A Look At MetLife’s U.S. Operations And Our $51 Estimate

by Trefis Team
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MetLife’s (NYSE:MET) stock has gained 25% in the last three months largely driven by rising bond yields as the U.S. job market has shown signs of a recovery. The company invests close to 75% of its assets in fixed maturity securities like government and corporate bonds and is expected to gain from higher bonds yields. The 10-year Treasury bond yield has climbed from 1.66% in May to around 2.63%, primarily due to speculation that the Federal Reserve’s Quantitative Easing program might be winding down in the near future. [1]

But rising yields are not the only positive for MetLife. The company has also established strong operations in emerging international markets of Asia and Latin America whilst maintaining a 10% share in the U.S. life insurance market and has been the market leader for the last few years ahead of Prudential Financial (NYSE:PRU). [2]

Given the current trends and the recent change of reporting structure by the company, we have restructured our model for MetLife and have updated our price estimate to $51, implying a premium of 5% to the current market price.

In MetLife’s Asian Potential Part 1: Japan and MetLife’s Asian Potential Part 2: India And China, we discussed the company’s international operations, focusing on Asia. In this article, we analyze MetLife’s operations in the U.S.

See our full analysis of MetLife

U.S. operations

MetLife is the biggest life insurance company in the U.S. and earns nearly 60% of its revenues from the country. Taking total premiums for life insurance, annuity considerations, deposit type contract funds, accident and health and other considerations, the company has a market share of 13.8% in the U.S.  [3]

MetLife’s operations can be divided into two broad groups: retail and group, voluntary and worksite benefits. The retail division caters to individual policyholders, offering products like life insurance (variable, universal, term and whole life insurance policies), property and casualty insurance (automobile and homeowner’s insurance), disability products and fixed and variable annuities. The division accounts for 30% of the U.S. premiums.

The group, voluntary and worksite benefits division offers life, dental, group short- and long-term disability and accidental death & dismemberment coverages to corporate employers across the U.S. The division accounts for 70% of the U.S. premiums.

Group Insurance

MetLife’s group insurance premiums decreased from $14.37 billion in 2009 to $13.95 billion in 2011, but a recovering job market drove a 6% growth in premium volume in 2012. The company has retained a market share of 25% in the group life insurance market. [4] The recovering U.S. job market will provide for growth in the insurance market. The unemployment rate in the U.S. has recovered remarkably from the peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.5% in April, staying around 7.6% through May and June before increasing slightly in July. [5]

Employment in the manufacturing and construction sectors has been strong. Manufacturing employment grew by 4.3% since 2010, while jobs in the construction industry have increased by 5.4% since the start of 2011. [6] Growth in these two sectors will drive demand for accidental death & dismemberment coverages. We expect a 2% to 3% premium growth rate in the coming years as the job market recovers.

Individual Policies

MetLife’s retail insurance premiums increased from $6.62 billion in 2009 to $6.71 billion in 2011, but fell to $6.53 billion in 2012 as the company cut back on equity linked variable annuity products to reduce exposure to the capricious markets.  MetLife was the highest seller of variable annuities in 2011, but decided to cut back on the product in 2012 to reduce risk and exposure. The company has now slipped to third place in the variable annuities market behind Prudential Financial and Jackson National Life, the U.S. subsidiary of Prudential plc. MetLife reported a 29% year-on-year decline in sales in the first quarter and a 40% decline through the second quarter of 2013.

However, MetLife still has a market share of 10% in the variable annuities market and a share of 8% in the overall annuities market. Variable annuities are a popular retirement solutions product in the U.S., accounting for 80% of the annuities market. [7]

In life insurance, MetLife has a 12% market share in the individual life insurance market and is in close competition with Northwestern Mutual. The recovering U.S. job market will provide for growth in the insurance market. Measured in terms of chained 2005 U.S. dollars, the per capita real disposable income was around $34,600 before the onset of the financial crisis, but the figure declined to about $31,000 in 2010. Since then it has started recovering, albeit slowly. [8] The per capita disposable income in January 2013 was $32,483. With less disposable income in their hands, U.S. consumers have limited discretionary purchases like life insurance. According to our analysis, the life insurance penetration, measured by taking premiums as a percentage of GDP fell below 1% in 2010, but has since recovered to the historical average of 1.1%. [9]

As the company cuts back on variable annuities in the coming years, we expect MetLife’s individual insurance premiums to decline in the near term. However, long term market growth as well as the company’s strong market position will lead to a long term increase in premiums.

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Notes:
  1. Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  3. Ref: 2 []
  4. ACLI Life insurers’ Fact Book []
  5. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey []
  6. Overview and Outlook for the Workers Comp Market: Growth, Performance and the Economic Environment, Insurance Information Institute []
  7. LIMRA []
  8. Real Disposable Personal Income: Per capita, FRED []
  9. GDP growth (annual %), The World Bank []
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