While MetLife’s (NYSE:MET) is reporting its second quarter earnings on Wednesday, August 1st, we expect a lot of attention to be paid to the pending sale of the insurer’s banking assets to General Electric’s (NYSE:GE) GE Capital Finance. MetLife is looking to dispose of its banking operations after failing the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) test earlier this year. Although the so-called “stress test” is not designed for insurance companies, MetLife’s banking operations qualify it as a bank holding company. The Federal Reserve has moved the deadline for MetLife to clean its operations from June 12 to September 30 of this year. (See MetLife Gets Three More Months To Clean Its Operations)
Although the company expects to win approval from the FDIC for the deal, no date has yet been specified.  We will keep a close eye on the announcement for further developments as well as other key metrics which we discuss below. Our price estimate of $35 for MetLife’s stock is about 15% above the current market price.
Cutback In Variable Annuities Expected
Variable annuities were one of Metlife’s top products in 2011, generating sales of nearly $5 billion for the company. Though still popular among the American populace, these offerings are somewhat risky for the company as they are equity linked, and add to liabilities under volatile market conditions. Sales of the products in the U.S. have fallen 8% in the first half of the year as industry peers such as Prudential Financial (NYSE:PRU) and Hartford Financial Services Group (NYSE:HIG) have also taken a prudent stance.  Metlife had earlier indicated that it would cut sales by a third this year, and the earnings presentation on Thursday should provide further insights on the company’s position regarding the products.
Despite the cutback in variable annuity products, we maintain a positive outlook for Metlife’s retirement annuities division, which accounts for 11% of the company’s stock value, according to our analysis. For more details about our stance, please read : Good Times Ahead For Retirement Solutions Providers
Asian Markets To Perform Well
We expect emerging markets in Asia and Latin America to fuel a growth in Metlife’s earnings. The Asian markets in particular have witnessed an economic boom in the last few years. The middle class income group, which is the target demographic for insurance companies, has been growing steadily in these markets.
Metlife established a foothold in the Asian market with the acquisition of Travelers Life & Annuity from Citigroup (NYSE:C) in 2005 and ALICO in 2010, and is now in a prime position to benefit from the expected growth. International insurance accounts for 30% of our price estimate for Metlife’s stock.
No Favors From The Feds
The Federal Open Market Committee’s indication that short-term interest rates will likely be kept near zero through 2015  came as a big blow to Metlife. The company invests premiums, collected from its insurance divisions, in the credit and equity markets to generate income to pay for the insurance claims of their customers. This activity accounts for 33% of the company’s value and will suffer from the low interest rate environment. We will keep a close eye on the company’s strategy to deal with a dampened yield curve.Notes: