MetLife (NYSE:MET) is scheduled to report earnings for the fourth quarter of 2013 on Thursday, February 13.  The insurance company reported strong results for the third quarter, as operating income from the Americas grew 7% over the prior year and income from Europe, the Middle East and Africa (EMEA) was up 37%. However, currency fluctuations affected the company’s performance in Asia. Premiums and fees from the Asia-Pacific region were up 12% on a constant currency basis, but down 5% on a nominal reported basis. We expect similar results from the company this time around. Our $49 price estimate for MetLife’s stock is in line with the current market price.
Moderate Growth In The U.S.
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The Americas region, which includes the U.S. and Latin America, accounts for three-quarters of MetLife’s revenues and around 80% of its operating income. MetLife is the largest life insurance company in the U.S., with a market share of over 10%, ahead of Prudential Financial (NYSE:PRU).  The company’s operations in the country are divided into retail, group voluntary & worksite benefits and corporate benefit funding. The retail division offers life insurance products and annuities to individuals, while the group voluntary & worksite benefits division offers life, dental, group short- and long-term disability and accidental death & dismemberment coverages to corporate employers across the U.S. Through the September quarter, earnings from the retail division were up 34%, with a 6% increase in premiums. Operating income for the group division fell 20% as the loss ratio (operating expenses to premiums) increased from 108% in the third quarter of 2012 to 110%. We expect the company to maintain moderate growth in the retail division and will keep a close eye on the group division to see any changes in profitability.
Margins Depend On Investment Returns
Investment income is very important for insurance companies, MetLife has maintained an average expenses to premiums ratio (loss ratio) of 144% in the last four years in the U.S. This implies that the company would be running in losses if it was not generating sufficient returns from its investments. The Federal Reserve’s decision to scale back its $85 billion monthly bond purchase program will help MetLife. The 10-year Treasury bond yield, which can be used as a benchmark for bond yields, has been rising since the Fed first suggested the possibility of QE tapering in May 2013. The yield has increased from 1.6% in May to over 3%, but is still a long way off from the pre-recession level of 5%. 
Around 75% of MetLife’s assets are invested in bonds. The company’s fixed-maturity yields fell from 5.4% in 2008 to 4% in 2012. We calculate the annualized spread earned on the average account balance by subtracting the interest credited to policyholder account balances from the net investment income. According to our analysis, MetLife’s annualized spread in the U.S. dropped from 4.15% in 2010 to 4% in 2012. We expect a moderate increase in the annualized spread in the coming years, with the yield from fixed maturities reaching the pre-recession level of 5% by 2015.
MetLife will not be able to greatly capitalize on the strengthened equity markets through the fourth quarter, as it has been cutting back on its equity-linked variable annuity offerings. MetLife was once the leading seller of variable annuities, but reported a 41% decline in sales last quarter and has dropped down to fifth place in the market.  AIG (NYSE:AIG), meanwhile, has been strengthening its position in the annuities market and is now the sixth largest seller of the products.
Currency Fluctuations In The East
MetLife earns around 18% of its revenues and 15% of operating income from the Asia-Pacific region, with established operations in markets like China, Japan, Hong Kong, South Korea, Australia, the UAE, Nepal, Bangladesh, India and Pakistan. As highlighted earlier, the company’s earnings from the region have been affected by currency fluctuations in the last few quarters, particularly due to the weakening of the Japanese Yen in comparison to the U.S. dollar. MetLife’s peer, Prudential, recently reported premium volume of $3.8 billion from its Asian operations for the fourth quarter. However, on a constant currency basis, the volume would have been $4.3 billion. We expect similar results from MetLife this quarter, but the company might be able to sustain long-term growth through its operations.Notes:
- MetLife to Hold Conference Call for Fourth Quarter and Full Year 2013 Results, Press Release [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]
- U.S. Individual Annuity Sales, LIMRA [↩]