MetLife (NYSE:MET) delivered a strong performance in the second quarter of 2012 as operating profit jumped 18% year-on-year to $1.4 billion.  The company reported net income of $2.26 billion, more than double the amount reported for the same period last year. This jump was primarily due to one-time gains of $1.4 billion from derivatives tied to interest rates. We discuss below a few key trends which influence our $35 price estimate for MetLife’s stock, which is 10% above the current market price.
International Growth On Track
Operations in emerging markets observed strong growth during the three months ending June. Earnings from Asia jumped 61% from $171 million in the second quarter of 2011 to $275 million. After adjusting for exceptional claims and expenses of $44 million due the earthquake and tsunami in Japan last year, the rise in operational income was still quite healthy at 25%. Insurance sales in the geography grew by 13%, driven by a 33% year-on-year growth in Japan. Strong sales were also observed in China and Australia, where life and accident and health products were exceptionally popular.
Revenues from Latin America increased by 19%, on a constant currency basis. MetLife continues to focus on expanding operations in emerging high growth markets. The company recently acquired Aviva plc’s life insurance operations in the Czech Republic, Hungary and Romania, to capitalize on the growth in Eastern Europe.
We expect a steady growth in the international insurance market through our forecast period, particularly in Asia and Latin America. This will be beneficial for MetLife as international insurance accounts for 29% of the company’s value, according to our analysis.
Back Home In America
U.S. Non-Medical Health insurance reported operating earnings of $133 million, an increase of 22% over the prior year. The company’s prudent approach to underwriting saw the benefit ratio, a measure of profitability for insurers, improve by 140 basis points to reach 86.1%.
Property & casualty earnings were helped by Mother Nature, as catastrophe losses declined significantly to $144 million. The division reported a net profit of $44 million, up $100 million from last year.
Variable annuities were one of MetLife’s top products in 2011, generating $4.93 billion in sales for the company. Although still quite popular, the annuities are equity linked and are a liability under the current market conditions. With this in mind, MetLife reduced sales of the product by 34% in the quarter, to manage risk effectively. A similar strategy has been adopted by competitors Hartford Financial Services Group (NYSE:HIG).
We believe that MetLife will see continued growth in the U.S. while maintaining its margins in the region through the next few years. The life and non-medical health insurance division accounts for 22% of our price estimate for MetLife’s stock,
MetLife is currently awaiting the approval of the FDIC for the sale of its depository business to General Electric’s (NYSE:GE) GE Capital Finance. The company is keen to dispose of its banking assets after failing the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) test, earlier this year. We will keep a close eye on developments as they unfold and adjust our model accordingly. You can gauge the effects of a change in forecast, by modifying the graph shown aboveNotes:
- MetLife Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 3rd August, 2012 [↩]