MetLife Earnings Preview: Focus On Asia-Pacific, U.S.

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MetLife (NYSE:MET) is scheduled to report earnings for the first quarter of 2014 on Thursday, May 1. [1] The insurance company beat market expectations for the December quarter of 2013, with a 14% year-on-year increase in operating income helped by strong results from its Asia-Pacific operations. Operating income from the region surged 64%, while that from EMEA (Europe, the Middle East and Africa) grew 51%. The company also reported a 17% increase in operating income from Latin America.

However, MetLife has had a mixed start to 2014, and was fined $50 million by the New York Department of Financial Services to settle allegations related to its ALICO and Delaware American Life Insurance operations. [2] However, investors have not been deterred by this controversy; our $49 price estimate for MetLife’s stock is in line with the current market price.

See our full analysis of MetLife

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ALICO Helped Asia-Pacific Operations

MetLife acquired ALICO from AIG (NYSE:AIG) in 2010 as the latter was divesting non-core operations following the 2008 bailout. New York regulators have suggested that ALICO misled authorities in 2009 regarding its operations in New York. [3] The ALICO acquisition allowed MetLife to expand its Asia-Pacific operations, and its market share in the region went up from 0.18% in 2009 to 0.93% in 2012. MetLife currently operates 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 and 60% of its international premiums. FX headwinds affected results in the December 2013 quarter; premiums and fees were up 9% on a constant currency basis, but fell 8% on a nominal basis. This was partly due to the strengthening of the U.S. dollar against the Japanese Yen. Japan is the fulcrum of MetLife’s Asia-Pacific 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. [4] MetLife has around 100 banking partners in the country, with over 42 tier 1 regional banks and five mega banks.

Despite the impact on the top line, MetLife reported a 64% increase in operating income from the Asia-Pacific region. This increase was primarily due to strong investment returns from Japan, which led to a 3% increase in net investment income. 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%, even though the loss ratio (expenses to premiums) remained at 138%.

Going Strong In The U.S.

MetLife is the largest life insurance company in the U.S. with a market share of over 10%, ahead of AFLAC Group and Prudential Financial (NYSE:PRU). [5] The company earns half of its operating income from the country, offering life insurance products and annuities to individuals as well as group life and dental contracts to corporate employers. The retail division accounts for a quarter of the U.S. earnings and reported a 4% increase through the December quarter. Strong fixed annuity sales and higher separate account fee income allowed a 4% increase in premiums and fees.

MetLife was the leading seller of variable annuities in the U.S. in 2011, but has been cutting down on sales of the products for the last two years. The company reported a 49% decrease in sales for the fourth quarter of 2013 and has now slipped down to sixth place. [6]  MetLife has also 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 expect the company to further cut down on equity-linked variable annuities in the coming years.

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Notes:
  1. Q1 2014 MetLife, Inc. Earnings Conference Call, Investor Relations []
  2. MetLife to Pay $50 Million to N.Y. Regulator, The Wall Street Journal, March 31, 2014 []
  3. MetLife Fined $60 Million, to Cooperate in AIG Probe []
  4. MetLife Alico Japan Overview []
  5. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  6. U.S. Individual Annuity Sales, LIMRA []