An Upside/ Downside Case for MetLife
MetLife (NYSE:MET) is the largest insurance company in the U.S. with total assets of over $730 billion as of December 31, 2010. MetLife competes with AIG (NYSE:AIG), The Hartford (NYSE:HIG), Prudential Financial (NYSE:PRU) and New York Life. U.S. life & health insurance is the most valuable segment for MetLife and constitutes about 28% of the $48.83 Trefis price estimate for MetLife’s stock, which is 6% above the current market price. Below we look at the key drivers of the US life & health insurance segment with potential upside and downside to the Trefis price estimate for MetLife.
10% Upside – Increase in MetLife’s Share of the U.S. Life & Health Insurance Market
MetLife’s share of the U.S. life & health insurance market increased consistently from 6% in 2006 to 6.3% in 2009 due to its strong sales and distribution capabilities. The company is the largest life insurer in the U.S. with a strong brand image which has been built by gaining trust of customers in over 140 years of operation. We expect MetLife’s market share to increase to about 7.2% from its current level of 6.7% by the end of the Trefis forecast period.
However, there is 10% upside to the Trefis price estimate for MetLife‘s stock if its market share increased to 10% in this time frame.
10% Downside – Stagnant Operating Margin
MetLife’s life & health insurance operating margin was stable at around 7.5% during 2006-07 but jumped to 13% in 2008 as the life insurance sales increased with increased market share but the expenses were kept in control by the company. In 2009, high investment losses caused the margin to decline to -2.6%.
Margins recovered to just under 8% in 2010 and we expect the margins to reach 12.5% by the end of the Trefis forecast period as the returns on its investment portfolio improve from losses previously and the economic recovery gains momentum.
However, there is 10% downside to the Trefis price estimate for MetLife‘s stock if MetLife’s operating margin remains at it its current level which could be the result of high competition.