MetLife (NYSE:MET) is planning a $600 million cut in expenses by 2016, with U.S. retail sales to individuals the primary target for savings.  The insurance company is reducing capital-intensive products such as variable annuities while adding accident and health products to its range of offerings as it plans to increase return on equity to 14% by the end of the aforementioned period. 
Dropping Annuities To Limit Risk
Variable annuity sales have dropped in the last two quarters as insurance companies such as Metlife, Prudential Financial (NYSE:PRU) and Manulife (NYSE:MFC) become more risk averse. Variable annuities provide income to the customers regardless of the market conditions and are one of the riskiest offerings for insurance companies as they can lead to severe losses in volatile market conditions.
Metlife was the top seller of variable annuities in 2011, as sales of the product generated $4.93 billion for the company. However, a shift in strategy saw sales drop by 13% in the first quarter of 2012. Despite cutbacks in variable annuities, we expect retirement solutions sales to continue to increase with increased margins, as awareness regarding post-retirement financial security grows along with the number of people approaching retirement age, which is expected to touch 65 million by 2025.
U.S. retirement annuities account for 10% of our price estimate for Metlife’s stock.
The ever expanding applications of the internet have engulfed users all across the globe. Social network websites such as Facebook (NASDAQ:FB) and e-commerce solutions like Amazon (NASDAQ:AMZN) have hooked nearly everybody to the web.
To capitalize on this trend, Metlife is developing an online direct sales business platform to sell life insurance. The company has established a strong reputation as a leading provider of dental and disability coverage and the introduction accident and health insurance products will enhance its offerings. We expect the company’s investments to pay off with an increased share in the U.S. Life & Health Insurance Market.
Investments in Emerging Markets
Middle class consumers form the primary market for insurance companies such as Metlife, and a growing number of people in the income group in developing countries Russia, Turkey, Brazil and China provide a huge window of opportunity for the insurers. Although the company has backed out of bidding for ING’s Asian insurance division , it still maintains plans for aggressive expansion in the aforementioned regions. The company established a foothold in Japan, Australia and the U.K as it purchased Travelers Life & Annuity from Citigroup (NYSE:C) in 2005 and has been growing rapidly in the last few years.
We will keep a close eye on Metlife as the Federal Reserve recently rejected the company’s plans for share repurchases and a dividend increase, following the company’s failure of the Comprehensive Capital Analysis and Review (CCAR) test (See MetLife Fumes as it Fails Fed Stress Test) The company also plans to divest its bank holding businesses going forward.
We have a price estimate of $39 for MetLife’s stock, which is in line with the current market price.Notes:
- MetLife Says U.S. Retail to Have Largest Share of Expense Cuts, Bloomberg, 23rd May, 2012 [↩]
- MetLife to Expand in Emerging Markets, Pare Annuities, Bloomberg, 23rd May, 2012 [↩]
- MetLife exits $7billion ING Asia insurance sale [↩]