MetLife (NYSE:MET) has performed strongly over the last year, driven by growth in retirement product sales and international expansion. We believe that the company is well-positioned to capitalize on increasing opportunities in the international market. However some expected margin pressure related to market conditions and investment performance have prompted us to revise our price estimate for the company’s stock downward slightly to $35, which is still about 20% ahead of the current market price. We expect that the company’s solid international growth outlook will help it shine versus insurance peers such as Hartford Financial (NYSE:HIG) and Prudential (NYSE:PRU).
Retirement product sales in the U.S. have been increasing steadily over the last few years, as an increasing number of people approach retirement age. The growing age of the baby boomer generation as well as an increased focus on long-term financial planning among younger generations (See Hartford Financial Targets Youth To Drive Retirement Plans), has boosted annuity sales. The company reported a 20% increase in revenues generated through U.S. Life & Non-Medical Health Insurance for the first quarter of 2012 and we expect revenue growth to continue over the next few years.
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Variable annuities, the returns on which depend on the performance of the managed portfolio, have seen a decline in sales as customers seek to secure their financial positions by reducing risks and therefore prefer the guaranteed income generated through fixed annuity products.
MetLife plans to capitalize on growing economies across Asia. The company recognizes the potential offered by the aging demographics in the region, especially in China, where the accelerated rate of urbanization through the country provides huge potential for expansion. MetLife China, a joint venture with Shanghai Alliance Investment Ltd., reported an increase of 34% in gross written premiums over the last quarter. MetLife is one of the suitors for ING’s Asia life insurance unit. International insurance accounts for 29% of our price estimate for MetLife and we expect increasing sales volumes as the company continues to penetrate into emerging markets across Asia and Latin America.
Relief from Natural Disasters
Property and Casualty (P&C) insurance was hit hard last year by a large number of natural catastrophes. This year, however, the world has taken a collective sigh of relief from calamities and we expect this to have a positive effect on the margins of MetLife’s U.S. Property & Casualty Insurance division, which accounts for 3% of our price estimate of MetLife’s stock.
Federal Stress Test
MetLife continues to divest its banking operations, with the sale of its online operations to General Electric last year. The company also announced its exit from the forward residential mortgages business. MetLife is considered a bank holding company as it owns MetLife bank, and is hence required to maintain an 8% risk-based capital ratio. However, the company failed the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) test (See MetLife Fumes as it Fails Fed Stress Test) and is thus unable to increase its dividend or repurchase stock. We expect the company to incur one-time exit related costs of about $90-$100 million as it plans to cease its banking operations this year. However, this will not impact the company’s operations as the division represents only 9% of our price estimate and accounts for only 2% of the company’s operating income.