MetLife Beats Q1 Estimates On Higher Investment Income But Derivative Losses A Concern

MetLife (NYSE:MET) announced mixed Q1 results last week, with revenues declining 12% year-over-year (y-o-y) to $16.3 billion driven by high derivative losses partially offset by higher investment income. Net derivative losses were $926 million in Q1 2017 compared to gains of $1.34 billion in Q1 2016; net investment income improved 14% y-o-y from $4.6 billion in Q1 2016 to $5.2 billion in Q1 2017.

In terms of the bottom line, strong performances by the Retirement and Group Benefits businesses in the U.S., MetLife Holdings, and favorable underwriting in EMEA were offset by declining operating profits in Asia, Latin America, and Brighthouse Financial. The company’s operating earnings (after-tax) grew by 16.3% to $1.54 billion or $1.41 per share, beating consensus estimates by 14 cents. MetLife’s net income tumbled from $2.2 billion in Q1 2016 to $820 million in the last quarter on net derivative losses of $926 million, reflecting changes in interest rates, equity markets, and foreign currencies.

U.S. Business Results

MetLife reorganized its U.S. retail business in the third quarter last year and Brighthouse Financial is now a separate division consisting largely of variable annuities and individual life insurance products. MetLife filed for a spinoff of this retail business unit on October 5, 2016 and cited low returns of the individual life product and high volatility of the variable annuity businesses as reasons for the same.

In Q1 2017, Brighthouse Financial’s revenues declined 7.3% to about $2 billion but after tax operating earnings declined 25% to just $244 million largely due to a $42 million cost related to separation activities with MetLife Holdings.

MetLife Holdings, consisting largely of MetLife’s legacy retail and long-term care runoff businesses, reported a 44% increase in operating earnings to $385 million, owing to the previously mentioned $42 million benefit related to separation activities, a $34 million reserve adjustment, and strong variable investment income.

Following the 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 a major chunk of the segment formerly known as Corporate Benefit Funding), and Property & Casualty. In the first quarter, the U.S. retail division reported strong earnings growth of 24% to $503 million, driven by higher variable investment income, lower expenses, and volume growth.

International Business Performance

MetLife’s operating earnings in Latin America declined 5% on a reported basis, and remained flat on a constant currency basis, to $143 million. Excluding all notable items, operating earnings were down 12 percent due to higher claim volumes in the quarter and the impact of an assumption change in the company’s Chile pension business.

EMEA was the star performer with operating earnings growing 19% on a reported basis, and 34% on a constant currency basis, driven by favorable expense margins and volume growth. Operating earnings in Asia declined 3% to $295 million due to a change in the Japan effective tax rate, partially offset by volume growth and lower expenses.

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