Business Growth, Lower Investment Income Drive MetLife’s Earnings

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MetLife

MetLife (NYSE:MET) reported better than expected earnings for the fourth quarter of 2014. [1] For the fourth quarter operating income of $1.6 billion was up 2% year-over-year (y-o-y).  The company benefited from growth across regions, including the Americas and Asia. However, currency fluctuations erased most of the gains made from international markets. A relative lack of major catastrophic related losses, a favorable prior year reserve development and certain tax-adjustments also added to the growth in Q4. Net income for the quarter increased substantially to about $1.5 billion from just $877 million a year ago. Foreign currency fluctuations as well as the low interest rate environment had a negative impact. [2] The company’s top line improved slightly, as the revenues from premiums and other fees increased by 4% y-o-y.

On a full year basis, MetLife’s operating income improved 5% y-o-y to $6.6 billion, reflecting growth in different geographies. MetLife’s operating income has grown at over a 12% CAGR since 2011. Below we discuss MetLife’s fourth quarter performance across its businesses. We have a price estimate of $59 for the company’s stock, which is about 20% higher than the current market price.

See our full analysis of MetLife

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U.S. Growth Continues At Slow Pace

Driven by across the board growth in its businesses in the U.S., the company reported a 4% y-o-y rise in its operating income from the Americas region during the fourth quarter. MetLife’s operations in the Americas include the U.S. and Latin America regions. The retail business segment, which offers life insurance products and annuities to individuals, reported strong income annuity sales. This led to a 3% y-o-y rise in premiums for the segment in the fourth quarter. Improvement in underwriting as well as favorable expenses resulted in 4% y-o-y jump in operating earnings of $683 million in the fourth quarter. [3]

The group voluntary and worksite benefits business segment had a favorable underwriting performance during the fourth quarter. However, lower investment income results partially offset those gains. This led to just 2% y-o-y growth in operating earnings of $235 million from the segment.

Growth In Asia Hit By FX Headwinds

With around 15% of its operating income and about 20% of the revenues coming from operations in Asia-Pacific, the region forms an integral part of MetLife’s business. In the fourth quarter, operating earnings in Asia suffered from FX headwinds. Operating earnings for the quarter increased 3% y-o-y compared to 9%y-o-y growth on constant currency basis, led by Japan and Korea. The company posted a 21% y-o-y increase in sales of accident and health products in Japan, primarily on the back of new products introduced in the country in September 2014. Going forward, we expect MetLife to benefit from the huge growth potential in Asian markets.

Investment Income Declined

Low interest rates in the U.S. resulted in a decline in investment yields. Net investment income for the quarter declined 3% y-o-y to $5.1 billion, which included a drop in variable investment income and also losses on derivatives. We expect the low interest rate environment to continue to impact the company’s investments in the near future.

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Notes:
  1. MetLife Announces Fourth Quarter and Full Year 2014 Results, Press Release []
  2. MetLife’s CEO Steven Kandarian on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha []
  3. SEC 8-K Filing []