MetLife Earnings Preview: Business Growth In Sight Despite Challenges
MetLife (NYSE:MET) is scheduled to hold a conference call to discuss its earnings results for the first quarter of 2015 on Thursday, May 7. [1] MetLife’s operations are spread across geographies, including Americas, Europe, the Middle East and Africa (EMEA) and Asia. The company witnessed growth in business across most of these regions in 2014. Last quarter, MetLife’s performance was affected by foreign currency fluctuations, a low interest rate environment as well as a relative lack of catastrophe-related losses. Operating income increased by just 2% year-over-year (y-o-y) during the period. However, net income increased substantially to about $1.5 billion from $877 million a year ago due to some tax benefits accrued during the period. [2]
In this note, we delve into key factors that will drive MetLife’s first quarter results. We have a price estimate of $57 for MetLife’s stock, which is about 10% higher than the current market price.
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Business Growth, But Challenges Persist
The Americas region accounts for three-quarters of MetLife’s revenues and around 80% of MetLife’s operating income. MetLife is the largest life insurance group in the U.S. with a market share of over 8% in terms of premiums earned. [3] The company’s operations in the country are divided into retail, group voluntary and worksite benefits and corporate benefit funding. During the fourth quarter of 2014, higher income annuity sales led to a 3% y-o-y rise in premiums for the segment. Improvement in underwriting as well as favorable expenses resulted in a 4% y-o-y jump in operating earnings from the U.S. operations. MetLife downsized its variable annuity business in 2014, sharply reducing its market share from nearly 7.3% at end of 2013 to just 4.5% in December 2014. [4] We will keep a close watch on MetLife’s performance along different product categories, including annuities during Q1 2015.
The Asian markets have seen good business growth over the last few quarters. Japan, which is a crucial market for the company, and Korea have been the primary drivers of growth for MetLife. During the fourth quarter of 2014, operating earnings from Asia increased 3% y-o-y compared to 9% y-o-y growth on a constant currency basis, led by Japan and Korea. MetLife posted a 21% y-o-y increase in sales of accident and health products in Japan, primarily on new products introduced in the country in September 2014. But that was marred by FX headwinds. Currency fluctuations continued in the first quarter of 2015 as well, and the impact of this is likely to reflect in the upcoming earnings results for the period. We will also be keeping a close watch on any announcements related to the company’s plans, if any, to expand its venture with Punjab National Bank in India. The government of India recently opened up the country’s highly under penetrated and lucrative insurance sector, raising the foreign direct investment limit to 49% from 26% earlier.
Lower Investment Income Will Affect Margins
MetLife has maintained a loss ratio (expenses to premiums ratio) of over 120% in the last couple of years in the U.S. This implies that the company would be running losses if it were not generating sufficient returns from investments. We believe that the persistent low interest rate environment, coupled with uncertain conditions in key international markets, will weigh on the company’s Q1 investment returns, especially impacting margins. The effect of lower investment income reflected prominently in AIG‘s (NYSE:AIG) Q1 results announced last week. [5]
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More Trefis Research
- MetLife to Hold Conference Call for First Quarter 2015 Results, Investor Relations [↩]
- MetLife’s CEO Steven Kandarian on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY, 2015 [↩]
- U.S. Individual Annuity Sales (2014), LIMRA [↩]
- AIG Earnings: Lower Investment Income Offsets Underwriting, Business Growth, Trefis [↩]