MetLife (NYSE:MET) has announced the sale of its U.K. based specialist bulk annuity pension provider, MetLife Assurance, to Rothesay Life.  The transaction is expected to close in the second quarter of 2014 with Rothesay assuming $5 billion (£3 billion) in assets under management. MetLife is expected to record a loss of about $350 million to $390 million on the transaction, but it should have no long term impact on the company’s earnings. MetLife has operations in 31 countries across the Europe, Middle East and Africa region, including Poland, the U.K., France, Italy and the United Arab Emirates. The company earns less than 5% of its revenues from these operations. During the last quarter of 2013, MetLife reported a 51% increase in operating income from the region, helped by the strengthening of the Euro against the U.S. dollar.
Having been designated as a non-bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC), the company is looking to cut down on capital intensive products, and this might be part of the reason for the sale of the U.K. subsidiary.
We expect MetLife’s Asia Pacific operations to drive future earnings. Our $49 price estimate for MetLife’s stock is about in line with the current market price.
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Cutting Back On Annuities
More than half of MetLife’s operating income comes from the U.S., where it is the largest life insurance company, with a market share of over 10%.  MetLife was also once the highest seller of equity linked variable annuity products but has been cutting down on sales for the last two years. For the September quarter, the company reported a 49% year-on-year decline in sales of variable annuities. As a result of its strategy, MetLife is now the sixth largest seller of variable annuities, behind AIG (NYSE:AIG), which has been capitalizing on MetLife’s exit with a sales push of its own.  This move will limit MetLife’s exposure to the volatile equity markets. Currently, only 1% of its invested assets are invested in equity securities while 72% are in fixed maturity securities like bonds.
We calculate the annualized spread earned by MetLife 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. is around 4.15%. We expect a moderate long term increase in the annualized spread as bond yields increase.
In the Asia Pacific region, MetLife has operations in China, Japan, Hong Kong, South Korea, Australia, UAE, Nepal, Bangladesh, India and Pakistan. These operations account for 20% of the company’s operating income. Operating income surged 64% during the fourth quarter 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.
Japan is the second biggest life insurance market in the word, after the U.S.  and is an important market for any insurance company operating in Asia. 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.  The company utilizes the bancassurance distribution model and has around 100 banking partners in the country, with over 42 tier 1 regional banks and 5 mega banks.
However, MetLife is exposed to currency fluctuations, particularly the weakening of the Japanese Yen. During the fourth quarter, MetLife’s premiums and fee revenues from the region were up 9% on a constant currency basis but down 85 on a reported basis. These trends might affect MetLife’s earnings in the coming years, but we believe it is well-positioned for long term growth.Notes:
- MetLife Says Loss Is at Least $350 Million on Unit Sale, Bloomberg, February 22, 2014 [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- U.S. Individual Annuity Sales, LIMRA [↩]
- Swiss Re’s World Insurance [↩]
- MetLife Alico Japan Overview [↩]