MetLife Q2 Earnings Preview: FX Headwinds, Investments Will Be Key

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MetLife

MetLife (NYSE:MET) is scheduled to report earnings for the second quarter of 2014 on Thursday, July 31. [1] The insurance company reported mixed earnings for the first quarter, which were largely affected by FX headwinds, an after-tax loss of $343 million related to the sale of the U.K. pension risk transfer business to Rothesay Life Ltd., as well as a $57 million after-tax expense related to the recent settlement with the New York Department of Financial Services. [2] Net income was up 36% year-over-year, while operating earnings fell 4% during the same period. Income from the Asian region dropped 2% on a reported basis despite an 8% increase on a constant currency basis, while in the Americas the company reported a 3% year-over-year increase in operating earnings. We expect Q2 results to be affected by currency fluctuations, with the company’s investment returns continuing to impact margins.

We have a price estimate of $53 for MetLife’s stock, which is in line with the current market price.

See our complete analysis of MetLife’s stock here

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U.S. Operations

MetLife is the largest life insurance group in the U.S. with a market share of just over 8% in terms of premiums earned. [3] The company sells life insurance products and annuities to individuals through its retail division and group contracts to corporate employers through its group voluntary and worksite benefits division. The retail division accounted for nearly 80% of the first quarter operating income from U.S. operations. Fixed annuity sales led to a 9% increase in premiums, fees and other income. The mortality ratio, which determines direct claims experienced as a percentage of the expected claims, increased from 91.3% to 93.6% year-over-year, beyond the company set target of 85% to 90%. As a result, operating earnings fell 2% over the previous year for the first quarter.

There are various challenges that the company has been facing. MetLife is close to being designated as a non-bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC). This will impose stricter capital requirements along with other regulations which might hamper future growth prospects.

Investment Returns Will Continue to Impact Margins

MetLife’s operating margins are to a large extent affected by the returns on the investments that it manages. The company has maintained a loss ratio (claims to premiums ratio) at around 140% for the past few years, and we expect that to continue. Investment returns are determined by a variety of factors such as interest rates and the spread of investments across financial instruments. Interest rates have been gradually improving as the Federal Reserve has started tapering off the quantitative easing (QE) program. The 10-year Treasury bond yield is still around 2.5-2.6% levels, less than half of what it was prior to the economic downturn. [4] As rates continue to rise, the company’s investment yields should improve.

International Prospects

Japan is MetLife’s biggest market in Asia, and the company has a share of around 5% in the Japanese insurance market, with around 7 million policies in force and over $75 billion in assets. [5]  The company has been seeing FX headwinds due to fluctuation in the Yen, as the company offers Yen-based whole life products in addition to U.S. Dollar and Euro whole life products. Fluctuations in the Yen continued in the second quarter as well, as it dropped by 1.8% in the April-June period against the U.S. Dollar. [6]

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Notes:
  1. Q2 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. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  4. Daily Treasury Yield Curve Rates, U.S. Department of The Treasury []
  5. MetLife Alico Japan Overview []
  6. Google Finance []