MetLife’s Earnings Dip On Derivative Losses But Operations Remain Strong

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MetLife (NYSE:MET) reported a 78% year-on-year decline in net income for the second quarter of 2013, primarily affected by a $1.1 billion after-tax net derivative loss that the company incurred due to the recent surge in interest rates as well as changes in foreign currencies, principally the weakening of the Yen compared to the U.S. dollar. MetLife owned credit associated with its variable annuity program also impacted the derivative loss. However, MetLife’s businesses remained strong as the company reported a 11% year-on-year increase in operating earnings with a 18% surge in both the Americas and Asia. Europe, the Middle East and Africa (EMEA) operating earnings however, dipped 13% from the prior year’s figure. Total premiums, fees and other revenues were up 3% through the three months ending June.

MetLife continued to cut back on variable annuities as sales fell 40% through the quarter. Despite its efforts to cut back on the equity linked product, MetLife is still the third highest seller of variable annuities in the U.S. with a market share of 10% in the variable annuities market and a share of 8% in the overall annuities market. [1]

See our full analysis of MetLife

Market Leadership In The U.S.

Nearly half of MetLife’s operating income comes from retail and group, voluntary and worksite benefits operations in the U.S. The company reported a 6% increase in retail premiums, driven by separate account fee growth. This growth, along with higher returns from investments led to a 42% increase in operating earnings for the retail division.

The mortality ratio (observed deaths to expected deaths) increased from 85.6% to 89.7%, leading to a jump in the retail loss ratio (ratio between benefits and loss expenses to premiums) from 134% to 138%. The expense ratio or ratio between insurance operating costs and other expenses to premiums improved from 62% in the second quarter of 2012 to 60% in the three months ending June.

The group, voluntary and worksite benefits division reported a 3% increase in operating earnings, driven by a similar increase in premiums. Dental, disability and worksite benefits lines of insurance performed strongly through the quarter.

MetLife has a market of over 10% in the U.S. life insurance market and is the market leader ahead of Prudential Financial (NYSE:PRU). [2] We expect the U.S. life insurance market to grow in the coming years as the economy recovers and MetLife is in pole position to capitalize.

 

Speculation regarding the Fed’s Quantitative Easing program has led to an increase in bond yields in the last few months. The 10 year Treasury yield has climbed from 1.76% at the end of 2012 to around 2.75%. [3] Around 75% of MetLife’s assets are invested in fixed maturity securities like government and corporate bonds, returns from these investments are largely linked to interest rates. Although the company’s hedging policy led to a derivative loss this quarter, we expect it to benefit from higher interest rates in the long term.

International Growth

MetLife reported a 2% increase in premiums from Asia for the second quarter driven by a 3% increase in sales, primarily in the three of the biggest economies: Japan, India and China. MetLife has a market share of around 5% in the Japanese insurance market, with around 7 million policies in force and over $75 billion in assets. [4]  In China, the company has a market share of 10% of the foreign-owned life insurance market with registered capital of RMB2.12 billion and 1,100 employees. [5] The company also has a 10-year exclusive distribution agreement with the largest nationalized bank in India, Punjab National Bank (PNB). [6] For more on these markets and MetLife’s growth prospects, please refer to MetLife’s Asian Potential Part 1: Japan and MetLife’s Asian Potential Part 2: India And China

MetLife’s operating income from Latin America fell 7% over the prior year primarily due to higher expenses related to business expansion and lower investment income. Sales in the region remained strong, increasing 32% driven by business growth in Mexico. Premiums from Latin America increased 12%, year-on-year. We expect the company to continue to expand in emerging markets in Latin America and Asia.

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Notes:
  1. 2013, LL Global, Inc. SM U.S. Individual Annuity Sales 1st Quarter 2013 []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  3. Analysis: Higher interest rates? Not a problem for some U.S. stocks, Reuters, July 16 []
  4. MetLife Alico Japan Overview []
  5. Foreign Insurance Companies In China, PWC, December 2012 []
  6. MetLife Enjoys Year-End Success on International Business Growth []
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