MetLife (NYSE:MET) is expected to announce earnings for the fourth quarter of 2012 Thursday, February 14. The insurer has warned that low interest rates will hamper its ability to generate investment income and expects operating income for the fiscal year to be around $5.5 billion. The third quarter saw the end to its streak of three consecutive quarters of revenue growth for the company as the company’s decision to cut back on equity linked variable annuities affected sales. A one-time after tax goodwill impairment of $1.6 billion affected the top line as the company reported a net loss of $984 million.
Although the recently completed sale of its deposit business to General Electric’s (NYSE:GE) GE Capital Finance Inc. unit will allow MetLife to deregister as a bank holding company, the insurer might still be qualified as a systematically important financial institution and may be subject to regulations restricting its ability to raise dividends and buy back shares.
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Our $39 price estimate for MetLife’s stock is in line with the current market price.
Lower Sales Of Variable Annuities
MetLife was the top seller of variable annuities in 2011,  but decided to cut back on sales in 2012 to reduce risk involved with the market linked product. The product guarantees a fixed lifetime income and a further variable return based on the performance of certain investments, which include bonds and equities. The company reported a 46% year-on-year decline in sales in the September quarter and expects full year sales to be down 37%, with a further 40% cutback in 2014. MetLife expects a $800 million charge in the fourth quarter tied to changes in assumptions regarding customers’ use of variable annuities.
The effect of declining sales in the third quarter was mitigated by a 9% increase in PFOs from the Group, Voluntary & Worksite Benefit business, as total operating revenues reported for the Americas were in line with last year’s figures.
International Markets Will Be Key
MetLife’s insurance operations outside the U.S. account for 15% of the company’s revenues and nearly 40% of the net income. The company has seen strong growth in Asia following the acquisition of ALICO from AIG (NYSE:AIG) in 2010, which allowed it to establish a foothold in Japan. MetLife reported a 17% year-on-year increase in operating income from Asia in the third quarter. Its income from premiums, fees and other revenues (PFOs) was up 7% even as total insurance sales declined by 8%. Higher life insurance sales in Japan were offset by declines in other countries including Australia.
The growth in Asia was complemented by a 15% year-on-year increase in operating earnings driven by growth in Mexico during the September quarter. We believe international expansion is key to MetLife’s valuation as the division accounts for 60% of our price estimate. You can modify the interactive chart below to gauge the effect a change in forecast will have on our price estimate.Notes: