MetLife Can Grow Market Share, but at Great Cost to Profit Margins
MetLife (NYSE:MET) provides a variety of insurance products, retirement plans and annuities in the US and around the world, primarily competing with providers like AIG (NYSE:AIG), Hartford Financial (NYSE:HIG) and Prudential Financial (NYSE:PRU). MetLife, the largest life insurer in the US with total assets of over $539 billion in 2009, controls about 6% of the $330 billion US life & health insurance market.
We estimate that MetLife’s life and health insurance business in the US accounts for 37% of the $39.69 Trefis price estimate for MetLife’s stock. Our price estimate notably stands about 12% below the current market price.
Below we look at potential upside and downside scenarios for MetLife that focus on two key drivers to the company’s total value – market share and operating margins in its US life and health insurance business.
5% Upside – Gain in US Life and Health Insurance Market Share
MetLife has built a strong reputation in the US as a leading provider of life and health insurance. Its share in the US life and health insurance market has steadily increased over the past few years from 6.0% in 2006 to an estimated 6.4% in 2010 due to its wide distribution network consisting of partnerships with various banks, brokerage firms, and financial planners.
MetLife’s market share gains have continued at a steady pace while others have struggled to navigate the economic crisis. Competitor AIG witnessed brand erosion after seeking funds from the government, and saw its US life insurance market share fall from 2.0% in 2008 to below 1.3% in 2010. We project that this number will fall further to below 1.2% in 2011, before mounting a recovery.
MetLife, on the other hand, has continued to maintain customer confidence and could be positioned for market share upside beyond our estimates. There could be upside of roughly 5% to our price estimate for MetLife if the company is able to increase its US life and health insurance market share by 1 percentage point beyond our forecasts. The potential upside, however, would still leave our price estimate below market price.
12% Downside – Decline in US Life and Health Insurance Profit Margins
The life and health insurance market in the US is in a rapid growth phase, largely due to the aging baby boomer demographic. MetLife can stand to gain market share by targeting this population. However, in order to do so, MetLife would need to beat the competition on pricing, as cost remains the single most factor for potential life insurance customers. As the US life and health insurance remains highly competitive, beating the competition on pricing means sacrificing profit margins.
We currently forecast MetLife’s life and health insurance operating margin will remain stable at 12% through the Trefis forecast period. However, there could be a further 12% downside to our price estimate for MetLife if its US life and health insurance operating profit margins fall to about 8%, roughly in line with competitors AIG (8.4%) and Hartford Financial (8.1%).