MetLife (NYSE:MET) reported net income of $96 million for the fourth quarter of 2012, down 90% from the 2011 net income. This decline was influenced by a $855 after-tax net derivative loss. MetLife has a derivatives program to reduce its exposure to low interest rates and so rising long term interest rates during the fourth quarter led to a loss for the insurer. Changes in variable annuity policyholder behavior assumptions, a tightening of its credit spread and foreign currency fluctuations also caused derivative losses. Superstorm Sandy also led to higher claims in the property and casualty division with after tax catastrophe related losses reaching $70 million.
Excluding these losses, MetLife reported operating earnings of $1.4 billion for the quarter, up 10% from the operating income reported in the fourth quarter of 2011. This result was helped by a strong performance in the U.S., Latin America and the EMEA region (Europe, the Middle East and Africa) even though the Asian division reported a 24% drop in operating income.
Our $39 price estimate for MetLife’s stock is in line with the current market price.
New Acquisition Could Drive Growth In Latin America
MetLife reported a 20% year-on-year increase in operating income from its Latin American operations in the fourth quarter of 2012. Although a one-time tax benefit helped the top line, the company also saw organic growth. Total sales for the region increased by 26% while premium revenue increased by 6% over the prior year driven by strong performances in Brazil, Argentina, Mexico and Chile.
Speaking of Chile, the country has huge potential for future growth with a sovereign debt rating of A+ from S&P and Moody’s and a high 5-year projected GDP growth rate of 4.7%. MetLife is already the biggest life insurer in the country and is looking to enter the pension domain with an agreement with BBVA to acquire the largest pension provider in the country, AFP Provida, for $2 billion in cash. According to Chilean law, all employees are required to contribute a fixed percentage of their salaries to a pension provider which charges a fee based on the contribution. This system is different from the U.S., where management and administrative fees are charged as a percentage of assets under management. Provida currently has near 30% market share in the pension domain in the country and will help MetLife achieve its goal of expansion in developing markets.
Plans For Growth In Asia
A change in actuarial assumptions had a negative impact of $62 million on operating earnings from Asia, but the company still observed business growth. Premiums, fees and other revenues from the region increased by 11% over the 2011 figure with strong sales in Korea, Japan and Australia. The company is looking to expand in developing countries of Asia and has entered a collaboration with one of India’s biggest national banks, Punjab National Bank, to form the PNB MetLife India Insurance Company Limited.
India provides a big platform for expansion with the world’s second highest population, a high GDP growth rate 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%. 
Cutting Back On Variable Annuities
MetLife was the biggest seller of equity linked variable annuities in 2011, but it decided to reduce its market exposure by cutting back on sales in 2012. The company reported a 51% decline in fourth quarter sales of the product in the U.S., with full year sales down to $17.7 billion from $28.4 billion in 2011. The company expects sales to be around 10.5 billion in 2012, with a reduced risk profile. The insurer launched a new living benefit variable annuity product, GMIB Max V in February, with a reduced roll-up rate and a reduced withdrawal rate.
Despite cutting back in variable annuities, the U.S. retail division reported 43% increase in operating income driven primarily by higher investment income. Revenue from premiums and fees for the quarter was up 4% due to an increase in separate account fees. We expect a short term decline in MetLife’s share of the market in the coming years as the company continues to cut back on variable annuities.Notes:
- 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 [↩]