MetLife’s (NYSE:MET) fourth quarter results beat market expectations as the insurance company reported a 14% increase in operating income for the three months ending December. The company observed growth across geographies; earnings from the Americas increased 13% over the prior year, those from Asia surged 64% while EMEA (Europe, the Middle East and Africa) and Latin America climbed 51% and 17%, respectively. MetLife also reported a lower loss from its derivatives program designed to counter interest rate and currency volatility; the loss fell from $924 million in 2012 to $358 million. Investment returns were strong, net investment income increased as the net investment yield improved from 4.9% to 5.3%.
Our $49 price estimate for MetLife’s stock is in line with the current market price. We will shortly update our model to account for the latest earnings.
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Consistent Results In The Americas
More than half of MetLife’s operating income comes from the U.S., where the company offers life insurance products and annuities to individuals through its retail division, and group life and dental contracts to corporate employers through its group voluntary & worksite benefits division. Around a quarter of the U.S. income comes from the retail division, which reported a 4% increase in operating income for the December quarter. Strong fixed annuity sales and higher separate account fee income drove a 4% increase in premiums and fees.
MetLife continued to cut down on equity linked variable annuities, with sales during the fourth quarter down 49% from the prior year’s figure. The company was once the leading seller of variable annuities in the U.S. but has now slipped down to sixth place, behind AIG (NYSE:AIG). 
MetLife is the largest life insurance company in the U.S., with a market share of over 10%, ahead of Prudential Financial (NYSE:PRU).  However, it has been designated as a non-bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC). This designation will impose stricter capital requirements along with other regulations which might hamper future growth prospects. We will keep a close eye on developments and update our model accordingly.
Latin America earnings were helped by the $2 billion acquisition of Chilean private pension-fund administrator ProVida from BBVA. Operating income was up 22% on a constant currency basis but just 17% on a reported nominal basis. Premiums and fees increased 28%, with strong group and worksite sales in Mexico driving a 27% surge in total sales for the region. The company currently has a market share of 4.2% in Latin America, but we expect a gradual increase in the coming years.
Strong Asian Performance Despite FX Headwinds
MetLife’s premiums and fee revenues from the Asia Pacific region were down 8% on a reported basis but up 9% on a constant currency basis. Despite these headwinds, the company was able to maintain bottom-line growth. Operating income from the region was up 74% on a constant currency basis and 64% on a reported nominal basis. This increase was primarily due to annual actuarial unlocking charges incurred in 2012, as well as strong investment returns from Japan which led to a 3% increase in net investment income. The loss ratio (expenses to premiums) remained at 138% but increases in investment income, universal life and investment-type product policy fees and other revenues allowed the operating margin to expand from 10% to 15%.
In the Asia Pacific region, MetLife has operations in China, Japan, Hong Kong, South Korea, Australia, the UAE, Nepal, Bangladesh, India and Pakistan. These operations accounted for 20% of the company’s operating income during the fourth quarter. MetLife’s sales remained strong during the quarter, climbing 44% over the prior year with strong group product sales in Australia and life sales in Japan.
Japan is the fulcrum of MetLife’s Eastern operations. The company 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.  MetLife offers Yen whole life products such as low cash value whole life, Yen interest simplified whole life and simplified issue whole life, as well as foreign currency whole life products such as USD interest sensitive whole life and Euro interest sensitive whole life. Bancassurance is the main distribution model for the company, accounting for 33% of the sales. MetLife has around 100 banking partners in the country with over 42 tier 1 regional banks and 5 mega banks. We expect the company to maintain momentum through the coming years, but it is exposed to currency fluctuations.
In our next article, we will discuss MetLife’s investment results. Around 75% of the company’s investment income comes from its fixed maturity investments. These investments are largely affected by bond yields, which have increased over the last year.Notes: