MetLife’s (NYSE:MET) stock has slumped since the company’s earnings for the third quarter of 2012 when management reported a net loss $984 million. The market price has dropped nearly 10% since the earnings call on 1st November 2012. Since most of this loss was due to a one-time after-tax goodwill impairment of $1.6 billion, we believe the investors might have overreacted to the report. Our $39 price estimate for MetLife’s stock is 15% above the current market price, mostly based on growth in developing economies in Asia.
Three of MetLife’s main revenue streams are life insurance in the U.S. and the investment of insurance premiums, which account for around 30% each of net revenues. In addition international insurance accounts for about a quarter of its value. But because of higher margins, international insurance accounts for one-third of earnings before taxes, whereas U.S. life insurance accounts for just 23%. that we anticipate high revenue growth for MetLife as the company seeks to expand in Asian markets.
In 2010, MetLife acquired ALICO from AIG (NYSE:AIG) which was looking to divest its international subsidiaries in order to streamline its operations and pay off the debt it owed to the U.S. Government (AIG required $182 billion bailout following the financial crisis of 2008). ALICO had well established roots in the Japanese market. This was quite a smart move by the company as Japan is the second biggest market in the world. In 2011, premiums in the U.S. were $538 billion compared to $525 billion for Japan. 
The acquisition drove 150% annual growth in MetLife’s international premiums last year, and the company has not looked back since. MetLife is currently the second largest global insurance company in Japan behind Prudential Financial (NYSE:PRU). Manulife (NYSE:MFC) is number three on the list. Last quarter, MetLife reported a 17% year-on-year increase in operating income from Asia, which drove a 47% increase in company-wide operating income.
MetLife is also looking to expand in India, which has the world’s second highest population and a high GDP growth rate.  Life insurance penetration (premiums as a percentage of GDP) in the country is quite low at 4.4%. Compare this to a mature market like the U.K. which has a penetration of around 14% and you can see the potential that the country holds especially considering the higher expected growth rate of GDP over time. 
It is because of this low penetration that the Indian Government has increased the limit of foreign direct investment in insurance from 26% to 49%. The Union Cabinet recently approved the proposal, but the bill has yet to be taken up by the country’s parliament.  We believe that it’s only a matter of time before this new cap is implemented that will allow insurers like MetLife to capitalize on one of the biggest markets in the world.
MetLife started operations in the country in 2001 as a joint venture with a number of Indian partners. The company has a workforce of more than 30,000 advisers, has reported profits for the last seven quarters and is making a strong marketing push to build on its established foothold.
We believe that international growth holds the key for MetLife’s stock and our analysis shows that 60% of the company’s price is derived from its international operations. You can modify the interactive chart below to gauge the effect a change in forecast will have on our price estimate.
Stable Operations In The U.S.
The life insurance business in the U.S. has not seen much growth in the last two years. This is primarily because the U.S. market is mature, and the penetration in the country is quite high at 8%  We expect slight growth in the market as the economy improves. The penetration is still lower than that in U.K., but growth will not match that outside of the U.S. This is why U.S. life insurance accounts for just over 10% of our price estimate for MetLife.Notes:
- Manulife Asia: Delivering Now… More to Come, Manulife Presentation [↩]
- Life insurance penetration dropped in 2010-11, Indian Express, 15th May, 2012 [↩]
- Presentation To The American Council Of Life Insurers, Goldman Sachs Investment Banking Division, 28th March, 2012 [↩] [↩]
- Big bang reforms: Cabinet approves 49% FDI in insurance, 26% in pension, Times of India, 4th October, 2012 [↩]