MetLife (NYSE:MET) has had an eventful year in 2012, highlighted by the prolonged delay regarding regulatory approval for the sale of the company’s deposit-taking business to General Electric’s (NYSE:GE) GE Capital Finance Inc. The deal meant that MetLife was subject to (and failed) the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) in March. The test required companies to maintain minimum total risk-based capital ratio of 8%, to withstand a hypothetical stress scenario. This was of course meant for banks and not for insurance companies and MetLife’s failure meant that the Fed blocked the company’s plans to raise dividends and buy back shares.
MetLife’s shares slid following the decision, falling nearly 30% from March through June. Strong earnings in the second and third quarter allowed the stock to recover, but we believe the company still has a lot to offer in the coming years. Our $39 price estimate for MetLife’s stock, implies a premium of 15% to the current market price, and is primarily based on expansion plans in international markets.
The Office of the Comptroller of the Currency has finally approved the GE deal, but MetLife might still be qualified as a systemically important financial institution, and maintain adequate capital to support its operations accordingly. 
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- Business Growth, Lower Investment Income Drive MetLife’s Earnings
International Growth On Track
MetLife’s international operations account for 15% of the company’s net revenues. At the end of 2010, MetLife cashed in on AIG’s (NYSE:AIG) forced divestiture, acquiring ALICO, an established insurer in Japan and high-growth Asian markets. This proved to be a very shrewd deal as it drove a 150% annual growth in MetLife’s international premiums, through 2011. The company was able to maintain momentum in 2012 and reported a 17% year-on-year increase in operating income from Asia in the last quarter, complemented by reports of 15% year-on-year increase in operating earnings in Latin America.
We expect a push in Asian markets in 2013, particularly in India where the government has increased the limit of foreign direct investment in insurance companies from 26% to 49%. The bill is still awaiting the Union Cabinet’s approval, but MetLife is geared up to expand as soon as it is passed.  The company started operations in the India in 2001, as a joint venture with a number of Indian partners, and has a workforce of more than 30,000 advisers. MetLife India has reported profits for the last seven quarters, and is making a strong marketing push to build on its established foothold.
India provides a platform for expansion with the world’s second highest population, a growing GDP and a low life insurance penetration (premiums as a percentage of GDP) of 4.4%. 
In contrast, the U.S. life insurance market, which accounts for about 30% of MetLife’s revenue, is quite mature with a penetration of over 8%.  This is why we believe that MetLife will see greater revenue growth in international markets than in the U.S. market.
U.S. Still Going Strong
MetLife was the biggest seller of variable annuities in 2011, according to data from LIMRA. But in 2012, the management took a decision to reduce exposure to the capricious markets by reducing sales of the equity-linked product. Despite a 33% decline in sales through the first nine months of the year, MetLife is still the third highest seller of the product, behind Prudential Financial (NYSE:PRU) and Jackson National Life.
MetLife’s share of the variable annuities market has fallen from 18% to 13% through the first nine months of 2012, and we expect a short term decline in the coming years, as the company continues to cut back on variable annuities.
Interest Rates Will Hurt
MetLife has issued a guidance for 2013 which states that its top line might be affected due to the Fed’s strategy to keep interest rates low, until unemployment in the U.S. decreases. MetLife earns about 30% of its revenues from investment of insurance premiums and more than 70% of its asset base is invested in fixed maturity securities like Government bonds, which are directly affected by interest rates. We expect a dampened yield curve in the coming years.
You can gauge the effects of a change in forecast, by modifying the graphs shown aboveNotes:
- The Office of the Comptroller of the Currency has approved MetLife’s sale of its deposit-taking business to a unit of General Electric Co’s (GE.N) GE Capital, MetLife Inc (MET.N) said on Wednesday., Reuters, 12th December, 2012 [↩]
- Big bang reforms: Cabinet approves 49% FDI in insurance, 26% in pension, Times of India, 4th October, 2012 [↩]
- 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 [↩]