned and investment income, the company’s revenues declined 3% to $51.4 billion and operating earnings declined 11% to $3.7 billion in the first nine months of the year. MetLife’s net income tumbled 35% to $2.9 billion in the same period on net derivative losses reflecting changes in interest rates, equity markets and foreign currencies and a goodwill impairment charge of $223 million (after tax) in Q3 related to the spin-off of Brighthouse Financial.

met-18 U.S. Business Reorganization

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MetLife reorganized its U.S. retail business and reported Brighthouse Financial, consisting largely of variable annuities and individual life insurance products, as a separate business unit in the third quarter. MetLife filed for a spinoff of this retail business unit in October and cited low returns of the individual life product and high volatility of the variable annuity businesses as reasons for this. In the first three quarters of 2016, Brighthouse Financial’s revenues declined 1% to $6.75 billion but operating earnings declined 38% to $692 million largely due to the costs associated with the spinoff.met-17MetLife Holdings, consisting largely of MetLife’s legacy retail and long-term care runoff businesses, reported a 49% increase in operating earnings to $500 million driven by higher variable investment income.

Post-spinoff of Brighthouse Financial, MetLife’s U.S. retail division consists of three major businesses – Group Benefits (formerly known as Group, Voluntary & Worksite Benefits), Retirement & Income Solutions (represents major chunk of the segment formerly known as Corporate Benefit Funding) and Property & Casualty. In the first three quarters, the U.S. retail division reported earnings decline of 11% to $1.4 billion, owing to a 56% decline in the P&C division partially offset by higher investment margins in the Group Benefits business. met-15International Business Performance

MetLife’s international business revenues saw a decline of 3% y-o-y to about $14 billion in the first nine months on weak performances in all markets. The company’s international operating earnings declined by over 13% to $1.5 billion in the same period.

MetLife’s operating earnings in Latin America declined by 10% on a reported basis to $421 million. Excluding all extraordinary items, operating earnings actually grew on a constant currency basis in the region due to volume growth. EMEA was the star performer, with operating earnings growing over 8% on a reported basis driven by favorable underwriting, lower expenses, several non-recurring items as well as volume growth.met-16

Potential Impact Of Brexit

Following the United Kingdom’s vote to end its membership in the European Union in June, many investors shifted to relatively safer instruments such as government bonds in response to the increasing economic uncertainty. This caused government bond prices to rise and yields to decline. Yields on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, while yields on the U.K. benchmark government bond fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. This has major implications for the insurance sector, considering their investment yields and income are likely to decline.

MetLife’s net investment income yields declined from 4.93% in Q2 2015 to 4.39% in Q1 2016 before rising back to 4.65% in Q3 2016. The yield on fixed maturity securities, which account for most of MetLife’s investments, dropped from 4.55% in Q3 2015 to 4.38% in Q3 2016. We expect MetLife’s net investment yield in the U.S. to rise to about 5.3% by the end of our forecast period. If it increases to only about 4.6% due to this economic uncertainty, there could be a downside of about 10% to the company’s valuation.

See our full analysis of MetLife

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